Contract Law - Masselot Material

1. Incapacity
 Minors
 Persons of Unsound Mind
 Drunkenness
2. Victimization
 Duress (not examinable)
 Undue influence
 Unconscionable bargains
3. Privity of Contract

Incapacity
 Capacity (to contract) means that a person is legally competent to enter into a
contract in terms of age and mental capacity
 For a contract to be valid, both parties must be of full legal capacity to enter into the
contract
 Issue: Whether the contract entered into by the [minor, person of unsound mind,
drunken person] is enforceable

General principles
Protecting individuals: vulnerable people in society due to a lack of maturity or capacity
needed to understand the nature and extent of the agreement. Unable to confer legal
obligations except in very clear circumstances
 Minors
 Persons of unsound mind
 Drunken persons
Protecting society: limitation of ability to contract for the protection of society
 Bankrupts; and
 Corporations (in certain circumstances)

Minors
 Minor: a person who has not attained the age of 18 years; and a person is of full age
(capacity) if he/she has attained the age of 18 years (s 85 CCLA 2017)
 Every contract entered into by a minor is unenforceable against the minor but can still
be enforced by the minor
o However, this presumption is rebuttable (see below)

Categories of minors’ contracts under CCLA

 Court-approved minors’ contracts (ss 98-101)
 Presumptively enforceable minors’ contracts (ss 92-94)
o Life insurance
o Contracts of service
 Presumptively unenforceable minors’ contracts (ss 86-91)
o All other contracts

Court-approved minors’ contracts

Minors’ contract which are pre-approved by the District Court. These contracts have full
effect as if the minors were of full age (ss98-101)
 Condition: application must be made before the contract is entered into (prior
approval by DC needed)
 Application by minor/guardian/other party to the contract

Presumptively enforceable minors’ contracts

These’ contracts are presumptively enforceable against the minor in the absence of
unconscionability or oppression:
 Life insurance contract on the minor's own life entered into by a minor who has
attained the age of 16 years
 Contract of service entered into by a minor

However, this presumption can be rebutted:

 The court may intervene if the consideration given for the minor's promise was so
inadequate as to be unconscionable, or where any provision of the contract imposed
a harsh or oppressive obligation on the minor (s 93)
 In such circumstances the court may cancel the contract, decline to enforce the
contract (or make a declaration of unenforceability), or make any order for
compensation or restitution of property it considers just
 Exception: the court cannot intervene if there has been approval by the DC under s
98

National Bank of NZ Ltd v Ram (1992) 4 NZBLC 102,618

 R was 18 year old high school student, guaranteed a loan granted to his older brother by the bank, loan
defaulted and he argued he was entitled to protection
 Court found he was over 18 and therefore his defense was not as solid had he been a minor
 Court decided the documentation he signed was not inherently harsh or oppressive, and he did not seek
to understand his obligations, so R's defense failed

Presumptively unenforceable minors’ contracts

 Includes all other contracts
 Contracts in this category are presumptively unenforceable against the minor, subject
to the court’s discretion to enforce the contract and/or to order remedies of
compensation or restitution depending on the fairness and reasonableness of the
contract

Enforcing by the court

 Under s 86, contracts in this category are presumed to be unenforceable against the
minor (but still enforceable against the other party who is of full age)
 However, the court has the discretion to look into the fairness and reasonableness of
the contract at the time the contract was entered into (s 87)
o Factors (s 90):
a. the circumstances surrounding the making of the contract
b. the subject matter and nature of the contract
c. in the case of a contract relating to property, the nature and the
value of the property
d. the age and the means (if any) of the minor
e. all other relevant circumstances
 If the court finds that the contract was fair and reasonable, the court may: (s 88)
o Enforce the contract against the minor
o Declare that the contract is binding on the minor, either in full or in part
o Make the contract voidable at the discretion of the other parties to the
contract, on conditions the court thinks just
o Make an order for compensation/restitution under s 95
 If the court finds that the contract was not fair and reasonable, the court may: (s 89)
o Cancel the contract
o Make the contract voidable at the discretion of the minor, on conditions the
court thinks just
o Make an order for compensation/restitution under s 95
 Morrow & Benjamin Ltd v Whittington [1989] 3 NZLR 122 (HC)
 Plaintiff stockbrokers started to buy shares for the defendant when he was 15, originally paid in cash but
allowed him to continue to purchase on credit past his limit
 When share markets collapsed, plaintiffs tried to recover debt
 HC held that the discretion of the court under ss 86-91 is to be exercised in 2 stages:
1. The court shall determine whether the contract was fair and reasonable at the time the contract
was entered into, taking into account the factors in s 90
o Fairness/reasonableness not assessed as between consenting and informed adults
2. The court shall exercise its discretion in making orders under s 88 or 89 (depending on whether
it was found to be reasonable/fair or not), taking into account the factors in s 90
 In this case, found to be unreasonable:
o The plaintiff stockbrokers were aware of the defendant’s minority
o The contracts were for the purchase on credit of highly speculative investments
o The plaintiff knew the minor’s means were inadequate
o They regarded him as unreliable yet failed to implement their normal credit controls (allowed him
to purchase well past his credit limit)

Wine Country Credit Union v Rayner [2008] 2 NZLR 698

 Credit was given to two 17 year olds to buy a car, loan officer made a mistake (miscalculation) and didn't
realise when approving credit that they were minors (thought they were 18)
 Bad purchase - cars collapsed, didn’t have money to repay the loan, couldn’t sell car
 Action taken against them to repay the loan
 Court found it was unenforceable, as they were under 18
o Nothing unreasonable in the contract
o Age had been misrepresented, mistake from a loan officer who had been careless
o Had they misrepresented their own age, they would have been liable
o Should have had a person of full age (guardian etc.) to guarantee loan
 Confirmed Morrow - circumstances surrounding contract relevant to determine whether a contract is fair
or reasonable

Orders for compensation or restitution (s 95)

Relief may be granted by the court to:
(a) any party to the contract; or
(b) a guarantor or indemnifier under a contract of guarantee or indemnity; or
(c) any person claiming through or under or on behalf of any such party, guarantor, or
indemnifier.
Persons of Unsound Mind
 Under the common law, contracts entered into by a person of unsound mind during a
period of incapacity will be voidable by the person subject to two requirements:
o The person must have been incapable of understanding the general nature of
what he/she was agreeing to at the time of the contract (Scott v Wise)
o The other party must have known that the person was of unsound mind (Hart
v O’ Connor)
 Ought to have known sufficient where there is serious contractual
imbalance or unfairness (Nichols v Jessup)
 During a period of lucidity (often only brief and temporary) when a mentally
incapacitated person regains enough mental capacity to understand the general
nature of the document he/she is signing, a contract made by him/her can be valid.

O'Connor v Hart [1983] NZLR 280 (CA); [1985] 1 NZLR 159 (PC)
Facts:
 Contract for the sale of land by an old man with dementia, sold land to neighbour who did not know about
lack of capacity
 Sale was at an undervalue, but the terms of sale were proposed by O’s solicitors and the price was fixed
by a registered valuer
 After sale he died, family members wanted contract set aside
 Law:
 Contract entered into by a person of unsound mind is voidable if the other party knew of unsoundness
 BUT: If entered into by person ‘ostensibly sane’ (other person believes to be sane), contract to be
adjudged as to whether fair/unfair on same grounds as person of sound mind (full capacity)
o Unfairness must create grounds for relief in equity, e.g. it is unconscionable
Held:
 This contract could not be set aside as it could not be known O'Connor had dementia, Hart had conducted
himself in a way that was above reproach
 Unfairness/disability does not in itself set aside a contract, about whether the other party knew the person
was of unsound mind or not
o Must amount to an equitable remedy e.g. undue influence or unconscionability
 If assumption they are dealing with person of full capacity, normal approach applies

Nichols v Jessup [1986] 1 NZLR 226 (CA)

 A contracting party can be treated as having constructive knowledge of the other’s disadvantageous
position by reason of serious contractual imbalance or unfairness
o i.e. ought to have known of unsoundness
 In such a case the contract can be set aside as unconscionable

Scott v Wise [1986] 2 NZLR 484 (CA)

Facts:
 Scott was in his 70s, entered into a complex contract to do with his farm
 Then discovered S was suffering from senile dementia, admitted into hospital
 Guardian tried to set aside transaction on grounds of incapacity
Law:
 Capacity requires an understanding of the general nature of the transaction (as opposed to specific
details) when explained
 Must also show knowledge of the other party’s lack of capacity
Held: the transaction was set aside as S understood the contract

Gifts
Only need to show a lack of capacity to properly understand the transaction (Dark v Boock).

Exceptions
Contracts entered into by mentally incapacitated persons are binding in the following
situations:
 The contract is a contract of necessaries
 The contract is affected by an order under the Protection of Personal and Property
Rights Act 1988
 The person is subject to a property order

Necessaries
 Contracts for the supply of necessaries to a person who lacks contractual capacity is
binding on that person. The person is obliged to pay for the goods supplied even
though he/she lacks contractual capacity (s 124(2) CCLA)
o Necessaries: “goods suitable to the condition in life of the person, and to his
actual requirements at the time of the sale and delivery.” (s 124(3) CCLA)

Proving necessary:
 Onus of proving whether an article or service is capable of being a necessary is on
the plaintiff, who must prove that it is of a kind or description reasonably suitable to a
person in the station of life of the defendant
  If this is established, it is a question of fact whether the article or service is a
necessary in the particular circumstances, taking into account the actual
requirements of the defendant at the relevant time

Common law:
 Peters v Fleming
o Not just basics (e.g. food, shelter), but things that are necessary to maintain a
person's station or standard of life
o Must be done at a reasonable price
 Re Rhodes
o Items must not have been given as charity, as that is not a contract
o There must be an intention to pay for the goods/services

Protection of Personal and Property Rights Act 1988

 The Family Court has jurisdiction to make orders in relation to the property of an
incapacitated person. A person is presumed to be competent unless the contrary is
proved, and unreasonable actions are not enough to prove incompetence
 The FC can make two types of orders in relation to an incapacitated person’s
property:
o For smaller amounts of property, the Court can make a personal order
appointing a person to manage that property.
o If the Court thinks a person cannot manage their own property, it can make a
property order appointing someone to manage the property (a property
manager), up to any value (s 25)
 Every disposition and contract made by that person – unless made
with the leave of the court – can be avoided by that person or the
manager
 If a manager is not appointed, principles of common law and equity
will apply

Drunkenness
The same general principle of contractual capacity applicable to persons of unsound mind
applies to drunken persons.
 Enforceable unless shown the intoxicated party didn’t understand general nature of
contract, and other party was aware of incapacity
 Distinction as to degree of intoxication (Peeters)
o Extreme intoxication deprives person of reason, so consent and contract are
void
o Mild intoxication deprives person of business sense, contract is at most
voidable and more circumstances are examined (unfair advantage, other
party aware of intoxication)

Peeters v Schimanski [1975] 2 NZLR 328 (SC)

 Vendor had alcohol problem, signature was obtained while he was drunk
 Courts found he was affected by alcohol, but knew what he was doing and was able to read the fine print
(distinction between mild and extreme intoxication)
 Extreme intoxication: deprives person of reason, so consent and contract are void
 Mild intoxication: deprives person of business sense, contract is at most voidable
o However, equity may grant relief to the drunken party if shown that their condition was known to
the other party and unfair advantage had been taken, but will not interfere to avoid or enforce the
contract

Kurth v McGavin [2007] 3 NZLR 614

  Agreement of sale and purchase
 Vendor was alcoholic, too drunk to consider offer on day it was communicated to him
 Following day he was able to complete the sale
 Attempted to get the contract cancelled, on grounds he was drunk when he signed
Held: There was a distinction between drunkenness that deprived a party to a contract of his or her reason, and
drunkenness that deprived that person of his or her business sense only; in the latter case the contract was
voidable only.
 Knowledge of intoxication an important factor

Onus of proof - unsound mind / drunkenness

 The onus of proving the existence of both incapacity and knowledge of that
incapacity rests with the person seeking to rely on it to avoid the contract – the
person of unsound mind or drunken person
o With persons of unsound mind in an apparently lucid period, the onus can be
difficult to discharge. With drunken persons the incapacity is usually apparent
 The plaintiff is only required to show that he/she was incapable of forming a rational
judgment about the terms of the specific transaction when the contract was entered
into
o Proof of a total inability to understand what was happening is not necessary

Effect of finding unsound mind or drunkenness

 The contract is voidable at the option of the person of unsound mind or drunken
person
 The plaintiff may later ratify the contract, which will become binding if they are
capable of understanding the nature and terms of the agreement (Matthew)

Victimisation
1. Duress: illegitimate pressure exerted by one person to coerce another to contract on
particular terms (not examinable)
2. Undue influence
3. Unconscionable bargains

Undue influence
 Equitable doctrine
 “Undue influence consists in the gaining of an unfair advantage by an
unconscientious use of power by a stronger party against a weaker … The doctrine is
founded on the principle that equity will protect the party who is subject to the
influence of another from victimisation.” (Snee)
 Generally involves a relationship of trust and confidence where the dominant party
uses their position to unduly influence the servient party to benefit themselves
 Equity will not intervene unless the influence is abused (Hew). However, the stronger
party does not need to have wrongful conduct/intent for undue influence to be found
(Carey)
 The essence of the doctrine is impairment of free will - focus on the mind of the
person consenting, not the motives of the person exerting the pressure or influence
(Green)
 The court can set aside the gift / terms of the contract that are advantageous to one
party, if undue influence is found
 However, a presumption of undue influence can be rebutted by evidence that the
claimant entered the transaction of their free will
Proving Undue Influence (Etridge)
The complainant has to prove:
1. There is a relationship of trust and confidence
o The complainant placed trust and confidence in the other party in relation to
the management of their financial affairs
2. The circumstances of the transaction call for an explanation
o i.e. not readily explicable by the relationship of the parties

IF the complainant can meet these requirements there is a rebuttable evidential presumption
that the transaction was procured by undue influence AND the dominant party then must
produce evidence to rebut the presumption.

Royal Bank of Scotland v Etridge (No 2) [2001]

Facts:
 Husband and wife have a mortgage to secure a loan
 Wife asked to remortgage the house to secure a loan the husband had taken for his business
o Wife did not benefit from transaction (unbalanced power between genders)
 Husband's business failed, bank wanted to repossess home
 Wife claimed undue influence

Principles of Lord Nicholls’ Judgment

1. Where there is a fiduciary or similar relationship between the parties, there is a legal and irrebuttable
presumption of trust and confidence. There is no legal presumption that influence was exercised or that it
was undue.
2. Presumed undue influence is in essence the same as actual undue influence. The difference lies in how
undue influence is proved. There is no difference in what needs to be proved. Sometimes undue influence
is proved directly, by evidence of the actual exertion of wrongful influence. But sometimes a claimant
proves circumstances which justify the drawing of an evidential inference that undue influence has
occurred.
3. A rebuttable evidential presumption of undue influence arises where there is a relationship involving
elements such as trust, confidence, reliance and dependency by one party towards the other, and the
circumstances of the transaction are such as to call for an explanation. The relationship may be
recognised by law or may simply be proved on the facts of the case. Factors which bear upon any need
for an explanation include the size of the transaction and disadvantage to the weaker party. An element of
disadvantage is relevant but is not a necessary condition before a presumption can arise.
4. In every case the question is whether undue influence has been established on the facts that have been
proved. The legal burden of proof is on the plaintiff. An evidential presumption can assist in reaching the
conclusion that there was undue influence in fact. It can be rebutted by evidence showing that the weaker
party was free from any improper influence.

1. A relationship of trust and confidence

 To establish a relationship of trust and confidence the complainant must show that
either:
1. There is a special relationship in which the law presumes trust and
confidence; or
2. There is a relationship of actual trust and confidence.
 Per Etridge: looking at evidence of reliance, dependence or vulnerability of the
weaker party and dominance or control by the dominant party
 Show there is a relationship of trust and confidence in the financial management of
the servient party's affairs

2. Transaction calling for an explanation

The transaction must be one:
 That is not readily explicable by the relationship of the parties
o i.e. size of transaction disproportionate to the relationship
 It must involve the servient party suffering a disadvantage sufficiently serious to
require evidence to rebut the presumption that it was procured by the exercise of
undue influence

Cases where an evidential presumption of undue influence was found

Allcard v Skinner (1887) 36 Ch D 145
 Requirement of being member of religious order: provide a property gift to the sisterhood, the poor etc.
 Held there was a relationship of influence and the gift was substantial, represented all of the property of
that person => therefore the gift required an explanation
 Overall claim failed by reason of her only asserting her claim once she left the sisterhood (affirmation, you
cannot claim undue influence)
 Lindley LJ: "the gift is so large as not to be reasonably accounted for on the ground of friendship,
relationship, charity, or other ordinary motives on which ordinary men act.”

Cases where an evidential presumption of undue influence was not found

Re Brocklehurst [1978] Ch 14; [1978] 1 All ER 767
 Rich old man (“strong-minded, autocratic, eccentric”), owner of stately home
 After his death, executor found he had granted shooting rights over his large estate to the defendant
(mechanic in a garage)
o Had become friends, despite the fact they were in different classes of society
 Executor tried to have the right set aside, as it was undue influence - when the old man had granted the
rights, it was done so without legal advice, it was disproportionate
 Court found there was no undue influence - looked at personality of parties and their relationship. Found
there was no relationship of trust and confidence (no reliance, one party not involved in managing the
affairs of the other). It was merely a friendship. The man was old but he had a dominant personality, so
was not taken advantage of. Not a question of undue influence

ASB Bank v Harlick [1996] 1 NZLR 655

 Son and daughter-in-law had their father guarantee a loan they took for the husband's business
 Business failed, issue whether the father who gave the guarantee had been put under undue influence
 Was there a degree of reliance/trust/dependence?
 Held the father had not been a victim of undue influence because he was not reliant in any way on the
son

UDC Finance Ltd v Down (2009) 9 NZBLC 102,705

 Down was the director and sole shareholder of a company, she personally guaranteed loan from UDC to
company on the advice of her husband and the company accountant
 Company failed, she could not pay the loan
 She claimed undue influence from her husband and accountant
 Court held she had a motivation in getting the loan (would benefit from it) whereas the husband would not,
and she was not the weaker party, and there was no evidence of influence, so the claim failed

Public Trust v Ottow (2010) 10 NZCPR 879

 PT advanced money to a family trust, the husband and wife were beneficiaries and trustees and
personally guaranteed the advance
 Wife claimed undue influence from husband
 Court held that advancing money to buy property she would have lived in would not have put her at a
disadvantage. She was a beneficiary/trustee, it was a normal transaction for her benefit (no undue
influence)
Rebutting the Presumption of Undue Influence
The presumption of undue influence may be rebutted by showing that the servient party:
1. Had taken fully informed independent advice before entering into the transaction (r
would have ignored that advice anyway) (Etridge); and
2. Had the ability to exercise, and did freely exercise, an independent will in entering
into the transaction (Re Brocklehurst)

Hammond v Osborn [2002] WTLR 1125

 Disabled man H gifted nearly £300,000 to O, his helpful neighbour
 Relationship of trust and confidence, gift so large it required explanation
 H received no independent legal advice, never told the gift amounted to about 90% of his estate
 Couldn’t pay £50,000 tax on the gift
 No undue influence on the part of O - had not done any reprehensible behaviour
o However, O passively accepted gift without making sure H had advice or information
 Court set aside gift
Held: even if the other party did not commit any reprehensible behaviour (no actual undue influence on their part),
a rebuttal may fail where there is a relationship of trust and confidence and a transaction so large it requires
explanation - he did not make the gift after full, free and informed consent.

Effect of Undue Influence

 If undue influence is established, the contract or gift is voidable by the victim
 The court may restore the parties to the positions they occupied before the contract
was entered into

Exceptions
The right to relief may be lost through:
 Affirmation or acquiescence
o E.g. inordinate delay in taking action after the influence ceases
 Where a third party has acquired an interest in good faith and for good consideration

Imputed undue influence

 2 situations where undue influence might be imputed on the bank: (Barclays Bank)
o The third party who exerts undue influence, is acting as an agent (actual or
ostensible) of the bank
o The bank has actual or constructive knowledge of the undue influence - i.e.
the bank is "put on notice"
 If undue influence is imputed to the bank, the transaction might be set aside and be
unenforceable by the bank, even though the bank has not done anything wrong

Agency
Objective test: whether a reasonable person in the complainant’s position would have
concluded that the principal had held out the third party as their agent (Snee)
 Where there is an actual appointment of the wrongdoer as an agent, imputation is
found
 Where the principal conferred ostensible authority on the third party wrongdoer to
obtain execution of the documents, the principal is fixed with any improper pressure
exercised by the third party

Agency was established:

  Kings North Trust: because the bank had charged the husband to get signature from
wife, the husband was acting as the bank's agent, and the husband’s
misrepresentation was imputed to the bank
 Nathan v Dollars & Sense: D&S had entrusted N with a number of tasks, including
getting the signature from his mother. Because of that, it was held he was acting as
the agent, even though he was not asked to forge signature

Agency was not established:

 Snee: merely sending deeds to son’s company not enough to suggest agency. No
communication implying agency, did not make a reasonable person believe CB were
entrusting son to do anything

Notice
Circumstances putting the bank on inquiry - bank is held to have constructive knowledge of
undue influence.
 The bank should be put on inquiry in every case where the relationship is non-
commercial (Etridge); and where the transaction is only for the benefit of one
cohabitee (principal debtor); but both cohabitees (surety and principal debtor) bear
the risk (Barclays Bank)
o Bank should be put on inquiry whenever it is aware that a wife offers security
for her husband's debt or the debt of his company (Etridge)
o However, where the transaction would jointly benefit both cohabitees (surety
and principal debtor), the bank is not put on inquiry (CIBC Mortgages -
involved money used for stock market speculation)
 If there is no special relationship, but there is a significant manifest disadvantage and
lack of benefit to one party
o Credit Lyonnais Bank Nederland: an employee offered her house as security
for a loan for the company in which she had no interest. She also did not take
independent legal advice

Steps a bank should take when put on inquiry (Etridge):

Take reasonable steps to satisfy itself that the surety has understood, in a meaningful way,
the practical implications of the proposed transaction.
 Communicate with the surety directly
 Disclosure of financial information and risks
 Inform the surety’s solicitor of belief or suspicion of undue influence
 The bank should insist on advice being given to the wife by a solicitor independent of
her husband
o Advice must bring home to the surety the nature and extent of the risks
involved in the transaction
o Deficiencies in the solicitor’s advice do not affect the bank unless it knows or
should know improper advice was given

Bank does not have to discover whether there is undue influence - that is the court's job. The
objective of the bank is to make sure the wife understands the nature and effect of the
transaction.

Transaction should not proceed:

 Unless bank has received confirmation from wife's solicitor, who has access to all the
relevant financial information
 If the husband refuses to consent to the disclosure of this information
 If the bank suspects undue influence - in this case inform the wife's solicitor
 If the wife refuses to have her own independent solicitor
Unconscionable bargains
 Equity will intervene to relieve a party from the rigours of the common law in respect
of an unconscionable bargain
 This equitable jurisdiction is not intended to relieve parties from “hard” bargains or to
save the foolish from their foolishness. Rather, the jurisdiction operates to protect
those who enter into bargains when they are under a significant disability or
disadvantage from exploitation

Requirements (Gustav)
1. The weaker party is under a significant disability, resulting in a serious
disadvantage
 A condition or characteristic which significantly diminishes a party’s ability to assess
his or her best interests (Gustav)
o E.g. ignorance, lack of education, illness, age, mental or physical infirmity,
stress or anxiety, but other characteristics may also qualify depending upon
the circumstances of the case
o Factors include: inadequacy of consideration, procedural impropriety (e.g.
unfair pressure to obtain consent), absence of independent advice (A-G for
England and Wales v R)
 Not satisfied by proof of ‘mere disadvantage’ or ‘inequality of bargaining power’ -
there must be some disabling condition or circumstance which significantly
diminishes the affected party’s ability to make rational decisions in his or her own
best interests (Gustav)
 The characteristic in itself is not enough - must result in a serious disadvantage
(Blomley)

2. The stronger party knows, or ought to know, of that disability

 The stronger party must or should have known of the ‘special disability’
 The requisite knowledge may be that of the principal or an agent, and may be actual
or constructive
o Constructive where there is a marked imbalance in consideration, especially if
coupled with a failure to obtain independent advice
 It is enough that he or she was aware of circumstances that would put a reasonable
person involved in the transaction on inquiry

3. Victimisation (active or passive)

 The stronger party has victimised the weaker in the sense of taking advantage of the
weaker’s disability, either by:
a. active extortion of the bargain; or
b. passive acceptance of it in circumstances where it is contrary to conscience that the
bargain should be accepted;
 Unconscionability will be found in agreements where the terms are unfair and the
disparity is sufficiently marker to allow the court to conclude that the stronger party
should have known of the other party’s position of weakness and took advantage of it

Rebuttal: stronger party must show that the transaction was a fair and reasonable
one and should therefore be upheld

The Effect of Unconscionability

  The contract is voidable at the instance of the weaker party
 In appropriate cases the court may simply reduce that party’s liability instead of
extinguishing it completely
 The right to relief can be lost through ratification, affirmation, delay, intervention by a
third party or unconscionable conduct by the weaker party

Cases where unconscionability was found

 Moffat: separation agreement where wife ceded entire interest in matrimonial
property. Court said it was marginal case, but unconscionable as strain on wife, her
ignorance of the value of the home and lack of independent legal advice created a
serious disadvantage, which was known and taken advantage of by the husband
 Nichols: imbalanced arrangement, where the plaintiff knew or ought to have known of
the disadvantage, even though the intention was not to exploit

Cases where unconscionability was not found

 Hart: vendor O suffering from senile dementia. Not unconscionable as H had no
actual or constructive knowledge of disability, he was acting in good faith (no
victimisation), value was set by valuer (not H), independent legal advice was taken
 Gustav: director P of company G was terminally ill with cancer. Not unconscionable
as P was perfectly capable of conducting his affairs at the time of the transaction, M
had applied no pressure and there was nothing unconscionable about the transaction

Imputing unconscionability to the bank

Where the bank knew or ought to have known of wrongdoing by a principal debtor in
procuring a guarantee for a loan, but does nothing, they have passively accepted the benefit
in unconscionable circumstances.
 Amadio: elderly, non-English speaking parents guaranteed son’s loan. Held bank
manager knew of special disability of parents, and despite this did nothing to make
sure they understood the nature and extent of the transaction, and therefore the bank
was taking advantage which was unconscientious
 Bowkett: son used elderly parents’ home as security for loan. Held plaintiffs were
under significant disability as they were unversed in business matters, under
pressure from son, had no independent legal advice, large inadequacy in
consideration (would receive no benefit). Held the defendants, through their agent
the legal executive, knew or ought to have known of this disability and accepted the
benefit in unconscionable circumstances

Privity of contract
 Promise creates benefit/obligation for third party
 A contract cannot confer any obligations/rights to a third party that is not part of the
contract - they cannot sue (or be sued) on the contract, even if they are specifically
intended to benefit under the terms of the contract
o No consideration under the contract
 Only parties of the contract can sue for breach

Privity – Privity refers to a legal relationship that exists between two or more parties to a
transaction (a contract)
Privy – A party who is in privity with another
Beneficiary - The person or party who is to receive the benefit under a legal instrument (e.g.
a contract, a will, a trust).
Stranger – A stranger to a contract is a person or party who is not a party to the contract

Applicable law:
 Contracts before April 1983 - common law doctrine applies to burden and benefit
  From April 1983 - statutory rules apply to benefit, common law continues to apply to
burden

Common issues
 Whether the beneficiary who is a non-party to a contract is entitled to enforce a
benefit conferred under the contract?
o Could interfere with the rights of the parties under the contract
o How could parties rely on the contract?
o If the contract provides a benefit to the third party, and parties then change
their mind/terms of the benefit, this is unfair and might impact the third party
 Highly controversial, led to revision of common law. Now regulated by
statute - Contract Privity Act 1982, now incorporated into Contract and
Commercial Law Act 2017
 Whether the beneficiary is a designated person under s 12 of the CCLA 2017?
o How do we identify these people?

Common law doctrine of privity of contract

1. Only a party to a contract can enforce it
2. A contract cannot impose an enforceable obligation on a stranger, that is, a person
that is not a party to a contract.

Reason for the rule:

 A person should not be subject to obligations without their consent (meet obligations
in contracts they have not been involved in)

Two principles (Dunlop Pneumatic Tyre Co)

1. Benefit aspect: A contract cannot confer benefits on a third party. Only an original
party to a contract can sue on it. A beneficiary cannot sue
o Note: Promisee (who is a party to a contract) may sue to enforce a promise where the
Promisor agreed to confer a benefit on a third party
2. Burden aspect: a contract cannot impose restrictions or burdens on a third party.
Only an original party to a contract can be sued on it

Tweedle v Atkinson (1861) (QB)

 Couple getting married, father of the groom and father of bride agreed that they would each pay a sum of
money to the couple
 Father of the bride and father of the groom died before paying the money
 Groom claimed against the executor of the bride's father's estate to get the money, but was unsuccessful
as the groom was not a party to the contract and therefore not entitled to enforce the agreement - only the
original parties can sue (i.e. the fathers)
 Per Wightman J: …it is now established that no stranger to the consideration can take advantage of a
contract, although made for his benefit [at 397-98 judgement]

Dunlop Pneumatic Tyre Co Ltd [1915] (HL)

 Dunlop made a contract with Dew to sell tires at a discounted price. Condition that Dew would not resell
tire at less than listed price, and any reseller from Dew had to agree also not to sell at a discounted price
 Dew sold tires to Selfridge who went on to sell at discounted price, and Dunlop objected
 Dunlop could not impose obligation on Selfridge, as there was no contract between Dunlop and Selfridge
(obligation with Dew, not with Selfridge)
 Third party cannot be sued for non-performance of an obligation imposed upon them by a contract to
which they are not a party

Remedies for promisor’s breach

  Promisee (who is a party to a contract) may sue to enforce a promise where the
Promisor agreed to confer a benefit on a third party
 If the promisor fails to fulfil the promise made to the promisee in favour of a third
party, the promisee can sue the promisor for breach of contract and may obtain a
remedy
 How do you quantify loss suffered, if the promise benefits a third party ("stranger")
but not the promisee?

Specific performance
 Discretionary remedy, only available if damages are inadequate

Beswick v Beswick [1968] (UKCA, HL)

 Lord Denning (CA): Someone specifically intended to benefit from a contract should be able to enforce it
 The House of Lords disagreed with Denning’s reasoning, but allowed specific performance for other
reasons

Common law damages

 Damages awarded to compensate any loss suffered by the claimant
o Can be argued that the original party lost nothing if they had nothing to
personally gain from the contract
o Promisee must show they have suffered a genuine loss as a result of the
promisor's breach to fulfil their promise in favour of a third party (difficult to
prove)
 Remedies for loss suffered by the third party
o General rule: contracting party cannot recover losses suffered by a third party
o Jackson departed from this rule - can recover when third party is family?

Jackson v Horizon Holidays [1975] (UKCA)

 Booked holiday for himself and his family through the defendant, it was such terrible accommodation that
the whole family suffered discomfort and they went home disappointed
 Could he recover the money for his loss and the loss his family suffered?
 Held that the plaintiff, being a party to the contract, could recover damages for the loss suffered by his
whole family (partial recovery of loss)

Exceptions
These exceptions allow imposition of rights and obligations on third parties:
 Trusts: The beneficiary of a trust may sue the trustee to carry out the contract
 Collateral contract: If A enters into a contract with B on the condition that B enters
into a contract with C, A may have the right to sue 'C' for compensation if they breach
the contract
 Agency: A person who has taken no part in the making of a contract, and who may
not even be named in it, can sue and be sued on the contract as undisclosed
principal if it can be shown that the party making the contract was acting as his/her
agent
o A servant or agent whose act or omission causes loss is not protected by
exclusion clauses
 Third-party insurance: A third party may claim under an insurance policy made for
their benefit
 Assignment: The contract is in effect transferred to a third party, the assignee.
  Statutory exceptions: e.g. s 24 of Consumer Guarantees Act 1994 provides that
donees of goods may enforce the statutory guarantees against suppliers

Strict application of the doctrine of privity can lead to unjust decisions - eventually lead to
statute being created where 3rd parties can receive benefit.

Contract and Commercial Law Act 2017

 Consolidating act, replaced Contracts (Privity) Act 1982
o Contracts before April 1983 - common law doctrine applies
o From April 1983 onwards - statutory rules apply

Part 2 Subpart 1 of the Contract and Commercial Law Act 2017

S 10: modifies the common law benefit rule and allows a third party to enforce the benefit
conferred by a contract to which he or she is not a party, provided certain requirements are
met
 Note: burden aspect still controlled by common law
 S 11: defines benefit

S 12: Deeds or contracts for the benefit of third parties

(1) This section applies to a promise contained in a deed or contract that confers, or purports
to confer, a benefit on a person, designated by name, description, or reference to a class,
who is not a party to the deed or contract.
(2) The promisor is under an obligation, enforceable by the beneficiary, to perform the
promise.
(3) This section applies whether or not the person referred to in subsection (1) is in existence
when the deed or contract is made.

S 20: any right or remedy that is available apart from this subpart is not limited or affected
 Promisee can still enforce a benefit for a third party under the common law - the
subpart just brings a more reliable remedy for the third party

Effect of CCLA
Where a contract contains a promise that confers a benefit on a third party, an obligation is
imposed on the promisor to perform the promise, whether or not the third party beneficiary is
in existence when the contract is made. The beneficiary can directly enforce the
performance of the promise if:
 The beneficiary is designated by name, description or reference to a class (s 12)
 There is an intention to create a benefit enforceable by the beneficiary (s 13)

If these elements are established, s 17 empowers the beneficiary to enforce the promise as
if they were a party to the contract.
 Relief includes damages, specific performance, and injunction

Is a nominee sufficiently designated by description for the purpose of s 12?

 Wording of s 12 implies beneficiary will be expressly stated and must not be implied
o Initially very restrictive approach (Holloway), but relaxed to allow nominees to
enforce contracts (Rattrays Wholesale)
 A person who only appears to benefit from a contract but is not identified in a
contract cannot sue, must have the designation in the contract
  Parties' intention to create a legal obligation in the contract must be clearly
established

Rattrays Wholesale Ltd [1997] (HC)

Facts:
 Rattrays sublet supermarket premises to defendants (M)
 In return, M paid money and there was a clause in the contract that M is only going to buy goods from
Gus (supplier) or the “lessor's nominee”
 M bought goods from someone else. R sued M on behalf of the lessor's nominee for breach of contract

Issue: Was the lessor's nominee sufficiently designated by name, description or reference to a class for s 12?

Held:
 Lessor's nominee was sufficiently designated by description for the purpose of s 12 - M would know with
sufficient certainty that the contract was intended to benefit a name coming from R
o Lessor's nominee enough to know M should not have bought from just anyone
 More of a liberal approach - criticised the restrictive approach in Holloway
o If a nominee is referred to in the contract, with an intention of creating legal obligation in their
favour, this nominee is a beneficiary under s 12
 Tipping J: "The purpose of the designation requirement was to enable the promisor to know with sufficient
certainty who could claim the benefit of the promise. Once nominated that person was identified with
certainty. It did not matter that until then the person could be anyone at all."

Laidlaw v Parsonage [2009] (NZCA)

 Affirmed decision in Rattrays
 Sale of house, family trust, L agreed to sell to P or a nominee of family trust. Is the designation sufficient
for the purpose of s 12?
o Yes - nominee designated by description
 Ellen France J: "The promise relied on by the trustees was made to the purchaser and the purchaser
included the nominee. There was therefore a promise which purported to confer a benefit on a person to
whom there was a sufficient designation in terms of s [12]. Nothing turned on the fact that the provision
was included as part of the description of the parties rather than part of the terms setting out the benefit
the nominee was to receive, nor on the fact that the nomination remained revocable up until the time of
the contract."

Pre-incorporation contracts
 S 12 allows for a beneficiary not yet existing at the time of contracting to be
designated
o Pre-incorporation of company: company not yet formed, contract leads to a
benefit for that company (McKinlay Hendry Ltd)
 Issue: Whether the parties are providing a benefit the pre-incorporated company, or
whether the parties to the contract are acting as an agents of the pre-incorporated
company?
o If the parties in the contract are providing a benefit for the pre-incorporated
company => s 12 will apply
o If the parties are acting as agents of a pre-incorporated company => s 12 will
not apply

Variation or discharge of contract

S 14: The promise and obligation cannot be varied or discharged without the consent of the
beneficiary where:
 The position of the beneficiary has been materially altered by his or her own or
another’s reliance on the promise; or
 The beneficiary has obtained judgment upon the promise; or
 The beneficiary has obtained the award of an arbitrator upon a submission relating to
the promise.
If the parties to the contract change their mind the beneficiary may suffer. S 14 sets limits as
to when the contracting party can vary or discharge the contract. Consent from beneficiary
needed to vary or discharge contract in certain cases.

S 15 provides that a variation or discharge is possible at any time:

a. by agreement between the parties to the deed or contract and the beneficiary; or
b. in accordance with an express provision in a contract which is known to the
beneficiary, and the beneficiary has not, before becoming aware of the provision, materially
altered his or her position in reliance on the promise

S 16 provides that the court may authorise a variation or discharge, even if prevented by s
14, if it is just and practicable to do so, on terms that it sees fit.
 If the beneficiary is “injuriously affected” by the order, the court must make it a
condition that the promisor pay compensation of a sum that the court thinks just
 Either party can apply to the courts. Conflicts with doctrine of estoppel