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05 August 2008
When considering whether a contract is unconscionable, should the question be asked with reference to the time of entry into the contract or the time when the contract became unconditional? In Gustav & Co Ltd v Macfield Ltd  NZSC 47 the Supreme Court adopted the former approach, reversing that taken by the High Court and the Court of Appeal.
The case concerned an agreement for the sale and purchase of substantial commercial premises. The purchaser acted through the person of its sole director, who at the time of the agreement was terminally ill. The agreement was conditional on the purchaser undertaking due diligence in respect of the premises. The agreement was declared unconditional by the purchaser almost three months after the agreement was executed. The purchaser’s sole director died about three weeks later.
The purchaser later claimed that the purchase price exceeded fair market value and that the bargain was unconscionable by reason of the director’s ill health. The High Court and the Court of Appeal both refused the plaintiff’s application to set aside the agreement as an unconscionable bargain.
The purchaser appealed to the Supreme Court. As the vendor raised the issue by way of cross-appeal, the court first had to consider whether to assess the unconscionability of the contract as of the date on which it was entered into or the date on which it was declared unconditional.
The lower courts had held that the correct question was whether the contract was unconsionable at the point at which it was declared unconditional. Their approach rested on the concept of passive acceptance and the nature of the specific contract, in which the due diligence clause had accorded the purchaser considerable scope to withdraw from the contract. The Supreme Court disagreed, holding that the correct approach was to examine whether the transaction was unconscionable at the date of its formation. However, it held that if a contract is varied at a later date to the detriment of the party claiming unconscionability, a court must assess whether the variation made the contract unconscionable as of the date on which the variation was agreed.
The Supreme Court disagreed with both points of the lower courts' analysis.
First, it held that passive acceptance concerns the acquisition of contractual rights, rather than the receipt of the benefit of a party's performance of obligations into which that party has already entered. Thus, the focus in the question of time should be on the entry into the transaction - that is, the time at which contractual rights were acquired, unconscionably or otherwise, not the time at which they were received.
Second, the particular terms of the contract, which in effect created an option to purchase because of the wide due diligence clause, did not make the relevant time of the inquiry that at which the purchaser became contractually bound. Even if the contract had been a true option, it would still have been correct to assess unconscionability at the time of entry, rather than on the date of exercise, because the vendor would have been in breach of the contract had it failed to accept the validity of the exercise of the option. It is the other party’s conscience that must be affected. Once the vendor entered into the transaction, it did (and could do) nothing amounting to conduct that rendered the bargain unconscionable.
The equitable doctrine of unconscionability is concerned with the conscience of the stronger party to a transaction. Therefore, the focus must be on the conscience of that party at the time at which it is said to have obtained a benefit (whether conditional or not) from the weaker party. The stronger party does not obtain new rights when a contract becomes unconditional, as the bargain is already in place. If the stronger party later gains more contractual rights by a variation, a court should examine the unconscionability of the variation agreement, but the mere performance of a contract or the fulfilment of conditions to which a transaction is subject does not attract separate consideration for unconscionability.
For further information on this topic please contact Chris Browne or Felicity Monteiro at Wilson Harle by telephone (+64 9 915 5700) or by fax (+64 9 915 5701) or by email (firstname.lastname@example.org or email@example.com).
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