Contractual Defects: Part B - Duress, Undue Influence, Unconscionability

Duration: 11:53 1540 transcript words EN summary

Video summary

This video explores three specific contractual defects: duress, undue influence, and unconscionability, using a recurring scenario involving characters named Sonia and Ahmed to illustrate each concept. Duress is defined as an illegitimate threat of harm that makes a contract voidable at the victim's option, encompassing threats against a person, their reputation, goods, or financial stability. A key distinction in economic duress lies between normal commercial pressure during negotiations and illegitimate pressure; a contract formed under economic duress typically requires proof that the threat was made in bad faith, left no reasonable alternative for the victim to resist, prompted immediate action once the pressure ceased, involved protest at the time of the threat, or occurred without independent legal advice. In the first example, Sonia threatens Ahmed with releasing an embarrassing video unless he buys her laptop, creating a duress based on harm to reputation that renders the agreement voidable because it was formed under illegitimate coercion. Undue influence occurs when one party is psychologically manipulated into entering a contract due to a relationship of trust or confidence known as a fiduciary relationship. To establish this defect, there must be evidence of actual influence exercised by one person over another and causation showing that this influence led directly to the creation of the contract. While influence can sometimes be presumed in relationships like lawyer-client or doctor-patient, it is also assumed when one party depends on the other for guidance, such as a student relying heavily on their tutor. Causation may similarly be presumed if the transaction appears suspicious because it offers little benefit or high risk to the weaker party, unless rebutted by evidence that the influence did not cause the agreement. In the second scenario, Sonia leverages her position as Ahmed's trusted tutor and mentor to convince him to purchase an expensive laptop he does not fully understand, exploiting his dependence on her authority to create a contract tainted by undue influence. The third defect discussed is unconscionability, which arises when one party exploits another's weakness or vulnerability to secure an unfair deal. This presumption exists if there is a substantial inequality in bargaining power due to personal traits like naivety or situational factors such as poverty and distress, combined with terms that are substantially one-sided in favor of the stronger party. Unlike duress or undue influence which often require specific intent, unconscionability can be established even without proof that the stronger party knowingly took advantage of the weaker one; it simply requires showing an inability to protect interests and a bargain that unduly advantages one side over another. The video cites the Canadian Supreme Court case *Uber Technologies v Heller*, where a standard form contract imposed prohibitive arbitration fees on drivers, creating such a disparity between the multinational corporation's power and the individual driver's financial reality that the clause was deemed unconscionable despite no malicious intent by Uber. In applying these principles to the final scenario involving Ahmed and Sonia, the video concludes that his desperate situation—facing an urgent assignment deadline with a broken laptop while being pressured into buying an overpriced device at $2,000—creates both inequality of bargaining power and substantially unfair terms. Because Sonia exploits this distressing circumstance where Ahmed feels he has no choice but to accept her offer, the contract is presumed unconscionable. This legal framework ensures that contracts formed under such extreme imbalances are not enforced against the vulnerable party, allowing them to seek remedies like voiding the agreement if they can demonstrate that their consent was obtained through exploitation of weakness rather than free and informed decision-making.

Read the full video transcript

This is Whan Chow. Welcome to contractual defects part B. Duress, undue influence, and unconscionability. We're back with Sonia and Ahmed. Sonia says, "Ahmed, I need some money. Do you want to buy my Apple laptop for $700?" And Ahmed says, "Honestly, Sonia, I can't afford it right now." Sonia says, "Listen carefully. If you don't buy it, that video of you at the party last month might accidentally get posted online. You wouldn't want your parents or your professor to see that, would you? Ahmed says, "What? That's private. You can't do that." Fine, I'll buy it. The contractual defect of duress is where there is some kind of illegitimate threat of harm that renders a contract voidable at the victim's option. There are a number of different types of duress. There is duress of person which involves a threat of harm to the party involved in the contract or one of their loved ones. This includes a threat of harm to reputation. There's duress of goods, which is a threat to detain, damage, or destroy goods. And also economic duress, a threat that may cause financial harm. Let's speak a little bit more about economic duress. Economic duress involves some kind of threat to cause financial harm. The difficulty of applying economic duress is to discern the difference between what is what might be considered to be illegitimate pressure versus normal commercial pressure. There's always pressure, some kind of pressure exerted in situations where parties are negotiating and each party is trying to get the best deal for themselves. A contract is more likely to be avoidable due to economic duress if there are a number of different things. One is there is a threat made in bad faith. The victim could not reasonably resist. The victim acted promptly once pressure was removed. The victim protested at the time of the threat if it was practical to do so. And the victim did not have legal advice before succumbing to the pressure. In this instance with Sonia and Ahmed, there is duress of person since Sony made a threat to harm Ahmed's reputation by releasing the video. The contract is voidable at Ahmed's option because it was formed under that illegitimate pressure. Let's now move on to the next scenario involving Sonia and Ahmed. In this scenario, Sonia is now Ahmed's tutor. As his tutor, she says, "Ahmed, you've been struggling in this course. I really want to help you pass. By the way, do you want to buy my Apple laptop for $700?" Ahmed says, "I don't know. I'm not good with computers and I can't really judge if it's worth it." Sonia says, "Trust me, Ahmed. This laptop will make a difference, a big difference for your studies. And Ahmed says, "Well, if you think it's best, if it's the best thing for me, then okay, I'll buy it." The contractual defect of undue influence is where someone has been psychologically manipulated into entering a contract. To prove undue influence, a plaintiff must show two things. First is influence. Second is that that influence causes a contract to be created. The first requirement of influence did one person exercise influence over another person. Influence is assumed where there is a fiduciary relationship between the two parties. A fiduciary relationship is considered to be a relationship based on trust or confidence such as the relationship between a lawyer and a client, a physician and a patient, a parent and a minor child. The stronger party in a fiduciary relationship is assumed to have influenced the weaker party. The second requirement is causation. The stronger party's influence needs to have actually caused the weaker party to enter into the contract. Causation is presumed if the transaction was considered to be suspicious. A transaction is suspicious if it creates little benefit or great risk for the weaker party. That presumption can be rebutted by evidence that the influence did not actually cause the other party to enter into the contract. In this scenario, Sonia is in a fiduciary-like role as a tutor or mentor to Ahmed. Ahmed depends on her for guidance and trusts her authority. Sonia uses that position of trust to push him into a contract that benefits her. This is undue influence. Therefore, the contract is voidable at Ahmed's option. Here's our next scenario. Sonia says, "Ahmed, do you want to buy my Apple laptop? I'll sell it to you for $2,000." Ahmed says, " $2,000? That's way more than I can afford, but my laptop just broke yesterday and I have a major assignment due tomorrow. Sonia says, "Exactly. Without a laptop, you'll probably fail that assignment. Think about your grades." Ahmed. Ahmed says, "I really can't fail. I guess I don't have a choice. I'll take it." The contractual defect of unconscionability is when one person exploits another person's weakness to create an unfair deal. Uncontionability is presumed if we have two things. First, a substantial inequality of bargaining power where one person is much stronger and the other party is much weaker. And this may be due to personal traits such as illiteracy, naivity, inexperience or gullibility or situational factors such as poverty, depression, infatuation, distress or drunkenness. The second requirement to raise a presumption of unconscibility is substantial unfairness of terms. This is where the transaction is substantially one-sided in favor of the stronger party. Once a a presumption of unconscionability is raised, it can be rebutted by proof that the bargaining process was fair, such as the weaker party having received independent legal advice before entering into the contract. The leading case in unconscionability is the Supreme Court of Canada decision in Uber technologies and Heler. In that case, there was someone named David Heler who was a driver for Uber delivering food. To become an driver for Uber, he had to accept a standard form contract provided by Uber. Within that contract was an arbitration clause that required any disputes under that agreement to be resolved through mediation and arbitration in the Netherlands. The arbitration clause also required an upfront administrative and filing fee of $14,500 plus the payment of any legal fees and other costs of participating in the dispute resolution process. Mr. Heler earned between $400 and $600 a week driving for Uber. Those fees under the arbitration clause represented most of his annual income. The legal issue that the court examined was whether or not that arbitration clause was invalid on the basis of unconscionability. The court examined the law of unconscionability. It pointed out that unconscionability requires both an inequality of bargaining power and a resulting improvident bargain and that an inequality of bargaining power exists when one party cannot adequately protect their interests in the contracting process and a bargain is improvident if it unduly advantages the stronger party or unduly disadvantages the more vulnerable. The court also pointed out that unconscionability can be established without proof that the stronger party knowingly took advantage of the weaker party. In other words, the stronger party does not need to intentionally take advantage of the weaker party. So in applying that law to the facts of this case, the Supreme Court found that there was clearly inequality of bargaining power between Uber and Mr. Heler. It pointed out that the arbitration agreement was a part of a standard form contract and that Mr. Heler was powerless to negotiate any of its terms. His only contractual option was to either accept or reject that contract. The court also pointed out that there was a significant gulf in sophistication between Mr. Heler as a food delivery man in Toronto and Uber, a large multinational corporation. As well, the arbitration agreement contains no information about the costs of mediation and arbitration in the Netherlands. A person in Mr. Heler's position could not be expected to appreciate the financial and legal implications of agreeing to arbitrate under ICC rules or under Dutch law. The court in in determining that the that the contract was improvident or that the arbitration clause was improvident uh said that the mediation arbitration processes required $14,500 in upfront administrative fees and that this amount is a close is close to Mr. Heler's annual income and does not include the potential costs of travel, accommodation, and legal representation or lost wages. The court noted that these costs are disproportionate to the size of an arbitration award that could reasonably have been foreseen when the contract was entered into and that the arbitration agreement also designates the law of the Netherlands as the governing law and Amsterdam as the place of the arbitration. This gives Mr. Heler and the other Uber drivers in Ontario the clear impression that they have little choice but to travel at their own expense to the Netherlands to individually pursue claims against Uber through mandatory mediation arbitration in Uber's home jurisdiction. In this scenario, Ahmed is under intense pressure. He has an urgent academic deadline and a broken laptop. Sonia exploits this desperate circumstance to push an unfair price. With both inequality of bargaining power and substantially unfair terms, the contract is presumed to be unconscionable and may be voidable at Ahmed's option.