March 20, 2017

NL Court of Appeal Restates Principles That Apply to Claims of Unconscionability

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Downer v Pitcher, 2017 NLCA 13


In this case, the Newfoundland and Labrador Court of Appeal considered the validity and enforceability of a full and final release involving two unrepresented individuals.

Background

The parties were involved in a motor vehicle accident caused by Downer rear-ending Pitcher’s taxi.  Downer, who admitted fault, agreed to pay for repairs to the taxi and $300 for income lost while the taxi was unavailable.  In return, Pitcher signed, without legal advice, a “Full and Final Release” which Downer had prepared using a precedent obtained from a lawyer.  The release purported to release Downer “without qualification or limitation” from all claims and causes of action arising from the collision, including bodily injury claims.     

While Pitcher felt fine at the time of the accident, she developed symptoms some seven months later and brought a claim against Downer on this basis.  She argued that the release was unenforceable because she had not read it in its entirety prior to signing it, and had thought that it related to property damage and income loss only.  

The lower court determined the enforceability of the release.  As no authority from the Supreme Court of Canada exists on this point, the trial judge was asked to determine which of two “tests for unconscionability” was applicable. 

Pitcher advanced the test enunciated by Justice Green, as he then was, in Howell v. Reitmans (Canada) Ltd. (2002), 215 Nfld. & P.E.I.R. 240 (Nfld. T.D.), which has three required elements: (1) inequality of bargaining position arising out of ignorance, need or distress; (2) the stronger party unconscientiously using a position of power to achieve an advantage; and (3) an agreement substantially unfair to the weaker party or substantially divergent from community standards of commercial morality, such that it should be set aside.

Downer advanced the test described in Cain v. Clarica Life Insurance Co., 2005 ABCA 437, which identified four necessary elements: (1) a grossly unfair and improvident transaction; (2) the victim’s lack of independent legal advice or other suitable advice; (3) an overwhelming imbalance in bargaining power caused by victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and (4) the other party’s knowingly taking advantage of this vulnerability. 

The trial judge preferred the test set out in Howell, which she characterized as presenting “a slightly lower threshold” than the “more extreme” test established in Cain.  After applying the Howell criteria to the facts, the trial judge held that the release was unconscionable and therefore did not operate to preclude Pitcher from bringing her injury claim.   Downer appealed this decision. 

Decision

The Court of Appeal, in a unanimous decision authored by Chief Justice Green, declined to adhere strictly to either of the suggested tests.  Given the equitable nature of the doctrine, the Court held that ‘rigid linguistic formulae’ should be rejected, as “any attempt to define a bright line that clearly identifies on which side of the line a particular case falls will likely fail”.  The Court advocated instead a ‘return to first principles’ in each individual case. 

Following a comprehensive review of the legal authorities, Chief Justice Green outlined the following “restatement of the applicable principles” in a claim for relief on the basis of unconscionability: 

1. A person claiming relief on grounds of unconscionability may succeed where:

(a)   there is an inequality of bargaining power between the parties resulting from or created by a special and significant disadvantage by reason of some condition or circumstance that provides an opportunity for the other party to take advantage of the party suffering from the disadvantage; and

(b)   the other party unfairly or unconscientiously (in the sense of lacking conscience) takes advantage of that opportunity.               

2. Inequality of bargaining position that is relevant to a claim for relief on grounds of unconscionability may arise from the personal characteristics of the claimant or the situation in which he or she finds himself or herself.  For example,

(a)   personal inequality could include special and significant disadvantage resulting from age, immaturity, senility, mental weakness, ignorance resulting from lack of access to critical information or physical disability; 

(b)   situational inequality could include special and significant disadvantage resulting from severe financial need or other pressure or dependence based on a trust or confidential relationship. 

No matter what the nature of the disadvantage, however, it must involve more than what would be regarded as reasonably tolerable differences and risks of normal human activity and interaction that one would expect from persons engaged in self-interested bargaining (i.e. the disadvantage must be “special”) and it must also have the potential, if allowed to govern the relationship, of the claimant being unfairly being taken advantage of (i.e. the disadvantage must be “significant”).

3. The advantage resulting from the inequality of bargaining power need not be a financial advantage; it could be of a more intangible kind that results in a transaction that, but for the disadvantage, the relief-seeker or no reasonable person in the position of the relief-seeker would not likely have entered into.

4. The circumstances surrounding the taking of advantage of the relief-seeker must be such that they make the other party’s actions unconscientious in the sense that in gaining the advantage the other party knew or ought, as a reasonable person in those circumstances, to have known of the relief-seeker’s vulnerability, therefore making it prima facie unfair or unconscionable for the other party to obtain and retain the benefit from the disadvantaged party.   Knowledge could be either actual (personal, willful blindness or willful or reckless failure to make relevant and reasonable inquiries) or constructive (knowledge of circumstances as would indicate, in the mind of a reasonable person, the relief-seeker’s vulnerability). 

5. Where the conditions in (1) are present, the normal policies of preserving the freedom and sanctity of contract will be displaced in favour of providing relief to the party claiming to have been taken advantage of, unless the other party can demonstrate:

(a)   the resulting transaction was not unfair in the sense that it was not improvident or otherwise did not in fact confer an undue advantage, whether tangible or intangible, on the other party; 

(b)   the relief-seeker had the benefit of relevant legal or other advice and, knowing of the disadvantage, voluntarily chose to proceed with the transaction anyway;

(c)   the other party took steps to bring the unequal circumstances to the attention of the relief-seeker or otherwise acted reasonably to be protective of the relief-seeker’s vulnerable position;

(d)   recognized equitable defences apply. 

6. While not a requirement for relief, evidence of the existence of a resulting improvident bargain, in the sense of some financial detriment to the relief-seeker, may be relevant to drawing an inference that a special and significant disadvantage existed or that an unfair or unconscionable use was made of the position of disadvantage of the relief-seeker by the other party.

In applying these principles, the Court noted the following.  Aside from Pitcher being characterized as “meek and unsophisticated”, no personal special disadvantage existed as between the parties.  Pitcher was a self-employed woman who was not incapable of looking out for her own interests.  The fact that she had no legal advice and did not read the full release before signing was her own choice.  Any “need” arising from the loss of income while her vehicle was being repaired was not of such a magnitude that she was compelled to agree to disadvantageous terms.     

For his part, Downer did not know that Pitcher believed the release only covered property damage and income loss.  He had suggested that she read the document and he did not represent that it was anything other than what the words clearly conveyed.  He relied on Pitcher’s assurance that she felt okay and he did not think that she had been injured.  There was no indication that he knew, in the actual or constructive sense, of any vulnerability or special and significant disadvantage.      

Having observed that, ‘the mere fact that a bargain turns out to be improvident or foolish for one party does not provide a basis for relieving that party from the product of his or her foolishness’, the Court found that the trial judge had erred in holding that the release was unenforceable on grounds of unconscionability and declared that Downer could rely on the release in defending Pitcher’s injury claim.      

In concluding its reasons, the Court made the final point that the right of insured tortfeasors to make private agreements with claimants so as to avoid risk classification reassessments by their insurers, which is permissible in this jurisdiction (Insurance Companies Act, RSNL 1990, c. I-10, s. 96.2; Automobile Insurance Prohibited Underwriting Regulations, NL Reg 80/04, s. 4(1)(b)), would be effectively negated if attempting to do so was essentially always regarded as an unconscionable attempt to take advantage of a tort claimant.

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