Equity and Trusts: Unconscionable Conduct, Undue Influence, and Estoppel

Module 3: Unconscionable Conduct, Undue Influence, and Estoppel in Equity

Unconscionable Conduct and Undue Influence Distinction

• Unconscionable Conduct: This doctrine focuses on preventing a stronger party from unconscientiously exploiting a person who is under a special disadvantage or disability. The core inquiry is whether the stronger party acted against good conscience by benefiting from the weaker party's vulnerability.

  • Assesses the circumstances surrounding the transaction, with a primary focus on the inherent inequality between the parties, which may extend beyond mere bargaining power to include various forms of disadvantage.

  • Key Example: Commercial Bank of Australia v Amadio $(1983)$ $151$ CLR $447$, where the bank took advantage of the Amadios' age, limited English proficiency, and lack of business experience to secure a guarantee.

• Undue Influence: This doctrine examines the quality of consent given by the weaker party. It scrutinizes whether the transaction was the free, voluntary, and independent act of the weaker party, or if it was procured by the improper influence of the stronger party.

  • Concentrates specifically on the nature of the relationship between the parties, typically one where there is an existing relationship of trust and confidence, or a position of ascendancy by one over the other.

• Note: This discussion builds upon the principles of vitiating factors studied in LAW1116 Contract. Statutory provisions from the Australian Consumer Law (e.g., $s$ $21$, $22$ ACL for unconscionable conduct) are not covered here as they fall outside the traditional scope of 'equity'.

The Doctrine of Unconscionable Conduct

• Foundations: Grounded in fundamental notions of 'good conscience' or 'hard conscience', which serve as the moral underpinning for equitable intervention. This concept historically justified the 'common injunction' to restrain unconscionable legal claims, a practice now obsolete.

• Protection: Aims to protect individuals who are under a 'special disadvantage' or 'disability' such that they cannot make a judgment as to their own best interests ($per$ Mason J in Amadio).

  • Examples of special disadvantage can include poverty, sickness, age, infirmity of body or mind, illiteracy, lack of education, inexperience, or emotional dependence (this list is not exhaustive).

• Relationship with Undue Influence: While closely related, unconscionable conduct and undue influence remain distinct doctrines, though they often overlap and can sometimes be pleaded concurrently.

  • Cases that may blur the distinction or allow for both claims include: Bridgewater v Leahy $(1998)$ $194$ CLR $455$, Louth v Diprose $(1992)$ $175$ CLR $621$, Thorne v Kennedy $(2017)$ $263$ CLR $85$.

  • It is possible to plead and obtain relief on both grounds in certain circumstances, highlighting their complementary nature in protecting vulnerable parties.

The Doctrine of Undue Influence

• Characteristics (per Johnson v Buttress $(1936)$ $56$ CLR $113$):

  • Ascendancy of one person over another, implying a dominant position. This doesn't necessarily mean abuse, but rather the potential for it.

  • Dependence of the weaker party on the stronger party, which could be emotional, financial, or intellectual.

  • Trust in the relationship, where the weaker party places confidence in the stronger party.

  • The influence must be 'undue', meaning it goes beyond acceptable persuasion and amounts to an improper or unconscientious use of power over the other's will.

• Types of Undue Influence: May be either actual/express undue influence, requiring specific proof of improper influence, or presumed undue influence, where the nature of the relationship itself prompts an assumption of undue influence.

Actual/Express Undue Influence

• Requirement: This type of undue influence does not require a special or antecedent relationship of trust and confidence between the parties. It focuses on specific improper conduct at the time of the transaction.

• Proof: The claimant must affirmatively establish:

  • $i)$ The existence and exercise of actual influence by the stronger party in the particular instance of the transaction.

  • $ii)$ The improper use of that influence, which effectively overbore the will of the weaker party, making the transaction not a truly free and independent act.

• Rebuttal: If proven, the stronger party must rebut this by providing evidence that the weaker party exercised free and independent will, such as receiving independent advice or having a full understanding of the transaction.

• Examples of improper use: This can include coercion, cheating, or overreaching (as per Allcard v Skinner $(1887)$ $36$ Ch D $145$), where the transaction is unfairly obtained through psychological or other forms of pressure.

Presumed Undue Influence

• Justification (Cotton LJ in Allcard v Skinner):

  • Actual Undue Influence: Operates to prevent the donee from benefiting from their own fraud or wrongful act, akin to a tortious wrong.

  • Presumed Undue Influence: Arises from public policy considerations, which require the prevention of the abuse of influence that is inherent within certain types of relationships. This creates a rebuttable presumption of fact that undue influence was exercised.

• UK House of Lords Classification (Barclays Bank Plc v O’Brien [1994] $1$ AC $180$):

  • Class 1: Actual undue influence, where improper pressure is specifically proven.

  • Class 2A & 2B: Categories of presumed undue influence.

  • This classification system, particularly the distinction between Class 1, 2A, and 2B, is commonly applied in Australian courts.

• Class 2A: Special Categories / Types of Relationships: These relationships automatically raise a presumption of undue influence due to their inherent nature, where one party is legally or professionally bound to care for the interests of the other. The law considers it highly probable that one party would place trust and confidence in the other, creating potential for abuse.

  • Solicitor & client (Haywood v Roadknight [1927] VLR $512$).

  • Doctor & patient (Bar-Mordecai v Hillston $(1999)$ NSWSC $805$).

  • Carer & patient (Haskew v Equity Trustees [1918] VLR $571$).

  • Parent & child / guardian & ward (West v Public Trustee $(1942)$ $42$ SR (NSW) $259$).

  • Religious mentor & mentee (Allcard v Skinner; McCulloch v Fern $(2001)$ $185$ ALR $669$).

• Class 2B: Factual Relationship of Influence; Ascendancy: A presumption of undue influence arises not from the type of relationship itself, but from the specific facts and history of the relationship, demonstrating an imbalance of power and trust where one party has gained a position of ascendancy over the other.

  • Engaged couples; de facto partners (Louth v Diprose), where one partner might exert significant emotional or financial control.

  • Spouses (Yerkey v Jones $(1939)$ $63$ CLR $649$; Garcia v NAB $(1998)$ $194$ CLR $395$), particularly concerning guarantees given by wives for their husbands' debts.

  • An antecedent relationship of influence and trust, built over time, where one party has become reliant.

  • Dependence arising from factors such as extreme age, illiteracy, mental or physical incapacity, lack of business acumen, or lack of education (Johnson v Buttress), which individually or in combination contribute to one party's susceptibility to influence.

Exclusions and Third-Party Benefits

• Wills and Probate: The presumption of undue influence generally does not apply to transactions involving wills and probate. In this context, actual undue influence amounting to coercion (e.g., actual compulsion or manipulation) must be affirmatively proven, as distinct from mere persuasion or advice (Bridgewater v Leahy).

• Third-Party Benefit: The benefit from undue influence may flow to a third party who was not directly involved in exerting the undue influence. Collusion is not a necessary element, but the third party must have been aware, or ought to have been aware, of the undue influence affecting the donor's decision-making (Khan v Khan $(2003)$ NSWCA $155$). This often arises in guarantor situations.

Rebuttal of the Presumption

• Burden of Proof: Once a presumption of undue influence is established (in Class 2A or 2B relationships), the burden of proof shifts to the stronger party (the donee) to demonstrate that the donor exercised free will and independent judgment when entering into the transaction.

• Mere Understanding is Insufficient: Simply proving that the donor understood the nature and effect of the transaction is not enough. The stronger party must show that the donor acted freely, not merely with comprehension.

• Other Factors to Consider: Courts assess various factors to determine if the transaction was the result of the donor's free and informed decision:

  • $i)$ Adequacy of consideration (Watkins v Coombes $(1927)$ $27$ SR (NSW) 20$): While not a sole determinant, a lack of adequate consideration (e.g., a substantial gift with no return) makes it harder to rebut the presumption.

  • ii)$<strong>Independent advice (<em>Birch v Birch</em> [1994]$1$FLR$610$; <em>Inche Noria v Shaik Allie Bin Omar</em> [1929] AC$127$; <em>Bester v Perpetual Trustee Co Ltd</em> [1970]$3$NSWR$30$): This is a crucial factor. The advice must be independent (from someone not connected to the stronger party), full (explaining all aspects and consequences), and informed (based on accurate facts). It demonstrates that the weaker party had the opportunity for reflection and informed choice.

  • $iii)$ Improvidence of the transaction (e.g., whether it was a gift versus a contract, Union Fidelity Trustee Co of Australia v Gibson [1971] VR 573$): A transaction that is highly disadvantageous or improvident for the weaker party (e.g., giving away most of one's assets) will make it significantly more difficult to rebut the presumption.

Defences and Remedies

• Defence: Delay or laches, demonstrating acquiescence or affirmation of the transaction after the undue influence has ceased. The defence requires showing that the weaker party, once free from the influence, knowingly and intentionally decided not to pursue their rights.

  • Allcard v Skinner saw a 5-year delay considered as a factor, though the remedy was still limited.

  • Bester v Perpetual Trustee Co Ltd [1970] 3$NSWR$30$involved a 20-year delay where the plaintiff finally sought relief after reaching an age where she fully understood her past transaction.</p></li><li><p>The period is measured from when the donor became aware of the true nature of the transaction and was free from influence, and the court assesses if their subsequent conduct amounted to affirmation.</p></li></ul></li><li><p><strong>Remedies:</strong> The primary goal of remedies for undue influence is to restore the parties to their original positions (status quo ante) as much as possible.</p><ul><li><p><strong>Rescission of the transaction:</strong> This is the most common remedy, aiming to set aside the impugned contract or gift entirely, rendering it voidable and unwinding its effects.</p></li><li><p><strong>Injunctions:</strong> To prevent further unconscionable acts or transfers of property.</p></li><li><p><strong>Equitable compensation:</strong> Awarded when rescission is not possible or insufficient to cover losses directly flowing from the undue influence.</p></li><li><p><strong>Account of profits:</strong> To strip the stronger party of any profits made from the unconscionable transaction.</p></li><li><p><strong>Constructive trust (or equitable lien):</strong> May be imposed over property acquired through undue influence, compelling the stronger party to hold it for the benefit of the weaker party.</p></li></ul></li><li><p><strong>Effect on Specific Performance:</strong> Proof of undue influence may defeat a claim for specific performance of a contract, as equity will not compel a party to perform a contract that was not freely entered into (<em>Blomley v Ryan</em>$(1956)$$99$CLR$362$).</p></li></ul><h6 id="431e99d6-6164-41e4-837d-0ec525b3e83a" data-toc-id="431e99d6-6164-41e4-837d-0ec525b3e83a" collapsed="false" seolevelmigrated="true">What is Estoppel?</h6><ul><li><p><strong>Definition:</strong> A fundamental principle in both common law and equity that prevents a person from asserting or denying a fact, or from relying on their strict legal rights, where it would be unconscionable or unjust to do so, given their previous conduct or representations.</p></li><li><p><strong>Foundations:</strong> Common law estoppel and equitable estoppel generally have different foundations and rationales, though some overlap exists. Common law estoppel is typically backward-looking (precluding a denial of existing facts), while equitable estoppel can be forward-looking (enforcing promises about future conduct).</p></li><li><p><strong>Unified Doctrine Debate:</strong> There is ongoing academic and judicial debate about whether a unified doctrine of common law and equitable estoppel should exist (e.g., <em>Kramer v Stone</em> [2024] HCA$48$). However, the current status quo in Australia generally maintains separate doctrinal paths for common law and equitable estoppel, albeit with recognition of underlying common principles.</p></li></ul><h6 id="56ce17bf-58d4-4186-bfbe-ed92616477ca" data-toc-id="56ce17bf-58d4-4186-bfbe-ed92616477ca" collapsed="false" seolevelmigrated="true">Estoppel in Common Law</h6><ul><li><p><strong>General Principle (per Dixon J in <em>Grundt v Great Boulder Pty Gold Mines Ltd</em>$(1937)$$59$CLR$641$at$674$):</strong> The law should not permit an unjust departure by a party from an assumption of fact which they have caused another party to adopt or accept for the purpose of their legal relations. If a party's action causes another to adopt an assumption, and that other acts on it to their detriment, the first party may be estopped from denying that assumption.</p></li><li><p><strong>Scope:</strong> Confined exclusively to assumptions and representations concerning existing facts (<em>Jorden v Money</em>$(1854)$$5$HLC$185$). It cannot apply to promises about future conduct or intentions.</p></li><li><p><strong>Operation:</strong> Operates primarily as a rule of evidence, determining the factual basis upon which legal rights and duties are then determined. It crystallises a state of affairs as between the parties.</p></li><li><p><strong>Traditional Role:</strong> Historically seen to operate entirely as a 'shield' (a defence) to prevent another party from asserting a fact, rather than as a 'sword' (a cause of action) to enforce a positive right or claim. It works defensively rather than creating new rights.</p></li><li><p><strong>Categories:</strong> Common law estoppel is generally divided into:</p><ul><li><p>$i)$<strong>Estoppel by Record:</strong> Includes estoppel by judgment (often referred to as issue estoppel, preventing re-litigation of decided issues; or res judicata, preventing re-litigation of the same cause of action) and estoppel by deed (arising from solemn representations in a formal deed).</p></li><li><p>$ii)$<strong>Estoppel by Conduct (Estoppel in pais):</strong> A broad category of common law estoppel based upon a course of conduct, which can arise by representation (where one party represents a fact, and another relies on it), or by convention (where parties conduct their relationship based on an agreed or assumed state of facts).</p></li></ul></li></ul><h6 id="69f5fc90-cd18-47ce-b0df-dfdb76d66266" data-toc-id="69f5fc90-cd18-47ce-b0df-dfdb76d66266" collapsed="false" seolevelmigrated="true">Estoppel in Equity</h6><ul><li><p><strong>Major Principles:</strong> Comprises two distinct but related principles, both designed to prevent unconscionable conduct:</p><ul><li><p><strong>Promissory Estoppel:</strong> Traditionally operates as a shield, but significantly expanded to act as a sword in Australia. It applies when there is a subsisting legal relationship (or an expectation of one), a clear and unequivocal assurance or promise by one party, reliance on that assurance by the other party, and resulting detriment if the assurance is not fulfilled (<em>Central London Property Trust Ltd v High Trees House Ltd</em> [1947] KB$130$; <em>Commonwealth v Verwayen</em>$(1990)$$170$CLR$394$).</p></li><li><p><strong>Proprietary Estoppel:</strong> Can operate as both a 'sword' (a cause of action, allowing a claimant to seek a proprietary right) and a 'shield' (a defence against claims to proprietary rights). It primarily concerns promises or representations relating to interests in land.</p></li></ul></li><li><p><strong>Consolidation (<em>Waltons Stores (Interstate) Ltd v Maher</em>$(1988)$$164$CLR$387):

    • Per Mason CJ, Wilson & Brennan JJ, promissory estoppel is considered a part of the broader, unified principle of equitable estoppel, with proprietary estoppel being the other part. This landmark case largely removed the requirement of a pre-existing contractual relationship for promissory estoppel.

    • In Waltons Stores v Maher, estoppel was notably used as a 'sword', allowing the Mahers to establish a cause of action and obtain relief against Waltons Stores for failing to proceed with a lease after the Mahers had acted to their detriment on the assumption that a contract would be concluded.

  • Juridical Basis: Unconscionability is the core underlying juridical basis for all forms of equitable estoppel. The court intervenes to prevent the unconscientious conduct of a party who resiles from a promise or representation after another has acted to their detriment.

  • Elements of Equitable Estoppel (per Waltons Stores v Maher): To establish equitable estoppel, a claimant must generally prove:

    • i)$A promise/representation (express or implied) made by the representor (<em>Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd</em>$(2016)$$260$CLR$1$, emphasizing clarity).</p></li><li><p>$ii)$An assumption/expectation by the representee that a certain legal relationship would arise or a promise would be fulfilled.</p></li><li><p>$iii)$Inducement by the representor, meaning the representor's conduct led the representee to adopt that assumption (<em>Commonwealth v Verwayen</em>).</p></li><li><p>$iv)$Reliance (action or inaction) by the representee on that assumption. This reliance must be reasonable in the circumstances.</p></li><li><p>$v)$Knowledge/intention on the part of the representor that the representee would act on the assumption. The representor must know or intend that their promise or conduct would induce reliance.</p></li><li><p>$vi)$Detriment to the representee if the assumption/expectation is not fulfilled, meaning the representee would suffer harm or loss if the representor departs from the promise (<em>Je Maintiendrai Pty Ltd v Quaglia</em>$(1980)$$26$SASR$101$).</p></li><li><p>$vii)$The representor has failed to avoid such detriment, usually by failing to fulfill the promise or to compensate the representee for their reliance loss (<em>Austotel Pty Ltd v Franklins Selfserve Pty Ltd</em>$(1989)$$16$NSWLR$582$).</p></li></ul></li><li><p><strong>Remedy:</strong> The 'minimum equity necessary to do justice'. The relief granted for equitable estoppel should be proportional to the detriment suffered by the relying party and should aim to prevent the unconscionable conduct. It is not necessarily about fulfilling the expectation, but preventing the detriment.</p></li><li><p><strong>Basis of Remedy:</strong> There is an ongoing debate between reliance-based remedies (aiming to compensate for the actual loss suffered due to reliance, returning the party to their pre-estoppel position) and expectation-based remedies (aiming to fulfill the promise, placing the party in the position they would have been in had the representation been true). Recent High Court decisions, such as <em>Giumelli v Giumelli</em>$(1999)$$196$CLR$101$and <em>Sidhu v Van Dyke</em>$(2014)$$251$CLR$395$, tend to favour preventing detriment, often resulting in reliance-based awards, though expectation-based relief may be granted where justified to avoid unconscionability.</p></li></ul><h6 id="824189f8-7b95-4af0-a123-ded7cf2ee4d2" data-toc-id="824189f8-7b95-4af0-a123-ded7cf2ee4d2" collapsed="false" seolevelmigrated="true">Proprietary Estoppel</h6><ul><li><p><strong>Scope:</strong> Operates predominantly in real property law, where promises or representations relate to present or future interests in land (e.g., promises of inheritance, rights to build, or occupy land).</p></li><li><p><strong>Limitation:</strong> It does not apply if there is an existing legally enforceable contract between the parties covering the proprietary right in question, as contractual remedies would then be available (<em>Giumelli v Giumelli</em>).</p></li><li><p><strong>Assumptions Regarding Proprietary Rights:</strong> Arises from assumptions concerning the grant, acquisition, or maintenance of proprietary rights, often through:</p><ul><li><p>$i)$<strong>Estoppel by encouragement:</strong> Where a party encourages another to act to their detriment based on a promise or representation of future proprietary rights. For example, explicitly encouraging someone to build on their land, or promising to leave them property in a will (<em>Dillwyn v Llewelyn</em>$(1862)$$45$ER$1285$). Notably, no need for subsequent encouragement or knowledge of reliance, the initial encouragement suffices (<em>Kramer v Stone</em>).</p></li><li><p>$ii)$<strong>Estoppel by acquiescence:</strong> Where a party with an interest in property knowingly allows another to act to their detriment based on a mistaken belief of obtaining or possessing proprietary rights, without correcting that mistaken belief (<em>Ramsden v Dyson</em>$(1866)$LR$1$HL$129$; <em>Priestley v Priestley</em>$(2003)$NSWCA$177$). The 'state of mind' of the promisor (knowledge of the mistake and the reliance) is highly relevant.</p></li><li><p>$iii)$<strong>Testamentary dispositions:</strong> Promises regarding inheritance or wills, where a person relies on a promise that they will inherit property upon the promisor's death (<em>Delaforce v Simpson-Cook</em>$(2010)$$78$NSWLR$483$; <em>Thorner v Major</em> [2009]$1$WLR$46$).</p></li></ul></li><li><p><strong>Test for Unconscionability (per Buckley LJ in <em>Shaw v Applegate</em> [1977]$1$WLR$970$at$978$$): Whether it would be dishonest or unconscionable for the person having the right sought to be enforced, to enforce it, given the encouragement, acquiescence, and detrimental reliance of the other party.

    • Other Criteria for Proprietary Estoppel: While the elements can vary slightly by jurisdiction and the specific facts, common factors include:

      • Mistaken belief as to legal rights regarding property.

      • Expenditure of money or effort (e.g., improving the property, foregoing other opportunities) based on that belief, representing the detriment.

      • Other party is aware of their inconsistent legal right (e.g., ownership of the land) and the mistaken belief of the relying party.

      • Other party expressly or impliedly encouraged such action or stood by allowing it to occur.

      • Detrimental reliance by the claimant, such that it would be unconscionable to allow the representor to depart from the assumption.

    • Remedy: The 'minimum equity required to do justice'. Similar to equitable estoppel generally, there is a discussion regarding the appropriate remedies, primarily between reliance loss (compensating the detriment suffered) versus expectation loss (fulfilling the promise of the proprietary right). The court seeks to satisfy the equity by providing what is necessary to prevent the unconscionable conduct