Wednesday, January 8, 2014

A Contract is a Contract is a Contract...or not?

Any competent lawyer, representing one side in contract negotiations, will advise the other side to obtain independent legal advice.  It's a professional requirement.  In general, when a lawyer is advising a client behind the scenes and drafting contract language, the language will include a clause indicating that the parties have all had an opportunity to obtain independent legal advice, and the client will be advised to suggest ILA to the other parties to the contract.  In some contexts, ILA is absolutely required, and can't be waived.  Other times, it's just a good idea.  But it's almost always a good idea for represented parties to suggest that unrepresented parties obtain ILA, because otherwise you may be taking a chance that the unrepresented party will later come back and challenge the contract.

I recently had a conversation with a friend of mine who operates a successful business - a sophisticated businessman with some experience of the legal system - who felt that contracts should not be so vulnerable to subsequent challenge.  He made an argument to this effect:  If you and I are negotiating terms, and I get you to sign a contract that has terms in it that are very advantageous to me, what's wrong with that?  If you're so imprudent as to sign the contract without appreciating the effect of those terms, why should you be spared the consequences of your own folly?  Especially if there's a term in the contract saying that you obtained independent legal advice, or had the opportunity to do so, how and why can you get around it later?

The Unconscionability Doctrine

There are countless ways of challenging a contract, but the key issue that my friend was highlighting was the doctrine of "unconscionability".  In Ontario, the doctrine of unconscionability sets the test high - it can be very difficult to get out of a contract this way.  I started explaining it to my friend with a "clearest case" kind of scenario:  Suppose that you're a highly sophisticated and educated person, and I'm uneducated, learning-disabled, with very limited literacy skills.  You put a contract to me with highly technical language which you know I won't understand, and which are so detrimental to me that no reasonable person would ever agree to them if they were understood.  Even my friend agreed that, in that case, it would be inappropriate to hold me to the contract.

There are four criteria to the unconscionability test:

(1) A grossly unfair or improvident transaction;
(2) Victim's lack of independent legal advice or other suitable advice;
(3) 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 other disability; and
(4) Other party's knowingly taking advantage of this vulnerability.

Saying "I didn't read the contract before signing" isn't helpful.  But what this test essentially gets at is a failure to understand the terms of the agreement, because it's a fundamental element of contract law that there be a meeting of the minds on the terms of the contract.  Not understanding the terms isn't quite enough, though:  There needs to be some element of exploitation.  If I put a contract to you with language I know you won't understand, and tell you that it's off the table as soon as you walk out the door, then I'm taking advantage of the fact that you aren't going to understand the terms, and not giving you an opportunity to remedy your lack of understanding.

This is why we recommend obtaining ILA.  ILA itself will defeat claims of unconscionability; but even if it isn't actually obtained, the fact that ILA was recommended and a meaningful opportunity was given to seek and obtain ILA will provide a lot of protection against allegations of exploitation.  "I put the contract to him, and yes I realized that he might not grasp the terms, but I told him to take it home, talk to a lawyer about it, and get back to me in a week."  This is why my friend's suggestion of just including an ILA clause in the contract isn't sufficient - because it doesn't actually resolve concerns about comprehension and exploitation.  Indeed, if you sign a contract saying "I obtained ILA" when you and I both know that you didn't, that's going to cast a shadow on the contract.

Where Does Unconscionability Stop?

My friend's concern is about the vulnerable party later changing his mind when the contract isn't going his way, or when he begins to suffer the consequences of what he agreed to, especially when it's a matter of the reason he agreed to it being subject to shifting priorities - he signed it because he felt that he couldn't afford to turn it down, but not he's realizing how much the terms are costing him.  My friend astutely described this situation as being akin to "duress".

What he was getting at, essentially, is the "economic duress" argument - a situation where I sign a contract that gets me the fast cash I need to feed my children, and then later have second thoughts about whether it's worth the cost to me.  At present, the law does not regard economic duress as being a basis upon which a contract can be challenged.

Implications in Employment Law

Unconscionability has relatively limited application in employment contracts.  It's recognized that employers typically have enormous bargaining power at the point of offer, but that recognition has manifested in employment standards statutes:  There are minimum wages, maximum hours of work, requirements for safety standards, holidays, vacations, termination entitlements, and others, which cannot be contracted out of.  An attempt to contract out of such terms will be void, on a statutory basis, and the fact that the legislature has set these minimum standards implies that any contract meeting them will probably not meet be so grossly improvident as to warrant a challenge to the contract.

For amendments to employment contracts, I could imagine unconscionability being a factor.  Most of these cases are determined on a 'lack of consideration' ground, because they involve an employer putting a contract to an existing employee that limits their termination entitlements without actually giving them anything in return (and a contract, to be effective, requires mutual consideration).  However, as the litigation on the point evolves, I entirely expect to see cases arguing that a contract amendment is unconscionable:  There's a fairly common practice these days of providing nominal consideration for contract amendments, and there will certainly be an argument at some point that a long-service employee didn't understand the contract language and common law framework sufficiently to realize that he was giving up termination entitlements in the tens of thousands of dollars in exchange for that $50 signing bonus, and that the employer was banking on the employee's failure to understand it.

On occasion, you see a challenge to full and final releases executed after termination.  This is where employers have to be more careful about unconscionability.  Some time ago, I posted about the Rubin case, involving an employer who offered a package which was ever so slightly more than the statutory minimum (and enormously less than his common law entitlements) in the termination meeting, presenting itself as exceeding his entitlements under the ESA (strictly true, of course), and clearly implying that if he didn't sign it, he would get nothing (which would violate the ESA).  He signed on the spot in the termination meeting, and the court determined that the deal was unconscionable.


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer. 

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