I Didn't Do It by TurksLegal

“I Didn’t Do It”

- Non Est Factum, Incapacity, Unconscionability and the Law By Susan Sumars | June 2011 Area of Expertise | Commercial Disputes & Insolvency

Summary

A Supreme Court of Victoria decision handed down on 1 June 2011 examined whether an underlying settlement agreement and consent judgment ought to be set aside on the grounds of mental impairment and/or unconscionable conduct.

Who Does This Impact?

All those involved in civil litigation as well as those involved in contractual transactions, especially in the context of people dealing with institutions.

What Action Should Be Taken?

Negotiators should be on guard against the potential for attack on agreements, including agreements settling legal proceedings, by reason of a party alleging his or her incapacity at the time the agreement was entered or that the other party acted in a way that the law recognises as unconscionable or oppressive in procuring such agreement.

The Facts: •

National Australia Bank (‘NAB’) held a mortgage over Ms K’s property as security for a loan facility extended to fund construction of a residence on the property.

•

Following Ms K’s failure to make repayments under the mortgage, and after giving notice, NAB issued legal proceedings for possession of the property.

•

Ms K was initially legally represented and filed a Defence in the proceedings. The proceedings continued through the usual interlocutory steps, with a mediation being held between NAB and Ms K. Shortly prior to the mediation, Ms K’s solicitors ceased acting.

•

The matter was not settled at mediation and settlement discussions continued thereafter.

•

Ms K signed Terms of Settlement, a Consent Judgment and a Legal Advice Waiver which were each witnessed by her de facto spouse at the time, Mr E.

•

Ms K failed to make payment pursuant to the Terms of Settlement and NAB filed the Consent Judgment with the Court. A Warrant for Possession of the property was then issued pursuant to the judgment obtained against Ms K.

•

Prior to execution of the Warrant, Ms K retained new solicitors and issued a summons to set aside the judgment on the basis that such judgment was impeachable due to NAB having allegedly engaged in oppresive and unconscionable conduct. Ms K contended the following:

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“I Didn’t Do It” - Non Est Factum, Incapacity, Unconscionability and the Law by Susan Sumars

–– Ms K was a person of limited business experience, with a foreign background and limited ability to understand English. –– Ms K did not obtain independent legal advice before settling the proceeding, and NAB ought to have ensured she did so. –– At the time Ms K settled the proceeding, she had a medical condition (bipolar disorder) which affected her in such a way she did not understand the nature and consequences of the settlement documents she signed. –– NAB knew Ms K had a defence of real substance. –– NAB knew Ms K had ‘little choice’ but to execute the settlement documents. –– Alternatively, NAB’s conduct was misleading and deceptive under the general law or under statute. –– Alternatively, the consent judgment should be set aside on the grounds of non est factum (i.e. ‘It is not my deed’) or by reason of Ms K having an impaired mental capacity.

•

NAB opposed the application to set aside judgment.

The Issue The issue for determination before the Court was whether the Consent Judgment ought be set aside because of Ms K’s allegation that NAB took unconscientious advantage of her mental health problems in obtaining her agreement to settle the proceedings, and in particular, to settle the proceedings on terms which provided for the entry of judgment in favour of NAB if the settlement sum was not paid by the due date.1

The Evidence before the Court Associate Justice Daly found as follows: •

Ms K did not present as a reliable witness2 and was not able to cogently refute any of the evidence given by NAB in relation to their dealings with her leading up to the mediation and the following negotiations;3

•

From the oral evidence, Ms K and Mr E presented as intelligent, confident and quite articulate in the English language. She did not give the impression of being easily pressured or bullied in the conduct of her affairs;4

•

There was highly probative circumstantial evidence demonstrating that Ms K would have been aware by the end of the mediation at the latest, that NAB was only prepared to reach agreement with her on terms that would require her to sell or refinance the property, failing which NAB would recover possession of the property.5

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“I Didn’t Do It” - Non Est Factum, Incapacity, Unconscionability and the Law by Susan Sumars

The Decision Her Honour determined: •

The Consent Judgment and settlement agreement were not impeached, and should not be set aside on the bases of non est factum, unconscionable conduct (either in equity or statute) or that Ms K had not obtained legal advice before settling the proceeding;6

•

On balance, it was more likely than not that Ms K did understand the consequences of signing the Terms of Settlement and Consent Judgment;7

•

In any event, it was absolutely clear from the evidence that there was no basis for finding that NAB was aware of Ms K’s mental health problems, and that there was nothing that would even put a reasonable person on enquiry regarding Ms K’s mental state, even if that would be sufficient to impeach the settlement agreement;8

•

The evidence could lead to no other finding than that NAB was unaware of Ms K’s condition, and that there was nothing which ought to have alerted NAB to her mental health problems.9

Her Honour stated as follows: I agree with counsel for NAB that the law did not impose any obligation upon NAB to ensure that Ms K obtained legal advice before settling the proceedings. Ms K was not a volunteer. The settlement sum involved a substantial discount upon NAB’s claim… There was no suggestion that the funds advanced by NAB had not been utilised by Ms K… or that she received no benefit from the funds… the prospects of Ms K making out a good defence at trial were not high.10 Further, although the evidence demonstrated Ms K was suffering some degree of mental impairment, this was not of itself sufficient grounds for setting aside the Consent Judgment.11

The Legal Position with respect to incapacity and unconscionability The relevant law can be summarised as follows: •

The doctrine of incapacity is similar to the principles of unconscionability – focus must be on the exploitative advantage taken by the other party rather than on unfairness of the transaction to the person seeking to impeach it;12

•

in order for a person to set aside a transaction on the ground of impairment, that person must show that the party seeking to enforce the agreement knew or ought to have known of the impairment or other special advantage of that party.13

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“I Didn’t Do It” - Non Est Factum, Incapacity, Unconscionability and the Law by Susan Sumars •

Although it is generally the case that a finding of unconscionable conduct also requires some knowledge of a party’s special disadvantage, the doctrine (particularly in its statutory formulations) is sufficiently flexible to provide relief for a party in the absence of actual or constructive knowledge of that party’s special disadvantage.

•

However, in the absence of knowledge, it would be necessary to establish that the party seeking to enforce the contract had engaged in conduct which involved a deliberate act, which is morally repugnant and irreconcilable with what is right or reasonable.14 Mere inequality of bargaining power is not enough.15

In conclusion, Her Honour determined that: An examination of the evidence of Ms K and the solicitors of NAB leading up to and after the mediation do not lead me to the conclusion that there has been any untoward conduct on the part of NAB, and certainly not conduct which was so unreasonable, unfair or thuggish as to warrant the finding that NAB acted unconscionably.16

Implications Whilst a settlement agreement cannot usually be set aside on the basis of unconscionable conduct in the absence of a party’s actual or constructive knowledge of the other party’s impairment or special disadvantage, there is scope for such agreement being set aside (even if a party could not reasonably be expected to have known of the disability), if that party has engaged in conduct which involves a deliberate act which is morally repugnant, thuggish, unfair and irreconcilable with what is right or reasonable. Parties entering into contractual transactions, including settlement agreements, should therefore give consideration to the surrounding circumstances prior to entering into such agreement, in that their conduct will not be seen as unconscionable and potentially resulting in the agreement being set-aside in the future. Although independent legal advice is not required to be obtained prior to entering into a settlement agreement, it would be a prudent precaution to take to prevent a party later attempting to set-aside such agreement on the basis of not having understood the nature of the agreement.

Endnotes 1 National Australia Bank Limited v Koller [2011] VSC 228 at par 18. Unless otherwise indicated, paragraph numbers referred to in the foot notes refer to this judgment. 2

Par 53.

Par 57.

Par 60.

Par 75.

Par 73.

Par 76.

Par 77.

Par 81.

10 Par 78.

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“I Didn’t Do It” - Non Est Factum, Incapacity, Unconscionability and the Law by Susan Sumars

11 Par 80. 12 See: Davis Contract: General Principles at 7.3.600. 13 See Gibbons v Wright (1954) 91 CLR 423, 441. 14 ACCC v Allphones Retail Pty Ltd (2009) 253 ALR 324 at 113. 15 ACCC v Berbaris Holdings Pty Ltd (2003) 214 CLR, 51, 11. 16 National Australia Bank Limited v Koller [2011] VSC 228 at par 83.

For more information, please contact: Susan Sumars

Lawyer T: 03 8600 5137 susan.sumars@turkslegal.com.au

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