It's not unconscionable to threaten to enforce own contractual rights

In May 2022, Payne JA considered defences and cross claims of unconscionability in circumstances where one contracting party (a landlord) threatened to enforce already existing contractual rights under a lease - to the significant determinant of the tenant - if the tenant failed or refused to agree to a termination of the lease.


See: Misthold Pty Ltd v NSW Historic Sites and Railway Heritage Company Pty Ltd (No 2) [2022] NSWSC 561


Background

In 2007, Misthold and NSW Historic Sites and Railway Heritage Company Pty Ltd (Historic Sites) entered into a long-term lease for the occupation of 7.8 hectares of land that included access to the main northern railway line running from Sydney. Historic Sites intended to curate and operate a train museum at the site.

In early 2012, the parties began to negotiate a number of alternatives commercial arrangements for the continued occupation of the site, with the most favoured scenario being that Misthold would buy out the remainder of the lease and Historic Sites would sell or relocate its historic trains and artefacts.


Note: it was a term of the 2007 lease that:

  1. Misthold had the right to issue a 'Relocation Notice' to Historic Sites at any time - such that the tenant would be required to relocate its entire collection of railway items to an alternative site at its own cost; however, if

  2. Misthold did not issue a Relocation Notice during the term of the 2007 lease, Historic Sites, as tenant, had the option to purchase the 7.6 hectares it occupied for just $1.00.


By June 2012, a Surrender deed and separate new lease for just 0.6 hectares of land were executed (to allow the orderly sale or relocation of train stock).


Claim

During the re-negotiation of the 2007 lease, Misthold threatened to issue a Relocation Notice on Historic Sites if the tenant refused to execute a surrender of the 2007 lease - thus causing it to have to relocate all of its museum artefacts and thereby render its continued occupation of the leased land futile.


Historic Sites claim of unconscionable conduct, in defence to Misthold's claim for possession of the land, was that the landlord was precluded from rely on the terms of the Surrender Deed because to do so would amount to "unfair pressure" that would force it to surrender current contractual rights and nullify its option to purchase the land.


Consideration

The directors of Historic Sites, Mr Richards and Mr Arnot based their claim of unconscionable conduct on the fact that they were:

  1. commercially naïve, gullible and easily overborne;

  2. not legally qualified to understand the scope and import of the Surrender Deed; and

  3. not able to seek independent financial or legal advice.

Payne JA considered each of the above circumstances, both separately and together, and explained as follows:


Sharp practice

The High Court in Kakavas v Crown Melbourne Ltd(2013) 250 CLR 392; [2013] HCA 25 at [17] explained that species of equitable fraud which prevents a party “taking surreptitious advantage of the weakness or necessity of another”. Just as the High Court said in Kakavas at [25] that there was nothing “surreptitious” about Crown’s conduct, so too here there was nothing surreptitious about Misthold’s conduct.


Imprudence of Surrender Deed

The point of Louth v Diprose(1992) 175 CLR 621; [1992] HCA 61 was not that Mr Diprose had made an imprudent gift because of his infatuation with Ms Louth, but that she had unconscientiously manipulated him, creating a false sense of crisis. For that reason, Mason CJ said that Ms Louth’s conduct was unconscionable in that it was dishonest and was calculated to induce, and in fact induced, Mr Diprose to enter into an improvident transaction: at CLR 626. Here, ... there was nothing foolish about the entry by Historic Sites into the Surrender Deed. Historic Sites was granted significant rights under that Deed and was entitled to be paid a significant sum of money, $650,000, which was in fact paid.


Prevention of victimisation

In Kakavas at [18] the High Court cited a passage from the reasons of Deane J in Louth v Diprose at CLR 638 to explain that equitable intervention was directed “not merely to relieve the plaintiff from the consequences of his own foolishness” but also to “prevent his victimisation”. The Court in Kakavas picked up this language again at [117], stating that “the concern which engages the principle is to prevent victimisation of the weaker party by the stronger”. The Court returned at the conclusion of its reasons at [161] to the notion of victimisation:

“Equitable intervention to deprive a party of the benefit of its bargain on the basis that it was procured by unfair exploitation of the weakness of the other party requires proof of a predatory state of mind. Heedlessness of, or indifference to, the best interests of the other party is not sufficient for this purpose. The principle is not engaged by mere inadvertence, or even indifference, to the circumstances of the other party to an arm's length commercial transaction. Inadvertence, or indifference, falls short of the victimisation or exploitation with which the principle is concerned.”

Even on that broad understanding of victimisation, there was in the present case no element of victimisation of Historic Sites by Misthold. The principle is not engaged by mere inadvertence, or even indifference, to the circumstances of the other party to an arm's length commercial transaction.


See also the decision of the New South Wales Court of Appeal in APS Satellite, where Bathurst CJ, Beazley P and Leeming JA held at paragraph 207:


generally speaking and subject to competition law constraints, a party, in dealings between experienced commercial entities taking place at arms’ length, is entitled to take advantage of its commercial position in setting “as high a price as it can achieve in a negotiation”. As Keane J pointed out in Paciocco HC at [293], the existence of disparity in bargaining power is “an all-pervading feature of a capitalist economy” and its exercise does not of itself establish that the conduct was unconscionable.


Conclusion

This decision highlights the fact that parties are entitled to fully exploit the fruits of pre-existing contractual rights and those at a disadvantage because of having previously agreed to terms now deemed to be dis-advantageous does not mean they are victims or the subject of unconscionable conduct.


However, this decision should be contrasted with that of APS Satellite, where a similarly strong bargaining position held by IPSTAR became unconscionable when combined with deception as to motives and justification for acting in a particular way.


By Rob Norton and Louise Gehrig



Unconscionable Conduct is behaviour so unjust that it is deemed to be far outside the norms of society and therefore offensive to good conscience.