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The UTRA: Protecting Society’s Vulnerable from “Unconscionable Transactions”

Here’s a Halloween-themed fact pattern for you: say a horde of trick-or-treaters arrive at your front door demanding candy (obviously, this imaginary scene takes place during some normal year, not 2020). You agree to provide one “fun size” bar to each child, but only on the condition that each recipient agrees to re-pay you with a “King Size” bar on the first day of every month, in perpetuity (muahaha). The children, in their sugar-induced delirium, agree to your terms. They sign on the dotted line, leave with their tiny bits of candy and you look forward to your lifetime supply of huge chocolate bars. You have yourself a sweet deal, right? Well, the Unconscionable Transactions Relief Act might have something to say about that …

What happens when unfair financial transactions are procured as a result of a “power imbalance, “or due to one party’s weakness relative to the other, stronger, party?

As capacity and estate litigators, we are always looking for tools that can be used to address and remedy instances where a vulnerable person has been taken advantage of by an unscrupulous third-party who has exploited the vulnerable individual’s frailty and the power imbalance that exists between the contracting parties.

Whether due to a person’s advanced age, diminished cognition or other impairment, it is all too common for said person to be exploited financially by those looking to take advantage of their vulnerability (this is becoming even more commonplace as our general population continues to age).

Tragically, such instances of financial exploitation are most often perpetrated by those who the vulnerable person relies upon for personal or financial care: such as their attorneys under POA documents, guardians, financial advisors, close friends or family.

Fortunately, when such unconscionable transactions are discovered, there are remedies available at law which can be used to right the wrong.

Equitable legal principles, such as undue influence, economic duress or unconscionable procurement, can be applied in the context of civil legal proceedings to unwind, set aside or render voidable improper transactions, and hold the perpetrator accountable.

Also, there are provisions available under the Criminal Code[1] (such as s. 331 ‘theft by a person holding a power of attorney’; s.386 ‘fraud’; s. 346 ‘extortion’, etc.) that can be pursued in circumstances that warrant criminal proceedings.

In addition, an underutilized statute, the Unconscionable Transactions Relief Act, RSO, 1990, c. U.2 (“UTRA”) can be used to set aside or vary “unconscionable” transactions that have been procured in circumstances of unequal bargaining power and where one party has taken unfair advantage of this imbalance.

Specifically, the UTRA applies to loans, gifts or mortgages, and permits a court to cancel or revise such transactions, when it considers the terms of the agreement or the circumstances surrounding the transaction to be “harsh and unconscionable”.

Section 2 of the UTRA provides that:

The court may,

2       Where, in respect of money lent, the court finds that, having regard to the risk and to all the circumstances, the cost of the loan is excessive and that the transaction is harsh and unconscionable, the court may,

reopen transaction and take account

(a) reopen the transaction and take an account between the creditor and the debtor;

reopen former settlements

(b) despite any statement or settlement of account or any agreement purporting to close previous dealings and create a new obligation, reopen any account already taken and relieve the debtor from payment of any sum in excess of the sum adjudged by the court to be fairly due in respect of the principal and the cost of the loan;

order repayment of excess

(c) order the creditor to repay any such excess if the same has been paid or allowed on account by the debtor;

set aside or revise contract

(d) set aside either wholly or in part or revise or alter any security given or agreement made in respect of the money lent, and, if the creditor has parted with the security, order the creditor to indemnify the debtor.  R.S.O. 1990, c. U.2, s. 2.

Courts, in discussing the UTRA and the judicial discretion to set aside unconscionable deals, have noted that it is not necessarily the financial terms of the impugned transaction that render it “unconscionable”, but rather it is the totality of circumstances that gave rise to the transaction that a court is interested in. Including the vulnerability of one party or unequal bargaining power that may have existed between the parties, and whether that imbalance was exploited in striking the deal.

Justice Judson for the Supreme Court of Canada in Ontario (Attorney General) v. Barfried Enterprises Ltd., 1963 CanLII 15 (SCC) (“Barfried”), notes that the purpose of the UTRA is to relieve a party from their obligations under a contract in instances where there has been an imbalance in bargaining power between the contracting parties, such that one party is deemed not to have actually given their free and valid informed consent to the contract. Read this way, the statutory relief available under the UTRA can actually be interpreted as an extension of the civil doctrine of undue influence.

The following is an excerpt from the SCC’s Barfried decision regarding the UTRA.

The wording of the statute indicates that it is not the rate or amount of interest which is the concern of the legislation but whether the transaction as a whole is one which it would be proper to maintain as having been freely consented to by the debtor. If one looks at it from the point of view of English law it might be classified as an extension of the doctrine of undue influence …  The theory of the legislation is that the Court is enabled to relieve a debtor, at least in part, of the obligations of a contract to which in all the circumstances of the case he cannot be said to have given a free and valid consent.[2]

The Ontario Superior Court in Smith v Pluim, 2015 ONSC 7945, cited the Barfried decision, and noted that the purpose of the UTRA is to provide courts with the power to “relieve a party to a contract from his [or her] obligation where the contract was made absent his [or her] informed consent or in circumstances of unequal bargaining power.”[3]

The Court in Smith goes on to rule that, in assessing whether an impugned transaction is “harsh and unconscionable” to the extent that a court should exercise its discretion under the UTRA to annul or vary the contract, “it must be established that either the terms are very unfair or that the consideration is grossly inadequate, or that there was an inequality of bargaining power between the parties and that one of the parties took advantage of this.” [emphasis added][4]

While the UTRA has not been used extensively, it is clear from the wording of the statute and its judicial treatment that it can be applied to set aside unfair deals, in circumstances where a vulnerable, compromised or unsophisticated individual has entered into an unfair agreement, in which the other party has taken advantage of the power imbalance between the respective parties.

In these circumstances, a court applying the UTRA could rule that the “weaker” party was at such a disadvantage, and the terms of the deal were so harsh, that the vulnerable party did not actually give their free and informed consent to the contract (similar to the rationale behind the doctrine of undue influence) and therefore the transaction should be set aside or varied in favour of the vulnerable party.

This is a potentially valuable legislative tool for individuals who have been taken advantage of, or exploited, in the context of a transaction.

Perhaps the UTRA will be considered more often in the future and put to use as a means to protect society’s vulnerable from unconscionable agreements – including cruel candy contracts.   Happy Halloween!

[1] Criminal Code (R.S.C., 1985, c. C-46)

[2] Barfried at pg. 577

[3] Smith at para. 17

[4] Smith at para. 21

This paper is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This paper is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.

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