Thorne v Kennedy: Analyzing Vitiating Conditions

Part A Case Analysis

Thorne v Kennedy illustrates the difficulty in distinguishing between three conditions of a contractual agreement which would render a contract invalid – undue influence, duress and unconscionable conduct. It may be noted at the outset that there are considerable areas that need defining in the relationships between undue influence, duress, and unconscionable dealing as usually the doctrines often relate to the same set of facts. Therefore, Thorne v Kennedy is important from the point of view of having an opportunity to distinguish and explain the three doctrines. The case itself involves pre-nuptial agreement, however the ruling has implications for all contractual agreements. This case analysis analyses each vitiating condition in turn and identifies the issues that still remain unclear or indeed may be made more unclear following the judgment in this case.

The facts of Thorne v Kennedy are that a 67 year-old multi-millionaire, Mr Kennedy met a 36 year-old Eastern European woman via online dating. Whilst Mr Kennedy made clear from the beginning that he intended that his wealth would be passed onto his children, he treated Ms Thorne with extravagance. Ms Thorne moved to Australia alone to live with Mr Kennedy. The pair were to marry. Eleven days prior to the marriage, Ms Thorne was presented with pre-nuptial contract which stated that Ms Thorne would receive a limited sum of money in the event of a separation after 3 years of marriage. Ms Thorne requested minor changes pertaining to her entitlements should Mr Kennedy pass away. She did not believe the marriage would end otherwise. Mr Kennedy made it clear that the wedding would not proceed if she did not sign the document. He waited in the car whilst Ms Thorne consulted a solicitor who advised her that the terms were grossly unfair, and that the agreement should not be signed. The final agreement was signed 4 days prior to the wedding. A second agreement of similar terms were signed again 30 days after the wedding. The pair separated after living together for close to 4 years. Ms Thorne commenced this proceeding the following year. Mr Kennedy died during the pendency of the suit.

The first instance judge set aside the two agreements on grounds of undue influence and unconscionable conduct. Mr Kennedy’s appeal to the full court overturned the finding, that Ms Thorne had prior understanding that the assets were for his children and independent legal advice had been adequately sought. Ms Thorne then appealed. The High Court set aside both agreements on grounds of unconscionable conduct and undue influence.

Duress, Undue Influence and Unconscionable Conduct

Duress

The first instance judge set aside the agreements on grounds of duress. The plurality of High Court elaborated that unlike undue influence, duress did not need a person to lose the ability to make informed decisions with full awareness of its consequences as well as other options. The person while still competent, made the decision because of being under threat to do so.

Whether the threats would be lawful or not, was not clarified in the decision although it was recognised that historically, the pressure could be lawful or unlawful as long as it was disproportionate to the matter. It was identified that both undue influence and duress contained the element of “lack of free choice” but that duress would be present if the person’s will was overborne.

It was noted that the plurality deemed the primary judge’s description of duress as “a form of unconscionable conduct” to be a description of the outcome rather than subsuming one under the other.

The level of pressure is measured by matter of degree. All relationships produce emotional pressure. The quality of the relationship needs to come under close scrutiny in order to establish if the pressure is in excess to the situation. This was indeed noted in the High Court judgment where the primary judge’s access to observe the parties in person was deemed significant in order to make such an assessment.

Undue Influence

Undue influence relates to “the quality of the consent or assent of the weaker party” where “the critical element…is the impairment of the will of the weaker party”. The key issue with relation to finding for undue influence is that “the transaction was the outcome of such an actual influence over the mind of the [weaker party] that it cannot be considered free act”.

The plurality took a gradation view of subordination whereby undue influence is where the person’s capacity for decision making is significantly substandard because of the other person. The High Court further stated the six conditions relevant to whether a financial agreement should be honoured:

1. whether or not the agreement could be negotiated;
2. the emotional circumstances in which the agreement was entered including any explicit or implicit threat to end a marriage or to end an engagement;
3. whether there was any time for careful reflection;
4. the nature of the relationship;
5. the relative financial positions of both parties; and
6. the independent advice that was received and whether there was time to reflect on that advice.

These are clear indicators for future considerations of undue influence cases. But it is unclear if any or all of these factors need to be present in order to establish undue influence. The standard for reasonable period of consideration of legal advice, and what constitute reasonable terms are unclear.

Gordon J elaborated that “what needs to be … impaired is the will of the weaker party…to exercise independent judgment” with actual restriction of choice. The will of the weaker party must be substantially limited although it need not be completely abdicated. Gordon J confirmed that the demarcation of undue influence from unconscionable conduct is the exercise of free will. Further, the presence of special disadvantage or disability in unconscionable conduct is to be established in the defendant, independent of the weaker party’s capacity.

At the core of it, undue influence is an equitable doctrine and its engagement with a particular set of circumstances depends on the discretion of the court. An important consideration for the court in such cases would be whether one party to the contract abuses the personal influence or authority that the party has over the other party to the contract. Therefore, an important element is that of personal influence and authority and it is in this area that there have come to be recognised changes especially in the gender context. In the present case, it was determined that a relationship of fiancé and fiancée was no longer presumed to be a relationship where one party would be deemed to be under personal influence of the other. This illustrates some aspects of the law changing with the times where the female party is not necessarily subordinate in a relationship any longer. This contrasts with Yerkey v Jones (1939) 63 CLR 649 where the married woman was presumed to be affected by undue influence for being the wife of the relationship.

At the base of the problem in identifying whether undue influence is met in a case or not is the difficulty in determining the occurrence of undue influence from its actual or presumed contexts, where the former requires readily ascertainable facts that raise suspicion of undue influence, and the latter is based on the existence of a special relationship. It is particularly difficult to determine the quality of the relationship and the possible abuse, wherein it may be difficult to generalise the circumstances in which one person acquires influence over another, and the manner in which influence may be exercised.

Unconscionable conduct

Unconscionable conduct is engaged where the innocent party is at a special disadvantage affecting his or her ability to make decision according to best interest, and the other party knowingly takes advantage of the special disadvantage.

Again, it can be differentiated from undue influence as the innocent party is not independent and his or her decision making capacity is impaired and overborne.

Inference on whether one party is dominant and the other subordinate requires the character assessment of the parties involved, with close scrutiny of the relationship. Whilst the first instance judge in Kennedy focused on the special disadvantage, the Full Court considered that Mr Kennedy did not engage in unconscionable conduct because Mr Kennedy did not mislead Ms Thorne about his assets. Mr Kennedy had expressly stated his assets were for his children prior to the plans for marriage. Independent legal advice was sought, and Mr Kennedy was not present in the room where Ms Thorne was being counselled by the lawyer. The implication from the judgment of the Full Court was that Ms Thorne’s blind conviction in the infallibility of the relationship led her into making a bad decision to sign the documents. Thus, there was no unconscionable conduct.

The High Court took a wider view of situation. Mr Kennedy created the urgency by offering the agreements at the last minute after all arrangements for marriage had been made. Ms Thorne could not have anticipated an agreement with such terms to be offered at this point of the relationship. Finally, there were no alternate arrangements in case of her refusal to enter into the agreement.

Justice Nettle and Justice Gordon further differentiated unconscionable conduct from undue influence. Given the precedent of Australia and New Zealand Banking Group v Karam (2005) 64 NSWLR 149 [Karam] where unconscionable conduct was deemed to mean illegitimate pressure to be exerted via threatened or actual unlawful conduct, Justice Nettle felt unable to consider the case involved unconscionable conduct. With respect to the second agreement, it may be construed that Ms Thorne was in an even more powerless position after marriage to negotiate any changes to the contract. However, since Karam, cases of unconscionable conduct have required the exertion of pressure “by threatened or actual unlawful conduct”.

Gordon J identified that the terms of the contract were clearly known to Ms Thorne. She understood the implications of entering into the agreement or otherwise. In bringing the case to trial, it was clear that she did not wish to enter into the agreements in their presented conditions. She chose to sign the agreements because of the circumstances in which the agreement was offered. Thus, her knowledge was not overborne and undue influence not applicable. Thus, her will was not overborne but the zone of her autonomy was restricted. Gordon J did state the defining qualities of special disadvantage, citing Amadio (1983) 151 CLR 447 [467], where it was explained that if one party has actual knowledge that the other party occupies a situation of special disadvantage in relation to an intended transaction, and is not able to make in decision in their interests, yet takes unfair advantage of such superior bargaining power, his conduct is unconscionable. Therefore, Mr Kennedy, in proposing the contract was in fact consciously taking advantage of Ms Thorne.

The majority stated that the primary judge was correct in considering the unfair terms of the agreements for determining undue influence. It stated that “financial inequality can be an indicium of undue influence” if a pre-nuptial agreement is signed despite being grossly unreasonable.

Implications in practice

The decision has implications for other contracts as well. In business transactions, there is a high likelihood of inequality of assets and power. It would seem that the court is sympathetic to the party of lesser means. In Commercial Bank of Australia Ltd v Amadio, the court considered the elderly couple in a state of disability as parties of lesser means with respect to the signing of the mortgage agreement. In such cases then, it becomes difficult for lawyers to know what was disclosed to the other party in their independent advice and whether the terms would be deemed unfair and unreasonable cannot be known until action is taken to contest.

Nevertheless, from this case a number of issues have been clarified. First, the ruling brings a number of cautionary points for family lawyers in financial agreements. However, it also left some significant confusing matters unanswered. Second, it has been clarified that the evidence of legal advice prior to entering into agreement and entering into an agreement before and after marriage does not eliminate the possibility of undue influence or unconscionable conduct. The important factor remains the disadvantaged position of one party, which can be used as an indicator of duress or undue influence or unconscionable conduct. In this sense, a post nuptial agreement may seem more useful as the threat of dissolution of the relationship is removed.

Third, there is increased recognition of equality in status in marital or engagement relationships and gender cannot be the sole basis for determining presumed undue influence. It had earlier been argued that undue influence and unconscionable conduct is only applicable in heterosexual relationships due to the general culture of gender inequality; however, after this ruling it is to be seen how courts would determine undue influence or unconscionable conduct in same sex marriage.

One of the issues not raised in this case but could have been considered is the hardship Ms Thorne may encounter if the agreement was not set aside. The agreements included a statement that effectively denied the application of s90F stating that Ms Thorne is able to support herself without having to rely on an income tested pension. But it is a potentially issue of debate as Ms Thorne had limited proficiency in English and the other means of supporting herself were not clear. Nevertheless, none of the judges have shed light on whether this statement would be considered binding or not.

The case now raises issues for any type of contractual agreements where there are substantial differences in contribution. According to the Family Law Rules 2004 r 13.04(1), the Pre Action Procedures and Federal Circuit Court Rules 2001 r24.03, there is an explicit duty to disclose each parties’ financial circumstances. It would be interesting to consider agreement where one party explicitly waived the right to full disclosure, whether the court would still consider the statement binding.

The High Court emphasised the terms of the agreement to be unfair and inadequate, using it to indicate likelihood of undue influence and unconscionable conduct. Gordon J’s comparison of Ms Thorne’s entitlements had she not entered into the agreement was used in this instance. It seems a reasonable criterion but it remains unclear how “bad bargain” will be defined in future cases. Continue your exploration of Sale of Goods Contracts, A case study of Sandra Peter and others with our related content.

Timing seems to have had an important role in determining the intensity of pressure exerted into entering the agreement. Had Mr Kennedy provided those nuptials several weeks or months prior, Ms Thorne would be deemed to have more choices.

Bibliography

A. Books/ Articles/ Reports

Auchmuty R, ‘When Equality Is Not Equity:Homosexual Inclusion in Undue Influence Law’ (2003) 11(2) Feminist Legal Studies 163

Barry A, “‘Trust Me, I’m Your Husband’ : Undue Influence and Royal Bank of Scotland v Etridge” 2006) 11 Otago Law Review 247.

Tjon SL, Minimum Contract Justice: A Capabilities Perspective on Sweatshops and Consumer Contracts (Hart Publishing, 2017).

Cases

Barclays Bank plc v O’Brien [1993] UKHL 6

Commercial Bank of Australia Ltd v Amadio [1983] HCA 14

Johnson v Buttress [1936] HCA 41

Royal Bank of Scotland v Etridge (No 2) [2002] 2AC 77

Thorne v Kennedy (2017) 350 ALR1

Yerkey v Jones [1939] High Court of Australia 3

Others

Bloore J, "Pressure, Influence, and Exploitation in Thorne v Kennedy" (24 July 2017), accessed .