Business Law: Dealing with unconscionability clauses in loan contracts

As a lawyer, I consider it very unpleasant, difficult and unpalatable whenever I am consulted by clients who have been sued by lenders be it banks, savings and loans companies, microfinance companies or even friends and acquaintances.

In my early days of law practice, my natural inclination on being consulted by debtor clients was to advise them to plead with their benefactors for time to fulfil their loan obligations. 

I was dismissive of such clients due to the prospect of not being remunerated myself due to the clients’ precarious situation or having the view that loan transactions, when reduced to writing, constitute a binding agreement which must be discharged by both parties.

Oftentimes too, such clients have not helped their cause by their failure to produce their loan contracts for scrutiny.

However, as the years wore on, I have adopted a different attitude towards such clients. I scrutinise diligently through loan contracts to find unconscionable clauses on which to stand to make a case for my clients.

The concept of unconscionability in loan contracts

Section One of the Loans Recovery Act, 1918 (Cap 175) states as follows: 

Re-opening of money lending transactions 

‘‘The court may re-open a transaction where the transaction is harsh and unconscionable or is otherwise a transaction in respect of which a court of equity would give relief.’’ 

It is important to draw the attention of lenders, particularly microfinance companies, to the threat the concept of unconscionability poses to their operations. 

Unconscionability can never be put in a strait jacket because the categories of unconscionability like negligence or contempt of court span a wide spectrum.

In the case of ATTITSOGBE VRS CFC CONSTRUCTION (WA) LTD & READ 2005/ 2006 SCGLR 858, it was held in holding One on unconscionability as follows:

‘‘Under the equitable doctrine of unconscionable bargain, the courts would set aside as unconscionable, any dealing whether by contract or by gift where on the account of the special disability of one of the parties, that party had been placed at a serious disadvantage in relation to the other. The categories of special disability which should not be regarded as close would include poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation was necessary.  All these circumstances could in the right context, justify the court’s intervention on the basis of the equitable principles embodied in the doctrine of unconscionable bargain.’’

Instances of unconscionability clauses  

In the case of ATTITSOGBE VRS CFC CONSTRUCTION LTD, the court stated some instances of unconscionability as lack of explanation where explanation was necessary. 

Invariably, most people who have been sued in court for default in discharging their loan obligations have made the case that they were not offered the chance to negotiate the terms of the loan agreement with their lenders on an even level, having regard for the fact that the loan agreements were solely drawn up by the lenders. 

Others have also contested such clauses in loan agreements as excessive interest charges, high processing fees, foreclosure of security without recourse to court, barricading of premises of clients without court order, publication of photos of defaulters etc.  

However, on some few occasions, lawyers who represent clients in loan default cases have raised issues with clauses in loan agreements which entitle lenders to automatic foreclosure and most importantly, the levying of penalties on default which exceed the principal and interest many times over. 

It is important to sound a note of caution to lenders that any of the issues enumerated above, if raised properly within a legal context, could have  the prospect of torpedoing a loan agreement and have it declared as unconscionable.

Mensah vrs Ahenfie Clothsellers Association (2010 SCGLR 680) 

The case of Mensah vrs Ahenfie Clothsellers Association represents an interesting spectacle in the relationship between lenders and their clients regarding the latitude of lenders to levy any amount they deem prudent on loan transactions.

In this case, the lender, Ahenfie Clothsellers Association, loaned money in the sum of GH¢30,000 to its client Mensah to be repaid in weekly installments of GH¢900.00 per week in 52 weeks. This would have yielded a total amount of GH¢46,000 at the end of the repayment period. 

The client, upon contesting the interest charged as excessive, was given a favourable ruling by the court which interpreted the provisions of section One of the Loans Recovery Act 1918 Cap 175 in favour of the client in holding One on the report as follows:

‘‘Where the money lending transactions was found to be excessive, harsh and unconscionable, the transaction was to be regulated by the provisions in section 1 of the Loans Recovery Act 1918 (Cap 175). The effect of the provision in section 1 of the Act was that, in any action involving money lending, on a finding by the court that the interest charged on the amount lent was harsh and excessive and therefore unconscionable, the court might order the transaction to be re-opened. In re-opening the transaction, the court was empowered under the old Cap 175 section 3(1) to consider all the charges levied by the lender as well as other expenses incidental to the loan given to the borrower”.

The decision of the court arrogating to itself the power to declare any loan transaction excessive, harsh and unconscionable requires that lenders of all categories should be on their guard regarding any unconscionable clauses in loan agreements since such clauses span a wide spectrum.

In K.E. POKU LTD VRS NIB 1989/90 2 GLR 490, the court, presided over by Ampiah JA, declared in holding Two on unconscionable transactions as follows:

‘‘Although equity had never assumed the right to make bargains for parties, where there had been the least degree of distress, inexperience or ignorance on the side of the contracting party to the most severe scrutiny resulting in unfair dealing, equity would set aside the transaction as harsh and unconscionable. And where the interest and other charges on a loan transaction were excessive as to render the transaction harsh and excessive, section 3(1) and (2) of the Loans Recovery Act 1951 Rev Cap 175 empowered the court to re-open both the loan transaction and any account settled between the parties.

Furthermore, in the case of PRO-CREDIT V AGORMANYA CASSAVA FARMERS ASSOCIATION & 2 ORS ( unreported), Mrs Justice Cecilia Hanzzy-Sowah JA declared the plaintiffs’ automatic foreclosure clause empowering the plaintiff to auction off the defendant’s tractor used to secure the loan as unconscionable because the plaintiff had exploited the defendant’s need for a loan.

Other cases of unconscionability  

In LLOYDS BANK VRS BUNDY 1974 3 AER 757, the court ruled in favour of a defendant who had offered his property as a guarantee to support a company owned by his son to secure an overdraft from a bank as not offering opportunity to the defendant to obtain independent advice.

Lord Denning, who delivered the judgement of the court, made a profound statement on unconscionable bargains as follows: 

‘‘Gathering all together, I would suggest that through all these instances, there runs a single thread. They rest on inequality of bargaining power. By virtue of it, the English law gives relief to one who without independent advice enters into a contract upon terms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires or by his own ignorance or infirmity, coupled with undue influences or pressures brought to bear on him by or for the benefit of the other. When I use the word ‘‘undue’’, I do not mean to suggest that the principle depends on proof of any wrongdoing. One who is in extreme need may knowingly consent to a most improvident bargain, solely to relieve the straits in which he finds himself. Again, I do not mean to suggest that every transaction is saved by independent advice. But the absence of it may be fatal”.

Conclusion

Even though the courts would give effect to the terms of an agreement reached between two parties, it is appropriate for lenders to avoid unconscionable clauses in loan agreements. 

These could include excessively high interest rates, high processing fees, foreclosure without recourse to the courts, barricading of client’s premises without court order, publication of pictures of defaulting clients, absence of explanation or legal advice when necessary, etc.    

The writer is a lawyer with specialisation in international business law.

Writer's email: guymilo@ yahoo.com