We have previously written about the case of Uber Technologies Inc. v. Heller, one of the leading Canadian decisions on the law of unconscionability in contracts. The case set out the legal test to be applied by courts when determining whether a contract should be set aside for being unconscionable. This test was applied recently by the Court of Appeal in the context of mortgage transactions in McKenzie-Barnswell v. Xpert Credit Control Solutions Inc.

Case Concerned Plaintiff Who Relied on the Financial Advice of the Director of a Private Mortgage Lender

The plaintiff in McKenzie-Barnswell was a friend of one of the defendants, Mr. Joshi, and relied on his financial advice. She also had a history of borrowing from a private mortgage lending company, Xpert Credit Control Solutions Inc. (“Xpert Credit”). Xpert Credit was another defendant and was Mr. Joshi’s company.

In 2015, the plaintiff borrowed money from Xpert Credit to make her parents’ home more “senior-friendly.” The amount was secured by a second mortgage on that property in favour of Xpert Credit. Xpert Credit subsequently took over the first mortgage and merged it with the second into a single mortgage.

After her father’s death, the plaintiff intended to sell or renovate the property that was the subject of the mortgage, but was convinced by Mr. Joshi to renovate it and keep it instead. In 2016, the plaintiff entered into a contract for construction at the property with another defendant, Right Choice Builders Inc. (“Right Choice”). Right Choice was also Mr. Joshi’s company, but when the construction contract was signed, the company did not exist.

After signing the construction contract, the plaintiff signed additional mortgages with Xpert Credit, including one over her own residence, which were eventually consolidated into one in 2017. During this time, Xpert Credit charged significant fees.

The construction work failed to meet the specifications set out in the contract and breached applicable building and fire codes. Eventually, Mr. Joshi had a different company complete the work, which demanded that the plaintiff pay more money. When the plaintiff refused to sign a new contract, the defendants abandoned the project and demanded payment in full of the mortgage that was then outstanding.

The plaintiff sued on a variety of bases, and the trial judge found for the plaintiff. Specifically, she found that the financial transactions had been unconscionable, among other things.

What is the Test For Unconscionability?

On appeal, the defendants argued, among other things, that the trial judge had applied the wrong legal test for unconscionability. The Court of Appeal agreed.

The test applied by the trial judge had been the one set out in Phoenix Interactive Design Inc. v. Alterinvest II Fund L.P. Under that test, four conditions had to be met for a finding of unconscionability:

• A “grossly unfair and improvident transaction”
• The victim’s lack of independent legal advice;
• There must have been an “overwhelming imbalance in bargaining power” due to the victim’s business ignorance, illiteracy, ignorance of the language the deal was made in, or disability, including blindness, deafness, illness, or senility; and
• The other party must have taken advantage of the victim knowingly.

This is a more stringent test than the one that the Supreme Court of Canada subsequently adopted in the leading case of Uber Technologies Inc. v. Heller. Under that latter case, a finding of unconscionability only requires proof of two things:

• An “inequality of bargaining power,” which occurs “when a party cannot adequately protect its interests in the contracting process;” and
• A “resulting improvident bargain.”

With respect to the first element of the Uber test in Uber, the Supreme Court of Canada held that inequality can arise from “an individual’s personal characteristics, or the vulnerabilities peculiar to a specific situation.” A party’s “financial desperation” or “cognitive asymmetry” may give rise to such inequality, as might a special relationship between the parties that places “trust and confidence” in one of them.

The second element of the Uber test is to be determined “contextually.” A bargain will be deemed improvident if, at the time the contract was made, “it unduly advantages the stronger party or unduly disadvantages the more vulnerable.” The Supreme Court of Canada has said that relevant circumstances may include “market price, the commercial setting or the positions of the parties” (see Uber). If the inequality between the parties is one in which the victim is in “desperate circumstances,” the question will be important of whether the other party has been “unduly enriched,” which may occur where “the price of goods or services departs significantly from the usual market price.” If the inequality relates to the victim’s failure to understand contractual terms, “the focus is on whether they have been unduly disadvantaged by the terms they did not understand or appreciate,” causing an “unfair surprise” or going against the victim’s “reasonable expectations” (see Uber).

Court of Appeal Agrees With Trial Judge that the Mortgage and Construction Contract Were Unconscionable

The Court of Appeal noted the trial judge’s evidentiary conclusions: between 2016 and 2017, Xpert Credit charged the plaintiffs pre-paid fees of over $158,000, which amounted to more than 15% of the principal advanced under the 2016 mortgages. The trial judge had also noted that the plaintiff had previously obtained a mortgage from BMO at a lower interest rate. These factors played a role in the trial judge’s finding that Mr. Joshi had “exploited his friendship” with the plaintiff and her “lack of sophistication in financial matters” to make money off her. As such, there had been an inequality of bargaining power that resulted in an improvident bargain.

Court Finds Trial Judge Erred in Determining the Appropriate Remedy

The Court of Appeal noted that the trial judge had ordered the construction contract and the entire 2017 consolidated mortgage to be set aside. However, the Court found this improper. Specifically, the Court of Appeal found that, while the part of the mortgage that advanced funds for the performance of the construction contract was implicated, mortgages are “severable,” meaning not all aspects are necessarily void. While some parts of the mortgage were unconscionable, funds advanced for other purposes (such as making her parents’ home more “senior-friendly” and paying funeral expenses) were unaffected. To order otherwise would give the plaintiff a windfall.

Accordingly, while the finding of unconscionability was upheld, the outstanding mortgage amount was reduced to reflect “the amount legitimately owed.”

Milosevic & Associates: Helping You Navigate Unconscionable Contracts

If you believe a contract has unfairly disadvantaged you due to fraud, misrepresentation, or unconscionability, don’t face it alone. The experienced litigation lawyers at Milosevic & Associates in Toronto possess extensive knowledge and experience in these complex areas of law. We are ready to provide you with the strategic advice and effective representation necessary to protect your interests. Contact us online or by phone at (416) 916-1387 for a confidential consultation.