Monthly Nutshell: Undue Influence (Contract Law)

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This month in our series of monthly bitesize extracts from Nutshells revision guides,  we discuss how the law recognizes Undue Influence.

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The narrow scope of the common law doctrine of duress led to the development, in equity, of the doctrine of undue influence. The doctrine of undue influence applies wherever improper pressure (not amounting to duress at common law) is brought to bear on a party to enter a contract. Where undue influence is found, the contract is voidable; gifts, as well as contracts, may be avoided under the doctrine.

The modern law has been shaped by two House of Lords’ decisions, Barclays Bank Plc v O’Brien, HL, 1994 and Royal Bank of Scotland Plc v Etridge (No.2), HL, 2002.

Undue influence may be categorized as follows

Actual undue influence. The claimant must establish that the defendant used undue influence in relation to particular transaction. There does not need to be any previous history of such influence, although there is normally some relationship between the parties, such as husband and wife: Bank of Credit and Commerce SA v Aboody, CA, 1990. In CIBC Mortgages Plc v Pitt, HL, 1993, it was held that the transaction does not have to be to the victim’s manifest disadvantage before the court will exercise its power to rescind.

(a) Special relationship. This category applies to certain established special “fiduciary” relationships: parent and child; guardian and ward; religious advisor and disciple; solicitor and client; and trustee and beneficiary (but not husband and wife). Such a special relationship gives rise to a presumption of influence only, but not undue influence. If the transaction in question is suspicious, i.e. it “calls for an explanation”, then a second evidential presumption, of undue influence, will arise. This second presumption, unlike the first, is rebuttable.

(b) No special relationship. This category covers cases where there is no special relationship as explained above, but the relationship is nevertheless one of “trust and confidence” where one party is in a position to exert undue influence over the other. Following Etridge there is no longer any presumption of undue influence in such cases. The claimant must show they placed trust and confidence in the defendant; once that is established, then, where there is a transaction “calling for an explanation” an evidential presumption that there has been undue influence will arise. It will be for the defendant to prove that no such influence was exercised.

Thus, an inference of undue influence may also apply even if the relationship is not within one of the special relationships but one party, by reason of the confidence reposed in him or her by the other weaker party, is able to take unfair advantage. For example, in Lloyds Bank Ltd v Bundy, CA, 1975, an elderly farmer gave the Bank a guarantee in respect of his son’s overdraft and mortgaged the farmhouse to the Bank as security. It was clear that the farmer had placed himself entirely in the hands of the assistant bank manager and had been given no opportunity to seek independent advice. Although, normally, the presumption of undue influence would not apply between bank and customer, the Court of Appeal held that it did so here and the transaction was set aside.

It was later held by the House of Lords in National Westminster Bank Plc v Morgan, HL, 1985 that the transaction would only be avoided in such cases where the transaction itself was “manifestly disadvantageous” to the weaker party. However in the Etridge case their Lordships considered that the label “manifest disadvantage” should be abandoned in favour of a test of whether the transaction “calls for an explanation”, thus adopting the dictum of Lindley J. in Allcard v Skinner, 1887: i.e. is the transaction such as “not to be reasonably accounted for on the ground of friendship, relationship, charity or other ordinary motives on which ordinary men act?”

The evidential presumption of undue influence may be rebutted by the beneficiary of the transaction showing that the other party exercised independent free will. This is normally done by proving that the other party received competent independent advice. However, in the Etridge case, the House of Lords indicated that the existence of independent advice may not be conclusive.

In Lloyds Bank v Bundy, Lord Denning M.R. had sought to establish a doctrine whereby all the instances where the courts intervene to set aside unconscionable transactions are based on a single unifying principle, namely, “inequality of bargaining power”. In National Westminster Bank v Morgan, the House of Lords refused to accept such a wide principle. Lord Scarman said, “… there is no precisely defined law setting limits to the equitable jurisdiction of a court to relieve against undue influence”.

BARS TO RELIEF

It remains to be seen whether Etridge has struck the right balance. In fact, the Etridge solution is to shift the burden from the bank to the solicitor advising the wife—the balance has therefore been struck in the creditor’s favour.

Where a contract is voidable for duress or undue influence, relief (i.e. rescission) may be barred by:

(i) affirmation of the contract by the weaker party after the undue pressure or presumptive relationship has terminated;

(ii) lapse of time;

(iii) the impossibility of restitution; and

(iv) the intervention of third party rights. Damages as such are not awarded.

This is an extract from Nutshells Contract Law by Robert Duxbury, available from bookstores and Amazon.co.uk.

Nutshells and Nutcases are the original revision and starter guides with content from Sweet & Maxwell and Westlaw UK. Nutshells are an ideal starter guide to the subject, giving a full overview, while Nutcases give an in-depth case analysis of the facts, principles and decisions of the most important cases.

 

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