Undue Influence

BUSINESS LAW 2
DR HASSAN NIZAMI
 Where a party has not entered into a contract voluntarily, the contract may be
voidable due to undue influence.
 The equitable doctrine of undue influence: a party enters into a contract as a
result of influence. The objective is, in part, to ensure that the influence of one
person over another is not abused.
 In some instances the claimant may be able to have a contract set aside against a
party who was not the person inflicting the influence or pressure.
History

 12th Century- The age of the local lords.

 The Christian King was answerable to God for the justness of his laws- thus his
prerogative also contained the power to deal with ‘unjust judgment’. Note: the
chancellor was a high ranking official in the kings court and up until the
Reformation, the chancellor was invariably a senior churchman.
 Essentially the chancellor was admitting merciful exceptions to the kings general
laws to ensure that the kings conscience was right before god. Method: defendant
would not be allowed to rely on his strict legal rights where it would be
unconscionable to do so.
Flexibility of equity.

 What is undue:
a) Too much?
b) Illegitimate?
 What about influence?
a) Pressure?
b) Some more subtle form of dominance?
What the court looks at to establish undue
influence:
a) Claimant focused- impairment of decision making process due to excessive reliance on the defendant,.
(Macklin v Dowsett, Pesticcio v Huet).
b) Defendant focused - some wrongful conduct on the part of the defendant I.e. the defendant exploited or
otherwise took advantage of the vulnerability of the clamant which exists as a result of their
relationship . Consent has been obtained through unacceptable means(R v A-G for England and Wales,
Davies v AIB Group).
c) A mixture of both. (Randall v Randall).
 Most cases of undue influence involve some wrongful conduct on the part of the defendant i.e.
exploitation or taking advantage of the vulnerability of the claimant.
 Exception: Allcard v Skinner - Vows of poverty and obedience. A wealthy lady wanted to become a
part of a religious order. You would be assigned to a mother superior and take vows upon joining. In the
befinning the lady doesn’t know about this, and once she joins the mother superior tells her to take the
vows and give everything she owns to charity. There is no wrongful conduct from the mother superior as
this is what the order truly believed, but it was clear that the lady placed excessive reliance on the the
mother superior cause. The contract was voidable here as they took the claimant focused point of view
so she could get all her money back
Categories of undue influence.

 Two distinct categories: Presumed and Actual undue influence.

 Category 1: Actual undue influence – the party claiming undue influence must
prove it i.e. the wrongdoer exerted undue influence on her to enter into the
transaction.
 Category 2: Presumed undue influence – the traditional class where a special
relationship exists. No requirement to prove that undue influence was actually
exerted, it is an automatic presumption. There are certain circumstances where the
law will say that this is a relationship where the party completely puts trust in the
other party and therefore the court presumes that this was a case of undue
influence.
Category 1: Actual undue influence

 Applies where no special relationship exists. Requires proof that the contract was entered
into as a result of actual influence exerted on the clm by the def
 Clm has to go and prove that the def exerted undue influence on them
 Claimant must show dominance prevented exercising free will and independently
forming contract. Williams v Bayley (1866).
 Examples: Threats to end a relationship, continuing to badger the party where they have
refused consent until they eventually give in.
 BCCI v Aboody (1990): Mrs Aboody was bullied by her husband into signing a mortgage
over the family home in favour of the bank as security for her husband’s business debts.
 But: “In everyday life people constantly seek to influence the decisions of others. They
seek to persuade those with whom they are dealing to enter into transactions, whether
great or small.” Lord Nicholls, in RBS v Etridge
Category 2: Presumed undue influence

 There are two sub-categories of presumed undue influence.

 Sub category 1: Existence of a relationship where the law automatically gives rise to presumption
of undue influence. e.g. law looks at this relationship and sees that this guy has excessive influence
over the other party so presume the contract was because of this e.g. parent and child , doctor and
patient, solicitor and client.
 Sub category 2: Relationships that do not fall under sub-category 1 but are of a kind where this is
a relationship where ethe claimant has placed trust and confidence in the defendant. Different
type of relationship, e.g. husband and wife today, woman are just as educated and financially
stable as men, so this is not the type of relationship that would give rise to a presumption of
undue influence, but this is not the case for some relationships e.g. wife might be dependant
and completely rust on the husband e.g. In terms of financials. If the wife proves that she puts
complete trust in the other party, then this gives rise to presumption- so this would be applied
to sub category A but only back in the days as this doesn’t happen anymore.
 The difference between the two: Under sub-category 2 the existence of a relationship of a kind
where one party placed trust and confidence in the other, must be proved.
Requirements to establish presumed undue
influence
 Lord Nicholls:
“Proof that the complainant placed trust and confidence in the other party in relation
to the management of the complainant’s financial affairs, coupled with”
2)”…a transaction which calls for explanation, will normally be sufficient, failing
satisfactory evidence to the contrary, to discharge the burden of proof.”
Sub category 1.

 Some relationships give rise to an automatic presumption of trust and confidence

being placed in the other party (principal-fiduciary).
 Examples:
a) Parent - Child
b) Solicitor - Client
c) Doctor - Patient
d) Trustee - Beneficiary
e) Guardian – Ward
 The relationship of husband and wife is not within this category. WHY? Because it is not
really relationship where there is a lot of influence being exerted as they have equal control
usually
 The transaction calls for explanation.
Sub-Category 2 Presumed undue
influence
 No automatic presumption arising as a matter of law.
 The claimant must prove that:
 1) They placed trust and confidence in the defendant in relation to the
management of their affairs.
 Examples:
a) Husband – Wife
b) Employer - Employee.
c) Cohabitees.
2) The transaction calls for explanation.
a transaction which calls for explanation

 Traditionally the successful invocation of category 2 required the existence of

"manifest disadvantage.” National Westminster Bank plc v Morgan. You had
to prove that you were manifestally disadvantaged by the influence exerted
on you
 BUT: Bank of Credit and Commerce International v Aboody - (though a case
of actual undue influence).
 Thus, the House of Lords in Royal Bank of Scotland v Etridge replaced
‘manifest disadvantage’ with the requirement that the transaction must be one
which can not be readily explained by the relationship of the parties – ‘transaction
calls for explanation’.
 No longer matters if the innocent party receives a benefit.
Requirement: the transaction ‘calls for explanation’.
(Replaced manifest dis-advantage)

 The claimant must prove that the transaction ‘calls for explanation’.
 Test: Whether the transaction cannot be accounted for on the ground of
friendship, relationship, charity or other ordinary motives on which ordinary
men act.
 Question: Does the presumption apply to birthday gift by a patient to a medical
adviser?
Rebutting the presumption.

 Once presumed undue influence is established i.e. relationship plus transaction

requires explanation, the burden of proof shifts to the defendant. She must rebut
the inference of undue influence, otherwise contract is voidable.
 There is list of the ways in which the presumption can be rebutted.
Examples:
1) Showing that the claimant acted independently of any influence of the defendant
– a spontaneous act. -
2) Claimant took independent advice before acting . - MOST COMMON AND
SIMPLEST WAY
Summary
 1) Actual undue influence- requires proof that the contract was entered into as a
result of actual influence exerted. The claimant must plead and prove the acts
which they assert amounted to undue influence.
 2) Presumed undue influence: no requirement to prove that improper influence
was actually exerted. But must prove
 A) There was a relationship which as a matter of law gives rise to a presumption
of undue influence (2a) or a relationship of such a kind that one party in fact
placed their trust and confidence in the other to safeguard their interest (2b).
 B) The transaction is one which can not readily be explained by the relationship
of the parties.
 3) Rebutting the presumption.
Undue influence and third parties

 Can the wife set aside a transaction, entered into as a result of undue influence
exerted by her husband, against the creditor (bank)?
1) If H is not an agent; Does the bank have constructive notice of the exercise of
undue influence (and thus the wife’s right to set-aside)?
Arises whenever a wife offers to stand surety for her husband's debts.
 Way around for the creditor: Take steps to satisfy themselves that the wife has
been appropriately advised.
Unconscionability - unfair bargain

 Lord Denning in Lloyds Bank v Bundy: “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 and
desires, or by his own ignorance or infirmity, coupled with undue influence or
pressures brought to bear on him by or for the benefit of the other.”
 Lord Denning essentially created a doctrine of inequality of bargaining power.
 BUT Lord Scarman in Pao On v Lau Yiu Long stated that a contract was not
voidable on the sole grounds that it was ‘procured by an unfair use of a dominant
bargaining position’.
 Lord Denning’s principle of inequality of bargaining power was definitively
rejected in National Westminster Bank plc v Morgan.
 Does this mean that a party can take unreasonable advantage of the others lack of
bargain power? Should unconscionable bargains be allowed by courts?
 Recall why the Court of Chancery was created in the first place.
 1) Fry v Lane (1888): ‘Poor and ignorant’, sale at under value, without
independent advice.
 2)Cresswell v Potter: ‘Member of the lower income group’ and ‘less highly
educated.’
 It seems that equity will intervene and set aside an unconscionable bargain made
with the modern day equivalent of a “poor and ignorant person.”
 Issue: No uniform test – uncertainty as to when equity will intervene and when it
wont.
 Given the rejection of Lord Denning’s doctrine of inequality of bargaining power
– is English law unconcerned with fairness of the bargain? Recall: consideration
need not be adequate.