3 - Duress and Undue Influence Flashcards
Provide an overview of duress and undue influence.
When there has been duress or undue influence exerted upon an innocent party, the resulting contract, or variation to a contract, is voidable (i.e., capable of being set aside).
The only remedy available for duress and undue influence is recission.
What constitutes duress in a contract and what is the burden of proof?
- Duress may take the form of violence or illegitimate threats or pressure that coerce a party into entering a contract or varying a contract.
- The burden of proving duress is on the party who alleges it.
- If there is a threat of violence (referred to as duress to the person) made at the time of contract, it can amount to duress if the threats were at least a reason for entering the contract.
- Duress need not be the only reason why the innocent party entered the contract, but it must have induced the contract in some way.
How does duress to the person differ from economic duress?
- Duress to the person involves threats of physical violence, though cases involving such threats are rare.
- In the modern commercial world, threats to a person’s economic or business interests are far more common.
- Legitimate commercial pressure (e.g., threats to take business elsewhere, sell to a competitor, or not give future discounts) does not amount to duress.
- For economic duress to exist, the threat must be improper or illegitimate (e.g., a threat to breach a contract or commit a tort).
What must be proven to establish economic duress?
The case of Carillion Construction Ltd v Felix (UK) Ltd outlined three key elements that must be proven:
1. Pressure whose practical effect is that there is compulsion on, or a lack of practical choice for, the victim.
2. The pressure is illegitimate.
3. The illegitimate pressure is a significant cause inducing the claimant to enter into the contract.
In other words, ‘but for’ the pressure, the victim would not have entered into the contract. “The minimum basic test of subjective causation in economic duress ought, it appears to be a “but for” test.
What factors are considered when determining if pressure is illegitimate?
The court considers a range of factors, including:
- Whether there has been an actual or a threatened breach of contract.
- Whether the threat was made in good or bad faith.
- Whether the victim protested at the time.
These guidelines help determine whether illegitimate pressure was involved, but illegitimate pressure must be distinguished from the normal pressures of commercial bargaining.
What is the effect of duress on a contract?
- Duress makes an original or renegotiated contract voidable, similar to the effect of a proven misrepresentation.
- A voidable contract is valid and binding unless and until rescinded by the innocent party.
- The innocent party can either rescind the contract or affirm it, but once affirmed, they cannot later rescind.
- The remedy for duress is rescission, where the innocent party must notify the other party of the desire to rescind.
- The innocent party may apply to the court for an order of rescission if necessary (e.g., if the other party refuses to return money or property).
What are the bars to rescission in cases of duress?
Rescission may be barred if:
1. The contract has been affirmed.
2. There has been undue delay.
3. A bona fide purchaser has acquired rights.
4. It is impossible to restore the goods or property.
Example -In North Ocean Shipping v Hyundai Construction (The Atlantic Baron), the court found economic duress but refused to rescind the variation due to affirmation and delay. The claimants had affirmed the variation by paying extra money after the pressure was removed, and they delayed for eight months before seeking repayment.
How does economic duress link with consideration?
In cases of economic duress, if a party was forced into a variation of the contract (promise to pay more), they could argue that no consideration was given for that promise.
However, performing an existing contractual obligation can be good consideration for a promise of more money if the party promising more money obtains a practical benefit in return, as seen in Williams v Roffey.
Further, if X does something above and beyond its original contractual obligations, it may amount to good consideration.
Nevertheless, if the promise was made under duress, the variation remains voidable.
Example: In Atlas Express v Kafco, it was successfully argued that Atlas had given no consideration for its promise of extra money as it was simply performing an existing contractual duty.
What happens if a promise to pay more was made under duress?
Although the general principle is that performance of an existing contractual duty is not consideration for a promise of more money, the courts take a more practical approach.
If the person promising more money obtains a practical benefit in return, performing an existing contractual duty can be good consideration.
However, if the promise to pay more was made under duress, the variation can be set aside, as only the variation is affected by duress, not the original contract.
What is the doctrine of undue influence and how does it differ from duress?
The doctrine of undue influence is similar to duress, making a contract voidable.
The remedy is rescission, with the same bars to rescission as for duress.There is no remedy of damages.
Undue influence differs from duress in what needs to be established.
Undue influence is:
- Influence that goes beyond what is acceptable; or
- When one party is in a position to influence another and takes unfair advantage of that position.
It consists not of threats or violence but influence that goes beyond what is acceptable. It can be difficult to identify at what point acceptable influence becomes undue influence.
The law identifies unequal relationships and considers whether the dominant person abused that relationship.
What are actual and presumed undue influence?
Unlike duress, where the innocent party must prove duress, undue influence can be presumed.
There are two types of undue influence:
- Actual undue influence is proved on the facts.
- Presumed undue influence arises where there is a fiduciary relationship or a relationship of trust and confidence, and a transaction occurs that calls for an explanation.
Example: Actual undue influence was established in Daniel v Drew [2005], where Mrs Drew signed a contract under the threat of court action by her nephew, whom she feared. The threat may be entirely legal, such as taking court action.
What conditions must be met to raise the presumption of undue influence?
There must be:
- A relationship of trust and confidence, and
- A transaction that calls for an explanation.
In certain relationships, like solicitor-client or doctor-patient, trust and confidence are irrebuttably presumed.
It is not presumed in relationships like husband and wife; the innocent party must prove trust and confidence.
Example: In O’Sullivan v Management Agency Ltd [1985], a relationship of trust and confidence was established between a young singer, Gilbert O’Sullivan, and his manager, allowing the singer to set aside agreements for undue influence.
The transaction must be one that cannot be easily explained by the relationship, such as a contract that is not for the party’s benefit or exposes them to risk.
The presumption is rebuttable if independent advice was taken.
How does undue influence apply to third parties, and what protections are in place for creditors?
The law on undue influence is important in cases involving third parties, such as creditors affected by a debtor’s undue influence over a surety (like a spouse).
For example: A husband obtains a loan secured by the matrimonial home through undue influence over his wife.
If the business fails, the lender seeks to enforce the security.The wife alleges undue influence and seeks to set aside the security agreement, which would leave the lender without security. The dilemma involves protecting both the wife and the lender, who may lose their security if always affected by undue influence.
Courts compromise by considering if the creditor had actual or constructive notice of undue influence.
What did the House of Lords decide in Royal Bank of Scotland v Etridge (No 2) regarding how constructive notice is established?
The House of Lords decided that a creditor has constructive notice if:
- It ought to have been put on inquiry, and
- It did not take reasonable steps to ensure the surety was aware of the implications of signing.
A creditor is put on inquiry in all cases where the relationship between the debtor and surety is non-commercial, and the loan is not for their joint benefit.
Reasonable steps include:
(a) There is no obligation on the creditor to have seen the wife itself as it is ordinarily reasonable to rely on a confirmation from a solicitor that they have advised the wife in an appropriate manner, unless the creditor is aware that this has not been done. It is for the solicitor to determine whether there is a conflict of interest if the wife’s solicitor also advises the husband (in other words to ensure the wife seeks legal advice).
(b) The creditor must provide the solicitor with sufficient information about the transaction for the solicitor to be able to explain it fully to the wife.
(c) If the creditor is aware, either actually or constructively, that the wife may have been misled, then the creditor must tell the solicitor of this.
If independent legal advice is taken and documented, the security will usually be upheld.
What is the solicitors position in a situation of surety?
The solicitor should start by warning the wife that his involvement may be relied upon by the bank to counter allegations that she could not properly understand the transaction or had given her consent to it. If the wife then consents to advice being given, the core minimum the advice should contain is:
(a) An explanation of the documents and their practical consequences, including the risk that the wife may lose her home.
(b) The seriousness of the risk, including the duration and terms of the security and the wife’s assets and means.
(c) The fact that the wife has a choice.
The solicitor should then obtain any necessary information from the lender/creditor.
If the solicitor fails in his duty to the wife, then she will have an action in negligence against the solicitor, but she will have no recourse to the lender/creditor which is entitled to assume that the solicitor has properly advised the wife.
