Chapter 6: Undue Influence

Question 1

Undue Influence

Answer 1

Contractual obligations should be both freely and independently assumed. If the consent to a
transaction was produced in a way such that the consent ought not fairly to be treated as the
expression of a person’s free will, then the transaction will not be allowed to stand. The objective is
to ensure that the influence of one person over another is not abused,

Question 2

Overlap with Duress

Answer 2

This concept overlaps with that of duress. Ideally, the doctrines of duress and undue influence
would have clear and distinct targets. However, the doctrine of duress is a common law doctrine,
whereas undue influence was developed by the courts of equity. The two have not always
developed with a clear view as to the role of the other. Where a contract appears to be the result
of pressure/coercion, you should consider each doctrine in turn

Question 3

RBS v Etridge (No 2) [2002] 2 AC 773

Answer 3

The leading case on undue influence is RBS v Etridge (No 2) [2002] 2 AC 773. In this case the court stated that undue influence exists where ‘a person’s consent to a transaction was produced in a
way such that the consent ought not fairly to be treated as the expression of their free will’. The
court stated that it was ‘impossible to be more precise or definitive’.

Question 4

Keeping Open Options for duress

Answer 4

The definition of undue influence provided in Etridge suggests the court wants to keep its options
open to find undue influence in any situation which falls within this test. Notwithstanding this, the
court detailed the circumstances in which undue influence has already been established. Etridge
clarified much of the case law in this area.

Question 5

Types of Undue Influence

Answer 5

First, there are instances of overt acts of improper pressure or coercion such as unlawful threats.
This type has much overlap with the idea of duress.

Second, there are situations where one party has influence or ascendancy over the other, and the
first party takes advantage of that influence/ascendancy. In these cases there may be no specific
or overt act of pressure or coercion, but the underlying relationship is sufficient for the undue influence to be exercised. The lack of an act of pressure or coercion makes this quite distinct from duress.

Question 6

1.1 Overt acts of improper pressure or coercion has to be deceitful and/or fradulent

Application of the ‘But For’ Test

Answer 6

In so far as the behaviour constituting undue influence is of a deceitful/fraudulent nature, the
causation test is the same as for duress to the person. It is necessary only for the innocent party to establish that the undue influence is a factor in inducing the claimant to enter into the contract.

Question 7

1.2 Taking advantage of influence or ascendancy in a relationship

Answer 7

A common situation is where a husband or wife (the ‘business owner’) wants their spouse to enter
into an agreement with the effect that the spouse’s share in the matrimonial home is used as
security for a loan to the business owner’s business. The effect is that the spouse might lose their
interest in the home. If the spouse has placed trust and confidence in the business owner and the
business owner abuses this trust in seeking the spouse’s consent to the transaction (for example,
by misrepresenting the nature of the transaction), then this can amount to undue influence. Note
the absence of a specific act of coercion or pressure

Question 8

Influence or Ascendancy Sources

Answer 8

Commonly, the influence will
come from the trust and confidence which one party has in the other. However, a relationship
where one party is very vulnerable or dependent might also allow the other party to have significant influence, even if the innocent party has not positively placed trust or confidence in the other party

Question 9

Irrebuttable Presumption

Answer 9

Such relationships include those between parent and child, guardian and ward, trustee and beneficiary, solicitor and client and doctor and patient. However, parent and adult child, or (crucially) spouses do not give rise to this presumption

Question 10

1.2.1 Proof of taking advantage of influence or ascendancy in a relationship

Answer 10

If a party wishes to allege it has been the victim of undue influence, it must prove this. If a party can show that there is a relationship of trust and confidence (or presumably one of the
categories of irrebuttable presumption) and also a ‘transaction which requires explanation’, then this will be enough for the court to determine that the transaction is the product of undue influence, unless the alleged wrongdoer can produce evidence to convince the court that there was no such undue influence

Question 11

Transaction explanation

Answer 11

A transaction will require an explanation if it does not fit with what would usually be expected in the relationship concerned. It might be a suspicious type of transaction, or be for a suspiciously high
value.

Question 12

Husband/Wife Transactions

Answer 12

Note that the court has indicated that, in the majority of cases, a husband/wife offering their
interest in the matrimonial home as security for a loan to their spouse’s business is not a
transaction which requires explanation, so the party alleging undue influence would need to prove that unfair advantage had been taken of the relationship

Question 13

Etridge approved Lindley LJ in Allcard v Skinner 1887 LR 36 ChD 145:

Answer 13

Lindley LJ pointed out that where a gift of a small amount is made to a person standing in a confidential relationship to the donor, some proof of the exercise of the influence of the donee must be given. The mere existence of the influence is not enough.

‘But if
the gift is so large as not to be reasonably accounted for on the ground of friendship,
relationship, charity, or other ordinary motives on which ordinary men act, the burden is upon
the donee to support the gift’.

Question 14

Relationship of Trust & Confidence

Answer 14

Where a party has shown a relationship of trust and confidence and a transaction which requires
explanation, then the wrongdoer might argue (for example) that the innocent party received
comprehensive independent advice about the transaction, and therefore that they could not have
been subjected to undue influence

Question 15

Consent under Undue Influence

Answer 15

Whether such an argument would succeed will depend on all
the facts. The court has made clear that even when someone fully understands a transaction
having received independent legal advice, it is possible that their consent to it is still being given
only as a result of undue influence.

Question 16

1.3 Limits on equitable relief (Discretionary)

Answer 16

Where undue influence is proven, a contract (or gift by deed) may be set aside. However, this
relief is equitable and, therefore, discretionary. The court may not allow this relief where the
innocent party has delayed making its claim because ‘delay defeats equity’. Also, it may be
disallowed where the claimant’s conduct has been underhand because those who come to equity
must come with clean hands.

Question 17

1.4 Summary

Answer 17

• Undue influence will be established where the contract results from overt acts of improper
  pressure or coercion – this is similar to duress.
• More common is undue influence arising from a relationship where one party has influence or
  ascendancy over the other, and abuses this position, for example by misrepresenting the
  situation to the other party or simply favouring its own position.
• There is no limit to the possible relationships of influence or ascendancy, but they will
  commonly be relationships where one party has placed trust and confidence in other. Some
  relationships, such as parent/child or solicitor/client are irrebuttably presumed to be such
  relationships – they will always amount to a relationship of influence or ascendancy by their
  very nature
• If a party can show a relationship of trust and confidence and a transaction which calls for an
  explanation, then undue influence is inferred, unless the other party can establish to the
  contrary.
• Relief for undue influence is discretionary and delay or a failure to come to court with ‘clean
  hands’ may lead to a remedy being refused.

Question 18

2 Undue Influence and third parties

Answer 18

Undue influence has, in the past, been largely confined to where a victim is attempting to avoid a
transaction because the other party has exerted an unfair advantage over them by virtue of their relationship to one another However, it sometimes arises, particularly in the context of a marital relationship, that the victim is persuaded to enter into a guarantee or surety contract with a bank or some other creditor on the basis of some undue influence, misrepresentation or other legal
wrong, not by the bank or creditor (ie not by the other party to the transaction), but by some
third party, for instance, their spouse

Question 19

Actual Notices & Risks of Undue Influence

Answer 19

If the contracting party (eg the bank) has actual notice (ie is aware) of the undue influence, the
contract will be affected. However, it is highly unlikely that the bank will have actual notice of
undue influence. Much more likely is that there are circumstances which might lead a bank to
realise that a transaction carries a risk of undue influence.

Questions to Ask:

Does this have any implications for the transaction? In this area of law, this problem translates to the question of when will the bank be
fixed with constructive notice of the undue influence – ie when will it be treated as having notice
of something that it is not actually aware of

Question 20

Spousal Undue Influence Factors

Answer 20

Firstly, a relationship between spouses is not one where there is an irrebuttable presumption of a
relationship of influence/ascendancy. The spouse will therefore need to prove such a relationship, most likely by establishing that they placed trust and confidence in their spouse. In most cases, it will be relatively easy to establish this.

Question 21

Spousal Undue Influence Factors

Answer 21

Secondly, the court has indicated that, in the majority of cases, a spouse offering their interest in
the matrimonial home as security for a loan to their spouse’s business is not a transaction which
requires explanation – so it will be for the party offering security to show more explicitly how their
spouse’s influence has been used unduly

It is only if undue influence is established, that the issue of the notice of the bank will be relevant.

Question 22

2.2 Barclays Bank plc v O’Brien

Answer 22

The frequent tripartite problem involving spouses and a bank was considered in Barclays Bank plc
v O’Brien [1994] 1 AC 180 and a number of subsequent similar cases which have refined (and
challenged) the principles.

Question 23

2.2 Barclays Bank plc v O’Brien

Answer 23

Mr O’Brien was a shareholder in a company and wanted to increase the overdraft facility of the
company in question. The company’s bank agreed a loan of £12,000 that was to be guaranteed
by Mr O’Brien, his liability in turn being secured by a second charge over the matrimonial home,
which was jointly owned by Mr O’Brien and his wife. The bank manager gave instructions for a
legal charge to be signed by both Mr O’Brien and his wife, together with a guarantee to be signed
by Mr O’Brien. He also instructed that both Mr O’Brien and his wife should be made aware of the
nature of the transactions and that, if they had any doubts, to obtain independent advice

Question 24

2.2 Barclays Bank plc v O’Brien

Answer 24

However, the bank staff had not followed these instructions and subsequently both husband and
wife signed the documents without reading them. When the company’s indebtedness increased
beyond the agreed limit, the bank took proceedings to enforce its security against the husband
and wife. In her defence, Mrs O’Brien contended that, firstly, her husband had put undue pressure
on her to sign the agreements and, secondly, that her husband misrepresented the effect of the
legal charge in that she believed it was limited to a sum of £60,000 over three weeks when in fact
the charge covered £135,000.

Question 25

2.2 Barclays Bank plc v O’Brien

Answer 25

It was held by the House of Lords that the bank was aware that the parties were husband and
wife and as such were put on notice that influence may be exercised. The bank had failed in its
duty to take reasonable steps to warn the wife of the risks she ran in entering into the surety
contract nor had it properly advised her to seek independent legal advice. On this basis, the bank
was fixed with constructive notice of the misrepresentation made by the husband to induce his
wife into the surety contract and therefore the wife was entitled to have the legal charge set
aside.

Question 26

Creditor would be put to notice

Answer 26

[…] a wife offers to stand surety for her husband’s debts by the combination of two factors: (a)
the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the
transaction.

Question 27

Creditor would be put to notice

Answer 27

It follows that unless the creditor who is put on inquiry takes reasonable steps to satisfy himself
that the wife’s agreement to stand surety has been properly obtained, the creditor will have
constructive notice of the wife’s rights.

Question 28

2.2.1 Post O’Brien developments in surety transactions

Answer 28

The House of Lords was once more asked to consider this area of law in the consolidated appeal
of RBS v Etridge (No 2) [2002] 2 AC 773. As well as clarifying and/or approving many of the
authorities in this area, Lord Nicholls extended the principles of constructive notice beyond cases
of spouses when he stated that ‘the only practical way forward is to regard banks as put on
inquiry in every case where the relationship between surety and debtor is non-commercial’. He
clarified that a bank is put on inquiry whenever one party in a non-commercial setting is standing
as surety for the other party.

Question 29

Post O’Brien developments in surety transactions

Answer 29

The House of Lords was once more asked to consider this area of law in the consolidated appeal
of RBS v Etridge (No 2) [2002] 2 AC 773. As well as clarifying and/or approving many of the
authorities in this area, Lord Nicholls extended the principles of constructive notice beyond cases
of spouses when he stated that ‘the only practical way forward is to regard banks as put on
inquiry in every case where the relationship between surety and debtor is non-commercial’. He
clarified that a bank is put on inquiry whenever one party in a non-commercial setting is standing
as surety for the other party.

Question 30

Post O’Brien developments in surety transactions

Answer 30

The House of Lords rejected the wife’s claim. The husband had not been acting as the lender’s
agent and the lender had no actual or constructive notice of the husband’s undue influence. As
the mortgage application said that the loan was for a holiday cottage, there was nothing to put
the lender on notice that the transaction was anything other than a normal advance for the
couple’s joint benefit.

Question 31

2.2.2 What are reasonable steps?

Answer 31

(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.

(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.

Question 32

2.2.3 The solicitor’s position

Answer 32

The solicitor should start by warning the wife that their
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.

(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.

Negligence of solicitor: 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.

Question 33

2.3 Summary

Answer 33

• A common problem is when a ‘victim’ is persuaded to enter into a contract such as a contract
  giving security to a bank on the basis of undue influence not by the bank but by some third
  party.
• This gives rise to whether the contract with the bank can be set aside, despite the fact that the
  bank exerted no undue influence. This depends on whether the bank had notice of the undue
  influence by the third party. Unless the bank had actual notice of the undue influence, the
  ‘victim’ will need to show that the bank had constructive notice of the undue influence.
• A bank will be held to have constructive notice in every case where the relationship between
  party giving the guarantee and the borrower is non-commercial, unless the bank takes reasonable steps to warn the weaker party of the risks of the transaction or to ensure that it
  gets independent advice.
• If the weaker party gets independent legal advice, the courts have given guidance as to what
  is expected from the solicitor giving such advice.