Contract Law - Duress & Undue Influence

Question 1

What is duress?

Answer 1

One party coercing another party into a contract - consent is not present or not given freely.

Effect: contract or variation of contract entered into under duress is voidable.

Includes:
- Duress to the person
- Duress to goods
- Economic Duress

Question 2

What is duress to the person?

Answer 2

Barton v Armstrong-once it is established physical threats contributed to the decision to enter into a contract, duress will be found, so long as threats were one of the reasons for contracting.

*Burden of proof on party exerting pressure to show threats and unlawful pressure contributed nothing to victim’s decision.

*Duress need only be a factor influencing victim’s behaviour, it does not need to be the reason, just a reason.

Question 3

What are is duress to goods?

Answer 3

*Threat to seize the owner’s property or to damage it.
*Insufficient to show duress was one factor, must be a decisive factor-but for the duress, the claimant would not have agreed to the contract (Occidental Worldwide Investment v Skibs).

Question 4

What is economic duress?

Answer 4

There must be pressure, whose practical effect is that there is compulsion on, or a lack of practical choice, for the victim, which is illegitimate and which is a significant cause inducing the claimant to enter into a contract.

*Significant cause-the agreement would not have been entered into if there had not been the duress.

Question 5

What are the consequences of duress?

Answer 5

*Contract is voidable-it remains in force unless the party subject to duress chooses to avoid the contract.

*Remedy is rescission-attempt to return the parties to the situation each was in prior to the contract being entered into.

*Affirmation operates as a bar to rescission-a contract is affirmed if, after the duress has ceased, the innocent party fails to challenge the contract in a timely way and/or acts in compliance with its terms.

Question 6

Explain what is meant by lack of practical choice in Economic Duress?

Answer 6

Pressure, whose practical effect is that there is compulsion on, or a lack of practical choice, for the victim, which is illegitimate, and which is a significant cause inducing the claimant to enter into a contract.

1) Lack of practical choice
*Pressure must result in a lack of practical choice for the victim-they have no practical alternative but to acquiesce to the demand.
*Carillion Construction v Felix-Felix knew a number of trades were dependent upon work completion, it would be impossible for Carillion to find an alternative supplier in time and Carillion agreed to pay more money for Felix to deliver cladding by original deadline-Carillion protested before paying the money-this is duress, had no viable alternative.
*Atlas Express v Kafco-where a party has no alternative but to accept revised terms that were detrimental to its interest, this is economic duress.
*B&S Contracts and Design v Victor Green-cancellation of contract would have caused serious damage to economic interests, but they had no practical choice but to pay the extra sum-company not entitled to additional sum given it came under duress.
*Kolmar Group v Traxpo- defendants had made demands they knew would cause the claimants loss that were backed by coercive and unlawful treats that they would not perform their obligations, and the claimant shad complied with those demands as a result of those threats.

Question 7

What is ‘illegitimate pressure’ in Economic duress? How is this measured by the courts?

Answer 7

Illegitimate pressure

Has there been a threatened breach of contract?
- Threat to breach a contract is an unlawful threat-will usually amount to illegitimate pressure.

*Pressure applied in good or bad faith?
- If unlawful threat is made for illegitimate ends, threat is made in bad faith.
- In Carillon and Atlas, party exerting pressure was threatening to breach, this threat was made to extort money that they were not entitled to.
- DSND-pressure was applied in good faith-refused work until other party provided insurance and indemnities covering safety of divers.

Did the victim protest?
- Victim should demonstrate evidence of protest at the time the alleged duress was exerted.
- Carillon-before paying the money, Carillon wrote a letter protesting.
- The Atlantic Baron-North Ocean Shipping failed to protest at the time of the threatened breach (waited 8 months)-claim failed.

Did the victim affirm?
- Unless the victim of duress takes immediate action once the pressure has ceased to operate, they may be taken to have affirmed the contract.

Question 8

What is meant by significant cause?

Answer 8

Claimant must show that duress induced (i.e. caused them) to enter into the contract.

‘But for’ test is applied, but for the duress, the innocent party would not have entered into the contract.

Question 9

What is the effect of duress?

Answer 9

The effect of all the forms of duress is to render the contract voidable by the party who was subject to the duress. This means that the contract will remain in force until the innocent party applies to have it set aside.

Question 10

What is the difference between duress and undue influence?

Answer 10

Duress = common law

Undue influence = equity. If a contract was executed as a result of one party being unduly influenced, it will render the contract voidable (not void) - this is an equitable remedy.

Question 11

What is undue influence?

Answer 11

Undue influence occurs where there is a relationship of trust, confidence, vulnerability or dependency, which one party abuses by taking advantage of the other party.

RBS v Etridge-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.

Three types of undue influence:
1) Actual undue influence (overt acts of improper coercion)
2) Presumed undue influence
2) The third party had notice of this undue influence.

Question 12

What is Actual undue influence ‘overt acts of improper pressure or coercion’ ?

Answer 12

Behaviour constituting undue influence is of a deceitful or fraudulent nature.

Claimant needs to establish the undue influence is a factor that induced them to enter into the contract, may not be the only reason but the party did actually exert influence on them.

This can be through psychological means too, e.g. ‘why the hell don’t you get on with what you are paid to do and witness her signature’?

Question 13

When can the presumption be rebutted?

Answer 13

If the presumption that the influence was undue applies, it will be up to the other party to rebut the presumption, e.g. by showing that the claimant entered the transaction or made the gift only after

Full, free and informed thought about it and therefore received independent legal advice.

Question 14

How do you establish that the influence was undue?

Answer 14

The influence will be presumed to be undue if the transaction cannot be explained easily by reference to the parties’ relationship:

is it suspicious and does it call for an explanation?

Question 15

What is meant by ‘actual notice’ required by a third party?

Answer 15

A party has actual notice of undue influence if it knows that one of the parties to the contract has been subjected to undue influence.

Question 16

What is meant by ‘constructive notice’ required by a third party?

Answer 16

Constructive notice : party ought to have known of the undue influence.

Creditor can be put on notice if the following two requirements must be met:

1) The bank ought to have been put on enquiry. This is presumed in all non-commercial relationships, such as in the example of a husband and wife. The lender will not be put no enquiry if it appears that the other party stands to benefit from the loan.

2) The bank has failed to take reasonable steps to ensure that the less dominant party’s consent was properly obtained.

The bank must ensure that the vulnerable party is fully aware of the risks of the loan by advising them to take independent advice. There is no obligation on the banker to have seen them personally, it is reasonable to rely on a solicitor. If the creditor is aware, either actually or constructively, that party may have been misled, then the creditor must specifically speak to the advising solicitor about it.

Question 17

What is the position regarding undue influence and third parties?

Answer 17

In scenarios where undue influence is exercised by a third party (e.g., husband who pressures wife to enter into contract as surety for business with a bank), the innocent party needs to prove one of the following factors:

1) Is undue influence established between A and B?

2) Does the third party have actual or constructive notice of undue influence?

3) If yes, the third party will be bound by the undue influence unless it has taken reasonable steps to avoid it.

Question 18

What happens if the relationship is not a protected category (e.g. recognised relationship with an irrebuttable presumption of influence?

Answer 18

The claimant must show that the relationship was nonetheless based on trust and confidence.

If they can show this, an evidential presumption of influence arises.

Question 19

What is meant by presumed undue influence?

Answer 19

There is no concrete evidence of actual undue influence, by its nature it occurs subtly within a trusted relationship, without documentary or witness evidence.

Therefore courts have presumed influence in some trusted relationship.

Burden of proof = Defendant (person denying the influence).

In order to establish presumed undue influence there must be
1) Relationship of trust and confidence, resulting in one party having influence over the other
2) Influence appears to have been undue
3) There is nothing to rebut the presumption of undue influence.

Example-husband or wife business owner wants their spouse to enter into an agreement where spouse’s share in matrimonial home is used as security for loan to business owner’s business. If spouse places trust and confidence in business owner and business owner abuses this trust (such as by misrepresenting nature of transaction), can amount to undue influence.

Irrebuttable presumption that one party has influence over the other:
Parent and child.
Guardian and ward.
Trustee and beneficiary.
Solicitor and client.
Doctor and patient.

Rebuttable:
Husband and Wife
Parent and Adult child
Employer and Employee

Not the case that every transaction between above will give rise to undue influence-only where relationship is taken advantage of there will be undue influence-the court will just not allow any argument that there was no influence in the relationship

Proof (one possibility)
- Party needs to show there is a relationship of trust and confidence (or one of the categories of the irrebuttable presumption).

Transaction requiring explanation
Majority of cases-husband/wife offering interest in matrimonial home as security for loan is not a transaction which requires explanation, so party alleging undue influence needs to show unfair advantage has been taken.

Equitable relief:
- Relief is equitable and discretionary.
- Court may not allow where innocent party has delayed claim because ‘delay defeats equity.’
- May be disallowed where claimant’s conduct has been underhand because ‘he who comes to equity must come with clean hands.’