Duress and undue influence Flashcards
What is duress?
Where one party coerces another party into a contract. Consent is not present or not given freely
What is the legal effect of duress?
Contract is voidable, rescission is available but may be lost if contract is affirmed
What are the three forms of duress?
- Duress to the person
- Duress to property
- Economic duress
What is duress to the person?
- Threat or act of violence
- Duress need only be one factor (need not be decisive)
- Burden of proof is on the party who exerted the pressure to show it contributed nothing towards decision to contract
What is duress to property?
- Seizure or damage to owner’s property
- Causation: it must be shown that the agreement would not have been entered into if not for the duress
What is economic duress?
- Threats to economic or business interests
- Lack of practical choice for victim
- Illegitimate pressure
- The pressure is a significant cause in entering the contract: apply the ‘but for’ test: but for the duress, the agreement would not have been entered into
What factors do the court consider when considering whether there is illegitimate pressure?
- Threatened breach of contract? Usually amounts to illegitimate pressure
- Pressure applied in good or bad faith? If the pressure is applied in bad faith = illegitimate
- Did the victim protest?
- Did victim affirm? The Victim should take immediate action once pressure has ceased to operate
How does economic duress interact with consideration by way of practical benefit?
- Practical benefit is good consideration to make a promise to pay more binding
- But doctrine of economic duress is important in ensuring that a party can seek relief from variations where they have entered into variations under duress
What is undue influence?
One party has influence or ascendancy over the other and the first party takes advantage. Often arises due to relationship of trust and confidence or where one party is very vulnerable or dependent on the other
What is the causation test for overact acts of improper pressure or coercion (type of undue influence)?
- If behaviour is deceitful/fraudulent - it need only be a factor in inducing claimant into entering the contract (need not be decisive)
- If not - but for test applies
What is needed to prove that a party took advantage of influence or ascendancy in a relationship?
- Relationship of trust and confidence
- Transaction which requires explanation
What is the remedy for undue influence?
Contract is voidable
When is a third party put on enquiry of the rsk of undue influence?
Whenever one party in a non-commercial setting is standing as surety for the other party and
1. the transaction is on its face not to their financial advantage
2. there is a substantial risk in transactions of that kind that a legal/equitable wrong has been committed against them
Is a spousal relationship one with an irrebuttable presumption of relationship of influence/ascendancy?
No - the spouse needs to prove this
In most cases, a transaction for security over the matrimonial home will not require explanation
When is a bank put on inquiry that a surety transaction might be tainted by undue influence?
Whenever one party in a non-commercial setting is standing as surety for the other party
What must a party do when put on enquiry of the risk of undue influence? (Etridge guidelines)
Take reasonable steps to ensure the innocent party is fully aware of the risks being taken and advise them to get independent advice
- can rely on confirmation from solicitor that they have advised the innocent party
a) There is no obligation on the creditor to have seen the spouse as it is ordinarily reasonable to rely on a confirmation from a solicitor that they have advised the spouse in an appropriate manner, unless creditor aware this has not been done
b) Creditor must provide solicitor with sufficient information about transaction for solicitor to be able to explain it fully
c) If the creditor is aware that the spouse ma have been mislead, the creditor must tell the solicitor
What should a bank do to ensure that a transaction is not affected by undue influence?
The bank should tell a solicitor if it is aware that the spouse may have been mislead
What is the solicitor’s position?
Advice should contain:
a) explanation of documents and practical consequences
b) seriousness of risk
c) the fact that the spouse has a choice
What happens if solicitor fails in duty to the spouse?
The spouse has an action in negligence against the solicitor, but they have no recourse against the lender/creditor which is entitled to assume that the solicitor has properly advised the spouse
What is presumed undue influence?
Where there is a fiduciary relationship:
- doctor/patient
- solicitor/client
- teacher/pupil
NOT husband/wife
Or a relationship of trust and confidence and a transaction calls for an explanation
If both apply = presumption is raised and must be rebutted by defendant
What is constructive notice?
A spouse/CP has influenced their partner to mortgage their house/shares in a business or asset for their debt (meaning there is undue nifluence)
The bank, which is the counterparty to the contract with the partner, may have constructive notice of the undue influence exerted by that spouse.
If the bank has constructive notice, the transacton is voidable
What is the effect of the bank having constructive notice?
The bank cannot enforce the loan
Bank is deemed to have constructive notice as they failed to take reasonable steps necessary
When will a bank have constructive notice?
If the transaction is:
- not to the financial advantage of the victim (the spouse being pressured to give security for the debt of their partner); and
- there is a substantial risk of undue influence (loan over house is for the sole use of one spouse)
The bank will have constructive notice of undue influence and contract will be voidable
What must the bank actually know to have constructive notice?
Must know the partner is giving security for the debts of another
How can the bank avoid having constructive notice?
They should take reasonable steps to ensure the other party (party being influenced) entered into the contract freely and with full knowledge of facts
Reasonable steps are:
1. Insist other party has a private meeting with representative of bank; and
2. Ensure they have written confirmation from a solicitor that the solicitor has provided independent, effective impartial advice to the other part
When should Etridge guidelines be followed by the bank?
In non-commercial cases where a private individual offers their property as security for another person’s debts
