Duress and undue influence

Question 1

What are duress and undue influence

Answer 1

Doctrines which deal with situations where free and independent consent to contract has not been given, and accordingly the contracts concerned are not allowed to stand.

Question 2

What is ‘duress’?

Answer 2

Duress involves one party coercing another party into a contract: consent is not present or not given freely.

Question 3

What happens if there is duress?

Answer 3

A contract or variation of a contract which has been entered into under duress is voidable, meaning that the wronged party may be able to take action to have it set aside.

Question 4

Types of duress

Answer 4

• Duress to the person
• Duress to goods
• Economic duress

Question 5

Duress to the person

Answer 5

• can void a contract when it amounts to actual or threatened violence.
• leading case Barton v Armstrong: once it is established that the physical threats contributed to the decision to enter the contract, duress will be found, so long as the threats were one of the reasons for contracting. Burden of proof is on the party who exerted the pressure to show the threats contributed nothing to the victim’s decision to contract.

Question 6

Duress to goods

Answer 6

• A contract can also be voided where there is a threat to seize the owner’s property or to damage it (Occidental Worldwide Investment v Skibs)
• it seems likely that it must be shown that the agreement would not have been entered into if there had not been the duress.
• unlike duress to the person, it is unlikely to be sufficient to show that duress was just one factor

Question 7

Economic Duress

Answer 7

• less well settled than the other two doctrines
• DSND Subsea Ltd v Petroleum Geo Services:
  ‘there must be pressure,
  (a) whose practical effect is that there is compulsion on, or a lack of practical choice, for the victim,
  (b) which is illegitimate,
  (c) which is a significant cause inducing the claimant to enter into the contract’
• courts have subsequently clarified that ‘significant cause’ means it must be shown that the agreement would not have been entered into if there had not been the duress.

Question 8

Legal effect of duress

Answer 8

The contract will be voidable. The proper remedy is one of recission, involving attempting to return the parties to the situation each was in prior to entering the contract.

Question 9

‘Voidable’ definition

Answer 9

A contract which is voidable remains in force unless some action is taken to void (annul) it.

Question 10

‘Recission’ definition

Answer 10

A remedy which involves returning the parties to the situation each was in prior to the contract.

Question 11

When will the remedy of recission be lost?

Answer 11

The remedy of recission will be lost when the contract is affirmed, as the affirmation will operate as a bar to recission. The court might concluded that the 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 12

‘Lack of practical choice’

Answer 12

Carillion Construction v Felix: If Carillion were to complete their main project on time, and avoid heavy fees for late completion, they had no choice but to agree to Felix’s demands.

Atlas Express v Kafco: where a party has no alternative but to accept revised terms that were detrimental to its interest, this amounted to economic duress.

Question 13

‘Illegitimate pressure’

Answer 13

In DSND v Subsea, Dyson J stated the following subset of factors to consider when assessing the legitimacy of pressure:

• whether there has been an actual or threatened breach of contract;
• whether the person allegedly exerting the pressure has acted in good or bad faith;
• whether the victim protested at the time;
• whether he affirmed or sought to rely on the contract

Question 14

Threatened breach of contract

Answer 14

• A threat to breach a contract is an unlawful threat. A breach of contract is a failure to comply with the terms of the contract, which will normally give rise to a right of the innocent party to claim damages.
• A threat to breach a contract will therefore amount to illegitimate pressure.

Question 15

Pressure applied in good or bad faith?

Answer 15

If the unlawful threat to breach a contract is made for illegitimate ends, then this is made in bad faith. In Carillion and Atlas, the threat was made in order to extort money from the other contracting party that they were not entitled to.

Question 16

Bad faith distinguished from driving a hard bargain

Answer 16

Alec Lobb v Total Oil: terms were in Total Oil’s favour, and had been able to negotiate such favourable terms because Lobb’s credit history was very poor and he would have struggled to obtain financial help elsewhere.. Lobb sought to allege the contract had been entered into under duress. The court disagreed. Hard bargaining did not amount to duress, and Lobb had chosen to enter the contract despite receiving legal advice not to.

Question 17

Did the victim protest?

Answer 17

• The victim should demonstrate evidence of protest at the time the alleged duress was exerted.
• Carillion: Before paying the money, Carillion wrote a letter protesting against Felix’s demand. Carillion’s registering of their dissastisfaction was material in their claim succeeding.
• North Ocean v Hyundai: North Ocean’s claim failed because they failed to protest at the threatened breach

Question 18

Affirmation - did the victim affirm?

Answer 18

North Ocean v Hyundai: North Ocean delayed in taking action to set aside the contract. It was not until 8 months later that the owners claimed the return of the extra 10%. Although the agreement to pay the extra money might initially have been voidable for economic duress, the fact that the shipping company waited 8 months before taking steps to avoid the contract meant they lost their right to have the contract for the increased payments set aside. They had, in effect, affirmed a variation to the contract.

Question 19

Causation element (but for the duress, the agreement would not have been entered into)

Answer 19

It must be shown that the agreement would not have been entered into if there had not been the duress.

Huyton SA v Peter Cremer: ‘The minimum basic test of subjective causation in economic duress ought, it appears to me, to be a “but for” test. The illegitimate pressure must have been such as actually caused the making of the agreement, in the sense that it would not otherwise have been made at all or, at least, in the terms in which it was made.’

Question 20

Economic duress and consideration

Answer 20

See consideration flashcards

Question 21

Can there be illegitimate pressure if there is only one of (a) unlawful and (b) In bad faith present?

Answer 21

CTN Cash and Carry v Gallaher: ‘the defendants were in law entitled to refuse to enter into any future contracts with the plaintiffs for any reason whatever or for no reason at all. Such a decision not to deal with the plaintiffs would have been financially damaging to the plaintiffs, but it would have been lawful….readily accept that the defendants have used lawful means does not by itself remove the case from the scope of the doctrine of economic duress…Outside the field of protected relationships, and in a purely commercial context, it might be a relatively rare case in which ‘lawful-act duress’ can be established…it might be particularly difficult if the defendant bona fide considered that his demand was valid…I deliberately refrain from saying ‘never.’ But as the law stands, I am satisfied that the defendants’ conduct did not amount to duress.’

Question 22

Woodhouse A.C. v Nigerian Produce

Answer 22

‘the modern approach to the question of consideration would be that where there were benefits derived by each party to a contract of variation even though one party did not suffer a detriment this would not be fatal to the establishing of sufficient consideration to support the agreement. If both parties benefit from an agreement it is not necessary that each also suffers a detriment.’

Question 23

What is undue influence?

Answer 23

• The doctrine of duress is a common law doctrine, whereas undue influence was developed by the courts of equity.
• Where there is doubt as to whether an act of coercion is duress or undue influence, the claimant should bring an action on both grounds.
• The objective is to ensure the influence of one person over another is not abused.

Question 24

RBS v Etridge

Answer 24

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 it is ‘impossible to be more precise or definitive’ than this, meaning the court wants to keep its options open to find undue influence.

Question 25

Two types of undue influence

Answer 25

RBS v Etridge:

• overt acts of improper pressure or coercion such as unlawful threats.
• situations where one party has influence or ascendancy over the other, and the first party takes advantage of that influence/ascendancy. 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.

Question 26

Overt acts of improper pressure or coercion

Answer 26

• 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 the contract
• If the behaviour is not deceitful/fraudulent, then the situation is less clear, and it may be that the ‘but for’ test applies

Question 27

Taking advantage of influence or ascendancy in a relationship

Answer 27

• 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. If the spouse has placed trust and confidence in the business owner and he/she abuses this trust e.g. misrepresenting the nature of the transaction, this can amount to undue influence.
• there is no definitive list of relationships of influence or ascendancy. 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 dependant might also allow the other party to have significant influence, even if the innocent party has not positively placed trust/confidence in them.

Question 28

Relationships where there is an irrebuttable presumption that one party has influence over the other.

Answer 28

• In these cases, the court will not allow any argument that, in fact, there was no influence.
• Parent and child, guardian and ward, trustee and beneficiary, solicitor and client, doctor and patient.

Question 29

Relationships that don’t give rise to an irrebuttable presumption; influence will need to be positively shown.

Answer 29

• parent and adult child

- husband and wife

Question 30

Proof of taking advantage of influence or ascendancy in a relationship

Answer 30

If a party can show there is a relationship of trust and confidence (or one of the categories of irrebuttable presumption) and also a ‘transaction which requires explanation’, 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 31

What is a ‘transaction which requires explanation’

Answer 31

• A transaction will require 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 of a suspiciously high value.
• In the majority of cases, a husband/wife offering his/her interest in the matrimonial home as security for a loan to his/her 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 32

Allcard v Skinner

Answer 32

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. There 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 33

Limits on equitable relief

Answer 33

• Where undue influence is proven, a contract 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.’
• It may also be disallowed where the claimant’s conduct has been underhand because ‘he who comes to equity must come with clean hands.’

Question 34

Undue influence and third parties

Answer 34

• undue influence has largely been confined to where a victim is attempting to avoid a transaction because the other party has exerted an unfair advantage over him
• it sometimes arises that the victim is persuaded to enter into a guarantee or surety contract with a bank/other creditor on the basis of some undue influence, not by the bank but by some third party e..g husband
• if the contracting party (e.g. the bank) has actual notice of the undue influence, the contract will be affected. The issue is when will the bank be fixed with constructive notice of undue influence, i.e. when will it be treated as having notice of something it is actually not aware of

Question 35

Barclays Bank v O’Brien

Answer 35

• Mrs O’Brien contended that her husband had put undue influence on her to sign the agreements and that her husband had misrepresented the effect of the legal charge.
• HoL held 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 this misrepresentation and the wife was entitled to have the legal charge set aside.

Question 36

Following Barclays v O’Brien, when will a creditor have constructive notice?

Answer 36

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 37

Post-O’Brien developments in surety transactions

Answer 37

RBS v Etridge: ‘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.’

CIBC Mortgages v Pitt: 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 38

What are ‘reasonable steps’ for the creditor on inquiry to take?

Answer 38

The purpose is to ensure the innocent party is fully aware of the risks being taken and advise him/her to take independent advice.

(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 the solicitor that they have seen the wife in an appropriate manner, unless the creditor is aware that this has not been done.
(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 39

The solicitor’s position

Answer 39

• The solicitor must 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 the advice being given, the core minimum the advice should contain is:
  (a) An explanation of the documents and their practical consequences e.g. that the wife may lose her home
  (b) The seriousness of the risk, e.g. 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 info from the lender/creditor.

Question 40

What happens if the solicitor fails in this duty to the wife?

Answer 40

She will have an action in negligence against the solicitor, but she will have no recourse to the creditor which is entitled to assume the solicitor has properly advised the wife.