Duress & Undue Influence

Question 1

What is the effect of duress on a contract?

Answer 1

Makes the contract voidable (ie. innocent party has the right to affirm or terminate)

The only remedy is rescission

Question 2

What is the effect of undue influence on a contract?

Answer 2

Makes the contract voidable (ie. innocent party can choose to affirm or terminate)

The only remedy is rescission

Question 3

What is the remedy for duress in contract?

Answer 3

Rescission only (not damages)

(As long as it is not barred - the main bars to rescission are:
A. Affirmation
B. Undue delay
C. A bona fide purchaser
D. Impossible to restore goods or property)

Question 4

What is the remedy for undue influence?

Answer 4

Rescission only (not damages)

(As long as it is not barred - the main bars to rescission are:
A. Affirmation
B. Undue delay
C. A bona fide purchaser
D. Impossible to restore goods or property)

Question 5

Which vitiating factors make a contract voidable?

Answer 5

Misrepresentation

Duress

Undue influence

Question 6

What is duress?

Answer 6

Physical threats

or more commonly

Economic duress

Question 7

When does economic duress arise?

Answer 7

When there is

• An illegitimate threat which leaves the other party with no practical choice

and

• That threat was factor inducing them to enter the contract or variation

Nb. ‘Illegitimate’ = threat to breach contract, commit a tort etc. - something more than hard bargaining

Question 8

What factors can be used to determine whether a threat is illegitimate?

Answer 8

For example -

• If there has been an actual or threatened breach of contract
• Whether the threat was made in good or bad faith
• If the victim protested at the time

Question 9

What is the effect of economic duress on contractual variations?

Answer 9

Contractual variations = promise to pay more for same contractual performance

General rule: performance of an existing contractual duty is not consideration for a promise of extra money

Exception (Williams v Roffey): practical benefit consideration (if performance of existing duty conveys real practical benefit on other party, will be consideration for promise to pay more

BUT regardless of practical benefit consideration, if the promise to pay more was made under economic duress the variation will be voidable (not the original contract)

Question 10

What is undue influence?

Answer 10

Essentially influence which goes beyond that which is regarded as acceptable

eg. Where one party is in a position of influence over another & takes unfair advantage of that position

There is actual undue influence & also presumed undue influence

Question 11

In a contract with undue influence, what might the innocent party be able to rely on?

Answer 11

Actual undue influence

• Proven on the facts (difficult to prove because everything usually behind closed doors)

→ More likely, they will be able to show presumed undue influence - must be:

• A relationship of trust & confidence; and
• A transaction that calls for an explanation

Question 12

What are the elements for presumed undue influence?

Answer 12

Relationship of trust & confidence

• In law: Certain categories of relationship always presumed - eg. solicitor & client, doctor & patient, parent & minor child, religious adviser & followers (but not husband & wife)
• or in fact: Where relationship not presumed to be one of trust & confidence, innocent party must prove this

and

Transaction that calls for an explanation
(eg. party enters into a contract that is not for their benefit or exposes them to risk)

and

There is nothing to rebut the presumption

Question 13

When will a creditor or lender be tainted with the undue influence of the third party debtor?

Answer 13

If it had actual or constructive notice of the undue influence

Deemed to have constructive notice if:

• The lender was put on inquiry

and

• The lender failed to take reasonable steps to ensure the surety understood the implications

*If they are tainted with undue influence & security documents are set aside, the lender will be an unsecured (rather than secured) creditor - will still have a debt action against the debtor

Question 14

When is a creditor or lender deemed to have constructive notice of undue influence?

Answer 14

If the creditor was put on inquiry

• Creditors are always put on inquiry where the relationship between the debtor & surety is non-commercial & not for their joint benefit (eg. H & W)

and

Failed to take reasonable steps to ensure that the surety understood the implications

• eg. By a private meeting without the influencing party, by an independent solicitor advising the surety of the inherent risks

Question 15

A husband wants a loan & the bank will only lend if it gets security in the form of a second mortgage over the home jointly owned by the husband & his wife. The wife signs security documents because of the undue influence of her husband.

The husband defaults on the loan & the bank seeks to enforce their security. The wife alleges undue influence by the husband.

What is the effect on the lender?

Answer 15

If the lender has actual notice of the undue influence, the surety may rescind the surety agreement (unless rescission is barred)

If the lender has constructive notice of undue influence, the surety may rescind the surety agreement (unless rescission is barred) - will have constructive notice if:

• The relationship between the debtor & the surety is non-commercial (the lender is automatically put on enquiry); and
• The lender has failed to take reasonable steps to ensure that the surety understood the implications

If reasonable steps were taken (or if the relationship between the debtor & surety is commercial), the lender can enforce the surety agreement

Question 16

If, in an upward variation for a sale of goods contract made under economic duress, the buyer must pay the extra money in order to take delivery of the goods, has rescission been barred?

Answer 16

No

If they have to pay the extra money to take delivery of the goods, this will not be construed as affirmation (which is one of the bars to rescission)