Lecture 16-Undue Influence

Question 1

Undue Influence Definition

Answer 1

It is an equitable principle.

The equitable concept of pressure can be exercised without making illegitimate threats or indeed any threats at all “where influence is acquired and abused, and where confidence is reposed and betrayed”

Question 2

Wrongful Conduct?

Answer 2

Some cases have emphasised the need for some ‘wrongful’ conduct on the part of the defendant

R v A-G for England and Wales [2003]

Some cases have not emphasised the need for ‘wrongful conduct’

Pesticcio v Huet [2004]

Question 3

Modern Approach

Answer 3

The modern approach focuses very much on the relationship between the parties

Did the stronger party abuse or exploit her position in the relationship to gain some kind of advantage?

Question 4

Classes of Undue Influence

Answer 4

Actual undue influence-Class 1
Presumed undue influence- Class 2

Question 5

Remedies

Answer 5

Undue influence renders a contract voidable not void

Complainant can either affirm the contract or rescind

Rescission can be lost through affirmation or lapse of time etc.

Like duress, damages are not available.

Question 6

Actual Undue Influence

Answer 6

Actual undue influence is about the situation where one party enters into a transaction, or makes a gift, because of the influence of another

Actual influence was in fact exercised to take advantage of the other party.

Unfair and improper conduct is at the heart of actual undue influence

Question 7

Extension?

Answer 7

Actual undue influence cases extend beyond pressure or threats

It can cover cases where the defendant has, in fact, taken advantage of or abused a relationship of trust that existed between the parties

Question 8

Arvind’s Four Ingredients

Answer 8

The dominant party must have the ability to influence the other party

The dominant party must have exercised that influence

The exercise of that influence must be ‘undue’

The exercise of influence must have induced the other party to enter into the contract

Question 9

Burden of Proof?

Answer 9

Burden of proof in actual undue influence cases is with the ‘victim’ to show, on the balance of probabilities, the existence of that undue influence

Question 10

Case of Actual

Answer 10

One advantage of actual undue influence is that it is unnecessary to establish that the relationship between the parties was one of trust and confidence. All that needs to be established is that one party had the ability to influence the other, and exercised it.

Morley v Loughnan [1893]

A man who had given money to a religious sect was found to have done so because of actual undue influence exerted by the sect leader

Question 11

Manifest Disadvantage

Answer 11

BCCI v Aboody [1990]
A transaction in which actual undue influence is shown to have existed will not be set aside unless the party can also show manifest disadvantage.

In 1994, the requirement for evidence of manifest disadvantage was overruled.

Question 12

Presumed Undue Influence (2)

Answer 12

If actual undue influence is too difficult to establish…

Presumed undue influence looks at two elements of the transaction

The nature of the relationship between the parties

The nature of the transaction

Question 13

Two Ingredients Case (Nuns)

Answer 13

Allcard v Skinner (1887)

The Court of Appeal held that the transaction was affected by undue influence. There were two classes of cases that could be set aside in undue influence. The first was where the court was satisfied that the transaction was the result of influence expressly used by the other party for the purpose. The second was where the relations between the parties shortly before the execution of the transaction were such as to raise a presumption that one party had influence over the other.

Question 14

Categories of Presumed

Answer 14

In some cases, the relationship between the parties gives rise to a presumption of influence – ‘protected relationships’ (Class 2A)

In other cases, it must be proved that the relationship was one of trust and confidence – depends on the facts of the case (Class 2B)

Question 15

Distinguishing Case

Answer 15

Barclays Bank v O’Brien distinguished between Class 2A and Class 2B relationships

But treat this with caution

In neither case is there a presumption of UNDUE influence

Question 16

Relationships where influence is automatically presumed

Answer 16

solicitor/client, doctor/patient, parent/child, religious advisor/disciple, trustee/beneficiary

Presumption of influence is automatic and irrebuttable, but you still have to establish that the influence was undue

Husband/wife relationship is not one to which this presumption applies, and the list is NOT exhaustive

O’Sullivan v Management Agency and Music Ltd [1985]

Question 17

Other Relationships

Answer 17

Here, the party claiming to have been influenced will have to prove the existence of a relationship of trust and confidence

There is no ‘presumption’ of influence

Question 18

Institutions?

Answer 18

Strong hierarchies, coupled with institutional identification are important

Allcard v Skinner (1887) influenced by the church hierarchy to come to her decision.

R v AG for England and Wales
“ … The Privy Council was swayed by the combination of the military hierarchy, the culture of regimental pride, and R’s admiration for his ‘commanding officer’.” (Arvind)

Question 19

Reliance on the other

Answer 19

No hierachys or institutional identification?

If these factors are not present, the courts will look at the extent to which one party relies on another party when conducting their affairs e.g. relationship between a bank and a customer

It depends very much on the facts of the case

Question 20

Reliance Bank Case

Answer 20

Lloyds Bank Ltd v Bundy [1975]
The courts tend to look at the extent to which one party relies on another in the conduct of their affairs.

Question 21

Husbands and Wives

Answer 21

It is not an inherent relationship of influence/it is likely that both spouses will be seeking to support each other.

There is no automatic presumption of influence but, on the facts, one may exist

Question 22

Cases

Answer 22

Barclays Bank v O’Brien- presumed undue influence?

RBS v Etridge- reiterated a more restrained approach

Presumed undue influence has also been applied to other ‘emotional relationships’ including cohabitees, whether heterosexual or homosexual

Question 23

Nature of the Transaction

Answer 23

2nd step- The influence must be undue

There must be something about the transaction in question that raises a presumption of undue influence

This element of undue influence used to be referred to as ‘manifest disadvantage’

Question 24

Manifest Disadvantage Case

Answer 24

RBS v Etridge - this has been rejected by the courts as it does not accurately describe this component of undue influence (replaced with explicable by ordinary motives or relationship)

Question 25

Rebutting the Presumption

Answer 25

The burden shifts to the dominant party to show that he or she did not abuse the position of dominance.

The dominant party will have to demonstrate that the complainant entered into the agreement of their own free will, and were fully aware of the risks

Was independent legal advice taken?

Turkey v Ahwad [2005]

Question 26

Undue Influence and Third Party Rights

Answer 26

1. Husband exerts undue influence over his wife
2. Wife guarantees the debts of her husband (with the lender)
3. Lender (the contract is between the wife and the lender eg a bank)

Question 27

Privity of Contract

Answer 27

Can the lender enforce the guarantee against the wife?

The rule of privity of contract states that only a party to the contract can enforce rights, or have duties enforced against her, under that contract

Applying this rule, the actions of the wrongdoer (e.g. the husband) should have no impact on the transaction between e.g. the wife and the bank

Question 28

Exception? (2)

Answer 28

Barclays Bank plc v O’Brien [1991]

A guarantee (for a loan) can be set aside in one of two circumstances:

1. Where the husband acted as the bank’s agent in obtaining the guarantee (the wife would have not entered into the transaction without the husband’s influence);
2. Where the bank had actual or constructive notice of the facts leading to the wife guaranteeing the loan (knowledge over the circumstances of the transaction)

Question 29

Actual Notice

Answer 29

Did the bank have factual information which should have caused it to inquire whether undue influence had been exerted on the wife?

If yes, it had actual notice

If the bank failed to make such an inquiry, then the guarantee may be set aside for undue influence

Question 30

Constructive Notice

Answer 30

If the bank had “any reason to suspect” undue influence or if the bank “knows facts which put him on inquiry as to the possible existence of undue influence”

Question 31

Put on Inquiry?

Answer 31

1. The transaction is on its fact not to the financial advantage of the wife; and
2. There is a substantial risk in a transaction 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 (if there is evidence that the husband had influenced her agreement, the bank should be put on inquiry)

Question 32

Case

Answer 32

Royal Bank of Scotland v Etridge (No.2) [2001]

HL critical of the language of ‘constructive notice,’ sought to provide a test that was “simple, clear, and easy to apply in a wide range of circumstances”

Was there something about the transaction that ought to put the bank on inquiry as to the presence of undue influence?

If so, the bank (and solicitor advising the wife) should take certain steps to discharge their obligations