Undue Influence Flashcards
The doctrine of duress is a common law doctrine, whereas…
…undue influence was developed by the courts of equity
What is Undue Influence?
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.
“It is impossible to be more precise or definitive.”
RBS v Etridge (No 2) [2002] 2 AC 773
The objective is to ensure that the influence of one person over another is not abused
The leading case on undue influence is…
RBS v Etridge (No 2) [2002] 2 AC 773
In this case the court stated that 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 that it is ‘impossible to be more precise or definitive’ than the definition above. This suggests that the court wants to keep its options open to find undue influence in any situation which falls within this test.
Notwithstanding this, the court detailed the circumstances in which undue influence has already been established.
All the legal principles set out in this element, save those in the last page, were summarised in Etridge, which clarified much of the case law in this area.
In Etridge the court set out two types of undue influence.
Firstly, there are instances of overt acts of improper pressure or coercion such as unlawful threats. This type has much overlap with the idea of duress.
Secondly, there are situations where one party has influence or ascendancy over the other, and the first party takes advantage of that influence / ascendancy. In these cases 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. The lack of an act of pressure or coercion makes this quite distinct from duress.
What are the 2 types of undue influence?
- Overt acts of improper pressure or coercion (eg unlawful threats). This has a clear overlap with duress.
- Relationship of influence / ascendancy… of which unfair advantage is taken.
What is the difference between undue influence and duress?
There are two types of undue influence, one has more overlap than the other.
- Firstly, there are instances of overt acts of improper pressure or coercion such as unlawful threats. This type has much overlap with the idea of duress.
- Secondly, there are situations where one party has influence or ascendancy over the other, and the first party takes advantage of that influence / ascendancy. In these cases 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. The lack of an act of pressure or coercion makes this quite distinct from duress.
Are Overt acts of improper pressure or coercion common? How is the causation test?
Insofar as the first type is concerned, these cases are necessarily rare. Many cases which fall into this category would today probably be decided on the basis of duress.
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 into the contract. The innocent party does not need to establish that the undue influence was a decisive factor.
If the behaviour is not deceitful / fraudulent, then the situation is less clear, and it may be that the ‘but for’ test applies: but for the behaviour constituting undue influence, would the innocent party have entered into the contract?
Is taking advantage of influence or ascendancy in a relationship common? Eg?
This type is more common and the majority of recent authorities are concerned with this type.
A 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.
The effect is that the spouse might lose their interest in the home. If the spouse has placed trust and confidence in the business owner and the business owner abuses this trust in seeking the spouse’s consent to the transaction (for example, by misrepresenting the nature of the transaction), then this can amount to undue influence. Note the absence of a specific act of coercion or pressure.
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 dependent might also allow the other party to have significant influence, even if the innocent party has not positively placed trust or confidence in the other party.
There are a number of relationships in which there is an irrebuttable presumption that one party has influence over the other. In these cases, the court will not allow any argument that, in fact, there was no influence in that relationship. Such relationships include those between parent and child, guardian and ward, trustee and beneficiary, solicitor and client and doctor and patient. However, parent and adult child, or (crucially) husband and wife do not give rise to this presumption. The influence will therefore need to be positively shown.
Note that it is not every transaction between parties to such a relationship that gives rise to undue influence. It is only where the relationship is taken advantage of that there will be undue influence, for example because the party with influence has deceived the innocent party, or simply taken a decision entirely in his own interests.
Relationship of influence / ascendancy…
- Often where trust and confidence is placed by one party in another, but there are other examples e.g. a relationship with a vulnerable or dependent person.
- “Irrebuttably presumed” in cases of parent / child, guardian / ward, trustee / beneficiary, solicitor / client and doctor / patient
What is the proof of taking advantage of influence or ascendancy in a relationship?
If a party wishes to allege it has been the victim of undue influence, it must prove this.
The court has established some basic principles as to how this might be proved.
If a party can show that there is a relationship of trust and confidence (or presumably one of the categories of irrebuttable presumption) and also a ‘transaction which requires explanation’, then 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.
Party alleging undue influence shows relationship of trust and confidence AND transaction which requires explanation
Burden shifts to defendant.
Can they produce evidence to show there was no undue influence?
Yes - Undue influence not established
No - Undue influence established
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 for a suspiciously high value.
Note that the court has indicated that, in the majority of cases, a husband / wife offering their interest in the matrimonial home as security for a loan to their 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.
Etridge approved Lindley LJ in Allcard v Skinner 1887 LR 36 ChD 145:
“Lindley LJ pointed out that 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. The mere existence of the influence is not enough. He continued, at p 185 “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.”
Where a party has shown a relationship of trust and confidence and a transaction which requires explanation, then the wrongdoer might argue (for example) that the innocent party received comprehensive independent advice about the transaction, and therefore that they could not have been subjected to undue influence. Whether such an argument would succeed will depend on all the facts. The court has made clear that even when someone fully understands a transaction having received independent legal advice, it is possible that their consent to it is still being given only as a result of undue influence
If a party can show a relationship of trust and confidence and a transaction which calls for an explanation, then…
…undue influence is inferred, unless the other party can establish to the contrary.
Relationship of trust and confidence + Transaction which requires explanation =
Undue influence established, unless the accused party can establish to the contrary
The frequent tripartite problem involving spouses and a bank was considered in…
Barclays Bank plc v O’Brien [1994] 1 AC 180
Mr O’Brien was a shareholder in a company and wanted to increase the overdraft facility of the company in question. The company’s bank agreed a loan of £12,000 that was to be guaranteed by Mr O’Brien, his liability in turn being secured by a second charge over the matrimonial home, which was jointly owned by Mr O’Brien and his wife. The bank manager gave instructions for a legal charge to be signed by both Mr O’Brien and his wife, together with a guarantee to be signed by Mr O’Brien. He also instructed that both Mr O’Brien and his wife should be made aware of the nature of the transactions and that, if they had any doubts, to obtain independent advice.
However, the bank staff had not followed these instructions and subsequently both husband and wife signed the documents without reading them. When the company’s indebtedness increased beyond the agreed limit, the bank took proceedings to enforce its security against the husband and wife. In her defence, Mrs O’Brien contended that, firstly, her husband had put undue pressure on her to sign the agreements and, secondly, that her husband misrepresented the effect of the legal charge in that she believed it was limited to a sum of £60,000 over three weeks when in fact the charge covered £135,000.
It was held by the House of Lords 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 the misrepresentation made by the husband to induce his wife into the surety contract and therefore the wife was entitled to have the legal charge set aside.
It was held that a creditor would be put on notice when:
“…a wife offers to stand surety for her husband’s debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions 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.
It follows that 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.”
What advice would a solicitor give in regards to this?
The solicitor should 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 advice being given, the core minimum the advice should contain is:
(a) An explanation of the documents and their practical consequences, including the risk that the wife may lose her home.
(b) The seriousness of the risk, 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 information from the lender/creditor.
If the solicitor fails in his duty to the wife, then she will have an action in negligence against the solicitor, but she will have no recourse to the lender/creditor which is entitled to assume that the solicitor has properly advised the wife.
