Contract Law Notes - Duress, Undue Influence & Unconscionable Bargains
In these contract law notes, we cover duress, undue influence and unconscionable bargains.
The Policing of Contracts
Duress
- Threats to the Person and to Property
1.1 Illegitimate Pressure
Barton v Armstrong (1976) AC 104
Astley v Reynolds (1731) 2 Str 915
1.2 Causation
- Person
Barton v Armstrong (1976) AC 104
‘If Armstrong’s threats were ‘a’ reason for Barton’s executing the deed he is entitled to relief even though he might well have entered into the contract if Armstrong has uttered no threats to induce him to do so.’
- Property
Dimskal Shipping Co SA v ITWF (The Evia Luck) (No 2) [1992] 2 AC 152 (a ‘significant cause’)
Economic Duress
2.1 Consideration
Stilk v Myrick (1809) 2 Camp 317
Williams v Roffey Bros [1990] 1 All ER 512
2.2 Causation
Pao On v Lau Yiu Long [1980] AC 614
Dimskal Shipping Co SA v ITWF (The Evia Luck) (No 2) [1992] 2 AC 152 (a ‘significant cause’)
Huyton SA v Peter Cremer [1999] 1 Lloyd’s Rep 620 (‘the pressure must have been decisive or clinching’)
2.2.3 No Practicable Alternative
Huyton SA v Peter Cremer [1999] 1 Lloyd’s Rep 620
The ‘but for’ test ‘could lead too readily to relief being granted. It would not, for example, cater for the obvious possibility that, although the innocent party would never have acted as he did, but for the illegitimate pressure, he nevertheless had a real choice and could, if he had wished, equally well have resisted the pressure and, for example, pursued alternative legal redress’.
2.2.4 The Demand
Universe Tankships Inc of Monrovia v ITWF (The Universe Sentinel) [1983] 1 AC 366
Pao On v Lau Yiu Long [1980] AC 614
Undue Influence and Unconscionable Bargains
Undue Influence
Introduction
Tate v Williamson (1866-67) LR 2 Ch App 55
‘Wherever two persons stand in such a relation that, while it continues, confidence is necessarily reposed by one, and the influence which naturally grows out of that confidence is possessed by the other, and this confidence is abused, or the influence is exerted to obtain an advantage at the expense of the confiding party, the person so availing himself of his position will not be permitted to retain the advantage, although the transaction could not have been impeached if no such confidential relation has existed’.
2 Overt Abuse (Old Actual Undue Influence)
2.1 Relational Pressure
Bank of Scotland v Bennett (1997) 1 FLR 801
Husband used ‘wounding and insulting language’; said wife was a ‘waste of rations’. Court found ‘moral blackmail amounting to coercion and victimisation’.
2.2 Manifest Disadvantage?
CIBC Mortgages v Pitt [1993] 4 All ER 433
‘[A]ctual undue influence is a species of fraud… A man guilty of fraud is no more entitled to argue that the transaction was beneficial to the person defrauded than is a man who has procured a transaction by misrepresentation’.
3 Failure to Protect by Omission (Old Presumed Undue Influence)
3.1 Burden of Proof and Presumptions
RBS Plc v Etridge (No 2) [2002] 2 AC 773
‘Proof that the complainant placed trust and confidence in the other party in relation to the management of the complainant’s financial affairs, coupled with a transaction which calls for explanation, will normally be sufficient, failing satisfactory evidence to the contrary, to discharge the burden of proof. On proof of these two matters the stage is set for the Court to infer that, in the absence of a satisfactory explanation, the transaction can only have been procured by undue influence. In other words, proof of these two facts is prima facie evidence that the defendant abused the influence he acquired in the parties’ relationship. He preferred his own interests. He did not behave fairly to the other. So the evidential burden then shifts to him. It is for him to produce evidence to counter the inference which otherwise should be drawn’.
3.2 Relationship of Influence
Automatic Presumption
Irrebuttable legal presumption; not just evidentiary.
Presumption of influence or that C reposed trust and confidence in D; not undue influence.
- doctor and patient;
- solicitor and client;
- parent and child; guardian and ward;
- trustee and beneficiary; and
- religious advisor and disciple.
- NOT wife and husband.
- Proved Relationship of Influence
Relationships where proved that C reposed trust and confidence in D.
- parent and child (Avon Finance v Bridger [1985] 2 All ER 281;
- wife and husband (BCCI v Aboody [1990] 1 QB 923);
- great-uncle and great-nephew (Cheese v Thomas [1994] 1 WLR 1021); and
- junior employee and employer (Credit Lyonnais v Burch [1997] 1 All ER 144).
3.3 A Transaction Calling for Explanation
National Westminster Bank plc v Morgan [1985] AC 686 (‘manifest disadvantage’ requirement)
RBS Plc v Etridge (No 2) [2002] 2 AC 773
Allcard v Skinner (1887) LR 36 Ch D 145
Re Brocklehurst’s Estate [1978] Ch 14
Cheese v Thomas [1994] 1 WLR 1021
3.4 Rebutting the Presumption/ Inference
Zamet v Hyman [1961] 1 WLR 1442 (D must show that C’s consent was ‘full, free and informed’)
RBS Plc v Etridge (No 2) [2002] 2 AC 773
‘In the normal course, advice from a solicitor or other outside adviser can be expected to bring home to a claimant a proper understanding of what he or she is about to do. But a person may understand fully the implications of a proposed transaction… and yet still be acting under the undue influence of another. Proof of outside advice does not, of itself, necessarily show that the subsequent completion of the transaction was free from the exercise of undue influence. Whether it will be proper to infer that outside advice had an emancipating effect, so that the transaction was not brought about by the exercise of undue influence, is a question of fact to be decided having regard to all the evidence in the case’.
Bank of Montreal v Stuart [1911] AC 120
‘She says she acted of her own free will… and that she would have scorned to consult anyone… Her declarations shew how deeprooted and how lasting the influence of her husband was’.
Credit Lyonnais v Burch [1997] 1 All ER 144
4 Non-Commercial Guarantees
4.1 Vitiation by the Primary Debtor
RBS Plc v Etridge (No 2) [2002] 2 AC 773
‘Statements or conduct by a husband which do not pass beyond the bounds of what may be expected of a reasonable husband in the circumstances should not, without more, be castigated as undue influence. Similarly, when a husband is forecasting the future of his business, and expressing his hopes or fears, a degree of hyperbole may be only natural. Courts should not too readily treat such exaggerations as misstatements’.
4.2 Lender’s Notice
Barclays Bank v O’Brien [1994] 1 AC 180
RBS Plc v Etridge (No 2) [2002] 2 AC 773
‘the only practical way forward is to regard banks as “put on inquiry” in every case where the relationship between the surety and the debtor is non- commercial’.
4.3 Lender’s Failure to take Reasonable Steps
RBS Plc v Etridge (No 2) [2002] 2 AC 773
Normally, lender should take ‘reasonable steps’ to ensure that the guarantor understands the nature and effect of the transaction. It is enough to require guarantors to obtain legal advice and to rely on confirmation from legal adviser that appropriate advice given.
Lawyer should hold an interview with guarantor without the debtor being present, and explain:
- why he has become involved;
- the nature of the documents;
- the seriousness of the risks;
- that she has a choice;
- check that she wishes to proceed.
The lawyer may certify the transaction even if they disapprove but should refuse if it is ‘glaringly obvious that she is being grievously wronged’.
Exceptional situations, ie, where the lender knows facts that heighten the risk of undue influence, duress or misrepresentation by the debtor, eg, aware that guarantor has not received adequate advice, or that guarantor has mistaken understanding of transaction. Lender must take further steps, eg:
- meet guarantor themselves;
- insist on the independence of the advisor;
- inform advisor of its suspicion of wrongdoing.
- Unconscionable Bargains
Introduction
Chesterfield v Janssen (1750) 28 ER 82, 101
Jurisdiction arises ‘from the circumstances or conditions of the parties contracting – weakness on one side, usury on the other, or extortion or advantage taken of that weakness… it means an unconscientious use of the power arising out of these circumstances and conditions’.
Boustany v Pigott (1995) 69 P & CR 298:
C has a bargaining impairment relative to D;
D exploits C’s weakness;
manifestly improvident transaction;
C lacks adequate advice.
Bargaining Disability
Clark v Malpas (1862) 4 DF & J 401 (‘intellectually not gifted’)
Earl of Aylesford v Morris (1872-73) LR 6 Ch App 484 (expectant heirs)
Fry v Lane (1880) 40 Ch D 312 (‘poor and ignorant’)
Cresswell v Potter [1978] 1 WLR 255 (members ‘of the lower income group’ and the ‘less highly educated’)
Backhouse v Backhouse [1978] 1 WLR 243 (‘great emotional strain’)
Blomley v Ryan (1956) 99 CLR 362
‘The circumstances adversely affecting a party are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where… [this] is necessary’.
3 Unconscionable Conduct
3.1 Active Victimisation
taking the initiative;
undue haste;
contributing to a misapprehension without creating it;
low level pressure on C to agree.
3.2 Passive Victimisation
Cresswell v Potter [1978] 1 WLR 255
Passive victimisation describes the acceptance of a highly advantageous bargain despite knowing C is impaired, without bringing to C’s notice ‘the true nature of the transaction and the need for advice’.
Ayres v Hazelgrove (9 Feb 1984, 1982/NJ/ 1003, unreported)
Constructive knowledge of impairment sufficient, ie known facts must have indicated C’s impairment or put D on inquiry.
Boustany v Pigott (1995) 69 P & CR 298
4 Improvident Transaction
Alec Lobb (Garages) Ltd v Total Oil (GB) Ltd [1983] 1 WLR 87 (
Entails such substantial undervalue that it ‘shocks the conscience of the court’.
Gaertner v Fiesta Dance Studios (1972) 32 DLR (3d) 639
5 Lack of Independent Advice
Fry v Lane (1880) 40 Ch D 312
Inche Noriah v Shaik Allie Bin Omar [1929] AC 127
