Contract Law Notes - Duress, Undue Influence & Unconscionable Bargains


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