Undue influence

Intro

Undue influence exists where a contract has been entered as a result of pressure which falls short of amounting to duress, the party subject to the pressure may have a cause of action in equity to have the contract set aside on the grounds of undue influence. Undue influence operates where there exists a relationship between the parties which has been exploited by one party to gain an unfair advantage. Undue influence is divided into actual undue influence and presumed undue influence. Where a contract is found to be entered into as a result of undue influence, this will render the contract voidable. This will enable the person influenced to have the contract set aside as against a party who subjected the other to such influence. In addition, in some instances the party influenced may be able to have a contract set aside as against a party who was not the person inflicting the influence or pressure.

Classes of undue influence:

There are three classes of undue influence which were set out in the case of Bank of Credit & Commerce International v Aboody [1990] 1 QB 923 (Case summary)

Class 1 - Actual undue influence

Class 2a - Presumed undue influence

Class 2b - Presumed undue influence

Class 1 - Actual undue influence

Actual undue influence, as the name suggests, requires proof that the contract was entered into as a result of actual influence exerted. The claimant must plead and prove the acts which they assert amounted to undue influence.

This may include such acts as threats to end a relationship, continuing to badger the party where they have refused consent until they eventually give in. There is no precise definition of undue influence. Lord Nicholls, in RBS v Etridge described the concept as:

"Undue influence is one of the grounds of relief developed by the courts of equity as a court of conscience. The objective is to ensure that the influence of one person over another is not abused. In everyday life people constantly seek to influence the decisions of others. They seek to persuade those with whom they are dealing to enter into transactions, whether great or small. The law has set limits to the means properly employable for this purpose. The law will investigate the manner in which the intention to enter into the transaction was secured: If the intention was produced by an unacceptable means, the law will not permit the transaction to stand. The means used is regarded as an exercise of improper or 'undue' influence, and hence unacceptable, whenever the consent thus procured ought not fairly to be treated as the expression of a person's free will. It is impossible to be more precise or definitive. The circumstances in which one person acquires influence over another, and the manner in which influence may be exercised, vary too widely to permit of any more specific criterion."

Manifest disadvantage?

Originally it was a requirement that the claimant seeking to find relief through actual undue influence must also establish that they had suffered a manifest disadvantage (See BCCI v Aboody above).

However, it was held in CIBC Mortgages v Pitt [1994] 1 AC 200 (case summary) that manifest disadvantage was not required in cases of actual undue influence.

Class 2 a - Presumed undue influence

Establishing the presumption

Under class 2a there is no requirement to prove that improper influence was actually exerted. Instead it must be established:

1. There was a relationship which as a matter of law gives rise to a presumption of undue influence

2. The transaction is one which can not readily be explained by the relationship of the parties.

1. Relationships capable of giving rise to an automatic presumption of undue influence are those of a fiduciary nature and include:

Parent: child
Solicitor: Client
Religious advisor: disciple
Doctor: Patient
Trustee: beneficiary

2. The transaction is one which can not readily be explained by the relationship of the parties.

Where the transaction is obviously not to the benefit of the vulnerable party but confers a great advantage to the party in a fiduciary position, the law will raise a presumption that the transaction was entered as a result of some sort of abuse of the relationship. This requirement used to be expressed in terms of manifest disadvantage. However, this lead to confusion particularly where a wife had an interest in the husband's business see:

National Westminster Bank v Morgan [1985] 1 AC 686 Case summary
Bank of Credit & Commerce International v Aboody [1990] 1 QB 923 (in relation to actual undue influence) Case summary
CIBC Mortgages v Pitt [1994] 1 AC 200 (also actual undue influence) Case summary

Given the difficulties in relation to manifest disadvantage, the House of Lords in Royal Bank of Scotland v Etridge [2001] 3 WLR 1021 (case summary) held that the term should no longer be used and replaced with the requirement that the transaction must be one which can not be readily explained by the relationship of the parties. This is intended to exclude trivial gifts but bring within its realm substantial benefits even where the vulnerable party also receives a benefit. The court should consider the transaction as a whole.

Class 2b - Presumed undue influence

Establishing the presumption

Under class 2b there is no automatic presumption arising as a matter of law. Here it must be established that there is a relationship of such a kind that one party in fact placed their trust and confidence in the other to safeguard their interest. Any relationship is capable of amounting to this examples include husband and wife, cohabitees, employer and employee. The important distinction between class 2 a and 2b is the fact that the trust and confidence relationship must be proved. In modern times it is no longer the case that wives will generally place all their trust in their husbands to deal with the financial matters although in some marriages this may be the case. If the wife exercises independence of mind in financial matters then no presumption will be established.

Barclays Bank v O'Brien [1993] QB 109 Case summary

Exceptionally, it has been held that a relationship of trust and confidence existed between a bank manager and his client:

Lloyds Bank v Bundy [1975] QB 326 Case summary

However, it has been held that the normal relationship between banker and client is not one of trust and confidence:

National Westminster Bank v Morgan [1985] 1 AC 686 Case summary

A relationship of trust and confidence has also been seen in employer and employee relationship:

Credit Lyonnaise Bank Nederland v Burch [1997] 1 All ER 144 Case summary

There is no need to establish that the party subject to the influence would not have entered into the contract but for the influence. There is also no need to establish a causal link in relation to misrepresentation beyond reliance:

UCB Corporate Services Ltd. v Williams [2002] EWCA Civ 555 Case summary

Rebutting the presumption in class 2a and class 2b

The party accused of exercising undue influence may rebut the presumption by demonstrating that the vulnerable party exercised free will in entering the transaction. This is most commonly established by demonstrating that they were fully aware of the risks involved and had received legal advice before agreeing to the transaction.

Undue influence and third parties

Generally the undue influence is exercised between a husband and wife. Where a wife establishes undue influence it will entitle her to have the transaction set aside as against her husband, however, the transaction is generally with a bank who was not a party to the influence. Following the decision in Natwest v Morgan, it became clear that banks were not acting in a fiduciary capacity so as to give rise to a presumption of undue influence. There had to exist another factor in order to have the contract set aside as against a bank. Barclays Bank v O'Brien [1993] QB 109 (Case summary) introduced the concept of constructive notice.

Constructive notice

Constructive notice arises where the bank is

1. put on enquiry and

2. fails to take reasonable steps to ensure that the transaction was entered freely without the exercise of undue influence.