Undue influence

• Equitable doctrine
Two principal views in play
§ Focus in undue influence cases is upon the position of the claimant and that the basis on
which the court gives relief is the impairment of the claimant's decision making process
caused by his excessive reliance or dependence upon the defendant
§ Looks to position of defendant and requires some 'wrongful' conduct on the part of the
defendant - emphasis is placed on the need for an 'abuse' of a position of confidence, the
'exploitation' of the weaker party or some other form of 'advantage taking'

Judges have placed emphasis on the need for some 'wrongful' conduct on the part of the
defendants,
R v AG for England and Wales, Lord Hoffman stated
"Like duress at common law, undue influence is based upon the principle that a transaction to which
consent has been obtained by unacceptable means should not be allowed to stand. Undue influence
has concentrated in particular upon the unfair exploitation by one party of a relationship which gives
him ascendancy or influence over the other."

Lord Millett in National Commercial Bank Ltd v Hew

Undue influence is one of the grounds on which equity intervenes to give redress where there has
been some unconscionable conduct on the part of the defendant... The doctrine involves two
elements.
(1) First there must be a relationship capable of giving rise to the necessary influence.
(2) And secondly the influence generated by the relationship must have been abused.

Mummery LJ in Pesticco v Huet

Although undue influence is sometimes described as an 'equitable wrong' or even as a species of
equitable fraud, the basis of the court's intervention is not the commission of a dishonest or
wrongful act by the defendant, but that, as a matter of public policy, the presumed influence arising
from the relationship of trust and confidence should not operate to the disadvantage of the victim, if
the transaction isn't satisfactorily explained by ordinary motives: Allcard v Skinner (1887) at 171. The
court scrutinises the circumstances in which the transaction, under which benefits were conferred
on the recipient, took place and the nature of the continuing relationship between the parties,
rather than any specific act or conduct on the part of the recipient. A transaction may be set aside by
the court, even though the actions and conduct of the person who benefits from it could not be
criticised as wrongful.

Allcard v Skinner: excessive dependence on the defendant and failed to ensure that the claimant,
who was a novice in a religious order, had access to independent advice before deciding to give
away all her property on entering the order
In Royal Bank of Scotland v Etridge, Lord Nicholls 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.”

2 catagories
• Presumed
• Actual undue influence

ACTUAL UNDUE INFLUNCE

• Lord Nicholls in Etridge, 'comprises overt acts of improper pressure or coercion such as
unlawful threats' and thus there is toady 'much overlap with the principle of duress as this
principle has subsequently developed'

Williams v Bayley
• A father sought to rescind a mortgage which he had executed in favour of a banker
• He proved that he had executed the mortgage because he was frightened by the banker's
warning or threat that he had it in his power to prosecute his son for forgery
• Entitled to rescind the mortgage on ground of undue influence - can be analysed as a duress
case -- where actual undue influence takes the form of the application of illegitimate
pressure then it is suggested that there ought to be no need for a claimant to prove that the
transaction cannot be reasonably be accounted for on ordinary motives of friendship or the
like; there is no such requirement in cases of common law duress and
Nugee J in Holyoake v Candy, if pressure is not illegitimate for the purposes of the law of duress, it is
equally not undue influence for the purposes of the equitable doctrine of undue influence.

In Bank of Credit and Commerce International v Aboody, a husband exerted actual undue influence
over his wife in order to get her to sign a charge securing the family home on the debts owed by the
company in which the husband and wife owned shares. The couple were unable to repay the
mortgage and the bank sought to repossess the home. The wife sought to have the mortgage set
aside on the grounds that it was procured by actual undue influence of the husband. The husband
had in fact exerted actual undue influence on the wife. However, the transaction was not proved to
be manifestly disadvantageous to the wife since she owned shares in the company. Therefore the
bank was granted possession.

HOWEVER: (MANIFEST DISADVANTAGE ISN'T ALWAYS NECESSARY)

In CIBC Mortgages Plc v Pitt, Mr Pitt wished to purchase some shares on the stock market. He
pressured his wife into signing a mortgage of £150,000 securing the family home. The stated
purpose of the loan was to purchase a holiday home and pay off the existing mortgage. The husband
used the money to purchase shares and then used those shares as collateral to purchase further
shares. For a time the shares did very well and he was a millionaire on paper. The wife saw no
benefit from these shares as any income was always used to purchase more shares. In 1987 the
stock market crashed. The bank sought to enforce the security under the mortgage which at the
time exceeded the value of the home. The wife raised actual undue influence in defence.
It overruled BBCI v Aboody - it is not necessary for a claimant to demonstrate manifest disadvantage
where a defence is based on actual undue influence. However, as the transaction on its face did not
seem to the manifest disadvantage of the wife, because the stated purpose was to purchase a
holiday home, the bank was not put on enquiry and therefore could not be fixed with constructive
notice.

In BBCI v Aboody, three classes of undue influence were set out:

ACTUAL UNDUE INFLUENCE
In Royal Bank of Scotland v Etridge (No. 2), Lord Hobhouse defined actual undue influence as ‘an
equitable wrong committed by the dominant party against the other which makes it unconscionable
for the dominant party to enforce his legal rights against the other’. This broader notion of actual
undue influence would appear to encompass cases in which the claimant can prove that the
defendant has in fact taken advantage of, or abused, a relationship of trust that existed between the
parties.
In other words, it is necessary for the claimant to prove affirmatively that the wrongdoer exerted
undue influence to enter into the impugned transaction.

PRESUMED UNDUE INFLUENCE

• two distinct senses of ‘presumed’ or ‘presumption’
o presumption of a relationship of influence: established categories of relationship
raise irrebuttable presumption in law
• once presumption is raised, cannot rebut - arises from fixed list of
established relationship
o the ‘presumption’ of undue influence arises when: (Etridge)
• Complainant reposed trust and confidence in the defendant
• transaction in question ‘calls for explanation’ or 'is not readily explicable
by the relationship of the parties, 1&2 - presumption of undue inf.
• rebuttable by evidence showing informed consent and free will and
therefore more of an inference of fact than ‘presumption’

Lord Nicholls '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.'
Barclays Bank v O'Brien
CLASS 2A
• Claimant must prove he placed trust and confidence in the defendant in relation to the
management of his affairs or that he was in a position of vulnerability or dependence in
relation to the defendant
o Etridge Lord Nicholls stated that there are certain relationships where 'the law
presumes, irrebuttable that one party had influence over the other'
o Parent and child
o Guardian and ward
o Trustee and beneficiary
o Solicitor and client
o Medical adviser and patient
o Spiritual adviser and disciple (Curtis v Curtis)

Relation of husband and wife is not within this category

In cases outside this category, the claimant must prove that he actually reposed trust and
confidence in the defendant, making the case fall under Class 2b rather than Class 2a.
• A claimant can prove a case of relational undue influence in one of two ways
• He reposed trust and confidence in the D and the D abused or took advantage of that trust
• Prove existence of a relationship of trust and confidence between himself and the defendant
and a transaction that cannot be accounted for on ordinary motives and the evidential
burden will shift to the defendant to rebut the inference of undue influence

• Claimant must prove that the transaction 'calls for explanation' - reformulation of the
manifest disadvantage requirement - first appeared in the speech of Lord Scarman in
National Westminister Bank plc v Morgan
• Lord Nicholls in Etridge went back to the test originally adopted by Lindley LJ in Allcard v
Skinner, namely whether the gift is so large that it cannot be accounted for on the ground of
friendship, relationship, charity or other ordinary motives on which ordinary men act
o a woman became an associate of the sisterhood and was admitted as a full member.
Without independent advice, she made gifts of money and stock to the mother
superior on behalf of the sisterhood. She left the sisterhood in 1879 and claimed the
return of the stock later. It was held by the Court of Appeal that the plaintiff’s gifts
were voidable because of undue influence brought to bear upon the plaintiff
through the training she had received. Nevertheless, she was disentitled to recover
because of her conduct and the delay.

In Royal Bank of Scotland v Etridge (No. 2), Lord Nicholls pointed out that the greater the
disadvantage to the vulnerable person, the more cogent must be the explanation before the
presumption is rebutted.
Lord Hobhouse stated that
“If all that has happened is that, say, a client has left a small bequest to his family solicitor or that a
solicitor has made a reasonable charge for professional services rendered to the client, no inference
of abuse or unfair dealing will arise. But if a solicitor has bought property from his client and it is
properly put in issue that the purchase was at an under-value or that the client’s consent may have
been improperly obtained, the solicitor will have to show that the price was fair and that the client's
consent to the transaction was freely given in knowledge of the true facts. The solicitor has to justify
what he has done. He has a burden of proof to discharge and if he fails to discharge it he will not
have succeeded in justifying his conduct.”

REBUT UNDUE INFLUENCE

• Defendant's attempt to rebut the inference of undue influence that has arisen from proof by
the claimant of the existence (actual or presumed)
o May be rebutted by showing that the donor had competent and independent
advice before acting
o May also be rebutted by showing the act of the donor in making the gift had been a
spontaneous and independent act (Re Brocklehurst)
o Not sufficient to rebut the presumption to show that there was a reasonable
explanation for the transaction
The causal link
• Sufficient causal link between the undue influence and decision to enter into the impugned
transaction but the influence need not have been the 'principal reason' for entry into
transaction
o UCB Corporate Services Ltd v Williams
• Be weakest where there has been a fraudulent act on the part of the stronger party and in
general it must be established the undue influence was 'part of the process' by which
consent was obtained (the libyan investment authority v goldman sachs)

Third Party Scenario

In Barclays Bank v O’Brien, Mr O’Brien was a chartered accountant and he also had a shareholding in
a company in which he was an auditor. The company was experiencing financial difficulty and the
bank wished to find security for the company’s debts. Mr O’Brien offered the matrimonial home as
security. He told his wife that the charge was limited to £60,000 and that it was only to last for a few
weeks.
• Initially, the wife refused to sign but was later persuaded to sign as the husband told her
that the company would fail if she did not and that her son, who also had an interest in the
company, would lose his home.
• In fact, the charge was not limited in the amount or time. The wife agreed to sign the
charge. The branch executing the mortgage received but ignored instructions to ensure that
the wife was aware of the risk and liability and to advise her to take independent advice.
• The bank sought to enforce the charge and the wife raised undue influence and
misrepresentation in her defence to have the charge set aside. The defence based on undue
influence failed because the wife was held to exercise independence of thought on
financial matters. She used to deal with the family finances independently. The wife was
successful with regard to misrepresentation. The charge was set aside as the bank had
constructive notice of the misrepresentation and failed to take reasonable steps to ensure
that the charge had been obtained without influence or that Mrs O’Brien was aware of the
full extent of liability.

WHAT IS THE BANK EXPECTED TO DO?

Etridge: “[54] The furthest a bank can be expected to go is to take reasonable steps to satisfy itself
that the wife has had brought home to her, in a meaningful way, the practical implications of the
proposed transaction. This does not wholly eliminate the risk of undue influence or
misrepresentation. But it does mean that a wife enters into a transaction with her eyes open so far
as the basic elements of the transaction are concerned. “(per Lord Nicholls)
Note: the banks invariably seek confirmation from a solicitor that the he has explained the nature
and effect of the documents to the wife.

In Barclays Bank v O’Brien, the three requirements for a transaction involving a third party to be set
aside arose.
The concept of constructive notice was also introduced and steps required to be taken by banks to
avoid being fixed with constructive notice were set out: unless the creditor who is put on inquiry
takes reasonable steps to satisfy himself that the person’s agreement to stand surety has been
properly obtained, the creditor will have constructive notice of the surety’s rights.
Requirement 1:
The transaction in question may be rescinded on grounds of undue influence or misrepresentation
It is unsafe for the lender because the transaction becomes voidable when the guarantor, who sets
up the security, is subjected to the loanee’s undue influence or misrepresentation.

Requirement 2:
Bank is ‘put on inquiry’
It is unsafe for the lender when he/ she is put on inquiry. It indicates that the security of the
transaction is set up by the guarantor for the loanee without a non-commercial relationship, possibly
with a substantial risk in transactions of undue influence or misrepresentation. In which case, the
transaction would be set aside.

Requirement 3:
Reasonable steps are required to ensure that the guarantor’s consent to the surety is given by
his/her independent free will.
The creditor would want to ensure that it does not have constructive notice of the wife’s rights.
It is plainly impossible to require banks and other financial institutions to inquire of all spouses
whether they have been unduly influenced or misled by the others.

A creditor can satisfy these requirements by insisting on holding a private meeting with the wife (in
the absence of the husband), where she is informed of the extent of liability as surety, warned of the
undertaking risk, and urged to take independent legal advice. The creditor would then preclude a
subsequent claim that it had constructive notice of the wife’s rights and ensure that the guarantor’s
consent was obtained properly.
• The bank is not obliged to provide the necessary information to the wife themselves,
‘ordinary it will be reasonable that a bank should be able to rely upon confirmation from a
solicitor, acting for the wife, that he has advised the wife appropriately’
• If the bank ‘knows that the solicitor has not duly advised the wife or … knows facts from
which it ought to have realised that the wife has not received the appropriate advice … the
bank will proceed at its own risk’

Conclusion:
If the third party, being the guarantor of the loan, is subject to wrongdoing by the loanee, and the
lender does not take reasonable steps to ensure that the guarantor understands the risks and obtains
independent advice, it is unsafe for the lender as the transaction may be set aside with its liability
avoided.

Rescission of the contract is the remedy for undue influence. Since undue influence only makes a
contract voidable but not void, the plaintiff’s right to rescission may be lost.
Rescission may be precluded where:
1. The plaintiff has affirmed the contract after the influence or the relationship giving rise to a
presumption of influence has ceased
2. The plaintiff has delayed in seeking relief
3. The third party acted in good faith, for value and without knowledge of the undue influence
and her rights are accrued from the transaction.
4. It is no longer possible to restore benefits already obtained by the parties under the contract.
Though rescission could be ordered as long as the court could do substantial justice or
practical justice