Tutorial 2: Undue Influence (English Law)

Ted also needs to raise capital for his business. He speaks to Judith about taking a loan from
Marclays Bank PLC (“the Bank”) using Judith’s house, inherited from her mother, as security. Judith
is not too keen but is persuaded by Ted to at least go with him to the Bank. They visit the bank
together and the bank’s manager, who is aware that Ted and Judith are married, advises Judith to
see a solicitor before she agrees to anything. Judith sees Ted’s solicitor who tells her that there is
little risk involved since Ted runs his business very well. Ted is present at this meeting and keeps
telling Judith not to worry. The next day, again in Ted’s presence, Judith signs the mortgage
agreement in favour of the Bank.

Advise Ted, in respect of his contract with Judith, who now wishes to avoid the mortgage with the
Bank.
Answer:
Parties: Judith v Ted
 Judith want rescind the contract, thus must prove that the contract with bank is voidable
contract
 Not actual undue influence because actual undue influence no need to prove unfair
disadvantage (Treitel, The law of contract)
 Definition of actual undue influence: some unfair and improper conduct, some coercion from
outside, some overreaching, some form of cheating (Allcard v Skinner)
 Case of actual undue influence (Williams v Bayley, CIBC Mortgages Plc v Pitt [use for refinancing
house, bank was not suspicious, in question want to raise capital for business])
 Court already decided that husband and wife relationship cannot go for class 2A

Issue: When bank seeks to enforce the guarantee against Judith, can Judith rase Ted’s influence as a
defence and have the guarantee set aside

Category: Class 2B
1. Test of influence: whether one party (X) placed confidence in another (Y) who is in a position of
dominance
 Yes, Judith placed confidence in Ted who is in a position of dominance
2. X and Y do not have a “special relationship”
 Judith and Ted do not have a special relationship
3. However, if the victim (X) proves that he/she did actually repose trust and confidence in the
other (Y) in the past, in particular in relation to financial matters, influence is presumed
 Yes, the relationship between Judith and Ted is husband and wife relationship, so Judith
repose trust and confidence in Ted in the past. Judith is confident in Ted in financial matters
4. But the mere existence of influence is not enough: to raise the presumption of undue influence
“something more is needed, something which calls for an explanation [by the dominant party]
 Ted keep tell Judith don’t to worry about it
 Bring action under class 2B only presumption of influence

Effect of presumed undue influence by a non-party:

 To prove there are unfair disadvantage of contract for undue influence
 Prove there are risk of losing matrimonial house if business of Ted’s doesn’t ho well
 The burden now shift to the dominant party (Ted)
 Ted must use the rebutting undue influence
 Independent advice
 Free will
a. Judith was not keen but Ted ask her to go bank together, solicitor said the risk is low and
Ted ask her don’t worry, not free will and independent advice

 A contract may be avoided where the undue influence is exerted on one party to the contract by
a third-party if
1. undue influence by the third party is first established
 Yes, Judith agreed because of the undue influence of Ted
2. The third party was acting as the other party’s agent
 No, Ted was not acting as Bank’s agent. He act in his own accord
3. Bank had knowledge or constructive notice of the undue influence exerted by Ted
 Yes, Bank had constructive notice of the undue influence exerted by Ted. Agreement is
benefit is to Ted and not Judith. Bank manager is aware that Ted and Judith are married and
advises Judith to see a solicitor before she agrees to anything at the presence of Ted and
Judith signs the mortgage agreement in favour of the Bank in Ted’ presence

Burden shift to bank manager, bank must prove that they have take reasonable step

Constructive notice:
Barclays Bank plc v O’Brien
 Facts: Wife charged her property to bank relying on misrepresentation made to her by her
husband
 Held: Charge was voidable because bank had constructive notice of husband’s misrepresentation
 Constructive notice applies when a party did not have knowledge or actual notice of the
particular circumstances but because, having been put on inquiry, the party turned a blind eye
by failing to make any inquiry or he was negligent in the inquiry made
 Stage 1 of constructive notice: being put on inquiry
a. A creditor is put on inquiry when a wife stands surety for husband’s debt if
 the transaction is on the face of it not advantageous to W
 there is a substantial risk that H had, in procuring W to act as surety, committed a legal or
equitable wrong that entitles W to set aside transaction
 Stage 2 of constructive notice
a. Where a creditor is put on notice of the risk of misrepresentation or undue influence by the
principal debtor, the obligation of the surety will be unenforceable if:
 undue influence, misrepresentation or some other legal wrong by the principal debtor with
regard to the surety is proven
 the creditor has failed to take reasonable steps to be satisfied that the surety entered into
the obligation freely and with knowledge of the true facts
 The creditor will normally be regarded as having taken reasonable steps by
 warning the surety (not in the presence of the principal debtor) of the amount of the
surety’s potential liability and risks involved
 advising the surety to take independent legal advice

Royal Bank of Scotland v Etridge

 Lord Nicholls provided more detailed guidelines to be followed by banks when dealing with
sureties
 Failure to follow these guidelines could mean that the bank has constructive notice of the 3rd
party undue influence:
1. banks are ‘put on inquiry’ in every case where the relationship between the surety and the
debtor is non-commercial
2. The transaction should be explained to the surety by an independent advisor, usually a solicitor.
Steps to be taken by the bank
 Communicate directly with the surety to see if she wishes to use a solicitor (may use the
same solicitor as that of the principal debtor)
 Bank must provide such solicitor with full financial information relating to the transaction
 If the bank suspects that the surety has been misled, the solicitor must be informed of the
bank’s suspicion
 Bank will require from the surety’s solicitor a written communication that the nature of the
transaction and its practical implications have been fully explained to the surety
3. Assuming that the surety wishes an independent solicitor to act for her, there must be a face to
face meeting between the solicitor and the surety where the solicitor should explain the
transaction and its implications in “suitably non-technical language”. At the very least this
means:
 Explaining the nature of the documents being signed together with consequences (eg. risk of
losing matrimonial home)
 Seriousness of the risk
 Making it clear that the decision to give the guarantee, etc is the surety’s and hers alone
 Asking the surety whether she wishes to proceed, or wants solicitor to negotiate further on
the terms with the bank

Application of constructive notice:

 Bank manager has constructive notice of the Ted undue influence because failure to follow the
guidelines
 Bank manager advises Judith to see a solicitor before she agrees to anything at the presence of
Ted
 Judith sees Ted’s solicitor who tells her that there is little risk involved since Ted runs his
business very well, this is not an independent advice
 Ted is present at this meeting and keeps telling Judith not to worry. Judith signs the mortgage
agreement in favour of the Bank in Ted’s presence. Must advice without the presence of
husband
 Bank manager did not mention she will lose the house
 Bank did not follow all the guideline, claim was to rescind the security document to get back the
house. However, Judith get back the house no need give back the money to Ted. Loan
agreement with Ted still there because only wife has contract had set aside

Remedies: No general bars. There are three remedies which is rescind, affirm and defence. Judith
can rescind the contract with bank

4 general bars:
Bona fide purchasers, restitution is impossible, undue delay, affirm the contract

Conclusion: The contract made between Judith and bank is under undue influenced, thus the
contract is void. When bank seeks to enforce the guarantee against Judith, can Judith rase Ted’s
influence as a defence and have the guarantee set aside