CONTRACT LAW
UNDUE INFLUENCE.
This is where one party holds real authority over the other such that the other party’s will is dominated. Such a position is used to gain advantage over the other.
There are 3 types of undue influence, this includes;
Actual undue influence;
it must therefore be shown that undue influence was exercised by one party on another party to the contract.
Presumed undue influence; where the relationship between the parties amounts to a presumption of undue influence as long as the contract can be proved to have existed.
Relationships of trust and confidence; where the relationship between people amounts to a presumption of undue influence. The confidence invested in another enables one to take advantage of the other such as fiancé and fiancée.
Lord Justice Lindely in the case of ALLCARD V SKINNER, justified the doctrine of undue influence as being founded upon the principle that it is right and expedient to save some people from being victimised by other people.
Further in PATEL V THAKORE, the East African Court Of Appeal adopted the definition of the then Indian Contract Act in Tanzania that undue influence exists where one party to the contract;
a) Is in position obtain an unfair advantage over the other party by using his position to dominate the will of such other party.
b) In fact uses that position to do so
Several principles under the undue influence and are discussed below.
Undue influence is possible if a contract is founded on fiduciary relationship.
A fiduciary in law is a person in a position of authority whom the law obligates to act solely on behalf of the person he or she represents and in good faith. Such as agents, executors and trustees among others. Area was developed so as to cover those areas where any form of improper pressure prevented a party from exercising their free will in entering a contract. Since equity is inevitably more flexible than common law, the doctrine could be applied whenever a party has exploited the other party to gain an unfair advantage.
In the case of ISSA HASSANALI & CO. v JERAJ PRODUCE STORE the brief facts are that the plaintiff repaired the motor bicycle of the defendant in turn for a certain payment. On claim of the payment the defendant was reluctant but he could only retrieve the motor bicycle if he paid. Signing a cheque to make the payment, he later cancelled it. The plaintiff therefore could not retrieve the money from the bank therefore they sued. The defendant claimed undue influence from the garage owners. It was however held that the garage was exercising its ‘possessionary lieu’.
For quite some time equity has declared that a number of relationships between parties prima facie give rise to the presumption of undue influence.
These special relationships include;
a) Parent & child; the brief facts in LANCASHIRE LOANS LTD v BLACK were that the defendant an extremely domineering woman approached bank and asked for a loan which had in turn demanded a guarantee of her loan. She then induced her daughter to stand as guarantor for the loan with the bank. Woman defaulted on the loan and bank sought to enforce guarantee against her daughter. The daughter was able to successfully claim undue influence. Court accepted that she: a) been dominated by her mother, b) did not understand the nature of the document she had signed and c) she had been given no independent advice. The only advice she had received was from her mother’s solicitor.
b) Bank & customer relationship; it used to be viewed by the law that there was a special relationship between the banker and the customer thus giving rise to the presumption of undue influence. However this has to be proved otherwise the contrary would deny any relationship created.
In LLOYDS BANK v BUNDY, a guarantee was given to the bank by an elderly farmer, a customer of the bank, for his son's debts. The guarantee was secured by a mortgage of Bundy's house in favour of the bank. An assistant manager of the bank, with the son, later told the father that they would only continue to support the son's company if he increased the guarantee and charge. The father did so, the assistant manager appreciating that the father relied on him implicitly to advise him about the transaction. The Court of Appeal set aside the guarantee and charge. Lord Denning held that the relationship between the bank and the father was one of trust and confidence. The bank knew that the father relied and trusted them implicitly to advise him about the transaction. This gave the bank much influence on the father yet the bank failed in that trust. They allowed the father to charge the house to his ruin. There was also a conflict of interest between the bank and the father, yet the bank did not realise it, nor did they suggest that the father should get independent advice. If the father had gone to his solicitor or any man of business there is no doubt that they would have advised him not to enter the transaction as the house was his sole asset and the son's company was in a dangerous state. Sir Eric Sachs made it clear that, in ordinary circumstances, a bank does not incur the duty consequent upon a special relationship where it obtains a guarantee from a customer. But once it is possible for a bank to be under that duty, it is, as in the present case, simply a question for "meticulous examination" of the particular facts to see whether that duty has arisen. On the special facts here it did arise and had been broken.
c) Religious advisor & disciple relationship; such a relationship creates the presumption of undue influence.
For example in the case of ALLCARD V SKINNER, in 1867 an unmarried woman aged 27 sought a clergyman as a confessor. The following year she became an associate of the sisterhood of which he was spiritual director and in 1871 she was admitted a full member, taking vows of poverty, chastity and obedience. Without independent advice, she made gifts of money and stock to the value of 7000 pounds to the mother superior on behalf of the sisterhood. She left the sisterhood in 1879 and in 1884 claimed the recovery of the value of property. Proceedings to recover the stock were commenced in 1885. She argued that the agreement to pass her property to the order had been made while she was subjected to undue influence. It was held by the Court of Appeal that there was undue influence brought to bear upon the plaintiff through the training she had received and any form of independent advice availed to her was from inside the order.
d) Husband & wife relationship and the possibility of undue influence. The relationship between the parties is such that one of the parties is by the confidence reposed in him or her by the other take an unfair advantage over the other.
For instance in the case of BARCLAYS BANK v O’BRIEN, the husband was a shareholder in a company and arranged an overdraft facility of £135,000 for the company. The husband's liability to the bank was to be secured by a second charge over the matrimonial home, jointly owned by the husband and his wife. The husband persuaded the wife to sign the security documents by misrepresenting the situation, saying the facility was short-term and the charge was limited to £60,000. When the company's debts increased, the bank brought proceedings against the O'Briens to enforce the guarantee. The House of Lords held that a wife who stood surety for her husband's debt and had been induced by undue influence, misrepresentation or similar wrong had a right to have the transaction set aside if the third party (in this case the bank) had actual or constructive knowledge. Unless reasonable steps were taken to ascertain a) whether the transaction was of financial advantage to the wife, and b) if there were reasons to suspect that the debtor had committed a legal or equitable wrong which had induced the wife into the transaction, then there would be, at least, constructive knowledge. The bank, having failed to take any such steps to verify the situation, had constructive knowledge of the husband's wrongful misrepresentation. The wife was entitled to have the charge set aside.
The principle of absence of special relationship but presence of coercion of mind. As long as a person’s mind has been impliedly forced into acting accordingly then the claim of undue influence can stand.
A case in point is WILLIAM v BAILEY where a son forged his father's signature on promissory notes and gave them to their bankers. At a meeting of all the parties at the bank, one of the bankers said to the father: "If the bills are yours we are all right; if they are not, we have only one course to pursue; we cannot be parties to compounding a felony." The bank's solicitor said it was a serious matter and the father's own solicitor added, "a case of transportation for life." After further discussion as to the son's financial liability the bank's solicitor said that they could only look to the father. The father then agreed to make an equitable mortgage to the bank in consideration of the return of the promissory notes. The father succeeded in an action for cancellation of the agreement. It was held by Lord Westbury that the security given for the debt of the son by the father under such circumstances was not the security of a man who acted with that freedom and power of deliberation that must be considered as necessary to validate a contract to give security for the debt of another.
The principle of a contract to manifest an unfair advantage; for a contract to be set aside it would have to be manifestly disadvantageous to the party that was alleging undue influence. Court should construe this manifest disadvantage from character of the transaction itself.
In the case of BANK OF CREDIT & COMMERCE INTERNATIONAL SA v ABOODY, wife had been persuaded by her husband to give a surety on jointly owned property to the bank from which he was borrowing money for his business. When husband defaulted on loan wife sought to challenge bank’s action. Mrs. Aboody jailed because transaction was held not to ‘manifest advantage’. Court held that in fact the loan had given the business a good chance of survival.
Relationships of confidence usually give a presumption of undue influence between the parties.
For instance in the case of RE CRAIG C, an old man of 84 years whose wife had died, employed Mrs. M as secretary or companion. From the beginning she occupied a position of trust, and in addition to running the house she took a confidential part in running C's affairs. From the time of Mrs. M's employment and C's death (January 1959 - August 1964) he gave her gifts worth £28,000 from his total assets of £40,000.It was held by the Chancery Division that (1) All the gifts complained of were such as to satisfy the requirements to raise the presumption of undue influence, namely, that they could not be accounted for on the ground of the ordinary motives on which ordinary men act, and secondly, that the relationship between C and Mrs. M involved such confidence by C in Mrs. M as to place her in a position to exercise undue influence over him. (2) Mrs. M failed to discharge the onus on her of establishing that the gifts were only made after 'full, free and informed discussion' so as to rebut the presumption of undue influence. The gifts would, therefore, be set aside
Rebutting the presumption of undue influence; the party benefiting from the transaction discharged bears the onus of rebutting the presumption of undue influence. There should be evidence of independent advice to the plaintiff.
In the case of RE BROCKLEHURST, the evidence of independent advice is essential in the rebutting this presumption. Brocklehurst was a strong-minded, autocratic and eccentric old man who was used to commanding others and had served in the army in positions of command. He was impulsively generous. When he was in his eighties he lived alone and became friendly with the owner of a local garage. They had a common interest in shooting and B permitted the defendant to shoot rabbits on the estate. B wrote to the defendant saying that he wished to give him the shooting rights over his estate and pressed the defendant to instruct a solicitor to draw up a lease. B executed the lease. After B died, his executors brought an action against the defendant to have the lease set aside on the ground of undue influence. The Court of Appeal upheld the lease. The Court of Appeal held that the nature of the relationship between the deceased and the defendant was not one of confidence and trust such as would give rise to a presumption of undue influence on the part of the defendant, for the evidence established that the relationship was one of friendship and did not indicate that it was such that the defendant had been under a duty to advise the deceased or had been in a position of dominance over him; on the contrary, it was the deceased who had tended to dominate the defendant. But even if the relationship had been one that gave rise to a presumption of undue influence, the defendant had rebutted the presumption for in the circumstances the presumption was rebuttable not only by proof that the deceased had been independently advised about the leases but also by proof that the gift of the leases had been the spontaneous and independent act of the deceased.
The inequality in bargaining power can create a presumption of undue influence.
In the case of WESTMINSTER BANK v MORGAN, Morgan‘s business run into difficulties and he was unable to pay the mortgage on the home that he jointly owned with his wife. He then asked the bank to refinance his building society loan so that he might avoid repossession of the family home. Bank agreed to this in return for securing an unlimited mortgage against the house and one that would also act as security against all various transactions with it. Manager of the bank arranged to meet with Mrs. Morgan in order to obtain her signature on the arrangement. She did express some concern that the document would have nothing to do with her husband’s ability to borrow money from the bank since she lacked confidence in the business ability and financial management. Manager assured her in good faith but incorrectly that the agreement covered only the refinancing of the couple’s mortgage on the home. Mrs. Morgan had no independent advice. Couple fell again into arrears and bank tried to re-enforce the surety and claimed repossession of the home. Mrs. Morgan claimed undue influence but failed and in any case the bank did not have a better bargaining position as Lord Scarman explained that; ‘a meticulous examination of the facts of the present case reveals that [the bank] never 'crossed the line'. Nor was the transaction unfair to the wife. The bank was, therefore, under no duty to ensure that she had independent advice. It was an ordinary banking transaction whereby the wife sought to save her home; and she obtained an honest and truthful explanation of the bank's intention which, notwithstanding the terms of the mortgage deed which in the circumstances the trial judge was right to dismiss as 'essentially theoretical', was correct; for no one had suggested that … the bank sought to make the wife liable, or to make her home the security, for any debt of her husband other than the loan and interest necessary to save the house from being taken away from them in discharge of their indebtedness to the building society."
Limitations
A victim of undue influence may lose his right to have the contract set aside if the following circumstances exist;
a) Since equity demands that whoever comes to it must come with clean hands and that delay defeats equity. A victim of undue influence must seek relief within a reasonable time. If he sits, back no relief is open to him as he is presumed to have ratified the contract.
A case in point is ALLCARD v SKINNER In 1867 an unmarried woman aged 27 sought a clergyman as a confessor. The following year she became an associate of the sisterhood of which he was spiritual director and in 1871 she was admitted a full member, taking vows of poverty, chastity and obedience. 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 in 1884 claimed the return of the stock. Proceedings to recover the stock were commenced in 1885.It was held by the Court of Appeal that although the plaintiff's gifts were voidable because of undue influence brought to bear upon the plaintiff through the training she had received, she was disentitled to recover because of her conduct and the delay. Six years was too long thus delay defeats equity.
In North Ocean Shipping Co. Ltd v Hyundai Construction Co. Ltd’ the Atlantic Baron, the Defendants had agreed to build a tanker for the Plaintiffs at a price to be payable in five instalments in Dollars. The Plaintiffs paid the first instalment but then the Dollar suffered a 10% drop in the international money market. The Defendants demanded a 10% increase in the contract price, stating that they would not complete the ship unless this was forthcoming. At the time, the Defendants were not aware that this threat was particularly damaging to the Plaintiffs since they had an agreement to charter the ship when it was completed. The Plaintiffs agreed to pay the extra money, despite the fact that, as they pointed out to the Defendants, they were not legally obliged to do so. Eventually, all four of the further instalments were paid, increased by 10% and the Plaintiffs took delivery of the ship. Eight Months later, the Plaintiffs sought to recover the extra moneys paid, but failed in their action. While Mocatta J considered that this was a case of economic duress, he held that they would be unable to recover since their delay in seeking the recovery of the extra moneys paid amounted to affirmation of the contract, even if they had no intention of affirming the contract as such.
b) Impossibility of restitutio in integrum; here the aggrieved party to a contract, to have it set aside and be able to restore the benefits he has obtained under the contract will not be possible.
In O’SULLIVAN v MANAGEMENT AGENCY, it was held that until O’sulllivan met the defendant, he had achieved no success in his music career. And that after he parted ways with the defendants, he achieved no success either. Although equity looks at the advantages gained by the wrong doer rather than the loss of the victim, the cases show that in assessing the advantage gained, the court will look at the whole situation in the ground.
c) Affirmation; an attempt to rescind the contract on grounds of undue influence will fail if the victim has affirmed the contract after the influence has ceased. In MITCHELL v HOMFRAY, it was held that a gift from a lady to her medical adviser, even though the former had not independent advice, is only voidable. And after the relationship had ceased, she intentionally abides by what she has done, her executors cannot recover the gift from medical advisor.
d) Acquisition of rights by third parties; if a third party in good faith has acquired an interest for value in the subject matter of a contract concluded under dureee or undue influence, the victim loses the right to set aside the contract reference. Bain Bridge v Brown (1881) 18 CH 188
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