Duress and Undue Influence Mike Semple Piggot At common law if a party enters into a contract under duress the contract may be set aside on ground of duress unless it has been affirmed expressly or impliedly after the duress has been withdrawn.

Duress may take several and various forms and, in particular, may take the form of economic duress, but whatever form it may take it must amount to a coercion of the will – such that there was no true consent.

The court will consider a range of factors in determining whether a duress was present and, in particular will wish to see whether the person coerced protested, whether he had an alternative course of action available and whether he sought and took independent advice.

Shivas v Bank of New Zealand [1990] 2 NZLR 327

Prologue

The classical conception of contract at common law had as its first premise the belief that private agreements should be enforced in accordance with their terms. The premise of course was subject to important qualifications. Promises procured by fraud, duress or undue influence were not generally enforced by the courts; and the same was true with certain exceptions of promises made by infants and incompetents. Again, agreements that had as their object illegal ends were not usually enforced, as for example, in cases of bribes of public officials or contracts to kill third persons. Yet even after these exceptions were taken into account, there was still one ground on which the initial premise could not be challenged: the terms of private agreements could not be set aside because the court found them to be harsh, unconscionable or unjust. The reasonableness of the terms of a private agreement was the business of the parties to that agreement. True, there were numerous cases in which the language of the contract stood in need of judicial interpretation, but once that task was done there was no place for a court to impose upon the parties its own views about their rights and duties. ‘Public policy’ was an ‘unruly horse’, to be mounted only in exceptional circumstances and with care.

This general regime of freedom of contract can be defended from two points of view. One defence is utilitarian. So long as the tort law protects the interests of strangers to the agreement, its enforcement will tend to maximise the welfare of the parties to it, and therefore the good of society as a whole. The alternative defence is on libertarian grounds. One of the first functions of the law is to guarantee individuals a sphere of influence in which they will be able to operate, without having to justify themselves to the state or to third parties: if one individual is entitled to do within the confines of the tort law what he pleases with what he owns, then two individuals who operate within those same constraints should have the same right with respect to their mutual affairs against the rest of the world.

Whatever its merits, however, it is fair to say that this traditional view of the law of contract has been in general retreat in recent years. That decline is reflected in part in the cool reception given to doctrines of laissez-faire, its economic counterpart, since the late nineteenth century, or at least since the New Deal. the total ‘hands-off’ policy with respect to economic matters is regarded as incorrect in most political discussions almost as a matter of course and the same view is taken, moreover, towards a subtle form of laissez-faire that views all government interference in economic matters as an evil until shown to be good. Instead, the opposite point of view is increasingly urged: market solutions – those which presuppose a regime of freedom of contract – are sure to be inadequate, and the only question worth debating concerns the appropriate form of public intervention.

That attitude has, moreover, worked its way (as these things usually happen) into the fabric of the legal system, for today, more than ever, courts are willing to set aside the provisions of private agreements.

One of the major conceptual tools used by courts in their assault upon private agreements has been the doctrine of unconscionability. That doctrine has a place in contract law, but it is not the one usually assigned it by its advocates. The doctrine should not, in my view, allow courts to act as roving commissions to set aside those agreements whose substantive terms they find objectionable.

‘Unconscionability: A critical reappraisal’
Epstein (1975) 18 J Law & Econ 293. 293-294

Concept

The agreement may be the result of some improper and excessive pressure exerted by one party over the other. The problem is dealt with by the common law doctrine of duress and the equitable doctrine of undue influence. These will be discussed in turn.

15.1 Duress

15.1.1 Definition and scope

Duress is a common law concept which, if established, renders the contract voidable.

The scope of duress at common law was originally very narrow and confined to actual or threatened unlawful physical violence or constraint of the other party.

Thus in an Australian case:

Barton v Armstrong [1975] 2 All ER 465

A threatened to have B killed if he did not buy A’s shares in a company of which B was the managing director. The majority of the Privy Council held that the agreement was vitiated by duress.

Latter v Bradell (1880) 50 LJCP 166

Consent was not vitiated where no physical violence was threatened or inflicted – a housemaid had protested at being required to take a medical examination.

15.1.2 Juridical basis of duress

Originally the courts refused to recognise “duress of goods”, i.e. a threat to damage a person’s property as constituting duress.

However, it is now recognised that the doctrine extends to goods: in The Siboen [1976]) 1 Lloyd’s Rep 293, Kerr J said, obiter, that a person coerced into a contract by the threat of having his house burnt down or a picture slashed could plead duress.

For conduct to amount to duress the threat must be illegitimate because the threat is wrongful or that what is threatened is a legal wrong – or because it is contrary to public policy.

See The Olib [1991] 2 Lloyd’s Rep 108

The basis of duress is an unlawful threat amounting to “coercion of the will”.

15.1.3 Pao On v Lau Yiu Long

Pao On v Lau Yiu Long [1980] AC 614; [1979] 3 All ER 65

P threatened to break a contract unless they were given an indemnity to cover the loss arising as a result of entering into the contract. There was no duress or coercion of the will. The guarantee was not vitiated by duress. HELD: Lord Scarman said that in determining whether there was coercion of the will such that there was no consent, it is material whether the person alleged to have been coerced (i) did or did not protest, (ii) whether at the time he did or did not have an alternative course open to him such as an adequate legal remedy, (iii) whether he was independently advised, (iv) whether after entering the contract he took steps to avoid it. These are all matters relevant in considering whether the plaintiff acted voluntarily or not.

15.1.4 Economic Duress

There are a number of recent cases in which the courts have recognised a doctrine of “economic duress”.

This may occur where parties are already in an existing contractual relationship and one party takes advantage of the plight of the other to renegotiate the contract on terms advantageous to himself.

North Ocean Shipping Co Ltd v Hyundai Construction Ltd (The Atlantic Baron) [1979] QB 705

A contract was made to build an oil tanker for an agreed price. The dollar was devalued and the shipbuilders refused to complete unless the buyer promised to pay a further ten per cent. The buyer agreed and made the payment as the ship was urgently needed to fulfil a charter. At this point it will be noticed that the facts resemble Stilk v Myrick (see under “Consideration”) however in this case the judge (Mocatta J) found a technical consideration in the fact that the shipyard had increased a letter of credit. Nevertheless it was held that the payment could in principle be recovered on the ground of duress, although the buyers had lost their right to rescind. They had paid the money and made no further protest until several months after taking delivery of the ship – this was held to constitute an affirmation. In effect the buyers had complained too late.

The parties need not, of course, already be in an existing contractual relationship for economic duress to arise. In Universe Tankships of Monrovia v ITTF (The Universe Sentinel) [1983] 1 AC 366, the plaintiff’s ship was “blacked” by a trade union, and in order to secure its release from blacking, the plaintiffs paid a sum of money into the union’s welfare fund. A majority of the House of Lords held that the agreement was vitiated by economic duress.

The Evia Luck [1990] 1 Lloyd’s Rep 319

Threatened blacking of a ship in Sweden (in a contract governed by English Law) rendered a contract voidable for economic duress despite being legal in Sweden.

15.1.5 Commercial pressure/threats do not amount to duress merely because what is threatened is a legal wrong

Treitel gives the illustration of a party entering into a new contract after a threat to break an earlier contract.

D&C Builders v Rees [1966] 2 QB 617

A part payment was accepted in full settlement in circumstances where there was an economic duress.

Pau On v Lau Yiu Long makes it clear that it will not necessarily be the case that any threat to break a contract will amount to a duress.

15.1.6 The dividing line

The dividing line between economic duress and what has been called “hard and fair bargaining” or mere commercial pressure will always be difficult to draw and will turn on detailed findings of fact by the court – see, for example, Atlas Express Ltd v Kafco (Importers and Distributors) Ltd [1989] QB 833; [1989] 3 WLR 389.

Finally, it should be noted that (as with misrepresentation) duress need not be the only or main reason for the plaintiff entering the contract in order for the contract to be vitiated; Barton v Armstrong [1975] 2 All ER 465.

15.2 Undue Influence

15.2.1 Concept

The narrow scope of the common law doctrine of duress led to the development, in equity, of the doctrine of undue influence. The doctrine applies to certain situations where improper pressure (not amounting to duress at common law) was brought to bear on a party to enter a contract.

The effect of undue influence is to render the contract voidable.

15.2.2 The classes of case

There are two classes of case which fall within the doctrine; first, where there is no special relationship between the parties in which case undue influence must be proved, and secondly, where, because of the relationship between the parties, there is a ‘presumption’ of undue influence.

15.2.3 No special relationship

These cases are sometimes called cases of Class 1 undue influence. Where there is no special relationship between the parties, the plaintiff must establish that the defendant exerted dominating influence over the plaintiff which he used to extract an advantageous bargain. The modern law of duress overlaps with this class of case.

Williams v Bayley (1866) LR 1 HL 200

A young man forged his father’s signature on some promissory notes and presented them to a bank, who discovered the forgery. At a meeting between the bank, the father and the son, the bank threatened to prosecute the son unless some satisfactory arrangement could be arrived at, and the possible penalty of transportation for life was referred to. As a result, the father entered into an agreement to mortgage his property to pay for the notes. The House of Lords set aside the agreement on the grounds of undue influence – the father could not be said to have entered the agreement voluntarily. Note that this is not a case of duress because the threat here is not in itself unlawful, i.e. to report a person for a criminal offence.

It would seem that in this type of case, the plaintiff must establish actual coercion or that the defendant exercised such domination or control that the plaintiff’s independence of decision was substantially undermined. Many of the cases under this heading involve gifts, not contracts, although the principles are the same.

15.2.4 Where there is a special relationship

A transaction may be set aside on the ground that a presumption of undue influence arises from the nature of the relationship between the parties.

Sometimes called class 2A undue influence, the presumption applies to the following relationships – parent and child; guardian and ward; solicitor and client; trustee and beneficiary; religious adviser and disciple; principal and agent. It will be noticed that in all these relationships trust or confidence is reposed by one party in another to such a degree that the former becomes defendant on the latter. (In spite of this, or perhaps because of it, it seems that the presumption does not apply between a husband and wife!)

However there is a category sometimes called class 2B undue influence, where it has to be proved on the facts that a relationship of undue influence existed. The list of such special or “fiduciary” (based on good faith) relationships is not closed. Thus even where the relationship does not fall into one of recognised classes above, it is possible to establish that the presumption arises from the particular facts. Thus “... in any case where one person turns to another for advice, or assistance, and the court thinks that the relationship of the parties, for example, their relative ages, or experience, or blood relationship, is such as to require confidence and good faith, the duty not to abuse that confidence may be imposed” (Atiyah).

In Lloyd’s Bank v Bundy [1975] QB 326, the Court of Appeal applied these principles to a bank and one of its customers. An elderly farmer gave the bank a guarantee in respect of his son’s overdraft and mortgaged the farmhouse to the bank as security. It was clear that the farmer had placed himself entirely in the hands of the assistant bank manager and had been given no opportunity to seek independent advice. On the particular facts of the case, the transaction was set aside.

National Westminster Bank v Morgan [1985] AC 686

The House of Lords made it clear that the presumption of undue influence does not arise from the mere relationship of banker and customer.

Barclays Bank v O’Brien [1994] AC 180

A security obtained by misrepresentation or undue influence may not be enforced – the creditor should take pains to make sure that no unfair advantage was gained.

The orthodox view is that the presumption may be rebutted by showing that there was no undue influence. However, the cases show that a transaction falling into this category may be set aside even though the conduct of the defendant falls well short of “domination” or “undue influence”. Thus in Goldsworthy v Brickell [1987] 1 All ER 853 the plaintiff was an eighty-five year old farmer, who owned a valuable farm, and he came to trust and depend on the defendant, a neighbouring farmer, for help and advice. There was no personal domination as the plaintiff was fit and active with a strong personality. Nevertheless it was held that there was a presumption of undue influence in the relationship between them. An agreement whereby the plaintiff let his farm to the defendant on very favourable terms was set aside.

15.2.5 Rebutting the presumption

What, then is the effect of establishing that a presumption of undue influence arises? The position is that unless the presumption is rebutted, the transaction is liable to be set aside.

The presumption of undue influence can be rebutted if it can be proved that the transaction was entered into with free will.

It was established in Goldsworthy v Brickell that if, despite the suspicious circumstances, the transaction was a truly spontaneous act of free will, this may rebut the presumption. It must be proved that the ‘weaker’ party fully understood and intended the transaction that was in fact entered into.

The burden of proving that the necessary relationship exists the burden of proving that it does exist is on the party seeking to set the transaction aside.

Lloyd’s Bank v Bundy [1975] QB 326

If the claimant received competent advice from an independent third party adviser then this may be sufficient to rebut the presumption. But the mere existence of independent advice may not be enough; in Inche Noriah v Sheik Allie Bin Omar (1929) AC 127 an aged widow who gave away almost the whole of her property to her nephew had consulted a solicitor but the solicitor was not fully aware of the circumstances, nor did he advise her that she could equally well have benefited her nephew by will.

15.2.6 The Etridge case

Royal Bank of Scotland v Etridge (No. 2) [2001] UKHL 44; [2002] AC 773

The House of Lords heard eight mortgage cases of which seven were typical: a husband in business had borrowed money from the bank, and the bank had taken a mortgage on his house, which involved the wife signing away her rights. When the husband’s business failed the bank tried to repossess the house, and the wife (with the husband probably agreeing) argued that her husband had exercised undue influence in persuading her to sign. If they could persuade the court to set aside the transaction between bank and wife, the couple might be able to keep their home.

In several cases following O’Brien, a wife (who after all had wanted and ‘benefited’ from the bank loan to the husband) succeeded in setting aside a mortgage transaction. The banks felt the situation was unfair, and was an obstacle to lending. The House of Lords looked again at the question of how much banks should do to ensure they were not ‘caught out’ by this type of case.

The relationship between husband and wife is not one where there is an automatic and irrebutable presumption of undue influence (class 2A), but is one where it is sometimes possible to prove in particular cases that the couple had the type of relationship where there was a rebuttable presumption (class 2B).

Some dicta in the case cast doubt on the distinction between class 2A and 2B, although the leading speech by Lord Nicholls seems to recognize it. In any event, the case is really about class 2B situations.

From the point of view principle the important point is encapsulated in the following quotation from 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. 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.” So – a three stage test: 1. prove trust and confidence in relation to financial affairs; 2. prove the transaction was one which calls for explanation – that there was something unusual about it which should have place the bank on enquiry; 3. since an explanation is called for, can a satisfactory explanation of the transaction be given?

The case goes on to give practical advice about the kind of advice the wife would have needed to ensure that they were not acting under undue influence, and on this score clarifies and in effect replaces the guidelines given in O’Brien. In particular their Lordships thought that the solicitor should check the wife is happy to take advice from him or her, and if so, it is usually sufficient for the solicitor to warn the wife of the risks. They also stated that it usually an unnecessary expense for the wife to have a separate solicitor. They rejected the suggestion that the solicitor is the bank’s agent. And they gave advice on ensuring that communication between bank and wife and her solicitor was effective.

Their Lordships suggested that it was hard decide in which cases the bank was put on enquiry, and that in any case where one person was in effect guaranteeing the debts of another, the same precautions should be applied.

15.2.7 Remedy for undue influence is Rescission: bars to rescission

The remedy for a plaintiff who has entered into a contract tainted by undue influence is rescission of the contract. The remedy may be lost in two ways:

(i)       Affirmation

If, after the undue influence has ceased, the influenced party expressly or impliedly affirms the transaction, the right to rescind will be lost. It seems that a private, secret mental reservation not to affirm will not suffice. The most significant factor will be the lapse of time after the termination of the influence. In Allcard v Skinner (1887) 36 Ch D 145, the plaintiff, under the influence of the defendant spiritual adviser, gave a large sum of money to the defendant. Six years after leaving the religious order in question the plaintiff sought to recover the money but it was held that her claim was barred by delay.

(ii)       Third party rights

If third party rights have intervened, for example by a resale of the property which is the subject-matter of the contract, rescission will not be available. Of course, if the third party is actually aware of the undue influence then the transaction which he has entered into will be likewise tainted and will also be voidable; Bridgeman v Green (1757) Wilm 58.

15.3 Inequality of Bargaining Power

There is no doubt that the cases just discussed on undue influence are part of a wider principle of fairness in contract bargaining. A similar type of case is the “unconscionable bargain”.

Fry v Lane (1888) 40 Ch D 312

It was held that where a purchase is made from a poor and ignorant person at a considerable undervalue, the vendor having had no independent advice, the court has an equitable jurisdiction to set the contract aside. I

Cresswell v Potter [1978] 1 WLR 225

The doctrine was applied to a post office telephonist, who, being a member of the ‘lower income group’ and ‘less highly educated’ was held to be the modern equivalent of poor and ignorant!

Lloyd’s Bank v Bundy [1975] QB 326

Lord Denning M R had sought to establish a single doctrine whereby all the instances where the courts intervene to set aside unconscionable transactions (including duress and undue influence) are based on a single unifying principle, namely, “inequality of bargaining power”.

However, in National Westminster Bank v Morgan [1985] AC 686 the House of Lords refused to accept such a wide principle. Lord Scarman said, “... there is no precisely defined law setting limits to the equitable jurisdiction of a court to relieve against undue influence.”

Legislation has gone some way to prevent abuse of unequal bargaining power. On the other hand the English courts have been slow to increase the scope for redressing ‘unfairness’ at common law. In this respect many civilian law jurisdictions, and many United States jurisdictions offer far greater protection to the weaker party to a bargain. To a lesser extent this is also true in Commonwealth jurisdictions, which have developed the remedial constructive trust, a concept not recognized in English law.