Contract: Undue Influence

Undue Influence

Establishing the Defence

The Requirements

To establish the defence of undue influence, the claimant must establish that:

  1. They were influenced to enter into the contract (or give the gift) by the defendant; and
  2. The influence exercised by the defendant was ‘undue’.
Establishing Influence

The case law shows that there are four ways of proving that the defendant influenced the claimant:

Actual Influence
threats, pressure, punch

The claimant could prove the existence of actual influence by providing evidence of real threats or pressure to enter into the contract or give the gift which overrode their will: Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44.

‘Type 2A’ Presumed Influence
signed document, presumed, formal

If the claimant can show that they had a special relationship with the defendant in which high trust is normally given (such as lawyers and their clients), the courts will presume that the defendant influenced the claimant to enter into the contract or give the gift: Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44; Goldsworthy v Brickell [1987] Ch 378.

‘Type 2B’ Presumed Influence
laughing couple, close relationship

If the claimant can show they were in a relationship with the defendant in which they reposed large amounts of trust and confidence that the defendant would look after their affairs, the courts will presume that the defendant influenced the claimant to enter into the contract or give the gift: Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44.

The fourth way, established recently by the High Court in Malik (Deceased) v Shiekh [2018] EWHC 973 (Ch), is to show that the claimant was vulnerable to or dependent on the defendant because of some other reason. Other reasons might include mental illness, ill health or age. There is no need for a prior relationship between the claimant and dependant to raise this presumption of influence: Moursi v Doherty [2019] EWHC 830 (Ch).

It is not clear whether the defendant can rebut the presumption of influence once it is raised. The judges of the House of Lords in Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44 were split on the matter.

If the claimant is attempting to establish that a dead person’s will is invalid for undue influence, none of the presumptions apply: Parfitt v Lawless (1872) LR 2 P&D 462. The claimant will need to show actual influence, which can be very difficult: Nutt v Nutt [2018] EWHC 851 (Ch).

Demonstrating that the Influence is ‘Undue’

‘Undue’ influence is an ill-defined term. It is often described as involving some element of ‘unfair’ or ‘improper’ behaviour. However, it has been established even where the defendant did not act immorally: Allcard v Skinner (1877) 36 ChD 145. There is no need to show that the transaction was disadvantageous: Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44.

What the claimant must do to prove that the influence was ‘undue’ depends on the kind of influence they proved. If they relied on actual influence, they will need to actively prove that the influence was undue. Examples of behaviour which might be held to be undue include:

Lying on the phone

Lying to the claimant or withholding relevant information: First Plus Financial Group v Hewett [2010] EWCA Civ 312.

Legal books, advice

Failing to ensure that the claimant got proper legal advice and understood the transaction: Hammond v Osborn [2002] EWCA 885.

Disadvantage, a small amount of money

Disadvantage is strong evidence of undue influence, though it is not always enough: McMullon v Secure the Bridge [2015] EWCA Civ 884.

If the claimant relied on one of the presumptions, by contrast, they only need to prove that the transaction ‘calls for explanation’. A transaction calls for explanation if it is not obviously an act of independent judgement or a normal incident of the parties’ relationship: Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44. If they show this, the burden shifts to the defendant to show that the influence was not undue.

Whether a transaction calls for explanation depends on the facts of the case and the parties’ relationship. For example, the courts have stated that it is not automatically suspicious if a spouse acts as a surety for the other spouse’s debts. Generosity is normal for people in loving relationships: Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44. Additional factors, such as deceit or vulnerability might need to be shown.

To show that the influence was not undue, the defendant must show that the claimant was able to make an independent, fully-informed and voluntary decision: Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44. It is not enough to show that the claimant would have consented to the contract or gift even if they were free from influence: UCB Corporate Services Ltd v Williams [2002] EWCA Civ 555.

In practice, the defendant will need to show that there were external factors which essentially freed the claimant from the influence, or counteracted it: Pesticcio v Niersmans [2004] EWCA Civ 372. The most common way is by showing that the claimant had independent, fully-informed and non-negligent legal advice: Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44.

The Effect of Undue Influence

If the claimant establishes undue influence, the contract becomes voidable at their election.

A contract which is voidable is not treated as never existing. Rather, it is treated as existing until the innocent party communicates that they are terminating the contract or take reasonable steps to do so. Reasonable steps include reporting the goods stolen if the defendant has vanished.


Asserting the Defence Against Third-Parties

The Relevance of Third Parties

The ability to establish undue influence against some one other than the person doing the influence is very important. This is because often the other party to the contract or gift will be someone other than the influencer. For example, a very common fact pattern involves wives who act as sureties for their husband’s loans. There is a separate need to show that undue influence should release the claimant from their contract with the third party.

When Will Undue Influence Affect a Third-Party Contract?

The claimant may only rely on undue influence against a third party if they can show that the third party had actual or constructive knowledge of the undue influence: Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44.

A third party has constructive knowledge of the undue influence if they are aware of circumstances from which a reasonable person would suspect there might be undue influence. This is known as being ‘put on notice’. Once a third party is fixed with constructive knowledge, undue influence can be used against them. To get rid of constructive knowledge, the third-party must show that they took reasonable steps to satisfy themselves that the claimant was making a free, independent and informed choice: Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44.

Banks and Constructive Knowledge

Most of the case-law providing guidance on when constructive notice arises concerns third-party bankers. A bank is on notice if they are aware that the surety and the debtor have a non-commercial relationship, unless the money is being advanced to both of them: Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44.

If the loan is made to a company which is jointly owned by the surety and the debtor, the bank is still put on notice – they are not entitled to assume that the surety has any real role in the business: Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44.

Banks and ‘Reasonable Steps’

The courts have set out clear guidelines for banks seeking to dispel constructive knowledge: Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44. In particular, the bank must ensure that the surety has been advised by a competent lawyer who is not connected to the debtor. The advice must pertain to the nature of the transaction, its consequences and its serious nature.

To fulfil this duty, the bank must ask the surety who their legal adviser is. They must then provide the legal adviser with sufficient information about the transaction to enable them to give competent advice. They may not proceed with the transaction until they have received a written confirmation from that adviser stating that the surety has been advised and understood the advice. However, if the bank is aware of circumstances which indicate that the adviser has been negligent or has a conflict of interest, they remain on notice: National Westminster Bank Plc v Breeds [2001] Lloyd’s Rep Bank 98; National Westminster Bank Plc v Amin [2002] UKHL 9.


0%

Contract Defences Quiz

Test yourself on the principles governing when a party to a contract has a defence.

1 / 52

Marcus has shown that he reposed a large amount of trust in his partner, Adrian, when it comes to financial affairs. He also shows that his decision to transfer his inheritance to Adrian is a transaction which calls for explanation. To avoid the transfer being affected by the defence of undue influence, what must Adrian do to show that the influence was not undue?

2 / 52

Celestine is an elderly woman whose eye-sight is failing. Her niece, Laura, persuades her to sign a document claiming that it will authorise Laura to remove £50 for Celestine's bank account to enable her to pay Celestine's bills. In reality, it is a contract transferring Celestine's house to Laura. Celestine did not bother to read it as she trusts Laura (who has helped her out with bills before) and her eyesight makes reading very difficult. Can Celestine rely on the defence of non es factum?

 

3 / 52

For the purposes of the defence of duress, what factors are relevant to whether the innocent party has a practical choice? (Three answers)

4 / 52

ABC Bank is advancing money to a debtor. An individual tells the bank that they wish to act as a guarantor or surety for that debt. The debtor has unduly influenced this individual. When is the bank taken to have constructive notice of the presence of undue influence in the transaction?

5 / 52

For the purposes of the defence of economic duress, can a lawful threat be illegitimate?

 

6 / 52

When establishing that the defendant's influence was undue for the purposes of the defence of undue influence, the claimant must show that the transaction was manifestly to their disadvantage. True or false?

 

7 / 52

For the purposes of the defence of unilateral mistake, when can a term as to the quality of the goods be considered 'vital'?

8 / 52

In which of the three following circumstances would the defence of common mistake apply?

9 / 52

Hannah is applying for a loan for the family business. Her girlfriend Celestine tells the bank that she will act as surety for the loan. The money is to be advanced to a company which Hannah and Celestine hold joint shares in. The bank is aware that Celestine is Hannah's girlfriend and that she has shares in the company, but they are not aware that Hannah has unduly influenced Celestine. They grant the loan. Can Celestine rely on the defence of undue influence against the bank?

10 / 52

When establishing the defence of undue influence, how does the claimant demonstrate 'Type 2A' presumed influence?

11 / 52

David induces Mary to enter into a contract to buy a car by promising that he will service the car before he gives it to her. He has no intention of doing so. Is this an actionable misrepresentation?

 

12 / 52

When determining if the defence of misrepresentation applies, the courts will presume, in the absence of contrary evidence, that the claimant relied on the statement if a reasonable person would have relied on it. True or false?

 

13 / 52

Can the innocent party prove that a misrepresentation caused them to enter the contract if they used their own resources to verify whether the statement was true?

 

14 / 52

Joanie has established that a neighbour of hers, Richard, pressured her into selling her house to him. To establish undue influence, what does she need to do to show that the influence was undue?

15 / 52

In what two scenarios are the courts likely to refuse to rescind a contract which has been rendered voidable by misrepresentation?

16 / 52

If a contract is voidable, can either party rely on its terms?

17 / 52

For the purposes of unilateral mistake, when is a term 'vital' to the contract?

18 / 52

Can undue influence be demonstrated in cases where the parties had no relationship prior to the transaction?

19 / 52

Maisy enters into a contract with a man falsely claiming to be her long-lost cousin, John, while they are catching up at a restaurant. The contract is in writing and signed, and the man signed his name as 'John'. Maisy later seeks to argue that she should not be bound by the contract, because she would not have entered into the contract had she known the man was not John. Can Maisy rely on the defence of mistake in relation to the man's identity?

20 / 52

What are the two requirements of the defence of misrepresentation?

21 / 52

When are damages available for innocent misrepresentation?

22 / 52

Does a defence of duress to property exist?

 

23 / 52

Complete this sentence: The defence of economic duress renders the contract...

24 / 52

What three elements must an innocent party show to establish the defence of economic duress?

25 / 52

Complete this sentence: The defence of misrepresentation renders the contract...

26 / 52

Does the claimant need to establish that but for the threat, they would not have entered into the contract if they are trying to prove duress to the person?

 

27 / 52

Richard offers to sell Michael a book. Richard knows that Michael believes that the book is signed by the author. Richard did nothing to make him believe this, but nor does he correct Michael. Michael relies on his belief that the book is signed when deciding to buy it. Can Michael rely on the defence of misrepresentation?

 

28 / 52

Xavier is a busy taxi driver who purchases a new car from Dodgy Dealers Inc. He signs their standard term car-purchase contract without reading it, not realising that it contains an onerous clause requiring him to pay a penalty fee if he gets the car serviced by anyone else within the first year. Can Xavier rely on the defence of non es factum to get out of the contract?

 

29 / 52

When are damages in deceit available for a misrepresentation?

30 / 52

What two conditions must be met before a transaction is void for unilateral mistake?

31 / 52

David offers to sell Mary a house, representing that it has a conservatory. Mary relies on this representation when deciding to buy the house. Prior to the sale, there is a fire, and the conservatory burns down. David does not tell Mary. Can Mary rely on the defence of misrepresentation?

 

32 / 52

Maisy enters into a contract over the phone with a man falsely claiming to be her estranged cousin, John. Maisy later seeks to argue that she should not be bound by the contract, because she would not have entered into the contract had she known the man was not John. Is the man's identity a vital term of the contract?

33 / 52

Complete this sentence: The defence of duress to the person renders the contract...

34 / 52

When establishing the defence of undue influence, how does the claimant demonstrate 'Type 2B' presumed influence?

35 / 52

When dealing with the defence of undue influence in a case where a presumption of influence has been raised, can the defendant rebut the presumption?

 

36 / 52

Maisy enters into a contract over the phone with a man falsely claiming to be her long-lost cousin, John. In reality, Maisy does not have a long-lost cousin named John. Maisy later seeks to argue that she should not be bound by the contract, because she would not have entered into the contract had she known the man was not her cousin. Is the man's identity a vital term of the contract?

37 / 52

Complete this sentence: The defence of illegality renders the contract...

38 / 52

When establishing the defence of undue influence, how does the claimant demonstrate actual influence?

39 / 52

What must a third-party bank do to rid themselves of constructive notice of undue influence?

40 / 52

If a contract is void ab initio, can either party rely on its terms?

41 / 52

When will the defence of illegality bar a claim?

42 / 52

In which two scenarios can a person rely on the defence of undue influence against a third-party?

43 / 52

Katie and Andrew enter into a contract which states that Andrew will deliver Thompson apples to Katie. The parties are not aware that there are actually two kinds of Thompson apples - Virginia Thompson apples and Alabama Thompson apples. The two types of apple taste very different and have very different uses. Andrew intends to ship Virginia Thompson apples, while Katie is expecting to receive Alabama Thompson apples. Is the contract void for mutual mistake?

44 / 52

Can a person rely on any of the three categories of presumed influence when trying to establish undue influence to challenge the will of a deceased person?

 

45 / 52

Can silence be an actionable misrepresentation?

46 / 52

Maisy enters into a contract with a man falsely claiming to be her long-lost cousin, John, while they are catching up at a restaurant. Maisy later seeks to argue that she should not be bound by the contract, because she would not have entered into the contract had she known the man was not John. Is the man's identity a vital term of the contract?

47 / 52

Joanie has established a presumption that her lawyer, Richard, influenced her when she sold her house to him. To establish undue influence, what does she need to do to show that the influence was undue?

48 / 52

When establishing the defence of undue influence, how does the claimant demonstrate the category of presumed influence established in Malik (Deceased) v Shiekh?

49 / 52

Can the innocent party prove that a misrepresentation caused them to enter the contract if they had the opportunity to verify the statement, but did not?

 

50 / 52

Complete this sentence: The defence of undue influence renders the contract...

51 / 52

Complete this sentence: The defence of mistake renders the contract...

52 / 52

Julie is applying for an overdraft on a joint account controlled by herself and her husband Johan at ABC Bank. Her husband Johan offers to act as surety. The bank is unaware of the fact that Johan has been unduly influenced by Julie, but knows that the two are married. The overdraft is granted. Does the bank have constructive notice of the undue influence?

 

Your score is