Undue influence in English law


"o protect people from being forced, tricked or misled in any way by others into parting with their property is one of the most legitimate objects of all laws; and the equitable doctrine of undue influence has grown out of and been developed by the necessity of grappling with insidious forms of spiritual tyranny and the infinite varieties of fraud."
Allcard v Skinner LR 36 Ch D 145, per Lindley LJ

Undue influence in English law is a field of contract law and property law whereby a transaction may be set aside if it was procured by the influence exerted by one person on another, such that the transaction cannot "fairly be treated the expression of free will".
Historically the doctrine had predominantly been invoked where the person who is exercising undue influence over another person either enters into a contract with the affected person or receives a gift from them. However, much of the recent case law relates to three party cases, where one person exerts undue influence on a second person to enter into a transaction with a third party. The doctrine originally developed because of perceived limitations in the law relating to duress. Although the modern law is different, previously in order to set aside a contract for duress it was necessary to show a threat of violence to the person, and the doctrine developed in response to more subtle forms of coercion. Accordingly, many earlier cases which refer to undue influence are capable of being reconsidered as actually relating to duress or unconscionable bargains in the modern sense.
The leading authority on undue influence is now the decision of the House of Lords in Royal Bank of Scotland v Etridge However much of the earlier case law continues to be relevant. There has been no real statutory intervention in this area of the law. Despite the wide array of cases considering the doctrine, there remains some disagreement as to the precise ambit of the doctrine.

Influence must be "undue"

In order to challenge a transaction as having been entered under undue influence. It is not sufficient to show that the person was influenced by another person; there must also be a degree of impropriety about the exercise of that influence.
Although there have been rare cases where a transaction has been set aside even where the party exercising influence is seeking to act in the best interests of the person being influenced, and that all that is required is that the person's free will has been vitiated, the preponderance of authority notes that undue influence has a "connotation of impropriety" or requires "unconscionable conduct". In Allcard v Skinner LR 36 Ch D 145 Lindley LJ said:
However other cases have struck a very different tone. In Mummery LJ said:
Chitty on Contracts suggests that the different approaches may be reconciled by taking into account the nature of the transaction. If the transaction is obviously one-sided such as outright gift, and especially if it will have a serious effect on the victim like leaving them with limited resources, where there is a relationship of trust and confidence between the parties, the courts will presume that the influence was undue. But this will not normally be so where the transaction is to the advantage of the person who was influenced; where a wife simply signed what is put in front of her by her husband his influence was held not to be undue where at the time the transaction appeared to be to her advantage. However, in either case it seems that it makes no difference whether the person exercising the influence obtains any personal benefit or not.

Undue influence

More recent case law has sought to divide undue influence into two separate sub-groups: actual undue influence, and presumed undue influence. In
Lord Browne-Wilkinson tried to further sub-divide presumed undue influence into two further categories: where the courts would presume, solely based upon the nature of the relationship, that the relationship is one with sufficiently significant influence in the form of trust and confidence or ascendancy and dependence, and relationships where the courts would not presume such influence. Treitel on the Law of Contracts has criticised the labelling as "potentially misleading". Both academic commentators and the courts have been skeptical as to the value of Class 2B relationships, and whether an evidential presumption is of assistance. In Royal Bank of Scotland v Etridge Lord Hobhouse and Lord Hodge appeared to reject the Class 2B category, and Lord Clyde questioned "the wisdom... of attempting to make classifications of cases of undue influence."

Actual undue influence

Most of the early cases relating to the development of the doctrine of undue influence related to actual pressure which was brought to bear on the victim, but which fell short of the legal requirements for duress. Many of these cases would now be treated as duress. For example, in Williams v Bayley LR 1 HL 200, Bayley's son forged his father's signature on promissory notes and gave them to Williams. Williams threatened Bayley with criminal prosecution, so Bayley made an equitable mortgage to get back the notes. The court set aside the mortgage, and expressed itself as doing so for reasons of undue influence; today the case would almost certainly have been treated as duress. For undue influence the equitable concept of "pressure" is much wider than for duress. Actual undue influence does not require the making of any threat.
In cases of actual undue influence, the party who claims relief must show that such influence existed and was exercised, and that as a result no independent judgment on the transaction could be formed. However, it is not necessary to show that the transaction was either manifestly disadvantageous, or that it called for explanation.

Presumed undue influence

Apart of cases of actual undue influence, equity may also give relief where a party is in relationship which gives rise to a presumption of undue influence. The sub-division of presumed undue influence based upon a relationship into two further sub-categories as discussed above remains controversial, but most academics continue to use the categorisation for discussion purposes.

Class 2A

In Lord Browne-Wilkinson's speech in O'Brien, he referred to "Class 2A" as relationships of presumed trust and confidence. In those specific relationships "the law presumes, irrebuttably, that had influence over ". Note that it is not an evidential presumption, but an irrebuttable one. Accordingly, irrespective of the true facts, the courts will presume that the one person had influence over the other. However, the presumption that the transaction was procured by that influence may be rebutted.
The categories of relationships which have been recognised as relationships of presumed trust and confidence include:
Note however that it does not apply to spouses and partners, whether heterosexual or homosexual, and this state of affairs has been criticised as anomalous and arbitrary. Nor does it apply as between employer and employee.

Class 2B

Where a relationship exists which does not fall into Class 2A above, but in which it is established that one person did in fact place trust and confidence in another, then the courts may apply a lesser evidential presumption that the transaction was procured by that influence. This presumption may be rebutted.
Most of the cases arise where one person had entrusted another with the management of their financial affairs. In O'Sullivan v Management Agency & Music Ltd QB 428, the musician and composer Gilbert O'Sullivan successfully set aside agreements he had entered into with his manager when he was a young aspiring musician. In Tate v Williamson LR 2 Ch App 55 where a young Oxford University student sold his estate to his financial adviser for half its value, the court set aside the sale. In that case, Lord Chelmsford noted that "The courts have always been careful not to fetter this jurisdiction by defining the exact limits of its exercise." As noted above, in much the same vein in Etridge the majority of the House of Lords seem to doubt the efficacy of having a Class 2B at all, and seemed to prefer such cases to be decided on general principles without the benefit of evidential presumptions.

Causation

A person seeking to set aside a transaction for undue influence only needs to establish that the undue influence was a factor. They do not need to establish that it was the only, or even principal reason that the transaction was entered into. The Court of Appeal had held in BCCI v Aboody 4 All ER 955 that the person seeking to set aside the transaction would have to satisfy the "but for" test and show that without the influence they would not have entered into the transaction; however that decision was overruled in. Treitel on the Law of Contract notes that whilst this brings the law of undue influence into line with law on duress and fraudulent misrepresentation, it does mean that "the burden is on the stronger party to show that any undue influence played no part at all."

Consequences

A transaction which is shown to have been entered into as a result of undue influence will voidable, and not void. The victim has the right to rescind the transaction, but if they have received any benefits under the transaction the right to rescind is conditional upon making restitution of those benefits. However the right to rescind may be lost in four ways:
Although parties cannot claim damages for undue influence, the courts have held that where rescission is not possible, victims may be entitled to "equitable compensation", which in practice will amount to much the same thing.

Notice

Complications can arise where the transaction was entered into by the victim of undue influence with a third party. By far the most common examples of this in the case law seem to be where a wife has either given a guarantee or granted security over the matrimonial home to support the business debts of her husband, and it is alleged that the husband has exercised undue influence over the wife to persuade her to enter into the arrangement. The courts will not presume undue influence into the husband/wife relationship. However, undue influence may be proved either as actual undue influence, or by establishing that the relationship was one in which the wife reposed trust and confidence in the husband to manage the financial affairs.
Generally speaking, where a person seeks equitable relief against a third party, then under ordinary equitable principles the third party must have had some kind of notice of the facts. Otherwise as an innocent third party, it would entitled to act in good faith and rely upon its rights. However, in relation to the doctrine of undue influence the courts have taken a softer line than in other equitable doctrines. Before Royal Bank of Scotland v Etridge the position in relation to undue influence was more orthodox - it would be necessary to establish that the third party had "constructive notice" of the circumstances that vitiated the consent of the affected person. Instead, the House of Lords said, the preferred language should be whether the third party had been "put on inquiry", and further that "a bank is put on inquiry whenever a wife offers to stand surety for her husband's debts", although not for a joint loan which is understood to be used for their joint purposes.
If a third party is put on inquiry for these or other reasons, then they are under a duty to take reasonable care to protect the person with whom they are dealing from undue influence. In recent case law the courts have spent considerable time trying to juggle how far to extend that duty of the third party to protect the person they are dealing with, with the countervailing policy consideration that family homes are an important source of collateral for people who wish to start their own business or otherwise raise finance. No shortage of criticism has been directed at the judiciary. The position that the courts have reached is that the third party must communicate to the person who may have been unduly influenced that they require a solicitor acting for the wife to confirm to the bank in writing that the solicitor has explained to the wife the nature and effect of the documents to be signed by the wife, and that this must be done in a face-to-face meeting in the absence of the person who might exercise undue influence over her. If those steps are taken then the bank is entitled to rely upon the confirmation from the solicitor that the wife has been advised appropriately.

Independent legal advice

The approach of the courts has been to try and push the responsibility for protecting spouses and other vulnerable parties onto solicitors, but in a way which is not unduly onerous and permits the use of the family home as a source of capital. Questions have been raised about how effective this is in reality in terms of protecting vulnerable wives.
The quality and effectiveness of that advice is not strictly patrolled. The solicitor must explain the transaction, but he has now power to veto it if the wife insists she has blind faith in her husband and wishes to press ahead. But the solicitor may have a duty to advise the client not to proceed with the transaction.
This was echoed in Coomber v Coomber:
The House of Lords in Etridge stated that if it is "glaringly obvious that the wife is being grievously wronged" the solicitor should decline to act. However, if the solicitor does not do so, it seems that the bank is still protected. Even if the transaction is one that "no competent solicitor could have advised the wife to enter" the bank is still protected.
However, if the solicitor did not have all the necessary information to advise the vulnerable party properly, then the transaction may still be set aside.