Your parents are careful in their will to ensure that their estate is fairly distributed and there is no undue influence. The pandemic hits and your sibling's business has gone busted. Next thing you know is that your parents have guaranteed the loans to the business and the bank is going to take everything. Can you claim the guarantee was made under undue influence to stop the bank from taking over their assets?
Undue influence is one of the biggest risks to individuals and businesses, yet few know what undue influence is, and how to identify it.
This article will provide an overview of undue influence in contract, and how to clearly identify it when you are negotiating your next contract.
Undue influence is where a person abuses a position of trust and confidence to pressurise another party, to enter into a legally binding contract against their will.
Undue influence requires a relationship between two parties whereby one party is depended or relied upon by another party. The person who is being depended on, in other words, is in a position of trust and confidence. The party, who is in a position of trust and confidence then abuses this position to pressure the other, dependent party to enter into a legally binding contract, which is often disadvantageous in some way to the dependent party.
There is no fixed list of relationships exclusively in which undue influence can occur. A finding of undue influence can occur in any relationship, so long as a few legal requirements as found to be present.
Undue influence can be exercised to induce the giving of a gift to another. For instance, party A may, through the exercise of undue influence, induce party B to give a gift to party C.
Likewise, undue influence can be exercised to induce another party to enter into a contract.
Undue influence applies where the person who has allegedly exercised the influence induces another party to enter into a contract with himself. For instance, Party A may, through the exercise of undue influence, induce Party B to enter into a contract with Party A himself.
Undue influence can also work to induce a person to enter into a contract with someone other than the purported influencer. For instance, Party A may, through the exercise of undue influence, induce Party B to enter into a contract with or make a gift to, Party C.
Undue influence is particularly prevalent in the finance sector.
More specifically, it is particularly common when it comes to mortgages and guarantees. Often, one party, usually a husband, will influence a spouse, to enter into a guarantee for a loan or mortgage on a home. The money from the loan or mortgage often ends up being for the husband’s business purposes. The husband then, often, defaults on loan repayments, leading the wife to claims for the agreement to be rescinded for undue influence.
There are three general categories of undue influence, recognised in most common law countries:
1) Actual undue influence
2) Presumed undue influence where the presumption is rebuttable
3) Presumed undue influence where the presumption is irrebuttable
We will go through each category.
This category, of ‘Actual Undue Influence’ encompasses cases where undue influence, is obvious and can clearly be proven.
A few things must generally be proven of the purported influencer:
A) That the influencer had the capacity to influence the purported victim
B) The influencer did in fact influence the purported victim and that influence was undue
C) Such influence did in fact bring about the transaction
An example of actual undue influence may include one party threatening to end a relationship with the other unless they enter into a specified contract.
Another example may include one party constantly pestering, and only stopping if the other to enters into a specific transaction.
If there is no actual undue influence, a purported victim may be able to establish a presumption of undue influence. Basically, in this category of undue influence, the purported victim proves that a certain set of circumstances exist, from which it is possible to infer undue influence.
Under this category, a purported victim must prove there exist a set of circumstances which suggest a few things
A) Firstly, the purported victim placed trust and confidence in the other party
B) Secondly, that the transaction entered into calls for explanation
Under this condition, the purported influencer can rebut the claim made by the purported victim of undue influence, by proving that there was no trust of confidence between them. In this sense, this category is labelled as ‘rebuttable’.
The second requirement – that the transaction entered into calls for an explanation – requires that the transaction should warrant some explanation.
If these two things are proven, to the satisfaction of the courts, it will be presumed that the transaction has been procured by undue influence.
At this stage, the purported influencer will have the opportunity to offer an explanation to suggest that the transaction was not procured by undue influence.
If no explanation is offered by the purported influencer, to the satisfaction of the courts, then it will be deemed to be a transaction procured by undue influence.
What constitutes a satisfactory explanation of the transaction will really depend on your specific circumstances. Nonetheless, generally, the more lob-sided, or disadvantage that the victim has been subjected to as a result of the transaction, the better the explanation should be before the presumption is going to be rebutted successfully.
Going back to the first requirement – that the purported victim placed trust and confidence in the other party - there have been many types of relationship which have fallen in this category.
Husband and wife relationships have been treated as one where trust and confidence has been placed by one in the other party.
Nonetheless, whether any particular spousal relationship is one of trust and confidence will vary from relationship to relationship.
Relationship between bank and customer can also be considered as relationships of trust and confidence.
Cohabitees in an emotional relationship of some sort with one another have been treated as being in a relationship of trust and confidence. This applies to cohabitees regardless of marital status or sexuality
Relationships between a soldier and an army officer have also previously been treated as relationships of trust and confidence.
Certain relationships are recognised in the law as beings special. These relationships have been treated as ‘special’ in the sense that in these relationships, one person having influence over another is customary and common.
In other words, unlike the second category, there is no need to prove a relationship of trust and confidence exists – it is already presumed once a particular type of relationship is found to exist. Following this, the purported victim just needs to prove that the influence was undue or calls for some explanation.
Examples of the types of relationships which qualify for this presumption of influence include the following:
D) Medical adviser/patient
It is important to note that a husband-and-wife relationship does not fall in this list.
Undue influence by someone who is not a party to the contract at issue – by a third party – on a party to the contract can give rise to a claim for undue influence. If successful, the contract between the purported victim – who will be a party to the contract – and the other to be voidable.
For the contract to be voidable, however, the other party to the contract should be ‘put on inquiry’. In other words, the third party should to some extent be aware of some undue influence at issue.
When a business is considered to have been ‘put on inquiry’ will depend on the facts of the situation at hand.
In the case of banks, however, there seems to be clearer guidance. It seems a bank will be ‘put on inquiry’ whenever a relationship between guarantor and borrower is non-commercial.
If put on inquiry, a business has a duty to take reasonable care to protect the person they are contracting with from any undue influence.
To fulfil this duty to take reasonable care, the business should host a private meeting, away from any suspected influencer. In this meeting, the extent of liability and the risks involved in acting as a guarantee or mortgagor, as the case may be. The purported victim should also be urged to take separate legal advice where possible.
The business, to firmly ensure they will be able to rely on the contract at issue, should obtain assurances from the solicitor they have been duly advised in a legal capacity.
Now that you have learnt to identify undue influence, you need to know how to proactively avoid transaction marred by undue influence. This will mean, the next time you get the slightest sign or hint that there might be an undue influence at play with the other party, you can take these steps to protect yourself.
Once a presumption of undue influence is established by a purported victim, the accused may rebut the presumption of undue influence by proving that the claimant entered into the contract freely, out of their own volition.
One of the main ways to prove that a person has entered into an agreement freely did not is to show that the supposed victim got independent advice regarding the transaction in which undue influence is claimed. Usually, the adviser will be a solicitor.
This independent solicitor should be truly independent – it should be a person who does not have any relationship with the purported influencer.
If a contract is found to have been procured by undue influence, the innocent party will be entitled to the remedy of rescission.
Rescission is where a contract is set aside, and the parties are put back into the position in which they were before the contract was made.
Rescission is different to termination of a contract. This is because termination operates prospectively. Where a contract is terminated, only the future obligations owed by either party fall away. The contract is brought to an end from the point of termination onwards – so, neither party has to perform any obligations which fall due after the date of termination.
In the case of rescission, it operates both prospectively and retrospectively. It operates prospectively because the parties are not required to perform any obligations as they fall due from the date of recission. It operates retrospectively because the parties are put in the position, they would have been in had the contract not been entered into at all.
Undue influence will give the innocent party a right to rescind the contract. This right, can however be lost – the ‘bars’ to rescission – in particular circumstances:
Basically, where a party elects to continue with the agreement despite the undue influence
If it is not possible to put the parties into the position they would have been in if the contract was not entered into, then restitution will not be possible.
This is usually not an issue for parties, because the courts often come up with a money equivalent even if there is no precise restitution.
A party who is subject to undue influence is required to seek relief within a reasonable period of time following the end of the undue influence
Please note that this is a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may wish to consult your lawyer.
DocPro Legal is a team of legal professionals with a passion for making quality documents and legal contract templates widely available to the public through cutting edge technology. Our lawyers are qualified in numerous common law jurisdictions including the United Kingdom, Australia, New Zealand, India, Singapore and Hong Kong. We have experience in major law firms and international banks with expertise in business, commercial, finance, banking, litigation, family, succession and company laws.
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