1.5 Case Notes on Undue Influence PDF

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1 Case Notes on Undue [email protected] INFLUENCEUndue Influence under English Law I (1993 - 2001) (Court of Appeal in Bank of Credit and Commerce International SA v Aboody [1990] 1 QB 923, and House of Lords in Barclays Bank plc v O’Brien & Anor [1993] 4 All ER 417)Undue InfluenceC...

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1 1.5 Case Notes on Undue Influence [email protected] UNDUE INFLUENCE Undue Influence under English Law I (1993 - 2001) (Court of Appeal in Bank of Credit and Commerce International SA v Aboody [1990] 1 QB 923, and House of Lords in Barclays Bank plc v O’Brien & Anor [1993] 4 All ER 417)

Undue Influence Class 1: Actual Undue Influence

❑ It

is necessary for the claimant to prove affirmatively that the wrongdoer exerted undue influence on the complainant to enter into the particular transaction which is impugned.

Class 2: Presumed Undue Influence

❑ The

complainant only has to show, in the first instance, that there was a relationship of trust and confidence between the complainant and the wrongdoer of such a nature that it is fair to presume that the wrongdoer abused that relationship in procuring the complainant to enter into the impugned transaction. ❑ There is no need to produce evidence that actual undue influence was exerted in relation to the particular transaction impugned: once a confidential relationship has been proved, the burden then shifts to the wrongdoer to prove that the complainant entered into the impugned transaction freely, for example by showing that the complainant had independent advice.

Class 2B: ❑ If the complainant proves the de facto existence of a relationship under which the complainant generally reposed trust and confidence in the wrongdoer, the existence of such relationship raises the presumption of undue influence.

Class 2A: ❑ Certain relationships (for example solicitor and client, medical advisor and patient) as a matter of law raise the presumption that undue influence has been exercised.

OR

Undue Influence made out Burden shift: The complainant will succeed in setting aside the impugned transaction merely by proof that the complainant reposed trust and confidence in the wrongdoer without having to prove that the wrongdoer exerted actual undue influence or otherwise abused such trust and confidence in relation to the particular transaction impugned.

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Undue Influence under English Law II (2001 – today) (House of Lords in Royal Bank of Scotland v Etridge (No. 2) [2002] 2 AC 773)

Undue Influence

Actual Undue Influence

Actual undue influence is an equitable wrong committed by the dominant party against the other which makes it unconscionable for the dominant party to enforce his legal rights against the other. It is typically some express conduct overbearing the other party's will. Actual undue influence does not depend upon some pre-existing relationship between the two parties though it is most commonly associated with and derives from such a relationship. He who alleges actual undue influence must prove it.

Presumed Undue Influence

Presumed undue influence necessarily involves some legally recognised relationship between the two parties. As a result of that relationship one party is treated as owing a special duty to deal fairly with the other. There are two prerequisites to the evidential shift in the burden of proof from the complainant to the other party.

First— that the complainant reposed trust and confidence in the other party, or the other party acquired ascendancy over the complainant.

AND

Second— that the transaction is not readily explicable by the relationship of the parties.

Presumption of undue influence made out. Burden shifts.

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3 AND

Note: Etridge (No.2) [2002] 2 AC 773 (HL) i.

ii.

The House of Lords questioned the wisdom of the classification given to undue influence in Aboody, i.e. no longer necessary to classify undue influence into Class 1 and Class 2, and Classes 2A & 2B. This led to confusion. (Para 92 of the judgment)

Presumed undue influence: Special class of relationship The evidential presumption discussed above is to be distinguished sharply from a different form of presumption which arises in some cases. The law has adopted a sternly protective attitude towards certain types of relationship in which one party acquires influence over another who is vulnerable and dependent and where, moreover, substantial gifts by the influenced or vulnerable person are not normally to be expected. Examples of relationships within this special class are parent and child, guardian and ward, trustee and beneficiary, solicitor and client, and medical adviser and patient. In these cases, the law presumes, irrebuttably, that one party had influence over the other. The complainant need not prove he actually reposed trust and confidence in the other party. It is sufficient for him to prove the existence of the type of relationship.

The label “manifest disadvantage” in Morgan has caused difficulty. The label is discarded. But agreed with Lord Scarman’s dicta in Morgan: "the Court of Appeal erred in law in holding that the presumption of undue influence can arise from the evidence of the relationship of the parties without also evidence that the transaction itself was wrongful in that it constituted an advantage taken of the person subjected to the influence which, failing proof to the contrary, was explicable only on the basis that undue influence had been exercised to procure it." (Paras 26 & 29)

iii.

Returned to Allcard v Skinner: two classes— “actual undue influence” and “presumed undue influence”. Lord Nicholls observed that the better approach is to adhere more directly to the test outlined by Lindley LJ in Allcard v Skinner 36 Ch D 145, and adopted by Lord Scarman in Morgan in the above passage. (Para 31)

iv.

“Actual undue influence” does not depend upon some pre-existing relationship between the two parties though it is most commonly associated with and derives from such a relationship. He who alleges actual undue influence must prove it. (Para 103)

v.

vi.

Presumption of undue influence made out. The law presumes irrebutably

“Presumed undue influence” requires two prerequisites: (1) that the complainant reposed trust and confidence in the other party, or the other party acquired ascendancy over the complainant; and (2) that the transaction is not readily explicable by the relationship of the parties.” (Paras 14 & 21-26) In special class of relationship, a different form of presumption applies. The

complainant need not prove he actually reposed trust and confidence in the other party. It is sufficient for him to prove the existence of the type of relationship. (Para 18)

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4 Undue Influence under Section 16 of the Contracts Act 1950, Malaysia Undue Influence

1st element ❑ The relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other. (section 16(1) of the Contracts Act)

Who is the person in a position to dominate the will of the other?

Where he holds a real or apparent authority over the other. (Section 16(2)(a)-1st limb)

AND

2nd element ❑ (The party who is in the position to dominate the will of the other) uses that position to obtain an unfair advantage over the other. (section 16(1) of the Contracts Act)

How to show or prove that he uses his position to obtain an unfair advantage over the other?

He enters into a contract with the other party

AND

OR

Where he stands in a fiduciary relation to the other. (Section 16(2)(a)-2nd limb)

Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress. (Section 16(2)(b))

on the face of it, the transaction appears to be unconscionable (Section 16(3))

OR

on the evidence adduced, the transaction appears, to be unconscionable (Section 16(3))

OR

Undue Influence is proved: Burden Shift: The burden of proving that the contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other

(Section 16(3))

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Undue Influence under English law: an overview In CIBC Mortgages Plc v Pitt (1993) 66 P & CR 179, Neill LJ (Court of Appeal) suggested that “on some future occasion it will be necessary to look more closely at the requirement … [of] manifest disadvantage”; and Lord Browne-Wilkinson (House of Lords), not satisfied with the application of the requirement of ‘manifest disadvantage, to presumed undue influence, stated that “the exact limits of the decision in Morgan may have to be reconsidered in the future”. Before Etridge (No. 2), in Barclays Bank plc v Coleman [2001] QB 20, the Court of Appeal had advocated that such requirement needs to be discarded. In Etridge (No. 2), however, the five law Lords of the House of Lords sought to refine the law on the issue. Lord Nicholls felt that in certain situations, the exact nature of the transaction is necessary to look at in order to raise the presumption but at the same time recommended that the label “manifest disadvantage” be discarded and insisted the test—“[I]f the gift is so large as not to be reasonably accounted for on the ground of friendship, relationship, charity, or other ordinary motives on which ordinary men act, the burden is upon donee to support the gift”—as laid down by Lindley LJ in Allcard v Skinner and adopted by Lord Scarman in Morgan’s case should be the guiding principle. Professor J. Beatson in Anson’s Law of Contract, 28th ed., at p. 287ff, commented on the decision in Etridge (No 2), that only special relationship type of cases (within the earlier Class 2A) “that there is true presumption of undue influence [—where ‘the law presumes, irrebuttably, that one party had influence over the other’—], arising from the law’s ‘sternly protective attitude towards certain types of relationship’. The claimant ‘need not prove he actually reposed trusts and confidence in the other party. It is sufficient for him to prove the existence of the reationship’.” In the earlier Class 2B presumed undue influence cases, “there is no true presumption but only a shift of the evidential onus on a question of fact. The burden of proving undue influence rests on the claimant, but will normally be discharged by proof that he or she placed trust and confidence in the other party and that the transaction between the parties is one which calls for explanation.”

▪ ▪ ▪ ▪ ▪ ▪ ▪

▪

▪

Royal Bank of Scotland v Etridge (No. 2) [2002] 2 AC 773 (HL) In Etridge (No 2), the Queen’s Bench Division of the High Court granted the claim of the plaintiff bank for possession of the defendants’ property at Hampshire, under a legal charge made by them. The first defendant’s appeal to the Court of Appeal was dismissed. The matter then came on further appeal before the House of Lords. The first defendant appellant, Susan R. Etridge, and the second defendant, Anthony T. Etridge, are husband and wife. The appellant agreed to charge her property in favour of the respondent bank in order to provide security for the payment of her husband’s debts, or her husband company’s debts. The bank commenced proceedings for possession of the mortgaged property with a view to its sale. The appellant defended the claim by alleging— (1) that her agreement to grant the charge to the bank was brought about by undue influence on the part of her husband, and, (2) that the bank, in the circumstances, ought not to be allowed to enforce the charge against her. The question was whether the bank should be treated as having had notice of the undue influence of the husband. The bank, however, had reason to believe that a solicitor had acted for the appellant in the transaction. The question, then, was the extent of the solicitor’s participation had absolved the bank of the need to make further inquiries about the circumstances in which the appellant was persuaded by her husband to agree to grant the charge, or to take any further steps to satisfy itself that her consent to do so was a true and informed consent. The House of Lords dismissed the appeal. Allcard v Skinner (1887) 36 Ch D 145, and National Westminster Bank plc v Morgan [1985] AC 686, were considered, and Barclays Bank plc v O’Brien [1994] 1 AC 180 were followed. The decision of the Court of Appeal in Barclays Bank plc v Coleman © mohaimin ayus

6 [2001] QB 20 was affirmed. The House of Lords observed that the confusion could be cured by “discarding a label which gives rise to this sort of ambiguity. The better approach is to adhere more directly to the test outlined by Lindley LJ in Allcard v Skinner 36 Ch D 145, and adopted by Lord Scarman in National Westminster Bank plc v Morgan [1985] AC 686. The House held that— (a) as a general rule, the burden of proving undue influence rests upon the person who claims to have been wronged (the complainant). The complainant has to prove— (1) that he/she placed trust and confidence in the other party in relation to the management of his/her financial affairs, and (2) the transaction calls for explanation. This will normally be sufficient to discharge the burden of proof. On proof of these two matters the court will infer that, in the absence of a satisfactory explanation, the transaction can only have been procured by undue influence. In other words, proof of these two facts is prima facie evidence that the defendant abused the influence he acquired in the parties’ relationship. (b) On presumed undue influence, Lord Nicholls said that the word ‘“presumption” is descriptive of a shift in the evidential onus on a question of fact. When a plaintiff succeeds by this route he does so because he has succeeded in establishing a case of undue influence.” (i) here a plaintiff claimed that the defendant abused the influence he acquired in a relationship of trust and confidence the plaintiff would succeeded by recourse to presumption (rebuttable evidential presumption). But this need not be so. Such a plaintiff may succeed even where this presumption is not available to him; for instance, where the impugned transaction was not one which called for an explanation.” (ii) “The law has adopted a sternly protective attitude towards certain types of relationship in which one party acquires influence over another who is vulnerable and dependent and where, moreover, substantial gifts by the influenced or vulnerable person are not normally to be expected. Examples of relationships within this special class are parent and child, guardian and ward, trustee and beneficiary, solicitor and client, and medical adviser and patient. In these cases the law presumes, irrebuttably, that one party had influence over the other. The complainant need not prove he actually reposed trust and confidence in the other party. It is sufficient for him to prove the existence of the type of relationship.” This decision, at once, shown that the classification in Aboody and O’Brien is not appreciated. It was not analysed by Lord Nicholls. Etridge (No 2) seemed to avoid the classification of undue influence, commonly known as Class 1 (actual undue influence), and Class 2 (presumed undue influence) which is further subdivided into Classes 2A and 2B. Lord Clyde, in his part of the judgment in Etridge (No 2), was not satisfied with the classifications in Aboody and reformulated in O’Brien.

The Malaysian law on Undue Influence Section 16 of the Contracts Act 1950 Section 16. "Undue influence". (1) A contract is said to be induced by "undue influence" where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. (2) In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of another — (a) where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or (b) where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress. (3) Where a person who is in a position to dominate the will of another, enters into a contract with him, and the © mohaimin ayus

7 transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that the contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other. ILLUSTRATIONS (a) A having advanced money to his son, B, during his minority, upon B's coming of age, obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence. (b) A, a man enfeebled by disease or age, is induced, by B's influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services. B employs undue influence. (c) A, being in debt to B, the moneylender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on B to prove that the contract was not induced by undue influence. (d) A applies to a banker for a loan at a time when there is stringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence.

The views of the Privy Council on section 16 of the Contracts Act 1950 The application of section 16 of the Contracts Act Poosathurai v Kannappa Chettiar AIR 1920 PC 65 No case of undue influence is made out if the plaintiff has merely established that the other party (wrongdoer) was in a position to dominate his will. The plaintiff, in this case, had not proved as a fact that the bargain of sale in question was unconscionable in itself or constituted an advantage unfair to him. He had not established as a matter of fact that the sale was for undervalue. ▪ The plaintiff appellant executed a deed of sale on 17 March 1906 in favour of Kannapa Chettiar (the third defendant). ▪ The appellant brought an action against the respondents for the cancellation of the deed of sale on the ground of fraud and undue influence brought about by the first and second respondents (his maternal uncles). ▪ The subordinate judge made a finding that the appellant was induced by the influence of the first respondent, who stood in fiduciary relation to him, and also undue pressure exercised upon him by the third respondent. ▪ The judge also found that the transaction was unconscionable and unfair. The learned judge ordered for the cancellation of the deed of sale conditionally upon the appellant paying Rs. 6,725 and interest to the respondent. ▪ On appeal to the High Court, the decision of the subordinate judge was reversed. ▪ The High Court held that the plaintiff appellant had failed to show that the first defendant, in concert with the third defendant, had induced the plaintiff to his detriment. The plaintiff further appealed to the Privy Council. ▪ The Judicial Committee of the Privy Council dismissed the appeal ▪ The Privy Council held that it is not sufficient to set aside a transaction on the ground of undue influence under section 16 where the plaintiff has merely established that the other party was in a position to dominate his will. Thus far, “influence” alone has been made out. The plaintiff has to prove more than mere influence to render influence ‘undue’. He has to also establish that the person in a position of domination has used that position to obtain unfair advantage for himself, or the transaction is in itself unconscionable. ▪ Lord Shaw of Dunfermline, delivering the judgment of their Lordships, said: © mohaimin ayus

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