2. Undue Influence - This is specifically made for exam purpose of contract law. It includes all PDF

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This is specifically made for exam purpose of contract law. It includes all the materials covered in lectures as well as books. The notes are precisely made and extremely useful....

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LAWS1042 Contract II Term 2, 2015-2016

UNDUE INFLUENCE KEY POINTS

READING FISHER & GREENWOOD P291-311 HALL 14-2

March 2015 Faculty of Law, The Chinese University of Hong Kong

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LAWS1042 Contract II Term 2, 2015-2016

UNDUE INFLUENCE A contract may be declared voidable in equity because one of the parties is in a position of dominance over the other (dominance in the psychological sense as opposed to economic - see economic duress). Equity interferes because there is no true consent; the weaker party's mind is "a mere channel through which the will of (the dominant party) operated". L J Slade in BCCI v Aboody 1992 4 AER 955 LJ Nicholls in Royal Bank of Scotland v Etridge “The means used is regarded as an exercise of improper or “undue” influence, and hence unacceptable, whenever the consent thus procured ought not fairly to be treated as the expression of a person’s free will”

CLASSIFICATION

ACTUAL UNDUE INFLUENCE (CLASS 1) Weaker party must prove undue influence .This is often very hard to establish Williams v Bayley BCCI v Aboody Diners Club International (Hong Kong) v Ng Chi Sing and Ng Yan Kiang (1987) HKCA No.143 Must P also go on to prove UI caused the victim to enter into the agreement? In the case of actual undue influence this was rejected in UCB v Williams [2002] EWCA CIV – 555 Court said it was irrelevant that victim would have made the agreement even if no UI. The reason being that actual UI is a species of fraud – if someone has been fraudulent as a matter of principle they should not be able to evade the consequences of their fraud by saying if they had not been fraudulent agreement would still have been made. March 2015 Faculty of Law, The Chinese University of Hong Kong

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LAWS1042 Contract II Term 2, 2015-2016

PRESUMED UNDUE INFLUENCE (CLASS 2) Usually plaintiffs prefer to rely on presumed undue influence where, if certain conditions are satisfied, the court will presume it has taken place and unless the dominant party can actually prove that the agreement was entered into freely e.g. this would usually be the case if the weaker party had independent legal advice, the agreement will be set aside. In the leading common law case Royal Bank Of Scotland v Etridge (No.2) [2001] UKHL 44 which has been followed in Hong Kong see Li Sau Ying v Bank Of China [2004] HKCU 1481 (Lord Scott one of the judges in Etridge appeared as a non-permanent judge in this case!) it was said that the following had to be established In order to establish the presumption:

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RELATIONSHIP BETWEEN THE PARTIES SUGGESTS THERE HAS BEEN INFLUENCE There is a relationship of trust and confidence between the parties

A.

RELATIONSHIPS WHERE THE LAW AUTOMATICALLY PRESUMES THIS RELATIONSHIP (CLASS 2A) Case law has established there are certain types of relationship where the courts automatically presume the existence of trust and confidence. These are (in bold represents the dominant one): Parent/Child Doctor/Patient Solicitor/Client Trustee/Beneficiary

Guardian/Ward Religious Advisor /Disciple Financer/Financee

Note that Husband/Wife or Bank/Customer do not come within this category.

B

RELATIONSHIP OF TRUST AND CONFIDENCE (CLASS 2B)

March 2015 Faculty of Law, The Chinese University of Hong Kong

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LAWS1042 Contract II Term 2, 2015-2016

If a relationship does not fall into one of the above special categories the plaintiff must prove that there is a relationship of trust and confidence (ascendancy and dependency) between the parties in order for influence to be presumed. The definition of what constitutes a confidential relationship is vague and whether it exists is a question of fact depending on the individual circumstances of the case. See L J Scarman in Nat West Bank v Morgan For example a confidential relationship was held to exist between a bank and a client in Lloyds Bank v Bundy but not in the Morgan case. The relationship may exist between an artiste and manager O'sullivan v Mam Armatrading v Stone Question of fact whether it exists between husband and wife. Hong Kong examples Li Sau Ying v Bank Of China Esquire Electronics v HSBC Bank of China (HK) v Wong King Sing [2002] 1 HKC 83

2.

INFLUENCE MUST BE UNDUE Once the confidential relationship is established the claimant must then prove the influence was undue. In Etridge the House of Lords stated that the claimant must produce evidence that the transaction is “suspicious” This means it requires explanation in the sense that it was not the sort of agreement that one would expect a party to enter into without undue influence.

March 2015 Faculty of Law, The Chinese University of Hong Kong

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LAWS1042 Contract II Term 2, 2015-2016

(Lord Scott said it must be one which “…cannot be explained by reference to the ordinary motives by which people are accustomed to act.”) This requirement would be satisfied, for example, if the weaker party sells his house to the dominant party at well below market value but not if the full price is being paid. In other words the unfairness of the transaction helps the court decide that there is a presumption of undue influence and the more unfair the agreement is, the stronger the presumption of undue influence is. Yien Yieh Commercial Bank v Hung Oi Wah [2009] HKEC 1775 DBS Bank (Hong Kong) v Hui So Yuk [2009] HKEC 1010 See R v Attorney v General [2003] UKPC 22 (Even though the relationship between the soldier and his commanding officer was the sort of relationship where trust and confidence would be placed in the latter the presumption of UI was found not to exist as the agreement was one which any soldier would reasonably have made and did not suggest the existence of UI.) A similar view was taken by the Privy Council in Dalley v Dalley [2003] UKPC 65 (Where the fact that the husband was paying his wife the full market value for his wife’s share in property they jointly owned again did not suggest undue influence and the presumption was not applied.) For a good example of the court applying the “does the transaction require an explanation” requirement see Turkey v Awadh and Turki [2005] EWCA Civ 382 It is not a suspicious transaction for a parent to help his children by remortgaging his property in order to provide financial assistance to them in relation to their business. Yien Yieh Commercial Bank v Hung Oi Wah [2009] HKEC 1775 March 2015 Faculty of Law, The Chinese University of Hong Kong

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Bank of China (Hong Kong) Ltd v China Hong Kong Textile Co Ltd [2011] 4 HKLRD (“…the law does not require the bank to police transactions of this nature to ensure that parents (even poor and ignorant ones) are wise in seeking to assist their children” per Johnson Lam at par 26) Compare Credit Lyonnaise Bank Nederland v NV v Burch [1997] 1 All ER 144 (Called for explanation where junior employee entered into an agreement charging her flat in order to benefit her employer’s business “..she risked personal bankruptcy and the loss of her home for a 20,000 [pounds] increase in the overdraft facility of a company in which she had no direct interest”) Note that the suspicious transaction requirement is not relevant to actual undue influence CIBC v Pitt [1994] 1AC 200 Because, as mentioned above, actual undue influence is a “species of fraud” and the law will intervene to help the victim no matter how fair the transaction may be.

3.

REBUTTING THE PRESUMPTION Once these two requirements are established the evidential burden shifts to the dominant party to prove there was no undue influence (this is similar to the reversal of the burden of proof that takes place in the tort of negligence under the res ipsa loquitor rule). To do this the burden is on the dominant party to show no abuse of a dominant position by proving that the weaker party entered into the transaction with a “free and independent mind”. The easiest way to prove this is to establish that weaker party had independent legal advice which he acted upon. Credit Lyonnais Bank v Burch 1997 1 ALL ER 144 (This was why George Michael failed in his claim against Sony. He had acted on independent legal advice.)

March 2015 Faculty of Law, The Chinese University of Hong Kong

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LAWS1042 Contract II Term 2, 2015-2016

However obtaining independent advice may not be a defence in every case. In Etridge Lord Nicholls said “But a person may understand fully the implications of a proposed transaction …and yet still be acting under the undue influence of another……Whether it will be proper to infer that outside advice had an emancipating effect ….is a question of fact to be decided having regard to all the evidence in the case”

4.

UNDUE INFLUENCE EXERCISED BY A PERSON NOT A PARTY TO THE CONTRACT Frequently the undue influence is exercised by someone not a party to the contract e.g. husband exercises influence over his wife and persuades her to enter into a contract with a bank for his benefit. Is the bank liable for the husband's undue influence? If it can be established that the dominant party is acting as agent of the bank it will be liable e.g. if bank left it to the husband to procure his wife's signature. Avon Finance v Bridger Such an agency is often hard to establish and courts should no longer artificially try to find it see Pitt and O'Brien. See also BCCI v Aboody However in Barclays Bank v O'Brien [1994] 1AC 180 It was established the law should treat "more tenderly than others" wives and other cohabitees who have an emotional relationship. This is because so many such relationships fall into Class 2(b) category and because of the sexual and emotional ties between the parties. Under the constructive notice rule established in the O’Brien case once a wife establishes the bank knew she was living with her husband and that the transaction was not to her financial advantage, the burden is then placed on the bank to show that it took all reasonable steps to satisfy itself her consent was properly obtained. Barclays Bank v Boulter (H.L.) 1999 4 ALL E.R. 513 What are reasonable steps?

March 2015 Faculty of Law, The Chinese University of Hong Kong

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For a detailed account of this see either the judgement of Lord Nicholls or Lord Scott in Royal Bank of Scotland v Etridge This represents the law in Hong Kong see Li Sau Ying case. However the basic requirements are that the bank should

EITHER Insist W attends a private meeting with a representative of the bank at which the bank tells her of the extent of her liability as surety, warn her of the risks she is running (could lose the house and become bankrupt) and urge her to take independent legal advice.

OR Ensure that this task is carried out by an independent legal adviser and obtain a written confirmation of the fact that the nature and effect of the transaction was explained to her. If bank suspects undue influence or misrep it must inform the W’s solicitor of the facts giving rise to this belief.

If the bank receive this confirmation from the solicitor that he has brought home to her the risks she is running it is protected. The H of L disagreed with Etridge at C of A level and Credit Lyonnais v Burch that if the transaction is one that no competent solicitor could properly advise her to enter then obtaining independent legal advice is insufficient to protect the bank. Solicitor should meet the W face to face in absence of H. Solicitor could act for both H and W. If solicitor gives negligent advice, bank not liable, not acting as the bank’s agent. For examples of cases where reasonable steps were not taken see Nat West v Breeds (Bank could not rely on fact solicitor’s advice had been obtained as the solicitor was also company secretary of the husband’s company, and as the bank knew, was playing a major role in trying to raise finance for the company. Bank should therefore have been aware of a real conflict of interest.) Also see March 2015 Faculty of Law, The Chinese University of Hong Kong

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Wing Hang Bank v Kwok Lai Sim [2009]4 HLRD 93 There was some uncertainty as to the extent of the O’Brien principle. However this was resolved by H of L in Etridge. To avoid artificial distinctions the reasonable steps rule applies to any situation where money is lent to a debtor in return for a security over a home and the relationship between debtor and surety was “non-commercial”. Therefore there is no longer the need to enquire if the debtor and guarantor are living together or have a sexual relationship. The O’Brien principle does not apply to other types of agreement which do not appear to be financially disadvantageous to the weaker party. Bank cannot be expected to be a detective. See, for example CIBC v Pitt (O’Brien did not apply to a joint loan application by husband and wife to enable a second home to be purchased.) Finally note that the above rules makes it very difficult for a non-commercial surety to establish the agreement securing property to the bank should be set aside on the grounds of the debtor’s undue influence as they must show 1. Presumed (or actual) undue influence. Surety placed trust and confidence in debtor and given the nature of the agreement it would not be the sort of agreement you would normally expect to be made in the absence of undue influence (e.g. where the agreement benefits the debtor’s interests only as in the Burch case, compare the Aboody case where the agreement was for the benefit of both the husband and wife. Lord Nicholls stated in the Etridge case the “in the ordinary course” a wife guaranteeing her husband’s debts did not indicate undue influence as given that “the fortunes of the two are bound up together” such a transaction would usually be for her benefit i.e. she is making the guarantee agreement to help the family business that both she and her husband depend on for income).

2. Bank has not taken reasonable steps to ensure that the surety understood the nature and risks of the transaction. March 2015 Faculty of Law, The Chinese University of Hong Kong

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Reasonable steps = informing surety need to take independent legal advice and getting written confirmation from solicitor that surety understood the practical consequences of what s/he was doing.

REMEDY Remedy is rescission not damages. Wing Hang Bank v Kwok Lai Sim [2009] 4 HKEC 718 However, in granting rescission the court will adopt a policy of "practical justice" and may allow wrongdoer to keep some of the profits as compensation for the work done on behalf of the weaker party O'sullivan v Mam

LAPSES A party must seek relief within a reasonable time after the removal of the influence under which the contract was made otherwise he is assumed to have affirmed the contract. Allcard v Skinner See also Samuel (Seal) v Wadlow [2007] EWCA Civ 155 (Where one of the reasons undue influence was denied was that 11 years had elapsed since the agreement. “Much water had flowed under the bridge” LJ Toulson)

March 2015 Faculty of Law, The Chinese University of Hong Kong

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