Duress, Undue Influence, Unconscionability and Inequality in Bargaining Power PDF

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Duress, Undue Influence, Unconscionability and Inequality in Bargaining Power...

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DURESS AND UNDUE INFLUENCE Anson, Chapter 10 -

English Courts are reluctant to establish a doctrine that requires people to act in good faith.

Duress:  hen one party exerts an improper force to compel the other party to enter into a contract. ♛ Def. : W (parties working at arm's length) DURESS IS A LEGAL DOCTRINE. -

♥U  niverse Tankships of Monrovia v International Transport Workers Federation (1983)‘ The rationale is that his [he party under duress] apparent consent was induced by pressure exercised upon him by that other party which the law does not regard as legitimate, with the consequence that the consent is treated in law as revocable unless approbated either expressly or by implication after the illegitimate pressure has ceased to operate on his mind’.

FORMS OF DURESS ♟(1) Duress  to the person - ♥ B  arton v Armstrong (1976)- Privy council. Both parties wanted to get into the contract, but one party, just to make sure the other party doesn’t back off, hires a man to threaten to kill the other party. The threatened party then argues that they never intended to enter into the contract and did so only because they were threatened, which effectively rendered the contract void. ♟(2) Duress  to goods - ♥S  keate v Beale (1840)- Threat to destroy the goods - ♥T  he Siboen and The Sibotre (1976)♟(3) Economic  duress Economic duress arises when one party uses its superior economic power to force the weaker party into an agreement. In commercial context ‘mere’ pressure is not sufficient.

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♥P  ao On v Lau Yiu Long (1980)- ‘Duress, whatever form it takes, is a coercion of the will so as to vitiate consent’. In a contractual situation, mere commercial pressure won’t be sufficient. - Test for sufficient pressure: The pressures must be such - 1. ‘ that the victim must have entered into the contract against his will, must have had no alternative course open to him and must have been confronted with coercive acts by the party exerting the pressure’ and - 2.‘ it must be shown that the payment made or the contract entered was not a voluntary act on his part ’.

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Test for coercion: In determining whether there was a coercion of will such that there was no true consent, it is material to enquire: - 1. whether, at the time he was allegedly coerced into making the contract, he did or did not have any alternative course open to him such as an adequate legal remedy; - 2. whether he was independently advised - 3. and whether after entering the contract he took steps to avoid it.

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♥ H  uyton v Cremer (1999)- Shifts the idea of legitimate pressure so that the legitimate pressure is said not to ‘destroy’ the will but to ‘deflect’ it.

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♥D  SND Subsea v Petroleum Geo-Services (2000)- Ingredients of an actionable duress (the pressure does not need to be the only factor inducing the person to enter into the contract, but only a factor): there must a pressure: - 1. whose practical effect is that there is compulsion on, or lack of practical choice for victim. - 2. which is illegitimate, and - 3. which is significant cause inducing the claimant to enter the contract. - Determination of whether illegitimate pressure was a factor in the creation of the contract requires court to consider a range of factors including (non-exhaustive list) whether: there has been an actual or threatened breach of contract, had the victim any realistic practical alternative but to submit to the pressure, person allegedly exerting pressure acted in a good or bad faith, victim protested at time, victim later affirmed and sought to rely on contract, etc.

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♥C  TN Cash & Carry v Gallaher (1994)- Lawful act duress; one party extended a credit to another party so the other party would have more time to pay. The creditor then later tells the other party that if they do not enter into another contract with him he will no longer extend the credit. Extending the credit is a lawful act, and hence it is not considered to be duress. (The court leaves the question of lawful act duress open). ♥M  arsden v Barclays Bank plc (2016)♥T  imes Travel (UK) Ltd v Pakistan International Airlines Corporation (2017) - The airlines compelled travel agents to enter into various contracts. It was held that although The Airlines acted lawfully, but did so in a way that was illegitimate in that it brought illegitimate pressure on the travel agencies such that the contracts were affected by duress.

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♥A  tlas Express v Kafco Ltd (2016)-

EFFECT OF DURESS - ♥B  arton v Armstrong (1976)-Duress held to render a contract void. NOT USED -

♥H  alpern v Halpern (2007)- Duress held to render a contract voidable. ♥N  orth Ocean Shipping v Hyundai Construction (1979) - Hyundai were building a ship for North Ocean Shipping, but did not have a currency equalizing clause in the contract. When the currency devalued Hyundai told North Ocean Shipping that they should pay more or they would not receive the ship. North Ocean agreed, but then refused to pay more once they received the ship. It was held that once the pressure is

removed the party under the pressure originally must act to set aside the contract and if they do not, the contract becomes good. DURESS DISTINGUISHED FROM COMMERCIAL PRESSURE - ♥A  lec Lobb Ltd v Total Oil (1983)- Alec Lobb entered into a hard bargain with Total Oil, but not because of something that Total Oil did, but because of their own financial situation. The Court held that this was not duress but mere commercial pressure, as the deal was the best that Lobb would have gotten regardless.

Undue Influence:  here one parties purposes trust and confidence upon the other party, the court will not ♛D  ef. : W allow that party to use that position of trust to abuse the other party. Actual undue influence: only prove that there has been active coercion to set aside contract Presumed undue influence: 1. presumption relationship of trust and confidence and 2. prove that the transaction was manifestly disadvantageous. -

♥ R  oyal Bank of Scotland v Etridge (No 2) (2001)- describes undue influence as ‘ one of the grounds of relief developed by the courts of equity as a court of conscience. The objective is to ensure that the influence of one person over another is not abused’.

FORMS OF UNDUE INFLUENCE - ♥ B  arclays Bank plc v O’Brien (1993)- Opinion that the differentiation between ‘actual’ and ‘presumed’ influence is illogical. ♟(1) Actual  Undue Influence - ♥C  IBC Mortgages plc v Pitt (1993)- Mr Pitt entered into a mortgage for his home. His wife, Mrs Pitt was the owner, and she did not want to sign the mortgage. Mr Pitt started to use active coercion to force his wife to sign the mortgage, which was undue influence. This was actual undue influence, a species of fraud, in which the victim is entitled to set aside the contract. ♟(2) Presumed  Undue Influence - to set aside a transaction for presumed undue influence one needs to take 1. the presumption and 2. the transaction being manifestly disadvantageous. -

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Relationships presumed by law: - ♥ R  BS v Etridge (No 2) (2001)- Relationships which the court automatically presumes by law the possibility for undue influence (closed category: parent/child, religious adviser/disciple, doctor/patient, solicitor/client, trustee/beneficiary) De facto relationships: - ♥L  loyds Bank v Bundy (1975)- De facto relationships, which do not fall within the presumed by law category can be proven by showing that one party reposes trust and confidence in another, the existence of such relationship raises the presumption of undue influence. - ‘ such cases tend to arise where someone relies on the guidance or advice of another, where the other is aware of that reliance and where the person upon whom the reliance is placed obtains, or may well obtain, a benefit from the transaction or has some other interest in it being concluded.’

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The presumption can be set aside if the party in the presumed stronger position proves the actual circumstances.

DOES THE TRANSACTION NEED TO BE MANIFESTLY DISADVANTAGEOUS: -

In actual undue influence the transaction does not need to be manifestly disadvantageous - ♥C  IBC Mortgages plc v Pitt (1993)- Mrs Pitt didn’t stand for any advantage of her husband’s dealings with the money from the mortgage, so the transaction was manifestly disadvantageous to her. - ♥R  BS v Etridge (No 2) (2001)- No need for manifest disadvantage.

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In presumed undue influence the transaction needs to be manifestly disadvantageous

EFFECT OF UNDUE INFLUENCE ON A THIRD PARTY: -

♥ B  arclays Bank plc v O’Brien (1993)- The business of Mr O’Brien was not successful and the bank wanted some kind of additional security. He went home and persuaded his wife (co-owner) that the bank wanted him to get a mortgage on the family home to secure the loan (and he lied the mortgage would only be temporary). The undue influence is in the relationship between husband and wife, but the contract is one with a third party. When the business fails and the bank proceeds to seize the home, Mrs O’Brien claims that the mortgage contract is void due to undue influence. The court comes up with two ways in which the transaction with the third party can be set aside: where 1. the wrongdoer acts as an agent of the third party (e.g. in the case if the bank had told O’Brien to lie to his wife about the length of the mortgage) or 2. third party takes with actual or constructive notice of the wrongdoing (e.g.: if the bank was aware of the wrongdoing). - It was held that the bank had to have constructive notice of the wrongdoing as it was commonly understood that such family relations of sexual and emotional dependence and trust are likely to induce undue influence (although he refrains from adding wives to the list of presumed by law relationships). Given that the transaction was disadvantageous when looked from outside (as Mrs O’Brien didn’t get anything, only the risk of losing her legal interest to the house), this should constitute constructive notice. Hence the contract can be set aside. - The bank can get out of the risk of having a contract set aside for undue influence between the private parties by providing legal guidance and explanations.

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♥C  IBC Mortgages plc v Pitt (1993)- Mr Pitt entered into a mortgage for his home. His wife, Mrs Pitt was the owner, and she did not want to sign the mortgage. Mr Pitt started to use active coercion to force his wife to sign the mortgage, which was undue influence. This was actual undue influence, a species of fraud, in which the victim is entitled to set aside the contract (but cannot because of third party rights). In the case Mr Pitt had told the bank that he would use the money from the mortgage to buy another family home (which on the outside looked like it was not disadvantageous for Mrs Pitt as she would be the co-owner of the new home). There is hence no constructive notice and the contract is good. ♥ R  BS v Etridge (No 2) (2001)- Sets out a series of steps to use to deal with situations of undue influence in family relations and third parties: In any

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non-commercial transaction, a creditor is put on an inquiry where 1. the transaction is on its face not to the financial advantage of the wife and 2. there is a substantial risk in transactions of that kind that, in having the wide agree to act as a surety, the husband has committed a legal and equitable wrong that entitles the wide to set aside the transaction. - rarely applicable (imposes a duty on the bank to do a series of things to ensure that the wife is aware and freely consenting, which would ensure that the contract won’t be consequently set aside on the basis of constructive notice). REMEDIES FOR UNDUE INFLUENCE: - Undue influence is a species of fraud which allows the injured party to set aside the transaction. They would be prevented from setting aside the transaction if: - 1. Restitution is impossible (the parties cannot be restored to initial position) - 2. Affirmation (reaffirmation of the transaction by the injured party) - 3. Delay in setting aside the transaction - 4. Third parties rights - when a bona fide purchaser without notice enters the transaction the injured party can no longer set it aside.

UNCONSCIONABILITY AND INEQUALITY IN BARGAINING POWER

Unconscionability: ♛ Def. : W  here one party takes advantage of the other by setting them up to enter into a transaction that is grossly advantageous to them. English law struggles to recognise unconscionability.

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♥A  ylesford v Morris (1873)- (1:10:00 - lecture 10/12/2018) - ‘ The victim comes to the snare, excluded and known to be excluded, by the very motives and circumstances which attract him, from the help and advice of his natural guardians and protectors, and from the professional aid which would be accessible to him, if he did not feel compelled to secrecy. He comes in the dark, and in fetters, without either the will or the power to take care of himself, and with nobody else to take care of him.’ - It was held that the actions of the money lenders was unconscientious because the lenders were taking advantage of him, hence the contract is set aside.

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♥F  ry v Lane (1888)- Applies A  ylesford v Morris. Poor and ignorant men sold at a considerable undervalue certain interests without proper advice, which brought the case under A  ylesford v Morrisand allowed for the case to be set aside.

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♥ A  lec Lobb Ltd v Total Oil (1983)- States that this would only apply to very exceptional cases.

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♥B  oustany v Pigott (1995)- Privy council. Ms Pigott was mentally handicapped and her affairs were taken care of by her cousin. In the absence of the cousin Boustany came to her and persuaded her to rent out her property at considerable undervalue. The cousin then set to have the contract set aside as it was unconscientious in that the other woman had taken advantage of someone who does not have the ability to appreciate their legal interest. The privy council allowed the contract to be set aside. They looked at 1. the fairness of the contract terms and also at 2. the exploitative behavior of the other party .-

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♥C  redit Lyonnais Bank Nederland NV v Burch (1997)- Ms Burch was a secretary in a company and was fairly close family friend to her boss. When the business went bad the boss persuaded her to take a mortgage on her flat to help, which she did. decided on undue influence

Inequality of Bargaining Power:  hen parties are grossly unequal in their bargaining power ♛ Def. : W

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♥L  loyds Bank Ltd v Bundy (1975)- Bundy mortgaged his farm to give money to his son. His lawyers argued that when he entered into a contract for the mortgage of the bank he did not know what he was doing and that he was so obviously incapacitated of understanding the legal risk. The transaction was set aside on the basis of undue influence (Bundy had placed trust and confidence in his bank manager, who had used it to induce the transaction). - ’ By virtue of it [inequality of bargaining power], the law gives relief to one who, without independent advice, enters into a contract upon terms which are unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs and desires, or by his own ignorance and infirmity, coupled with undue influences and pressures brought to bear on him by or for the benefit of the other. When i use the word ‘undue’ I do not mean to suggest that the principles depends on any proof of any wrongdoing. The one who stipulates for an unfair advantage may be moved solely by his own self-interest, unconscious of the distress ge us bringing to the other … One who is in extreme need may knowingly consent to a most improvident bargain, solely to relieve the straits in which he finds himself. I do not mean to suggest that every transaction is saved by independent advice.’

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♥N  ational Westminster Bank plc v Morgan (1985)- Dissapplies the doctrine set out by Lord Denning in L  loyds Bank Ltd v Bundy , saying that a doctrine of inequality of bargaining power does not exist in English law and cannot be used to set a contract aside. The protection for that inequality is in legislation (mainly derived from EU)....