Lecture 28 Duress and Undue Influence Notes PDF

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LECTURE 28

DURESS AND UNDUE INFLUENCE DURESS 1.

Introduction to Duress

Duress is another example of a situation in which a contract which appears to be valid on its face may be avoided. The contract is challenged because it is the result of some improper pressure such as physical threats or threats to the economic interests of the other party (‘duress’). Duress renders the contract voidable. So contract is valid until rescinded. You have already seen duress in the context of consideration and the case of Williams v Roffey and D & C Builders v Rees.

2. Types of duress Duress is a common law concept. This lecture will examine duress to the person and economic duress.

Duress to the Person Originally, the scope of duress was limited to actual or threatened unlawful physical force or violence or unlawful constraint by one party to the contract to the other (or to a close relative of the other).

Barton v Armstrong, [1975] 2 All ER 465 The managing director of a company was threatened with death if he did not arrange for his company to make a payment to, and buy shares from, the defendant. Statements made included: ‘The city is not as safe as you think between office and home’ ‘I will show what I can do against you and you had better watch out’ The contract was in the managing director’s commercial interests and it was argued that he would have agreed to it anyway even if the threats had not been made. HELD: (PC by a majority) that the contract was set aside for duress.

A more recent example of this is the case of Antonio v. Antonio [2010] EWHC 113 Comm where an ex-husband’s campaign of threats and intimidation against his ex-wife induced her to transfer shares to him. Here the threats were death threats to her and to someone close to her and her daughter. Statements included: “Your boyfriend is next” and that Mrs Antonio should tell that person his life is in danger. These cases are rare

To amount to duress to the person the threat must: a. Be sufficient (e.g. a threat to commit a crime); and b. Have the necessary effect on the party threatened so that it destroys their consent Lord Scarman in Pao On v Lau Yiu Long [1979] 3 All ER 65: Unlawful threat amounting to coercion of will which vitiates consent. In other words if the victim was acting involuntarily then his agreement to the contract is not real and can be dismissed. The rationale of duress is not the lack of consent, but the circumstances in which that decision is made.

Economic duress It is now established that, in certain circumstances, a contract can be set aside for what is termed “economic duress”. So for example a party to existing contract threatens to breach that contract unless other party will agree to new contract on better terms

One of the first decisions introducing the doctrine of economic duress was: North Ocean Shipping Co v Hyundai Construction Co (The Atlantic Baron) [1979] QB 705 The defendants (ship builders) agreed a contract to build an oil tanker for the claimants for a fixed sum. Whilst the oil tanker was being built the dollar devalued with the effect that the price payable was worth less than when agreed. The ship builders threatened not to complete the tanker unless the claimants agreed to pay an extra 10%. The claimants agreed as they needed the tanker to fulfil a charter but after delivery challenged the agreement to pay extra on the grounds of economic duress.

The Test for Duress In early cases the test appeared to be: The test laid provided by Lord Scarman in Pao On v Lau Yiu Long [1979] 3 All ER 65 (see above)

To determine whether there has been sufficient coercion of will the court will enquire: a. Whether the person threatened protested that they had no alternative but to agree to the new contract; b. Whether he was independently advised c. Whether he took steps to avoid the contract after entering into it This approach has been criticised as it suggests the innocent party is acting in an involuntary fashion when making the contract as they have no choice so there is no true consent.

There are 2 factors involved in determining whether duress is present: Enimont Overseas v Rojugotanker Zadar (The Olib) [1991] 2 Lloyds Rep 108

Illegitimacy of the Threat

The challenge is separating legitimate commercial threats which are normal in business and should not amount to economic duress from illegitimate commercial threats which may amount to economic duress. The threat must be illegitimate.

It has also been suggested that in appropriate circumstances a threat to commit a lawful act could amount to duress: CTN Cash & Carry Ltd v Gallagher Ltd [1994] 4 All ER 714 The claimant company ran a cash and carry business. The defendants supplied it with cigarettes on credit terms. The defendants in error sent a delivery of cigarettes to the wrong place of business for the claimants. The defendants agreed to remedy the error and deliver the cigarettes to the correct warehouse but before this could be done the cigarettes were stolen. The defendants genuinely but incorrectly (as a matter of law) believed the cigarettes were at the claimants risk when stolen and insisted on payment. The defendants backed up this demand by threatening to withdraw the credit facilities that the claimant had been using in respect of future contracts. The threat was not unlawful as it related to future contracts.

Held: There was no duress partly because the threat was issued in good faith. The defendant genuinely believed that their claim for payment was legitimate. Obiter Lord Steyn considers circumstances in which a lawful act could amount to duress: What would the court look at? a. The nature of the relationship between the parties b. The bona fides of the person making the threat

Lack of reasonable alternative

An example of this is in the following case: Atlas Express Limited v Kafco (Importers and Distributors) Ltd [1989] QB 833 Kafco (a small manufacturing company which made baskets) agreed a contract with Woolworths in which Kafco would supply baskets to all of Woolworths stores (a highly valuable contract to Kafco). Kafco contracted with Atlas (a national firm of carriers) for Atlas to deliver the baskets to Woolworths. Atlas would be paid a sum of money for delivering the baskets. However, Atlas underestimated the cost of delivery and on realising this refused to deliver the baskets to Woolworths (threatened to breach their existing contract) unless Kafco agreed to increase the delivery charges. Therefore, Kafco agreed to the increased charges under protest. In the circumstances they reasonably believed that it would be impossible to find another carrier and that breach of the Woolworth’s contract would ruin their business. When Atlas bought an action to recover the increased charges Kafco resisted on the grounds of duress.

The duress must be "operative" If duress is established it must also be shown to have induced the contract. For duress to the person the duress need not be the only or main reason for the claimant entering into the contract - Barton v Armstrong. Whether economic duress is found will depend upon if it is a “significant cause” of the contract – Dimskal Shipping Co SA v International Transport Works Federation (The Evia Luck) [1992] 2 AC 152.

Remedy for Duress Rescission NB this may be lost due to one of the bars being present: 

Affirmation/Lapse of Time

In the Atlantic Baron the right to rescind the contract was lost due to affirmation due to lapse of time.



Impossibility



Third Party Rights

UNDUE INFLUENCE 1. Introduction to Undue Influence Undue Influence is another example in which a contract which appears to be valid on its face may be voidable. In Undue Influence cases the improper pressure is from the psychological influence of the other party. Undue Influence may result in a contract being voidable as contractual obligations should be freely and independently assumed. 2. Undue Influence 2.1 Introduction to Undue Influence The scope of duress is narrow. This led to the development of the equitable doctrine of undue influence.

2.2 Effect of undue influence on the contract The contract is voidable. So the contract and all of the obligations under it remain valid until rescinded by the person influenced. Gifts as well as contracts may be avoided under the doctrine of undue influence. 2.3 How can undue influence arise? ‘Two Party Situations’: Here one party uses their influence or pressurises another person to enter into a contract with them.

‘Third Party Situations’ This is where the influencer (normally the husband) unduly pressurises the complainant (normally the wife) to guarantee the repayment of a loan to the husband by a bank using the wife’s share in the matrimonial home as security for the guarantee.

2.4 Categories of undue influence The law on undue influence was refined following the decision of the HL in Royal Bank of Scotland plc v Etridge (No 2) and other appeals [2001] 4 All ER 449.

Mrs Etridge executed a legal charge (mortgage) on the matrimonial home as security for her husband’s business overdraft. She signed the legal charge in the presence of a solicitor appointed by the bank to act on its behalf, and there was a certificate signed by the solicitor confirming that he had advised Mrs Etridge on its contents and effect. Later Mrs Etridge claimed that she only signed the legal charge due to the undue influence of her husband. Mrs Etridge’s claim was dismissed. It was held that there had been no actual or presumed undue influence exercised on Mrs Etridge.

Before Etridge The legal position prior to the decision in Etridge (established in BCCI v Aboody [1990] 1 QB 923 and Barclays Bank plc v O’Brien [1993] 4 All ER 417) established two categories of undue influence: 1. Actual undue influence [Class 1] 2. Presumed undue influence [Class 2] divided into 2 sub-categories: 

A special type of relationship existed between the parties [Class 2A] in which case undue influence is presumed; or



The specific relationship between the parties is such that the presumption of undue influence arose. e.g. the claimant generally placed trust and confidence in the influencer [Class 2B]

Before the decision in Etridge to bring a successful claim under Class 2 it was also necessary to show that the transaction was one which was to the manifest disadvantage of the complainant. After Etridge The categories of undue influence were refined: 2.4.1 Actual Undue Influence The claimant (the person under influence) must establish that the defendant used undue influence in relation to a particular transaction.

There does not need to be a previous history of such influence However, in reality, there will normally be a relationship between the parties as that is how influence arises.

The court found actual undue influence in: BCCI v Aboody [1990] 1 QB 923 The wife and Iraqi Jew much younger than her husband, educated in a traditional manner, and with limited knowledge of business affairs was requested to execute certain charges and guarantees by the bank to secure loans to a company run by her husband. At a meeting between the wife and the bank’s solicitor the husband burst into the room in a state of agitation and reduced the wife to tears. She entered into the guarantee. CA held that: The court however did not set aside the transaction as it was not to Mrs Aboody’s ‘manifest disadvantage’ as the transaction gave her husband’s company a reasonable chance of survival which was to her benefit. However today it is not necessary for the claimant to show that the arrangement was ‘manifestly disadvantageous’ CIBC Mortgages Ltd v Pitt [1994] 1 AC 200 This position was preserved by the HL in Etridge

2.4.2 Presumed Undue Influence Lord Nicholls Etridge said that presumed undue influence “arises out of a relationship between two persons where one has acquired over another a measure of influence or ascendancy of which the ascendant person takes advantage”.

However in addition there is something about the transaction which is suspicious or which calls for explanation.

There appear to be two categories of presumed influence: 2.4.2.1. Special Relationships

There are certain types of relationship between the parties which the law presumes to be one of trust and confidence i.e. that one party was in a position to exercise influence over the other. Here the law presumes that there has been influence and it is not possible to rebut that presumption of influence.

It is significant that Lord Nicholls made it clear that there is no special relationship in the case of: 

Husband and wife



Bank and customer

What must the complainant show? 1. The existence of one of the special relationships. The law will then presume that there has been influence. This presumption cannot be rebutted. Allcard v Skinner (1887) LR 36 Ch D 145 A member of a religious order, Mrs Allcard, transferred the ownership of all of her property to her "Mother Superior". Mrs Allcard eventually left the religious order and tried to argue that she only agreed to transfer her property as a result of undue influence exercised by the "Mother Superior".

2. However the complainant must also show that the influence has also been undue.

2.4.2.2. Specific Relationships In this category there is no special relationship but in the actual relationship between the parties the complainant places trust and confidence in respect of their financial affairs in the other party which demonstrates that one party was in a position to exert influence over the other. Husband and wife may fall into this category together with unmarried couples in long term relationships. What must the complainant show? 1. Relationship of Trust and Confidence:

A case in which the relationship is established: Lloyds Bank Ltd v Bundy [1975] QB 326 An elderly farmer gave the bank a guarantee in respect of his son’s overdraft and mortgaged his farmhouse as security. It was clear that the farmer had placed himself entirely in the hands of the assistant bank manager and had been given no opportunity to seek independent advice. In addition, it was difficult to ascertain what benefit the farmer had gained from the arrangement.

A case in which the relationship is not established: National Westminster Bank PLC v Morgan [1985] 1 All ER 821

The Morgans’ were in danger of losing home due to building society repossession. A Bank agreed to provide a bridging loan to the husband and wife in order to prevent this happening. The bank required security for the bridging loan. This took the form of a charge (mortgage) over the Morgans’ home. When the bank manager visited Mrs Morgan to obtain her signature to the charge documentation he incorrectly assured her that the charge would not extend to her husband’s business liabilities. Mrs Morgan did not receive independent legal advice. When the husband died the bank sought repossession of the house. 2. The complainant must also prove that the influence was undue.

It appears from Etridge that in essence the court will require evidence of the size and nature of the transaction and thereafter it will require explanation by the influencer.

Husband and Wife relationship and a transaction that calls for explanation Essentially the HL in Etridge decided that in transactions where the wife acts as surety for her husband’s business (e.g. making a charge over her share of the matrimonial home to secure her husband’s business loan) this doesn’t automatically mean the transaction came about by undue influence. 2.5 Rebutting the Presumption of Undue Influence If the complainant is able to show:   

A special; or A specific relationship AND IN EACH CASE The transaction cannot be explained by the relationship between the parties

Then a presumption of Undue Influence arises and then the burden of proof is on the influencer to show that undue influence had not been exercised. The influencer may be able to so this by proving that the complainant entered into the transaction due to his/her own independent free will

Lord Nicholls in Etridge: “Proof of outside advice, does not, of itself, necessarily show that the… transaction was free from the exercise of undue influence. Whether or not 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 of the case”....