Undue Influence and Unconscionable Conduct PDF

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Undue Influence and Unconscionable Conduct Lecture Notes....

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LECTURE 3: UNDUE INFLUENCE

When will a court of Equity refuse to enforce an otherwise contract? Main Questions 1. How is ‘undue influence’ distinguished from duress at common law? 2. When will undue influence be ‘presumed’? 3. Why does it matter whether undue influence is ‘actual’ or ‘presumed’? 4. How is ‘undue influence’ distinguished from the equitable doctrine vitiating contract for ‘unconscionable dealing’? UNDUE INFLUENCE DISTINGUISHED FROM DURESS

At common law, a contract can be vitiated for duress – meaning that the person seeking to avoid the contract claims that their consent was forced from them by illegitimate pressure (e.g., threats of violence or other harm). A validly made contract can be vitiated for duress- the person seeking to avoid the contract may claim their consent was forced by illegitimate pressure (undue influence being one of them). Equity permits vitiation of contracts for a broader range of more subtle forms of pressure (undue influence is one of them). Undue influence arises when one person exerts such ascendancy and influence over a weaker person’s decision-making, that the weaker person who relies upon them cannot be taken to have exercised their own free will. But see the difference of opinion between the majority and Gordon J in Thorne v Kennedy: how important is it to show that the weaker party has not exercised free will? ACTUAL UNDUE INFLUENCE (CATEGORY 1)

Described as a ‘species of equitable fraud’. Arises when one person can be shown to have exercised ascendancy over another and this influence procured the challenged transaction. Examples: •

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BCCI SA v Aboody [1990] 1 QB 923: A man procured his wife’s signature to security documents, by telling her to do so, deliberately concealing the contents of the documents. Coldunell Ltd v Gallon [1986] 1 QB 1184: overbearing son pressed his parents into providing a guarantee of his business debts. The son concealed information from the parents regarding the nature of the transaction.

PRESUMED UNDUE INFLUENCE (CATEGORY 2A)

Established relationships – In some kind of established relationships undue influence in presumed. Parents are expected to exhume undue influence over their children. One party is dominant and knowledgeable over the defendant. Examples: q q q q q

Parent over child Solicitor over client Trustee over beneficiary Doctor over patient Religious leader over adherent to the faith

PRESUMED UNDUE INFLUENCE (CATEGORY 2B)

The relationship between the parties is not an established category but it can be proven on its own facts to be a relationship where one party is dominant over the other. • •

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Step 1: Prove that the relationship is one in which one party exerts dominance over the other. Step 2: Any transaction whereby the weaker party benefits the stronger is now presumed to have been secured by undue influence unless the stronger party proves otherwise. Case example: Johnson v Buttress (1936) Facts o An elderly, illiterate and intellectually impaired man became dependent upon his wife’s friend, after his wife’s death. o He transferred his only asset – a house – to the friend, in appreciation for her kindness to him. He had no independent advice. o After his death, his son sought to have the sale set aside for undue influence, and succeeded, because the son could demonstrate the relationship of dependency, and the friend could not demonstrate that the transaction was the act of a person able to exercise independent judgment in the matter. o The son claimed the transaction had been procured by undue influence – the son succeeded- the son was able to demonstrate to the satisfaction of the court the nature of this relationship is dependency.

Can you see why it matters whether undue influence is presumed? Consider the burden of proof: Who must prove that the transaction was obtained by undue influence? •

In an actual undue influence case the person seeking to set aside the transaction has to prove there is actual undue influence.

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In a presumed undue influence case the undue influence is presumed is proved and it falls on the person seeking to claim to prove there was no undue influence.

CONSEQUENCE OF A SUCCESSFUL UNDUE INFLUENCE DEFENCE?

= Rescission of the challenged contract, the parties undo the transaction if there has been a been a price paid for the transaction the price needs to be returned. •

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A third party who takes property from a person who obtained it from a weaker party by undue influence that third party will then be liable to recognize the weaker party’s right to rescind the original transaction, unless the third party can demonstrate that they are a bona fide purchaser for value, without notice of the undue influence. So for example – If V agrees to sell property to A as a consequence of A’s undue influence over V, and then A sells the property to B, B will be liable to recognize V’s equity to have the sale set aside, unless B is a bona fide purchaser for value of the property at law.

A typical scenario? The bank guarantee: 1. A wants to borrow from B (the Bank). 2. B (Bank) wants security for the loan (e.g. a mortgage over property). A not being able to satisfy that security request approaches V (victim). 3. V is the owner of property. 4. A procures V’s consent to giving a guarantee of A’s debts, secured by a mortgage over V’s property in favour of B. 5. If A exercised undue influence over V, the mortgage may be set aside, unless B can establish B had no notice of the undue influence. Special equity of wives Yerkey v Jones (1939) 63 CLR 649 Affirmed in Garcia v National Australia Bank Ltd (1998) 194 CLR 395 These cases revolved around a bank guarantee given by a wife for debts owner by her husband and in both cases the guarantees were set aside the court was careful to say that there was no presumption if undue influence between a husband and a wife and they did not cast dispersions on the husbands claiming that they had necessarily asserted undue influence or behaved unconscionably Since wives are presumed to ‘repose trust and confidence in [their] husbands in matters of business’, a bank taking a voluntary guarantee from a wife to secure her husband’s debts will be taken to have notice that she may not have given informed consent. The relationship between trust and confidence between husband and wife is said to be sufficient to give the bank notice that there may be a need to explain the transaction to the wife independently and free of any influence of her husband,

In the Garcia case Kirby J suggests that there is quite a heteronormative gendered aspect to this particular doctrine that has this far not been overturned. How to rebut a presumption of undue influence? • • • •

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Relevant factors (although none will be determinative): Adequate consideration (there has been a proper price been paid for the transaction) has been given, AND the transaction is not otherwise improvident. The weaker party has taken the benefit of independent expert advice. Independent expert advice is not always required and making sure a party has had independent expert advice will not always guarantee a successful defense. It is dependent on the facts of the case. The provision of adequate consideration and the provision of independent advice are matters that are carefully weighed in the balance of any argument that the presumption of undue influence should be rebutted.

HOW IS UNDUE INFLUENCE DISTINGUIS HED FROM UNCONSCIONA BLE DEALING?

Unconscionable dealing focuses on the conduct of the stronger party, taking a consciences advantage of the other’s ‘special weakness’. Undue influence focuses on the quality of the consent given by the weaker party (the dependent party). It is important to know if the weaker part gave consent because they were overborn by or influenced by or heavily dependent upon the dominant party’s influence. The focus is primarily on the quality of their consent.

OFTEN SEVERAL ARGUMENTS W ILL BE RUN ON THE SAME FACTS . . .

1. X exerted undue influence over the alleged V and at the same time the facts may be construed… 2. X took unconscionable advantage of V’s special weakness. 3. X breached a statutory obligation not to engage in unconscionable conduct or any conduct that is prohibited under the principles of equity. o See Family Law Act 1975 (Cth), s 90KA (family law agreements assessed according to the ‘principles of law and equity . . .’ includes principles of undue influence and unconscionable dealing o See also Australian Securities and Investment Commission Act 2001 (Cth) ss 12CA-12CC, considered in ASIC v Kobelt [2019] HCA 18. ASIC decided to pursue a person who ran a store in indigenous communities via a credit system. ASIC claimed that the credit system breached provisions in the ASIC Act about unconscionable dealing in financial dealings.

LECTURE 4: UNCONSCIONABLE DEALING

Unconscionable dealing also known as unconscious conduct WHEN WILL A COURT OF EQUITY REFUSE TO ENFORCE AN OTHERWISE VALID CONTRACT?

Blomley v Ryan (1956) •

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Purchaser plies the vendor (a known alcoholic) with rum to procure a contract for sale of his land on terms favourable to the purchaser. The favourable terms involved a very slow repayment schedule with a very low interest rate. Vendor refuses to complete the contract, and the purchaser sues for specific performance of the contract seeking the vendor to complete the conveyance. The vendor pleads that the contract was obtained by unconscionable dealing, and succeeds in having the contract rescinded. See Fullagar J’s reasons (Sourcebook p 156)

Distinction between Common Law and Equity •

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Common law looks to consent – was there consent to the contract? – whether the vendor should be bound by the contract, the common law would look to the quality of his consent, whether there was consent to the contract whether there was agreement. Equity looks to the conscience of the party seeking to enforce the contract – have they behaved unconscientiously, in taking advantage of a known special weakness of the other such that their conduct can be seen as a species of equitable fraud. Intoxication alone is not sufficient to vitiate a contract (established in Blomley). It is not enough to say that the P was not in the best state of sobriety. However, intoxication will influence the outcome if it can be shown that the person taking the benefit of the contract has knowingly taken advantage of the other person intoxication to procure an advantageous deal. But knowingly taking advantage of another’s intoxication to procure an advantageous deal is sufficient to – o Cause a court of Equity to refuse the equitable remedy of specific performance (and leave the party to their remedy in contract which would be damages but not an order of specific performance); OR o Rescind the contract entirely.

What kinds of special disadvantage? “. . . poverty or need of any kind, sickness, age, sex, infirmity or body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other. It does not appear to be essential in all cases that the party at a disadvantage should suffer loss or detriment by

the bargain.” -- Fullagar J in Blomley It is not enough that the bargain is a poor bargain, the bargain does not have to be bad for equity to undo it if it is infected by unconscientious dealing WHAT WERE THE ‘SPECIAL DISADVANTAGES’ OF THE AMADIOS IN CBA V AMADIO?

Age, language skills, dedication to son, ignorance of his indebtedness… Remember that disadvantage is not sufficient alone to find an outcome of the case There must also be unconscionable conduct in taking advantage of a special weakness. • In CBA v Amadio, the bank knew that – o Vincenzo was heavily indebted so that the guarantee would be called on soon; o Vincenzo had not explained the matter to his parents; o The parents’ English was poor so they could not be expected to read and understand the documents themselves. o ALSO – the bank had participated in creating a false impression of V’s success (by selectively dishonouring cheques). o And a bank subsidiary was involved in V’s businesses, so benefitted from this dealing. Alternative arguments in Amadio for undoing the contract •

02- Undue influence category 2B 03- Prevailed in Amadio The High Court of Australia has considered several cases since Amadio . . . • Louth v Diprose (1992)- a majority set aside a gift of real estate from a solicitor who was besotted with the woman to whom he gave the gift. Majority of the court found in favour of the solicitor and ordered that the contract be rescinded. • Bridgewater v Leahy (1998) – an intervivos sale of farming land by an uncle to a nephew was set aside after his death, on the basis that the nephew took advantage (passively) of the uncle’s chauvinistic desire to keep the farm in the family (rather than let city-bound daughters sell it off after his death).

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Kakavas v Crown Melbourne (2013) – HCA rejected an argument that a casino took unconscientious advantage of a problem gambler – there must be a ‘predatory state of mind’, ‘victimization’ and ‘exploitation’, not merely inadvertence to the best interests of the other.

Thorne v Kennedy (2017) • Question for the court: Should a disadvantageous pre-nuptial agreement be set aside? • What was the special disadvantage of the bride? • How was the husband’s conduct unconscientious? • She did receive independent legal advice that she should NOT sign the agreement because it was highly disadvantageous to her, but she signed anyway. Why did this not defeat her claim?...