The doctrine of Undue Influence
- Equitable doctrine that is SUBTLE rather than obvious like Economic Duress
-Unduly influenced someones decision to enter into a contract or undermined them
-Provides relief from contracts entered into under improper pressure
-Explotation of relationships of trust and confidence to gain unfair advantages
-Different classification of types of undue influence (Actual or Presumed)
-Lord Browne Wilkinson in Barclays Bank v O'Brien defined undue influence as:
'A person induced to enter by influence of another, entitled to set aside'
Classification of different types of undue influen
BCCI V ABOODY DEFINED THESE CLASSES AND BARCLAYS BANK V O'BRIEN APPROVED THEN ROYAL BANK OF SCOTLAND V ETRIDGE (NO2) RE-EVALUATED CLASS 2 TO BE MORE SPECIFIC AS SEEN BELOW:
CLASS 1- ACTUAL UNDUE INFLUENCE
CLASS 2- PRESUMED UNDUE INFLUENCE
2A) PROTECTED RELATIONSHIPS OF TRUST AND CONFIDENCE AND PRESUMED INFLUENCED BUT NOT UNDUE UNTIL PROVEN. IRREBUTABLE.
2B) DEFACTO RELATIONSHIPS OF TRUST AND CONFIDENCE WHERE INFLUENCE MUST BE PROVED ON THE FACTS BUT CAN BE REBUTTED BY ESTABLISHING THAT NO INFLUENCE EXISTED.
SIR TRIETEL QC STATED WHEN DEFINING UNDUE INFLUENCE:THE QUESTION IS WHETHER ONE PARTY HAS REPOSED SUFFICIENT TRUST AND CONFIDENCE RATHER THAN WHETHER THE RELATIONSHIP BETWEEN THE PARTIES BELONGS IN A SPECIAL CATEGORY
ACTUAL UNDUE INFLUENCE CASES/DOMINATION CASES
1) Morley v Loughnan- deceased gave a member of religious sect £140k however courts held that no need to show special relationship because the religious man took possession of the whole life of the deceased man and the gifts were the effect of influence and dominiation.
2) CIBC Mortgages v Pitt- Second mortgage on family home as security for loan to finance share purchases. Principal issue whether her claim could succeed without having to prove that transaction was to her manifest disadvantage. House of Lords said this was CLASS 1 case and she did not have to prove a manifest disadvantage to herself. (This decision overuled BCCI v Aboody on manifest disadvantage)
Manifest disadvantage history...r.e. Class 1
BCCI V ABOODY (HUSBAND AND NON ENGLISH SPEAKING WIFE) PROVED THAT UNLESS TRANSACTION ENTERED INTO UNDER ACTUAL UNDUE INFLUENCE (TYPE 1) TO MANIFEST DISADVANTAGE...COULD NOT BE SET ASIDE UNTIL LAW CHANGED (AS BELOW)
Manifest disadvantage had been held to be required ingredient of presumed undue influence (class 2) in House of Lords case National Westminster Bank v Morgan BUT it had no relevance in actual undue influence (class 1)
Lord Browne Wilkinson stated in CIBC Mortgages v Pitt, this is because class 1 is a 'species of fraud' and like any victim of fraud, if not entered freely and knowingly, entitled to be set aside. Requirement for manifest removed in CIBC.
UCB Corporate Services Ltd v Williams clarifies this.... a wife was a victim of fraudulent misrep and actual undue influence by her husband. The judge at first instance rejected her claim because he said she would of signed the charge even if she did not know the full facts and risks. The Court of Appeal allowed her appeal as it was IRRELEVANT to ask whether she would of entered. It was sufficient that the actual undue influence was A factor inducing her.
ACTUAL UNDUE INFLUENCE SUMMARY
ACTUAL UNDUE INFLUENCE CASES DO NOT REQUIRE THE
COMPLAINANT TO PROVE ANY SPECIAL RELATIONSHIP OR A
MANIFEST DISADVANTAGE BUT DO HAVE TO PROVE THEIR
FREE WILL WAS INFLUENCED BY ANOTHER TO ENTER THE
TRANSACTION. LORD NICHOLLS IN RBS V ETRIDGE (NO2)
STATED IT IS NOT EASY TO PROVE ACTUAL UNDUE IN HUSBAND
AND WIFE CASES.
The classes defined...
CLASS 1- ACTUAL UNDUE INFLUENCE (very obvious but nothing presumed and influence and undue must be proved)
CLASS 2- PRESUMED UNDUE INFLUENCE
2A) PRESUMED BECAUSE OF THE RELATIONSHIP I.E. DOCTOR/PATIENT
2B) IF CAN PROVE A RELATIONSHIP OF TRUST THEN INFLUENCE MAY BE PRESUMED BUT MUST PROVE THAT INFLUENCE UNDUE (I.E. PROVE EVERYTHING)
UNDUE INFLUENCE IS NEVER ASSUMED AS A WHOLE, UNDUE MUST BE SATISFIED....
Type 2A... PRESUMED UNDUE INFLUENCE
Relationships as a matter of law where influence is presumed... i.e.
1) Parent/child 4) Spiritual advisor/disciple
2) Solicitor/client 5) Trustee/Beneficiary
- CANNOT REBUTT THESE TYPES OF RELATIONSHIPS AND PRESUMPTION OF TRUST AND CONFIDENCE IS AUTOMATIC
- LAW WILL PRESUME THAT ONE PARTY FROM THE ABOVE IS VULNERABLE BECAUSE OF THE EXPERTISE OF THE FORMER.
Class 2 requirements established in Turkey v Awadh
These requirements must be first raised to determine presumed undue influence:
1) Is there an existence of a protected relationship or facts that persuade the court that the party was in a position to be influenced
2) Was the party in the position that suggests they would be unlikely to enter unless 'his will was overborne' or out of the ordinary motives
3) Can the defendent rebut the presumtion establishing NO trust?
Class 2a.... balancing act issue:
Lord Nicholls defined the balancing act in Class 2A as:
'absurd for the law to presume every gift from a child to parent or transaction between solicitor and client was brought about by undue influence. Something MORE is needed before the law reverses the burden of proof. Something which calls for an explanation'
GREATER THE DISADVANTAGE = GREATER THE EXPLANATION
Class 2A presumed undue influence CASE
Bullock v Lloyds Bank (father/daughter)
Case outline: daughter entitled to fortune of deceased mother's will. Daughter settled on trust but lost all personal control of money. She should of received careful advice but only got from father and fathers solicitors and insufficient time given to her.
Outcome: She won the case as the relationship of father/daughter was protected by law and assumed as influencial and undue influence was proved as she recieved NO independence advice.
Class 2a presumed undue influence CASE
Allcard v Skinner
Case outline: Allcard introduced to Skinner by a reverend. Allcard became a 'sister of the poor' and took a vowl for poverty. After 8 years of poverty, Allcard wanted to leave and brought an action for her property.
Outcome: Court of Appeal held there had been undue influence and the law will presume scope for influence in this type of relationship which cannot be rebutted.
Would have been different if woman sought independent advice or was offered and chose not to.
Allcard v Skinner established a broader test in regards to manifest disadvantage focusing on the ACTUAL transaction and its suspicion with manifest disadvantage being used as further evidence only.
Manifest Disadvantage further.,.
It was suggested that manifest disadvantage EVEN in class 2 presumed undue influence is not absolutely required by Lord Browne Wilkinson in CIBC Mortgages v Pitt however the House of Lords needed to reconsider.
The Court of Appeal and House of Lords confirmed (Lord Nicholls) that manifest disadvantage is 'powerful evidential factor' in establishing undue influence BUT NOT 100% REQUIRED = broader interpretation
LJ Lindley in Allcard v Skinner suggested that a small gift given would not automatically be set aside by the courts because of the type of relationship however if the gift is so large not to be reasonablly accounted for, the burden lies with the donee to support the gift and prove.
Lord Nicholls in Etridge confirmed no longer a required to establish manifest disadvantage but it may hold an evidential factor. A wife, may/may not be disadvantageous as husband/wife bound up = NOT A REQUIRED ingredient!
Type 2b presumed undue influence CASE that WON
Lloyds Bank v Bundy
Overview: As bank and customer, no special or protected relationship so therefore complainant had to prove relationship of influence/confidence/trust which CAN be rebutted. Transaction must ALSO be suspicious calling for explanation. In this case, Bundy signed a charge on his house to support his son's business. Bundy had been a long standing customer of the bank and relied on his manager who was aware of this confidence. Bank came to his house to sign papers as was in their interest and it was clearly to Bundy's manifest disadvantage.
Outcome: The Court of Appeal held that there was undue influence and the bank were unable to rebut and therefore transaction not entered freely by Bundy.
Type 2b presumed undue influence BANK/CUSTOMER CAS
National Westminster v Morgan (pre Etridge)
Overview: Morgan's business was struggling and Bank offered loan for few weeks with security on house. Bank called at house to sign papers but forgot to say charge was for business too. Morgan died and possession sought.
Outcome: Lord Scarman held that no relationship beyond commercial, no domination and Morgan had to prove transaction to manifest disadvantage which it wasn't. This would of 'rescued her home' and therefore no undue influence.
HAD TO BE A MANIFEST DISADVANTAGE to be SET ASIDE UNTIL ETRIDGE OCCURED...
Husband and Wife relationships...
As husband and wife, such relationships may fall under category 2B of presumed undue influence where there may be emotional involvement or relationship of trust and confidence however it must be PROVED although Lord Nicholls in RBS V Etridge (no2) suggested more restrictive approach to concluding this between husband and wife and it must be proved that the husband ABUSED the trust.
Barclays Bank v O'Brien..... Husband/Wife
Barclays Bank v O'Brien
(Lord Browne Wilkinson in House of Lords)
Overview: In order to secure an overdraft, the security of the jointly owned home was charged and Mrs O'Brien signed without reading and then claimed undue influence as husband had failed to give full info of the debts. The bank had written a note that 'Mrs O'Brien may be a problem' which suggested some knowledge of undue influence and therefore had CONSTRUCTIVE NOTICE as it was obvious this was not to financial advantage of the Mrs and the husband had committed a wrong. The bank MUST of ensured the wife recieved independent advice rather than assuming by writting which she hadn't read.
Barclays Bank v O'Brien outcome...ACTUALLY A MIS
Outcome....Lord Browne Wilkinson in House of Lords...
Held, dismissing the bank's appeal, that a wife, where induced by misrepresentation or other legal wrong to stand as surety for a husband's debt, had an equity as against him to set aside the transaction; that right was enforceable against a third party with actual or constructive notice of the circumstances giving rise to the equity. The bank was fixed with constructive notice of the misrepresentation on the facts of the case, and Mrs O'Brien was entitled as against the bank to set aside the legal charge on the matrimonial home. The transaction was made VOIDABLE.
A contract would not be set aside for undue influence under type 2b unless could be shown that transaction WAS to manifest disadvantage (Natwest v Morgan)
THEN ETRDIGE HAPPENED....
BURDEN OF PROOF...
The Burden of Proof: General Principle:
He who asserts a wrong has been committed must prove it
once undue influence proven, the burden of proof shifts to the party to show
1) that no undue influence was exercised (i.e. by showing independent advice received)
2) and if the transaction is not easily explicable.
RBS V ETRIDGE (NO2)
RBS V ETRIDGE (No2)
Judges: Lord Bingham of Cornhill; Lord Nicholls of Birkenhead; Lord Clyde; Lord Hobhouse of Woodborough; Lord Scott of Foscote
Outline: A number of conjoined appeals concerning banks seeking possession of homes where a wife had signed a charge agreeing to security for husbands debt. 3 dismissed and 5 allowed. Bank has to know of UI or not take steps to be voidable.
Main changes: 1) Manifest Disadvantage- no longer use this term as misapplied instead transaction one that can't readily be explained on grounds of friendship, relationship or charity
2) Constructive Notice- Bank will be put on inquiry when wife offers surety
Summary of outcome of Etridge from Lord Nicholls a
(1) a lender was placed on inquiry whenever one party to a cohabiting couple offered to stand surety for the debts of the other party if the bank knew about the relationship that was non commercial.
(2) A bank would be required to insist that a wife attend a private meeting in order that it might explain the nature of the risk and urge her to seek independent advice. The most that a bank could be expected to do, was to take reasonable steps to satisfy itself that the practical consequences of the proposed transaction had been clearly explained;
(3) the decision whether to proceed to rests with the wife and it was not a solicitor's role to intervene and attempt to prevent the transaction. Guidance was given as to the minimum extent of a solicitor's advice to such a client. Solicitor can decline to act further.
(4) A solicitor was entitled to act for the bank or for the husband so long as such an arrangement did not give rise to a conflict of interest. A solicitor was not in the position of agent for the bank
(5) A bank should communicate directly with wives regarding the nature of the advice that she was to receive and ensure that the confirmation required by the bank from her nominated solicitor was fully explained to her
Balancing interests from Etridge...
Lord Nicholls in Etridge emphasised the need to balance:
'The law must afford both parties a measure of protection'
- Protect those giving the security
- Ensuring lenders can rely on the security by following appropriate procedures and minimize risk
NOTE: The wife or surety has the burden of proof that the bank or lender had necessary constructive notice
NOTE2: A Bank will be put on inquiry in ALL cases involving non commercial relationship between surety and debtor (Lord Nicholls WIDER PRINCIPLE)
CIBC Mortgages v Pitt
CIBC Mortgages v Pitt-
Outline: Second mortgage on family home as security for loan to finance share purchases. Principal issue whether her claim could succeed without having to prove that transaction was to her manifest disadvantage. House of Lords said this was CLASS 1 case and she did not have to prove a manifest disadvantage to herself. (This decision overuled BCCI v Aboody on manifest disadvantage)
Outcome: House of Lords considered the case of a joint loan to Mr and Mrs P secured on their home. So far as the bank knew, the purpose of the loan was in part a remortgage and in part for Mr and Mrs P to buy a second home. Mr P had persuaded Mrs P to let him borrow the money in order to speculate on the stock exchange. The House of Lords held that the bank had no notice of the undue influence. It had no reason to think that the loan was anything other than a normal advance to husband and wife for their joint benefit. So it was not put on inquiry and could not be fixed with the consequences of Mr P’s undue influence over Mrs P. The Bank was not liable and the wife lost!
Chater v Mortgage Agency Services No2 (2003)
Outline: Son/Mother. Jointly borrowed money for mortgage using security of mothers house. Purpose was to support son's business. Mother claimed undue influence and also that lender was fixed with notice on undue influence. Two stage test:
1) Undue influence had to be established on facts which it was.
2) Was there a transaction calling for explanation?(Allcard v Skinner) YES
UNDUE INFLUENCE ESTABLISHED
Court of Appeal held that lender was NOT put on inquiry and the info that was available to the lender gave them no way of knowing this was undue influence as they didn't know was for son's business. This follows from 'wider principle' established by Lord Nicholls in Etridge
Credit Lyonnais Bank v Burch (employment)
Credit Lyonnais Bank v Burch
Outline: defendent wwas a junior employee of a commpany and family friend of claimant who was the companies main share holder. Claimant asked her to provide security to cover the company's overdraft and would have to charge her flat giving unlimited guarantee to the bank. The bank had advised her to obtain independent advice but she did not. The company went into liquidation the bank sought possession arguing had discharged responsibility by advising to get advice.
Outcome: Court of Appeal argued that bank knew of employment relationship and UI was probable and should have ENSURED legal advice sought. Bank was fixed with notice of undue influence and transaction set aside/voidable.
Article for academic commentary...FEMINIST
Men behaving badly: an analysis of English undue influence cases.
- She argues that the balancing of interests by the courts is a false premise suggestive of a lack of empathy with women, and recommends policy improvements to provide greater protection than the guidelines formulated in Royal Bank of Scotland v Etridge Plc (No.2).
- Also argues that the law of undue influence employs mechanisms to condone masculine wrongdoing
Presumed undue influence: continuing misconceptions?
It was hoped that, post-Etridge, the relevant principles should be better understood. However, there are “continuing misconceptions”
- The irrebuttable presumption of influence and the rebuttable evidential presumption of undue influence are two different presumptions and should *L.Q.R. 33 be “distinguished sharply” from each other, as Lord Nicholls advised in Etridge
Journal article 3
Undue influence as wrongful exploitation
- The word “undue” is ambiguous and believes UI should be defined more as a wrong as was mentioned 30 times in CIBC v Pitts and Barclays v O'Brien.
- If and when undue influence secures its status as a wrong, the victim will be entitled soon enough to compensatory damages.
Undue influence exercised by 3rd party...
i.e. wife gives guarantee and charge over matrimonial home to bank but later wishes to have that contract set aside as she entered only due to husbands UI.
There are 2 distinct grounds which a bank can be affected by UI from husband:
If creditor/bank has actual or constructive notice (discovered if taken steps) at time of executing charge has been obtained by the exercise of undue influence, it CANNOT enforce the transaction and will be set aside and they are fixed with constructive notice.
-Agent of the bank, seen in Kings North Trust Ltd- i.e. if bank entrusts husband to obtain execution of relevant documents then they are in no better position then husband if it is established the wife was unduly influenced by husband and no advice sought.