Undue Influence Remedies
Improper Pressure
Equitable principles of undue influence may give relief from transactions entered by persons under improper pressure. Relief against undue influence seeks to protect persons who are vulnerable to having an advantage taken of them.
Where undue influence exists or is presumed, the law deems that the contract has not been freely entered, and accordingly that it may be invalidated and set aside by the innocent party. The principles do not apply to persons who deal at arm’s length, whether as businesses or consumer, without the exercise of actual undue influence.
There are a three principal categories of undue influence. In one type of case, it must be shown that actual undue influence was exerted. In another type of case, a particular category of relationship leads to a presumption of undue influence. In the other case, the actual relationship of the parties raises a presumption of undue influence.
Actual Undue Influence
Apart from cases where the actual relationship actual or its nature creates a presumption of undue relationship, actual undue influence may arise in the circumstances where there is no prior relationship. Evidence may be given that the transaction was not entered on the basis of the free will of the relevant party, typically the donor of a gift.
The beneficiary may have been in a position to influence the donor. The influence must have been exercised and must have been improper. It must be the cause of the transaction. The transaction must be to the manifest disadvantage of the donor.
The disadvantage may arise where there is a considerable disparity in capacity and experience between the parties, such that one may exercise dominance over the other. This combined with a highly improvident transaction may be sufficient to show actual undue influence. Some such cases may also be considered as cases of an unconscionable bargain.
Presumption from Relationship
Certain types of relationship raise a presumption of undue influence. They are relationship of potential dominance between the parties.
It usually arises from a relationship of trust and confidence in which one party relies on the other. Once this type of relationship exists, the presumptively dominant party must prove that the transaction was fair and without undue influence.
Relationships established as creating an almost automatic presumption of undue influence include the following
- solicitor-client;
- trustee- beneficiary;
- doctor-patient;
- parent-child,
- religious association / minister- devotee
Some such relationships are fiduciary in nature. The stronger party owes fiduciary duties to the weaker party.
Because of the risk that the trusted party may take advantage, there is a presumption that transactions between the parties are subject to “undue influence”. The party in whom confidence and trust have been placed, who wishes to uphold the contract must prove there was no undue influence.
Where parties who stand in the above types of relationship, enter a transaction by which the stronger party benefits and the weaker party obtains no financial benefit, such as in the case of a gift, there is a heavy onus to on the party who benefits to show it has been freely entered and properly understood.
Presumption of Undue Influence
Apart from cases where a transaction is entered between persons in the above types of relationships of trust and potential inequality (where undue influence is presumed) the nature of the actual relationship of the particular parties may be such, that a presumption of undue influence arises.
The presumption may arise from circumstances of personal influence, due to a particular interpersonal relationship. A common scenario involves pressure exerted on an vulnerable spouse or elderly relative to give a guarantee or security in support of another’s loan at great personal risk and for little or no personal benefit.
The transaction is typically manifestly disadvantageous to the weaker party. There may for example be a disparity in commercial experience
Where there is an actual relationship of this type, the stronger party must show that the agreement was fair and freely entered. The mere existence of a relationship of possible undue influence does not make the agreement void. It may be possible to show that the transaction was fair, informed and freely entered.
Unfair Contracts Usually Valid
The law holds persons to contracts entered, in the absence of limited negating factors, which are set out in other articles. An agreement is generally binding, notwithstanding extreme inequality of bargaining power, resources or education.
The bargain need not be equal, proportionate or in any way balanced. Apart from the consumer unfair contract regulations, the law generally upholds unfair contracts.
There have been suggestions from time to time that undue influence is part of a wider principle against unconscionable dealings. However, there is no general jurisdiction, even for courts of equity, to set aside transactions or gifts between parties who deal at arm’s length on the grounds of foolishness or imprudence.
Unconscionable Dealings
Restitution is potentially available, in respect of transfers which constitute an improvident or unconscionable bargain. Where circumstances show that a vulnerable person, has made a foolish or exploitative against rational personal interests, there may be and onus on the person benefited to prove the the person concerned has entered the transaction as the exercise of his free will
An unconscionable bargain is a harsh transaction where one person is in a much stronger position than the other. The court may exercise equitable powers to vary or set aside the transaction. It must be shown that the stronger party knew that the innocent party was at a disadvantage.
It is a necessary element that the party obtaining the benefit of the exchange knows of the other person’s vulnerability. Unconscionability is required. The courts have been reluctant to define this concept in detail.
It is sometimes described as equitable fraud. However, it does not require deliberate wrongdoing, such as to constitute criminal fraud or even a civil wrong. An equity must be raised against the party receiving and retaining the benefit of the exchange. It must be unconscionable for him to retain it.
Features of Unconscionable Bargain Cases
The principles are generally applied in private and domestic transactions. They are rarely available in commercial transactions.
The imbalance in the agreement may arise from inadequate consideration, unfair pressure, impropriety or the lack of independent advice. The conduct might be described as sharp practice. There may be elements of misrepresentation.
The element of disadvantage may depend on circumstances, education, illness or other factors. There must be an element of victimisation, taking advantage or overreaching.
In order to uphold the contract, the stronger party must show that it was in fact just and reasonable.
Third Parties
The person who exercises undue influence or benefits from an improvident bargain must repay benefits received and to pay for services rendered. The position is more difficult when the benefits or services are rendered to a third party.
Undue influence issues may arises in relation to a third-party, such as a bank which takes the benefit of a guarantee which is entered on foot of undue influence by their customer, is prejudiced by the invalidity.
If the third party has notice of the risk of undue influence, in the context of a gratuitous benefit received, they are likely to be bound if there is in fact undue influence, unless they have evidence that it was freely entered and understood, usually on foot of independent legal advice.