Negating Contracts by Pressure and Influence
An “agreement” to which consent is not freely given may be invalid. However, the categories of pressure which invalidate an agreement are limited. Agreements are frequently entered under economic and personal pressure. Such ordinary pressures will not avoid a contract.
There are a number of circumstances in which agreements may potentially be invalidated by pressure. There are three main categories of case.
The first category often called “duress” requires that there is pressure such as to completely negate consent to the contract. The second category of cases referred to as undue influence may apply to transactions between persons who are in a relationship of trust. The third category comprises so called unconscionable bargains. These are extreme cases of unfair dealing.
The equitable principles relating to undue influence may give relief from transactions entered by persons under improper pressure. Relief against undue influence attempts 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 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.
There have been suggestions from time to time that undue influence is part of a wider principle against unconscionable dealings. This has some limited support in case law. However, the overwhelming body of opinion is that 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.
Actual Undue Influence
Apart from cases mentioned below where the relationship actual or of its nature creates a presumption of undue relationship, actual undue influence may arise, even 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 had some capacity to influence the donor. The influence must have been exercised and must have been improper or undue. 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.
The same principles as set out below apply to cases where there is prior relationship, but actual undue influence is proved. Some such cases may also be considered as an unconscionable bargain. See the separate article on the court’s approach to these transactions.
Presumption of Undue Influence
Principles of undue influence apply where a transaction is entered between persons in a position of trust in certain relationships of potential inequality. The transaction is typically manifestly disadvantageous to the weaker party. The may for example be a disparity in commercial experience
Undue influence most commonly arises where there is a relationship by which one party is in a position to improperly influence or apply undue pressure to another party. In the case of certain relationships, undue influence is presumed from the very nature of the relationship itself. In other cases, the nature of the actual relationship of the particular parties may be such, that a presumption of undue influence arises. The relationship is fiduciary in nature. The stronger party owes fiduciary duties to the weaker party.
Where the relationship type raises the presumption of undue influence, the stronger party must show that they the agreement was fair and freely entered. The mere existence of a relationship of possible undue influence does not make the agreement void. It must be shown that the transaction was unfair or improvident. Generally, it is the other party who must be shown to have exercised undue influence
Presumption from Relationship
Certain types of relationship raise a presumption of undue influence. There is a relationship of potential dominance between the contracting parties. It usually arises from a relationship of trust and confidence in which one party relies on the other. Examples include
Once this type of relationship exists, the presumptively dominant party must prove that the transaction was fair and without undue influence. The relationships concerned include solicitor client, parent-child, doctor-patient, religious minister, and adherent.
Certain relationships are well established as creating an almost automatic presumption of undue influence. They include the following
- trustee- beneficiary;
- religious association / minister- devotee.
Because of the risk that the trusted party may take advantage, there is a presumption that transactions between the parties may be 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.
Trustees and solicitors are subject to rigorous requirements. Most transactions between them and their beneficiary or client are prohibited. The prohibition is close to total for trustees and almost as far reaching for solicitors.
A presumption of undue influence applies in the case of parent and child, where the child lives under the control of the parent. There is no corresponding presumption in respect of gifts by parents to children, although actual undue influence may be demonstrable in the case of improvident transfers by older vulnerable parents. A similar presumption applies in the case of a guardian and a ward of court.
The influence of religious orders, historically, on their members was profound. The courts of equity sought to protect members from advantage of this influence, being improperly taken by the order.
Transfers of substantial assets by members of religious orders to the order, without the opportunity for independent advice, were commonly held invalid. It does not matter that the order acts for worthy motives. The transaction may be set aside unless it can be shown to have been freely and fairly entered.
The principle is equally applicable between members of the public and religious confessors. It is not limited to members of orders, although the risk of undue influence may be substantially higher in this case. The religious organisation need not be the confessor of the person who has made the improvident transaction. He may, for example, be a member of another order or parish. The undue influence may be exercised by the confessor for the benefit of a third party.
Relationship of Influence in Fact
Outside of the established categories, there is no presumption of undue influence. It is necessary to show more than the nature of the parties’ respective roles. It may be shown in the context of other relationships, that there is or was, in fact, a relationship of potential undue influence. The relationship must be such that the degree of reliance and trust between the parties, suggests a real risk that a disadvantageous transaction may result.
The relationship of itself does not raise any presumption. It must be shown that there is, in fact, a relationship of trust, confidence and reliance. There are no limits to the category of cases and circumstances in which undue influence might be shown.
The influence may be acquired in any way. It may be due to inequality or disparity of age, financial inexperience, mental or physical incapacity. The relationship may be shown to exist where there is an opportunity to exercise a dominant influence.
Where it is shown that there is, in fact, a particular relationship of dependence and influence between the parties in the circumstances. If this relationship is shown, then the stronger party must justify a transaction entered between them. He must show that it is the result of free will and independent decision.
Many cases involve transfers and gifts between close relations. They may be siblings, children and vulnerable parents. Where a parent is elderly, infirm, vulnerable and/or lacking in education, a child, other relative or a stranger living with him and on whom he depends, may be in a relationship which creates a presumption.
There is no automatic presumption of undue influence between elderly parents and children or between spouses or cohabitees. It must be shown that in the actual circumstances, a relationship of undue influence potentially exists. Historically, spouses were very vulnerable and a position of undue influence could be readily shown. However, this is less likely to be so in modern times.
Where the circumstances show that there was a relationship of potential undue influence, the transaction must be justified. It is necessary that the stronger party prove that consent was given freely. It is usually essential to show that there was independent advice.
Bank – Client
The relationship between bank and customer, mortgagor and mortgagee or debtor and creditor do not of themselves lead to a presumption of undue influence.
In occasional circumstances, the actual relationship of the parties may be such that a presumption of undue influence arises. Exceptionally, there may be a relationship of actual trust, such that a fiduciary relationship arises. The customer may come to treat the bank as a trusted advisor.
Many of the cases involving a bank, raise a different consideration, namely whether the bank is on notice of the customer exercising undue influence over another, for example, where an elderly parent or vulnerable spouse gives a guarantee to the bank. Where the bank is or should be aware that the guarantor (for example) has no pecuniary interest in the transaction, it is deemed to be on notice of possible undue influence. Where undue influence, in fact, exists, it may invalidate the guarantee.
A number of undue influence cases have involved contracts entered by young inexperienced recording artists at the outset of an ultimately successful career. The cases have typically arisen between managers and artists and between record companies and artists. The artist’s success may be obvious only with the benefit of hindsight and there is commonly a high failure rate with other artists.
Some very well-known artists have engaged in litigation of this nature. Cases have succeeded where the agreements were grossly unfair and the artists entered them when they were young and inexperienced, commonly under the tutelage of a very dominant personality. In some cases, a manager or record company has been found to be in a fiduciary position, relative to the artist. Contracts signed without independent legal advice, when the artist was young and inexperienced were set aside.
The mere presence of dominance is not enough to have a contract set aside. The transaction must involve the manifest taking of unfair advantage of the position of dominance.
The Irish courts have taken a broader approach to undue influence, than the UK courts. Where a transaction is grossly improvident, this may be sufficient of itself to set it aside. The improvidence of the transaction may be evidence of undue influence. The more improvident the transaction, the more likely that undue influence will be found.
Manifest disadvantage is relevant only to presumed undue influence. Where actual undue influence is shown, there is an automatic right to have the transaction set aside. This is sometimes referred to as equitable fraud.
Unfairness and disadvantage in a transaction may be shown where there is a gross disparity in the consideration provided by the parties. The test for disadvantage is objective.
Third Party Undue Influence I
Generally, the person exercising undue influence will have received, a substantial benefit from the other. That other, person who was subject to undue influence will typically have made a gift or be given inadequate consideration for a transfer.
Where the party benefitting is aware of the undue influence by a third party, it will not be allowed to benefit from it. An example is where a bank is aware that a customer was in a position to exercise undue influence over an elderly relative to sign a guarantee for the benefit of the customer and undue influence was in fact exerted.
Generally, the undue influence must flow from the person who benefits from the transaction. However, where the third party, such as the bank, is aware of the circumstances of possible undue influence and the absence of benefit to the vulnerable party, the agreement (e.g. a guarantee) in its favour may be set aside, where there is in fact, undue influence.
Third Party Undue Influence II
The third party, (the bank in the above case) has actual or deemed notice of the possibility of undue influence. Where the transaction is of no obvious commercial advantage to the disadvantaged party, this is likely to be sufficient notice of the position. Notice of the relevant circumstances is enough to impute knowledge of the undue influence to it.
If the third party did not have actual notice and the transaction is an ordinary everyday transaction for value, then the existence of actual undue influence by another, will not negate the contract with the third party, if it is not first avoided. If there is nothing in the circumstances which alerts the third party to the possibility of disadvantage, it will not be affected by it.
Upholding the Transaction
Where there is a presumption of undue influence, it may be rebutted by showing that the party entered the transaction which has been challenged, was as a result of the exercise of his free will. The transaction must be fairly and freely entered. It must be shown that the party clearly knows what he is doing. It must be shown that the transaction was the exercise of his free will.
There is a high onus on the person who seeks to uphold the transaction. It must be shown the transaction was in fact freely entered or was otherwise just and reasonable.
It is generally prudent to show that the party has received independent expert advice, financial legal or otherwise, as may be appropriate. Independent advice should explain the consequences and nature of the transaction. It must give the person sufficient understanding so that he can freely decide to enter or not to enter the transaction.
Although independent legal advice is the principal means of rebutting an accusation of undue influence, it may be possible to show other circumstances by which the parties acted freely and fairly. Advice by some other independent person on the merits of the transaction may be sufficient, where the effect of the transaction is plain and does not require legal interpretation.
Nature of Advice
The independent legal or other advice should be given by a person with full knowledge of the circumstances. Independent advice should explain the consequences and nature of the transaction. It must give the person sufficient understanding so that he can freely decide to enter or not to enter the transaction.
The fact of independent legal advice is not enough to rebut the presumption, where the advice is inadequate due to the absence of information and understanding of the full circumstances. The solicitor or legal adviser should know the relationship between the parties, the context and practical effect of the proposed transaction.
In most cases, adequate legal advice and /or independent financial advice from a trusted source may rebut the presumption. It may be enough, that the possibility of getting independent advice is considered and is waived. However, this will not be sufficient in all cases. The weaker party may not be sufficiently informed or free from influence so as to give a fully free waiver.
Bank Guarantees and Mortgages
Where a third-party deals with the bank through an independent solicitor, it is not generally bound to do anything more to rebut the presumption. It may be enough that the bank urges the third party to obtain independent legal advice, where there are no warning signs, beyond the apparent inadequacy of the consideration.
In some cases, the spouse may benefit in a familial sense. However, this is not necessarily a material benefit and is insufficient to excuse the bank from further enquiry and requiring independent advice.
If the customer’s solicitor has confirmed that he has explained the transaction to the third party and he or she has waived independent legal advice, this will often be enough.
The independent solicitor must act exclusively for the third party who enters the transaction. He must not act in any way for the borrower or bank.
The bank is not fixed with notice what the solicitor learns in the course of the transaction, even if he is also the bank solicitor. The bank is entitled to assume that if the solicitor undertook the relevant role, he has satisfied himself in relation to conflicts of interest and independence. The bank is not concerned in relation to the sufficiency of the advice, in the absence of circumstances which indicate the contrary.
Undue influences in as equitable doctrine and equitable relief may be granted. The usual equitable remedies are available, and they are subject to the general limitations to which such remedies are subject.
If a transaction is set aside, the person who has benefited may have to account for any profits made or benefits received. Credit may be given for the expenses incurred by the party who allegedly exercised undue influence.
A delay in seeking relief may make it unjust to grant relief. Where the party, who was subject to undue influence, affirms the transaction after he has ceased to be unduly influenced, then it is unlikely to be set aside.
Restitution to Restore Position
The usual remedy for undue influence is that the relevant transaction is set aside. The courts will award restitution of benefits received. An account of profits thereby arising may be made against the person who has benefited. An allowance for equitable remuneration and for improvements made by them might be given.
Frequently it will not be possible to return the parties to their original positions. In this case, the courts will do what is practical and just between them, in order to restore the status quo. Compensation may be available in lieu of equitable relief.
Where a third party acting in good faith without notice of the undue influence, the transaction may not be set aside as regards that party. See in particular above regarding the position with bank guarantees. The same principle applies to a third-party purchase of goods which have been purchased from a party who has acquired them in good faith before steps are taken to set the transaction aside.
References and Sources
Irish Textbooks and Casebooks
Clark, R. Contract Law in Ireland 8th Ed. (2016) Ch.13
Friel, R. The Law of Contract 2nd Ed, (2000)
McDermott, P. Contract Law (2001) 2nd Ed (2017) Ch.14
Enright, M. Principles of Irish Contract Law (2007)
Clark and Clarke Contract Cases and Materials 4th Ed (2008)
English Textbooks and Casebooks
Poole, J. Casebook on contract law. (2014) 12th edition
Stone and Devenney, The Modern Law of Contract 10th Ed (2015)
McKendrick, Contract Law 10th Ed (2013)
Chen-Wishart, Contract Law 5th Ed (2015)
Anson, Reynell, Beatson, J., Burrows, Cartwright, Anson’s law of contract. 29th Ed (2010)
Atiyah and Smith, Atiyah’s introduction to the law of contract. 6th Ed.
Chen-Wishart, M. (2015) Contract law. 5th Ed.
Cheshire, Fifoot and Furmstons, Furmstons and Fifoot Cheshire, Fifoot and Furmston’s law of contract. OUP.
Duxbury, Robert (2011) Contract law. 2nd Ed.
Halson, Roger (2012) Contract law. 2nd Ed.
Koffman & Macdonald’s Law of Contract. 8th Ed. (2014)
O’Sullivan, Hilliard, The law of contract. 6th Ed. (2014)
Peel, and Treitel, The law of contract. 13th Ed. (2011).
Poole, J.Casebook on contract law. 12th Ed. (2014).
Poole, J. Textbook on contract law. 12th Ed. (2014)
Richards, P Law of contract. 10th Ed. (2011)
Stone, R. The Modern law of Contract. 10th Ed. (2013)
Treitel, G. H. An outline of the law of contract. 6th Ed (2014).
Turner, C Unlocking contract law. 4th Ed. (2014).
Upex, R. V., Bennett, G Chuah, J, Davies, F. R. Davies on contract. 10th Ed. (2008).
Stone,Devenney, Text, Cases and Materials on Contract Law 3rd Ed (2014)
McKendrick, Contract Law Text, Cases and Materials 6th Ed (2014)
Stone, R, Devenney, J Cunnington, R Text, cases and materials on contract law. 3rd Ed (2014)
Burrows, A. S. A Casebook on Contract. 4th Ed.
Beale, H. G., Bishop, W. D. and Furmston, M. P. Contract: cases and materials. 5th ed. (2008)
Blackstone’s Statutes on Contract, Tort & Restitution 2017 (Blackstone’s Statute Series)
UK Practitioners Texts
Chitty on Contracts 32nd Edition, 2 Volumes & Supplement (2016)
The above are not necessarily the latest edition.