UNDUE INFLUENCE IN EQUITY
INTRODUCTION "Equity gives relief on the ground of undue influence where an agreement
has been obtained by certain kinds of improper pressure which were thought not
to amount to duress at common law because no element of violence to the person
was involved" (GH Treitel, The Law of Contract). A person who has been induced to enter into a transaction (eg, a gift,
contract or guarantee) by the undue influence of another (the wrongdoer) is
entitled to set that transaction aside as against the wrongdoer. The effect of
undue influence, like duress, is to make the contract voidable. Such undue influence is either actual or presumed. In Barclays Bank v O'Brien
[1993] 4 All ER 417, the House of Lords adopted the following classification of
undue influence chosen by the Court of Appeal in BCCI v Aboody [1989] 1 QB 923: CLASS 1: ACTUAL UNDUE INFLUENCE In these cases it is necessary for the claimant to prove affirmatively that
the wrongdoer exerted undue influence on the complainant to enter into the
particular transaction which is impugned. For example, see: Williams v Bailey (1866) LR 1 HL 200. Undue influence was described by Lindley LJ in Allcard v Skinner (1887) 36 Ch
D 145, as "… some unfair and improper conduct, some coercion from
outside, some overreaching, some form of cheating and generally, though not
always, some personal advantage gained." The House of Lords held in CIBC Mortgages v Pitt [1993] 4 All ER 433, that
there is no further requirement in cases of this kind that the transaction must
be shown to be to the manifest disadvantage of the party seeking to set it aside
(disapproving BCCI v Aboody (1989) on this point). CLASS 2: PRESUMED UNDUE INFLUENCE In these cases the complainant only has to show, in the first instance, that
there was a relationship of trust and confidence between the complainant and the
wrongdoer of such a nature that it is fair to presume that the wrongdoer abused
that relationship in procuring the complainant to enter the impugned
transaction. In class 2 cases therefore, there is no need to produce evidence that actual
undue influence was exerted in relation to the particular transaction impugned:
once a confidential relationship has been proved, the burden then shifts to the
wrongdoer to prove that the complainant entered into the impugned transaction
freely, for example by showing that the complainant had independent advice. Note that it must also be shown that the transaction was manifestly
disadvantageous to the party alleged to be influenced (National Westminster Bank
v Morgan [1985] 1 All ER 821, below). Such a confidential relationship can be established in two ways: CLASS 2A Certain relationships as a matter of law raise the presumption that undue
influence has been exercised. The relationships where undue influence is presumed have been held to be:
parent & child (Wright v Vanderplank (1855); solicitor & client (Wright
v Carter (1903)); doctor & patient (Mitchell v Homfray (1881)); trustee
& beneficiary (Ellis v Barker (1871)); and religious adviser & disciple
(Roche v Sherrington (1982)). For a case example see: Allcard v Skinner (1887) 36 Ch D 145. The relationship of husband and wife does not, as a matter of law, raise a
presumption of undue influence within class 2A (Midland Bank v Shepherd (1988)).
Nor does the rule apply between employer and employee (Matthew v Bobbins
(1980)). CLASS 2B If the complainant proves the existence of a relationship under which the
complainant generally reposed trust and confidence in the wrongdoer, the
existence of such relationship raises the presumption of undue influence. In a class 2B case therefore, in the absence of evidence disproving undue
influence, the complainant will succeed in setting aside the impugned
transaction merely by proof that the complainant reposed trust and confidence in
the wrongdoer without having to prove that the wrongdoer exerted actual undue
influence or otherwise abused such trust and confidence in relation to the
particular transaction impugned. The relation of banker and customer will not normally give rise to a
presumption of undue influence, but it can do so in exceptional cases if the
customer has placed himself entirely in the hands of the bank and has not been
given any opportunity to seek independent advice. See: Lloyd's Bank v Bundy [1974] 3 All ER 757 MANIFEST DISADVANTAGE With both of the above presumptions (class 2A and 2B), the transaction must
be to the 'manifest disadvantage' of the party claiming undue influence. See: National Westminster Bank v Morgan [1985] 1 All ER 821 UNDUE INFLUENCE AND THIRD PARTIES Undue influence is now regularly invoked by wife-sureties where their
relationship with the bank-creditor is manipulated when the debtor-husband acts
as intermediary. For example, a husband persuading his wife to guarantee his
company's overdraft with a bank, using the matrimonial home, of which she is
joint owner, as security for the debt. In such situations the creditor may be
'tainted' by the undue influence of the intermediary. If a bank entrusts certain
duties to a debtor-husband who, as intermediary, is capable of exerting some
influence over his wife, the position is as follows: 1. If the transaction is one which is (a) on its face not to the financial
advantage of the party seeking to set it aside, and (b) if there is a
substantial risk of its having been obtained by undue influence, then the third
party will have constructive notice of undue influence giving the right to set
aside the transaction. The creditor must take reasonable steps to ensure that
the wife's consent was properly obtained. See: Barclays Bank v O'Brien [1993] 4 All ER 417. 2. However, if the transaction is not of this kind, but is on its face
capable of benefiting the party who seeks to set it aside, the third party will
not have constructive notice of any undue influence which may in fact have
existed. See: CIBC Mortgages v Pitt [1993] 4 All ER 433. Note the opinion of the Court of Appeal in: Barclays Bank v Coleman (2000) The Times LR, January 5 REBUTTING THE PRESUMPTION The presumption of undue influence is rebutted if the party benefiting from
the transaction shows that it was "the free exercise of independent
will", even if no external advice was given or even though it was not taken
(Inche Noriah v Shaik Allie bin Omar [1928] All ER 189). However, the most usual
way of rebutting the presumption is to show that the other party had independent
advice before entering into the transaction. Case examples include: Re Craig [1970] 2 All ER 390 Where a bank seeks to enforce its security against a wife who claims to have
been induced by her husband's undue influence or misrepresentation to charge the
matrimonial home by way of security, the principles which apply in determining
whether the bank is able to rely on the fact that the wife received legal advice
before entering into the charge to rebut the presumption of undue influence and
imputed or constructive notice thereof and whether the bank ought to have been
put on inquiry to ascertain whether the wife was subject to her husband's undue
influence, were given by the Court of Appeal in: Royal Bank of Scotland v Etridge (No 2) [1998] 4 All ER 705.
The remedy in cases of undue influence is rescission. Damages are not
available, but see below. RESCISSION Where rescission is ordered, the whole transaction will be set aside. See: TSB Bank v Camfield [1995] 1 All ER 951 Bars to rescission: (i) IMPOSSIBILITY OF RESTITUTION However, the fact that restitutio in integrum is impossible will not be a bar
to rescission: O'Sullivan v Management Agency & Music Ltd [1985] 3 All ER 351 (ii) DELAY Delay defeats equity. For example, see: Allcard v Skinner (1887) 36 Ch D 145. SEVERANCE It may be possible for the court to sever from an instrument affected by
undue influence the objectionable parts leaving the part uncontaminated by undue
influence enforceable. See: Barclays Bank v Caplan and Another (1997) The Times, December 12. DAMAGES Damages are not available for undue influence, but if a bank has broken a
duty of care to a wife-surety damages may be available in negligence under
Hedley Byrne v Heller (1964). See also, Royal Bank of Scotland v Etridge (No 2) [1998] 4 All ER 705, note 8
at p706: solicitor owes a duty of care to the wife.
National Westminster Bank v Morgan [1985] 1 All ER 821
BCCI v Aboody [1989] 1 QB 923
Re Brocklehurst [1978] 1 All ER 767.
REMEDIES
Dunbar Bank v Nadeem [1998] 3 All ER 876.
Cheese v Thomas [1994] 1 All ER 35
Mahoney v Purnell [1996] 3 All ER 61.
