undue influence

(per Lord Browne-Wilkinson in Barclays Bank PLC vs O’Brien [1994] 1AC 180 AT 191]

Critically discuss the above statement

The statement above focuses on undue influence in different forms and how it is exerted between two parties with a certain relationship. It brings forward one’s rights to set aside a transaction based on undue influence and duress in entering the agreement. In this essay I will be critically discussing the statement given and focusing on the laws based around undue influence and core duties of a bank which have been founded from past cases and decisions based on this topic.

Key Terms:

Undue Influence: This is an equitable doctrine which applies where one party uses their influence over the other to persuade them to make a contract. [1] 

Bank: A financial institute which regulate financial transactions and works with lending funds to customers and securing assets for them.

Equity: The residual value of a business or property beyond any mortgage thereon and liability therein.

Actual undue influence occurs when the claimant that they entered the transaction as a result of undue influence from the other party. Constructive notice occurs when where the awareness of the equitable interest would have come to him if he had made all such enquires which a practical purchaser would have made. In essence the doctrine of notice is an active equitable instrument for seeking to ensure that the property of another is not attained wrongfully. [2] 

Undue influence maybe presumed where there is a pre active relationship of confidence between two parties to a contract as a result of which one places trust in the other and the contract between them is unfavourable to the party who places trust In the other.

The facts of the given case are as follows. Mr and Mrs O Brien owned a home together which Mr O Brien wanted to put as collateral for his business debts. Mr O Brien instructed his wife that doing this would guarantee an overdraft facility of £60,000 however the true amount was £135,000. Following on from this the wife agreed and visited a branch where she did not regular undertake her banking transactions however the manager of her local branch instructed her that the nature of the transaction would be explained to her and had left a letter for her to read. Following this due to some confusion this did not happen. Mr O Brien’s business later malformed and the issue of whether Mrs O Brien was bound to the contract arose. After the case had gone to trial the lordships decided that the bank had constructive notice of undue influence and due to this was still able to make obligatory the contract. [3] 

From my understanding of the given case it is clear that both the bank and Mr O Brien were at fault in informing Mrs O Brien about the true consequences of the transaction. The house found that the transaction has been improvident that it was tricky to explain the absence of some impropriety so that the bank was put on enquiry. Banks can take certain pre cautions to avoid having constructive notice of undue influence.

An example of this can be found in the case of Royal Bank of Scotland vs. Etridge 2001. This case set out the guiding principle for the banks on avoiding constructive notice on undue influence which relate to any transactions carried out after the date of that judgement. In order to avoid constructive notice of undue influence a bank had to take logical steps to maintain its legal and ethical standards that the wife had been knowledgeable in a meaningful way of the practical implications of the tender transaction.

After being placed on enquiry the contracting party would need to avoid constructive notice. The party can only implement the contract if they can avoid having constructive notice of undue influence. The contracting party, in this case the bank will avoid having constructive notice by taking logical and coherent steps to suit itself and the other party’s concurrence had been freely given. In the given case study (Barclays Bank vs. O Brien) The House of Lords ruled that to avoid constructive notice in such cases the creditor should coordinate a private meeting with the wife where the husband would not be present and break down a detailed understanding of the implications of the transaction. This would include the likely degree of her liability and encourage her to take independent advice on this matter. However, if this confidential meeting did not take place and the husband (third party) did apply undue influence, the banks claim to the property would be subject to the wife’s interest in it. In certain anomaly cases where the creditor has awareness of further facts which give the existence of undue influence Lord Browne Wilkinson has said that the wife is to be advised separately not only to protect her but also the creditor.

The next step in relation to dealing with undue influence and avoiding constructive notice would be independent legal advice. This needs to be under taken by a qualified solicitor rather than a bank manager or representative. The content of the legal advice in the current sort of case it is not for the solicitor to prohibit the transaction by failing to confirm to the bank that he has explained the documents to the wife and the risks she is taking ahead of herself. If the solicitor see’s the contract is not in the wife’s best interest he/she will in turn give appropriate advice to the wife based on the terms and conditions relating to the wife’s financial and general ability. A wife is not disallowed from committing to a financially unwise transaction if for her own reasons she wishes to do so. [4] 

This being the general rule, there are a certain amount of exceptions where it is fairly obvious that the wife is being critically wronged, in which case the legal representative should refuse to act further for the bank. An example of this can be seen in the case of Wright vs. Carter 1903 and also in Powell vs. Powell 1900.

In the case of Royal Bank of Scotland vs. Etridge the Court of Appeal said that if the transaction is one into which no able solicitor could adequately advise the wife to enter the accessibility of legal advice is insufficient to avoid the bank being set with constructive notice. Frequently in practice the solicitor advising the wife will be the solicitor acting also for her husband either in the specific transaction or generally. Relating back to the given case study the steps a bank must take once it has been put on inquiry if it is to avoid constructive notice of the wife’s rights are not question of the exposition in earlier authority. This decision was created by the case of O Brien. [5] 

It is not ample for a bank to instruct a solicitor to attend the formalities in the signing of a legal charge without particularly asking the solicitor to advise the wife. In some cases where solicitors have been hired to instruct wives (third parties) in regards to a particular contract the contract has still seen to have an element of undue influence within it due to inadequate practice from the solicitor. An example of this can be seen in Pesticcio vs. Huet and Ors 2004.

However in contrast to this, the case of R vs. Attorney General for England and Wales the court considered whether the confidentiality contract was voidable on the source of undue influence. The Privy Council however rejected this as a case of undue influence and said that the appellant had no obtained accurate legal advice before entering into the contract. The Privy Council had said that this was a ‘matter of regret’ but was not fatal to the contract this is because the appellant knew what he was signing and penalty of doing so. [6] 

Lastly the existence of undue influence renders the contract voidable. The remedy in the case of undue influence is recession as Damages are not available, where recession is ordered the whole transaction will be set aside. An example of this is given in the case of TSB Bank vs. Camfield 1995. Damages are not available for undue influence but if the bank has breached a duty of care damages maybe available relating to negligence.

In this case it felt that Barclays Bank should have been aware of the risk of Mr O'Brien's misrepresentation, and had failed to certify that Mrs O'Brien had been sheltered by receiving independent legal advice. Mrs O'Brien was entitled to rescind her agreement with the Bank on the basis of her husband's misrepresentation.

In summary Undue influence is an equitable doctrine which can occur in two ways – actual undue influence and situations where there is an apparent presumption that influence has been exercise which may become an evidential presumption of undue influence where there is something in the transaction which may be in adequate or arise suspicion in terms of accuracy. In terms of presumptive undue influence, the summary of influence may arise automatically in the case of certain types of protected relationships but needs to be established on the facts in other cases on the basis that there is a relationship of trust between the specific parties. If undue influence is established between the contracting parties, the victim set aside the transaction.