Undue influence


To open the discussion on Mee's statement, it is best to revisit first principles of the doctrine of undue influence first to establish the foundation stones of which tripartite or third party undue influence occurs.

Undue influence is an equitable doctrine where the courts intervene to determine if a person has exerted dominion over another, resulting in some gain or benefit accruing to the defendant. The courts have been loath to define undue influence but, as Lindley LJ noted in Allcard v. Skinner 'no court has ever attempted to define undue influence'[1]. Many courts and jurisdictions have advances several interpretations of it and if it can't be defined, one will know it when they see it. Where a contract has been entered into as a result of undue influence, the contract will be rendered void.

Although undue influence has traditionally been divided between relationships that fit into actual or presumed undue influence, Lord Brown-Wilkinson in Barclays Bank plc v O'Brien[2] set out specific species of undue influence to differentiate the relationships. These were set out as, Class (1) Actual Undue Influence, where the claimant must prove that the act induced complies with the principles of undue influence. Class (2a) Presumed Undue Influence, the claimant must show that a fiduciary relationship existed where trust and confidence were broken and an advantageous benefit was exerted and accrued to the defendant. Relationships that fall within this category include the parent/child, guardian/ward, doctor/patient, and solicitor/client but not the relationship of husband and wife or visa versa[3]. It is in the area of husband/wife and third parties that this essay will de discussed. Under this class, there is no requirement to prove impropriety, but the presumption must be established from the basis of the relationship and in particular the transaction is such that it is inconsistent with the relationship itself.

This brings us on to the issues surrounding tripartite undue influence arrangements. Tripartite undue influence or third party undue influence as it is commonly known occurs when an individual has been unduly influenced into providing their surety as guarantor to a creditor for a debtor loan arrangement. This has become a common practice where husbands seeking business or commercial loans from financial institutions are required as a condition of the loan sanction to have the transaction co-guaranteed. The dependent spousal assent is provided where the family or matrimonial home has been pledged as security. There is nothing unusual or unethical about this modus operandi, as Bingham LJ in Royal Bank of Scotland v. Etridge (AP) said,

"It is important that lenders should feel able to advance money, in run-of-the-mill cases with no abnormal features, on the security of the wife's interest in the matrimonial home".[4]

In these types of loan transactions, husbands are generally not in a position to offer independent financial security other than the financial equity that may available within the family home. As the family homes are jointly owned and protected under the term of the 1996 Family Home Protection Act, the co-ownership equity within the family home is joint and severely protected and cannot be released or carved up independently unless a sale of the property is triggered either by the consent of the owners or by a repossession order of the court. Although the FHPA offers strict protection to dependent spouses regarding the security of the family homes, this chain of protection is easily broken once a dependent spouse has pledged her surety in it by was of a personal guarantee.

In Ireland, the commercial courts have seen an increase in the number of third party undue influence applications owing to the current economic climate. Audrey Byrne, a Partner with McCann Fitzgerald (Dublin) and a specialist in family law noted in a recent business article the effect these tripartite transactions were having on Irish family life.

"Many individuals borrowed beyond their means during the boom, using property equity - and even their family home - to fund their investments. Many company directors and property developers signed unlimited personal guarantees offering all their personal property as security for commercial debt. An attitude of 'sign now, worry later' was prevalent, but now that the recession has hit, there are serious repercussions for some guarantors".[5]

The doctrine of third party undue influence comes into focus when dependent spouses are unduly influenced into providing their personal guarantee as surety for these loans, where the guarantee is fixed to the family home. This doctrine can also apply where the contents of the loan documents and liability pertaining to the loan has not been properly discussed or explained to the dependent spouse. If the loan then becomes impaired by the debtor's inability to repay the loan, and the creditor seeks recovery and or repossession of the security to recover the debt, the dependant spouse may have sufficient grounds to have their guarantee set aside under the doctrine principles.

The celebrated English cases in Mee's assertion that deal with the issue of third party undue influence are the House of Lords decisions that flowed from Barclays Bank plc v O' Brien[6] in the first instance and several years later Royal Bank of Scotland v Etridge (No 2)[7] in the second, where the latter case being a reinterpretation and expansion of the rules set out in the former case.

In O'Brien, the facts of the case had the hallmarks of the principle of third party undue influence. The husband in this case induced his wife by deceit and dominion to have her provide her guarantee for commercial loans he had solely procured. The main trust of this case hung on a) to what extent undue influence was actually applied and b) establishing a threshold test for constructive notice constructive.

A difficulty always arose in cases of undue influence regarding the husband/wife relationship. Although, it is generally accepted that no presumption of undue influence does arise between such a relationship, the Court of Appeal in Barclays Bank plc v O'Brien[8] adopted the principle that wives should come within the scope of 'a special class' that should be protected. This special equity theory was based on the premise that a party to a marriage relationship could be emotionally swayed and influenced by the other side to offer their surety to a creditor to their disadvantage, out of love and affection in support of their husband's debt.

The difficulty the courts had after O'Brien was, establishing if bona fide undue influence inducement had actually transpired. The courts were left second guessing the quality and abuse that may have existed in each relationship that was presented before the courts to determine this matter. Nicholls LJ in Royal Bank of Scotland v Etridge at (Par 7) noted this

"The circumstances in which one person acquires influence over another, and the manner in which influence may be exercised, vary too widely to permit of any more specific criterion".[9]

The question of husband/wife presumption of undue influence was eventually confirmed as a void principle by Nicholls LJ in Royal Bank of Scotland v Etridge (2)[10]

In Ireland, the Irish courts came close but not entirely within the ambit of the O'Brien principle on matters relating to third party undue influence. In Bank of Ireland v Symth[11] and in contrast to the decision determined three years earlier in O'Brien, the documents that Mrs. Smyth signed purported to act as a personal guarantee for her surety against the family home were not explained to her and therefore held the transaction void. Although the Supreme Court held that it was not necessary to have the documents explained or that independent legal advice was necessary. However, the court ruled that it would have been better to do so to execute good title to the land.

The second test that O'Brien adopted was the constructive notice test.

There is nothing unusual to the reasoning of the theory in the cases of married life couples, or any of the relationships that fall under Class (2a). It would be normal practice for husbands and wives to engage in emotional sway and influential exchanges on a lifetime of experiences between each other. However, once a third party enters the cycle to benefit from the influence, the courts will apply the special equity theory.