Introduction to Business Law: Duress and Undue Influence

Classic Contractual Theory

•       According to classic contractual theory the only contracts that can be enforced are those entered into voluntarily

•       2 particular states of affairs might affect the voluntary nature of agreement 

•       Duress

•       Undue Influence

Consent

•       For an agreement to be a valid contract it has to be arrived at with the consent of the parties.

•       In the movie The Godfather the young Vito Corleone introduces a revolutionary new concept to contract law!

An Offer he Can’t Refuse

•       Michael: Well, when Johnny was first starting out, he was signed to a personal services contract with this big-band leader. And as his career got better and better, he wanted to get out of it. But the band leader wouldn't let him. Now, Johnny is my father's godson. So my father went to see this bandleader and offered him $10,000 to let Johnny go, but the bandleader said no. So the next day, my father went back, only this time with Luca Brasi. Within an hour, he had a signed release for a certified check of $1000.

•       Kay Adams: How did he do that?

•       Michael: My father made him an offer he couldn't refuse.

•       Kay Adams: What was that?

•       Michael: Luca Brasi held a gun to his head, and my father assured him that either his brains or his signature would be on the contract.

The Common Law Doctrine

•       This fictitious case illustrates very well why the common law doctrine was useless.

•       The bandleader was unlikely to sue the Godfather for applying undue influence.

•       Mafia bosses rarely worried about breach of contract claims!

Duress

•       The courts originally only recognised violence (or threats of it) to a party or those near to her/him

•       Barton v Armstrong [1975] 2 All ER 465

•       A transaction which benefitted the former chairman of a company was voidable for duress

•       He had threatened to kill the managing director of the company

•       Cumming v Ince (1847) 11 QB 112

•       Threat of unlawful confinement to a mental hospital

•       Welch v Cheeseman (1974) 29 Estates Gazette 99

•       The defendant threatened the claimant with violence to force her to transfer the house to him for 10% of its value

Threats to Property

•       Threats directed at property may amount to duress

•       Occidental Worldwide Investment Corporation v Skibs A/S Avanti (The Siboen and The Sibotre) [1976] 1 Lloyd’s Rep 293

The Siboen and The Sibotre) [1976] 1 Lloyd’s Rep 293

•       “ if I should be compelled to sign a… contract for nominally but legally sufficient consideration under an imminent threat of having my house burnt down…,

•       I do not believe that the law should uphold the agreement. 

•       The true question is ultimately whether or not the agreement in question is to be regarded as having been concluded voluntarily”

Economic Duress

•       A party coerced into a contract where there was no real consent can avoid the contract

•       The Universal Sentinel [1983] 1 AC 366

•       Ship-owners were told that unless they agreed to pay money to a sailors charity their ship would not be allowed to leave port

•       They paid but later recovered the money

•       They had not really consented to the payment

Atlas Express v Kafko Ltd. [1989]

•       The defendants contracted the claimants to carry goods to Woolworth’s shops around the country

•       The agreed price was £1.10 per carton

•       The 1^st load contained 200 cartons (the claimants had estimated 500)

•       The claimants said they would not carry the goods unless they were guaranteed 400 cartons per load

•       The defendants could not find another carrier so they were coerced into agreeing (they would have lost their contract with Woolworth’s)

•       After the cartons had been delivered they refused to pay

•       The court agreed with them, the contract was voided by the claimants economic duress

The Essence of the Threat

•       Economic duress refers to the focus of the pressure; rather than threats being made to harm a person

•       The threat is directed towards their financial well being…it does not have to be direct

•       E.g.  “sign this contract or I will bankrupt your business”

•       The threat does not have to have been expressed directly

•       The essence of duress is the “do this or else” element of the threat

•       Evidence of sufficient ‘compulsion of the will’ will suffice.

•       The Atlantic Baron [1979] QB 705

The Requirements of Economic Duress

•       Pao On v Lau Yiu Long [1980] AC 614

•       Duress requires ‘coercion of the will which vitiates consent’

•       So that any seeming agreement was given involuntarily

•       Ordinary commercial pressure is not however sufficient ‘coercion of will’ to amount to consent

Pao On v Lau Yiu Long [1980] AC 614

•       Did the person who claims to have been coerced protest at the time?

•       Did she have an alternative course of action open to her?

•       Did he have independent advice?

•       Did she take steps to avoid the contract after it was formed

•       Lord Scarman identified the four factors of economic duress

•       The factors identify duress

•       It would be reasonable to expect a party forced into a contract to object at the time

•       It would be expected that they would try to escape the oppressive terms of the contract as soon as possible afterwards

•       It would not be reasonable to categorise conduct as duress if the party had other alternative choices

•       Duress involves an absence of choice (voluntary decision making )

Ordinary Commercial Pressure?

•       Pao On v Lau Yiu Long [1980] AC 614

•       The claimants threatened not to proceed with the sale of shares unless the defendants agreed to renegotiation on other unrelated matters

•       The claimants tried to enforce the agreement but the defendants resisted on the basis of duress

•       The Privy Council decided that the agreement to renegotiate other matters had been arrived at through ordinary commercial pressure (business)

•       The PC found in favour of the claimants and enforced the agreement

•       The defendants could not establish that they had suffered ‘coercion of the will which vitiates consent’

CTN Cash and Carry v Gallagher [1994] 4 All ER 714

•       Lawful Act Duress

•       In commercial contracts only in extreme circumstances would threats of lawful action constitute duress

•       Threats to ‘withdraw credit facilities’ are a lawful act

Undue Influence

•       The exercise of undue influence, like duress can vitiate and agreement

•       Where one party has an unfair advantage they may apply improper pressure

•       There is no precise definition of what this unfair advantage might be

•       But two classes are said to exist

Bank of Credit and Commerce International v Aboody [1990] 1 QB 923

•       Class 1 – actual undue influence

•       Class 2 – presumed undue influence

•       Class 2 was divide into sub-classes in Barclays Bank plc. v O’Brien [1993] 4 All ER 417

•       Class 2A presumed from a special relationship between the parties

•       Class 2B presumed from a relationship of trust and confidence

Actual Undue Influence

•       Williams v Bayley [1866] LR 1 HL 200

•       A man forged the signature of his father on a bank promissory note

•       The bank discovered the forgery

•       They threatened his father that his son would be put on trial and transported to Australia unless he agreed to mortgage his property to them

•       The courts ordered the mortgage set aside

Williams v Bayley [1866] LR 1 HL 200

•       The party alleging the influence must prove:

•       That at the time of entering the contract they were not exercising free will in agreeing to the terms

•       The agreement was set aside (an equitable remedy at the courts discretion)

•       The bank had used undue influence because the father could no be said to have entered it voluntarily

Aboody [1990]

•       In Aboody the court decided that the party alleging undue influence had suffered a manifest disadvantage as a result of being induced into the contract.

•       In CIBC Mortgages v Pitt [1993] 4 All ER 433

•       The house of lords rejected this necessity

Presumed Undue Influence

•       In these cases the complainant only has to show, that there was a relationship of trust and confidence between the complainant and the wrongdoer

•       That is was of such an influence that it is fair to presume that the wrongdoer abused that relationship in procuring the complainant to enter the contractual agreement.

•       Special relationships between the parties (Class 2A)

•       The party alleging the undue influence has to prove the existence of the relationship

•       The burden of proof then falls on the party alleged to have used undue influence to induce the other into contract that:

•       The party alleging undue influence had full knowledge of the nature of the agreement, that they understood the contractual nature of the agreement

•       And this was satisfied if:

•       The party alleging undue influence had independent and impartial advice before entering the contract

•       Parent – Child

•       Religious leader – Religious adherent

•       Trustee – Beneficiary

•       Lancashire Loans Co v Black [1933] 1 KB 380

•       Allcard v Skinner (1887) 36 Ch D 145

•       Benningfield v Baker (1886) 12 App Cas 167

•       Doctor – Patient

•       Solicitor Client

•       Husband and Wife are expressly excluded from special relationships under a duty of confidence

•       Dent v Bennett (1839) 4 My & CR 269

•       Wright v Carter [1903] 1 Ch 27

•       Midland Bank plc v Shephard [1988] 3 All ER 17

•       Where no special relationship exists between the parties in the class 2 sense

•       Commonly covers the relationship between husband and wife

•       It can be applied in relationships between bank and customer

•       Lloyds Bank plc. v Bundy [1979] QB 326

Lloyds Bank plc. v Bundy [1979] QB 326

•       Abuse of unequal bargaining power between the parties

•       The CA found for the plaintiff because the relationship between the bank and its customer gave rise to a duty of confidentiality

•       Because they had done business with the claimant for many years

•       An elderly farmer made increasingly large mortgages on his farm in order to guarantee a business started by his son

•       The farmer was told by an assistant manager at the bank that if he did not increase his mortgage liability his sons business would fail

•       The son’s business failed anyway

•       The farmer was now unable to pay the mortgage and the ban applied for a possesson order on the farm

•       Held

•       The mortgage taken out in December on the advice of the assistant manager was voidable

•       The old farmer had relied on the advice of the Asst. Manager on trust

•       The bank could not repossess the farm

•       The bank should have advised the farmer to seek independent legal and financial advice before he agreed to the mortgage

•       The bank abused its influence on its customer

National Westminster Bank v Morgan [1985] 1 All ER 821

•       Contracts affected by undue influence are voidable not void

•       The doctrine is concerned with the protection of victims of improper behaviour

•       “Undue influence did not rest on vague public policy”

•       Since a contract tainted by undue influence is voidable the injured party must bring and action for rescission

•       The remedy may be lost in two ways

•       The victim may be held to have affirmed the contract after the undue influence had ceased

•       Failure to act within a short time of it ceasing may be constructive affirmation

Allcard v Skinner (1887) 36 Ch.D 145

•       The claimant under the influence of her spiritual advisor joined an order called the ‘Sisters of the Poor’

•       Her spiritual advisor was a senior member of this order

•       During the eight years she was a member she gave £7,000 to the leader of the order

•       Six years after leaving the order the claimant tried to recover the balance (£1,700)

•       The gift was held to have been given under undue influence

•       But

•       She had failed to take any action during the six years while she was no longer under any such influence