Duress and Undue Influence

Question 1

Give a brief overview of duress and undue influence and the only available remedy for both of them

Answer 1

Duress and UI are two different forms of improper pressure leading up to formation of contract

The only remedy for duress and UI is rescission

Question 2

What can amount to ‘duress?’

Answer 2

1) Physical threats

Must be at least a reason for entering the contract, but need not be the only reason

2) Economic duress – 3 elements in bold

Must be an illegitimate threat, which leaves the victim with no practical choice but to agree

• Typically involves a threat to breach a contract or commit a tort

This threat must be a significant reason for the party conceding to the contract

• Must be more than normal commercial bargaining or legitimate commercial pressure

3) In deciding if the pressure is illegitimate, court will consider:

• there has been an actual or a threatened breach of contract;
• the threat was made in good or bad faith; or
• the victim protested at the time

Question 3

What are the consequences of a finding of duress?

Answer 3

Makes the contract or contractual variation voidable – rescission is only remedy

• Returns parties to pre-contract position – goods and money returned

Bars to rescission

• Affirmation – cannot change your mind once affirmed
• Undue delay
• Bona fide purchaser
• Restitution is impossible

No other remedy if rescission is barred

Question 4

How do upward contractual variations link with duress?

Answer 4

Upward variations – promises to pay more for the same contractual performance

• Usually, performance of existing contractual duty is not consideration for a promise of extra money, unless there is a practical benefit conferred
• But if the promise to pay more was made under economic duress, the variation will be voidable (can be set aside if rescission is not barred)
• The rest of the contract will remain in place, as was untouched by duress

Question 5

What can amount to ‘undue influence?’ What is the effect of a finding of undue influence?

Answer 5

No recognised definition

• Usually involves someone in a position of trust and confidence who takes unfair advantage someone who trusts them, usually for personal gain
• It means influence which goes beyond what is regarded as acceptable

Effect

• Makes the contract voidable, if rescission isn’t barred
• No other remedy if rescission is barred

Question 6

How can undue influence be proven? What are the 2 ways?

Answer 6

1) Party may be able to show actual undue influence – difficult as often occurs behind closed doors

2) Party can raise a presumption of undue influence, if they show:

(a) A relationship of trust and confidence

• Some are irrebuttably presumed to fit this (doctor/patient, solicitor/client)
• Otherwise, claimant will have to show, in fact, they trusted the other party implicitly

(b) The transaction must call for an explanation

• Entering a contract which is not for their benefit
• Presumption can be rebutted, for instance, if innocent party took independent legal advice

Question 7

Undue influence can be prevalent in secured lending situations, involving husband + wife and the lender as a 3rd party.

Give an example of this and lenders are affected by the undue influence a husband may exert over a wife

Answer 7

Husband (H) wants a business loan

Creditor will only lend if it has security for loan repayment

• May need to be a second mortgage on a matrimonial home owned jointly by H and wife (W)

W may sign security documents because of undue influence of H

H defaults on loan and creditor seeks to enforce security

W alleges UI by H, not the other contracting party

• Creditors used to get away with this, as they were the other side, but now it has changed

Question 8

Lenders will be tainted with the undue influence of the third-party debtor if certain criteria are met.

Explain the criteria

Answer 8

If lenders had actual or constructive notice of the impropriety

• Unlikely to have actual notice

Deemed to have constructive notice if:

1) The lender was put on inquiry

Always happens if:

• Relationship between debtor and surety (wife) was non-commercial; and
• It wasn’t for their joint benefit

2) The lender failed to take reasonable steps to ensure the surety understood the implications of what they were signing

• Could be a private meeting with surety to explain risks
• Nowadays, main option is for lenders to get written confirmation from a solicitor, that they have advised surety of inherent risks of the agreement
• Confirming surety has had independent legal advice is the reasonable step