Undue influence

Question 1

What is undue influence?

Answer 1

An equitable remedy given at the discretion of the courts.

Protects against the abuse of a relationship of the exploitation of a vulnerable person.

Aims to uphold the principle that contracts are entered into voluntarily.

Question 2

What are the two types of undue influence?

Answer 2

1. Actual undue influence
2. Presumed undue influence

Question 3

What is actual undue influence?

Answer 3

Overt acts of improper pressure/coercion/illegitimate threats - overlaps with economic duress.

Question 4

What is presumed undue influence?

Answer 4

Applies where:
1. There is a relationship of trust and confidence; AND
* This can either be:
a.) Presumed in certain fiduciary relationships (doctor-patient; solicitor-client; teacher-pupil, but NOT husband-wife/civil partners)
b.) Proven on the facts;

2. A transaction that calls for an explanation: the party enters into a contract that is not for their benefit or is risky

If both apply, presumption of undue influence is raised and must be rebutted by the defendant (e.g., by showing the victim received independent advice before entering the contract).

If it cannot be rebutted, the only remedy is rescission NOT damages.

Question 5

Typical scenario - mortgages

Answer 5

Facts:
* Spouse persuades partner to put their house up for secuirty, so bank gives them a loan for their business.
* Undue influence is presumed because:
a.) Although a relationship of trust and confidence is not presumed (husband/wife), but it arises as it is proven on the facts (the courts readily see a relationship of trust and confidence between married partners)
b.) the partner is not benefiting from the transaction
* evidential burden shifts to influencer to prove otherwise

Bank/notice
* If the bank (third party) has notice (actual or constructive) of the undue influence the transaction will be voidable

Question 6

Test for constructive notice

Answer 6

The bank will have constructive notice if:
1. The transaction is not to the financial advantage of the victim.
2. There is a substantial risk of undue influence.

Note - the bank will be held to have constructive notice in every case where the relationship between the party giving the guarantee and the borrower is non-commercial, unless it takes reasonable steps.

Reasonable steps to avoid constructive notice:
* insist the party has a private meeting with a represenative of th ebank to explain risks of transaction
* ensures they receive independent legal advice + written confirmation of such