Contract Law: Duress and Undue Influence

Duress and Undue Influence

• The basis of contract law dictates parties must freely agree to terms
• A party forced into a contract via threats shouldn't be bound by it
• Improper pressure, not commercial pressure or unequal bargaining power, constitutes duress or undue influence
• Duress or undue influence makes a contract voidable, allowing the innocent party to rescind

Duress

• Traditionally, duress involved violence, illegitimate threats, or property damage coercing contract agreement or changes
• Physical violence is a form of duress
• The Barton v Armstrong case involved Armstrong threatening Barton to buy company shares
• Even if Barton considered the arrangement satisfactory, the threats meant he wasn't bound by the agreement
• Threats need not be the only reason one entered the contract
• If Armstrong's threats factored into Barton's decision to enter the contract, Barton is entitled to relief
• Violence, illegitimate threats, or pressure traditionally constitute duress

Economic Duress

• Illegitimate threats to a person's finances or business are more common than physical violence in commercial settings
• Illegitimate threats must be distinguished from hard bargaining
• Examples of hard bargaining includes threats to take business elsewhere, sell to a competitor, or withhold discounts
• The threat must be improper, such as breaching a contract or committing a tort, to constitute economic duress
• Difficulty may arise when differentiating between legitimate commercial pressure versus an illegitimate threat

Atlas Express v Kafco

• Atlas Express v Kafco [1989] established economic duress through road haulage
• Kafco, a small manufacturer, contracted with Atlas Express to transport goods to Woolworths for £1.10 per carton
• After supplying 200 cartons, Atlas Express demanded a minimum of £400 per load, expecting 400-600 cartons
• Kafco agreed due to the difficulty of securing another hauler and the risk of losing Woolworths' business if deliveries didn't arrive on time
• When sued for extra payment, Kafco argued economic duress, prevailing because of illegitimate pressure and no practical alternative, voiding the renegotiation
• Atlas Express giving no consideration for promise of extra money was also a factor
• Kafco argued successfully that simply performing an existing contractual duty (Stilk v Myrick (1809)) was given

Williams v Roffey

• Atlas Express v Kafco was decided before the ruling of Williams v Roffey [1991]
• Performing a pre-existing obligation can constitute valid consideration if the promisor receives a practical benefit
• Williams v Roffey principle can't apply if the promise stems from fraud or duress, as seen in Atlas Express where duress voided renegotiation

Vitiated Consent

• Early economic duress cases emphasized coercion that vitiated consent (Pao On v Lau Yiu Long [1980])
• Duress is not about an absence of consent but its procurement through improper pressure

Illegitimate Pressure

• Emphasis is on scrutinizing pressure to determine legitimacy
• Illegitimate pressure ranges from unlawful threats (crime, tort) to threats of contract breach, which Atlas Express did
• Carillion Construction Ltd v Felix (UK) Ltd [2001] outlines how to establish economic duress:
• Pressure causing compulsion or lack of choice for victim
• Pressure that is illegitimate
• Significantly causative pressure that induces the claimant to enter the contract

Factors Considered by the Court

• Whether there has been an actual or threatened breach of contract
• Whether the person allegedly exerting the pressure has acted in good or bad faith
• Whether the victim had any realistic practical alternative but to submit to the pressure
• Whether the victim protested at the time
• Whether they affirmed and sought to rely on the contract

Illegitimate Pressure

• Illegitimate pressure must be distinguished from normal commercial bargaining
• Adam Opel GmbH and Renault SA v Mitras Automobile (UK) Ltd [2007] invoked Carillion and Williams v Roffey
• Pakistan International Airline Corporation v Times Travel (UK) Ltd [2021] affirmed Carillion's guidelines, requiring:
  • Illegitimate threat/pressure by the defendant
  • That threat causing claimant to contract/vary the contract
  • No reasonable alternative to conceding

Lawful Act Duress

• Supreme Court discussed but did not deep dive into lawful act duress, which is outside the scope of the textbook

Effect of Duress

• Duress, akin to misrepresentation, renders contracts voidable
• Only rescission is available as a remedy, not damages

Rescission

• Easiest way to rescind is notifying the counterparty
• If this isn't possible due to an untraceable counterparty, notifying the police or an obtaining a court order of rescission is advised

Limitations to Recission

• Rescission can be barred either
• Affirmation
• Undue delay
• An innocent purchaser acquiring property interest
• The inability to restore goods substantially, such as if the propety is consumed or destroyed

*North Ocean Shipping v Hyundai Construction Co (The Atlantic Baron) [1979] case

• North Ocean Shipping v Hyundai Construction Co involved shipbuilding, where builders demanded more money
• The Court held that economic duress took place
• Shipbuilders had consideration, so that was not an issue
• Rescission wasn't possible as claimants affirmed by paying without protest after building, and waited too long

Sensible Strategy

• The most strategic course of action, thinking back to Atlas Express v Kafco, is to withhold payment and allow duress to serve as a defense in case of a lawsuit

Affirmation

• It was the later variation affected by duress that allowed rescission and not payment of the original contract value

Duress - Summary

• To establish duress, establish the illegal threat/pressure which inhibited choice and which significantly induced the other party to enter into the contract

Remedy

• To make a contract voidable
• Victim of duress can seek recission but it can be bars
• Duress can act as defence against claims for damages

Undue Influence

• Undue influence, like duress, makes a contract voidable with rescission available, but no damages
• It involves unacceptable influence, not threats or violence
• To identify unacceptable influences, find unequal relationships and consider potential abuse by the dominant person

Undue Influence Burden of Proof

• The onus is on the innocent party to prove actual duress
• With undue influence, some are presumed

Fiduciary Relationships

• Undue influence gets presumed where there is a fiduciary relationship where one has a trust/confidence to which calls for explanation

Actual Undue Influence

• The claimant demonstrates that defendant unduly influenced
• It can be one person's word vs. the other

Presumed Undue Influence

• Undue influence requires trust/confidence and a transaction that needs explaining
• Royal Bank of Scotland v Etridge (No 2) case established that this is needed to establish that influence was unduly used

Undue Influence - Relationships

• Certain relationships, such as solicitor/client and doctor/patient, have irrebuttable presumed trust
• Husband/wife ones don't

Undue Influence - Cases

• Tate v Williamson (1866) case
• The defendant was an extravagant Oxford student's financial advisor
• The undergrad took the advice without questioning it
• O'Sullivan v Management Agency Ltd case
• Gilbert O'Sullivan and his manager had the undue influence

Undue Influence - Transactions

• The transaction cannot be readily explained, but the relationship between the parties must explain the transaction

Rebuttable Presumption

• A presumption of undue influence is rebuttable
• Taking independent evidence could do it

Undue Influence - Structure

• See figure 7.1 for how to establish influence

Undue Influence - Third Parties

• This is where the creditor isn't affected by undue influence by a third party

Undue Influence - Example

• Husband has a loan from a bank and wife signs security agreement but husband defaults
• Bank seeks to enforce security agreement against wife
• Wife claims it should be set aside due to undue influence
• Security should not affect the agreement between the bank and the wife
• Many situations involve an injection of capital, so they agree to give a loan
• A surety, like a wife, agrees with documentation and then gets the money
• If the husband's business does bad, then reposession commences
• The dilemma in this situation is the protection of parties like the wife
• This is because the best way to secure a loan is through a matrimonial home
• It is unfair if the lender is tainted with the undue influence

Barclays Bank v O'Brien

• Commercial lender weren't affected and there was no agency
• This was because aiming to get the loan means not focusing on ensuring the loan

Barclays Bank v O'Brien - Introduced Idea

• The idea of notice to it was tainted
• Constructive notice, the creditor will, have it so steps can be taken to ensure what the surety is signing
• Ensure is aware of the risks too
• This means if there is constructive notice, it can be set aside

CIBC Mortgages plc v Pitt

• Actual undue influence could be proven
• Pitt wanted to finance share buildings
• The true purpose application was false
• The House of Lords held that not entitling the lender it there was no undue influence

Royal Bank

• The decision on is another case where the wife argued
• Because the solicitor had confirmed it there was no further steps the bank could take

Royal Bank of Scotland v Etridge

• The House of Lords declared it to be voidable
• Was a creditor "on inquiry"
• It take reasonable steps
• If advanced, on its own
• Lord Nicholls said to ensure they are told, warned, and to take legal action
• Secondly, to transfer it and confirm with lawyers to proceed
• Same principles and misrepresentations had happened
• The amount and duration of his loan were two
• He had to make an effort

Cases and Relationships

• All principles apply equally to other households
• One case was with and employer and employee but the courts declared it
• This will otherwise take the proposed security too

Figure 7.2

• Summarizes the relation to influences
• The security must enforce it if required

Undue Influence Summary

• The effect of influence can often influence
• There are is no easy definition
• Relationships are often described
• To be in contact will often call for advice
• Creditors need to ensure the signee know implication by setting a good standing

Financial Support

• Check that they are a good bank in line by having proper confirmation