Contract Law: Duress & Undue Influence - Week 3

• Contractual obligations must be freely and independently assumed.
• Duress and undue influence address situations where free and independent consent to a contract is absent.
• This may result in contracts not being allowed to stand.
• Common law courts developed duress, while equity courts developed undue influence.
• There is some overlap between these doctrines due to their separate development.

Duress

• Duress involves one party coercing another into a contract.
• This means consent is not freely given.
• A contract entered into under duress is voidable.
• The wronged party can take action to have it set aside and be returned to their original pre-contract position.
• Historically, duress was limited to threats or acts of violence (duress to the person).
• The doctrine has expanded to include duress to goods and economic duress.
• Economic duress involves threats to a party's economic or business interests, and is an increasingly important area of commercial law.

Types of Duress

• Duress to the person: actual or threatened violence.
• Duress to goods: threat to seize or damage property.
• Economic duress: threats to economic or business interests.

Duress to the Person

• Actual or threatened violence can vitiate a contract.
• Barton v Armstrong: Physical threats only need to be one of the reasons for entering the contract to establish duress.
• The burden of proof is on the party who exerted pressure to show the threats did not contribute to victim's decision to contract.
• The duress needs to be only one factor influencing the wronged party's behavior.

Duress to Goods

• A contract can be avoided if there is a threat to seize or damage property.
• Occidental Worldwide Investment v Skibs A/S Avanti (The Sibeon & The Sibotre): established duress to goods.
• Proving duress to goods requires showing the agreement would not have happened without the duress.
• It is unlikely sufficient to show that duress will be one factor (but not a decisive factor) influencing the wronged party's behaviour, unlike duress to the person.

Economic Duress

• It is a more recently developed doctrine than duress to the person or goods.
• It can pose particular difficulties, and appears to be less well settled.
• DSND Subsea Ltd v Petroleum Geo Services ASA: defines economic duress as pressure resulting in a lack of practical choice for the victim, caused by illegitimate pressure, which is a significant cause inducing the claimant to enter into the contract.
• The agreement would not have been entered into if there had not been the duress.
• Lack of practical choice: victim has no alternative but to agree to the demand.
• Caused by illegitimate pressure.
• But for the duress, the agreement would not have been entered into.

Legal Effect of Duress

• A contract entered into under duress is voidable and can be rescinded.
• Pao On v Lau Yiu Long: confirms that the effect of duress is to make a contract voidable.
• Voidable: A contract remains in force unless action is taken to void (annul) it.
• Rescission: Returning the parties to their pre-contractual position.
• Rescission may be lost if the contract is affirmed (e.g., by acting in compliance with its terms after the duress has ceased or failing to challenge the contract in a timely way).

Economic Duress: Key Considerations

• DSND Subsea Ltd v Petroleum Geo Services ASA set out the definition of economic duress.
• "The ingredients of actionable duress are that there must be pressure, (a) whose practical effect is that there is compulsion on, or a lack of practical choice, for the victim, (b) which is illegitimate, and (c) which is a significant cause inducing the claimant to enter into the contract …"
• Many older cases remain relevant as they overlap with the current test.
• The same cases may be used as authority for different elements of the test.
• Lack of practical choice: the pressure must remove any reasonable alternative to acquiescing to the demand.

Lack of Practical Choice - Case Examples

• Carillion Construction Ltd v Felix (UK): Felix exploited Carillion's dependence on their work to renegotiate a higher price, which Carillion had no alternative but to accept to avoid late completion fees.
• Atlas Express v Kafco Ltd: Atlas refused to deliver goods unless Kafco agreed to a higher price, which Kafco reluctantly agreed to due to reliance on the contract and inability to find another carrier.
• B & S Contracts and Design Ltd v Victor Green Publications Ltd: Plaintiff demanded additional payment to complete a contract, the defendant paid under duress since cancellation would have caused serious damage to economic interests.
• Kolmar Group AG v Traxpo Enterprises PVT Ltd: Defendants reneged on an original agreement to sell methanol, then gave a "take it or leave it" proposal when they knew the claimants needed it to satisfy a client order.

Illegitimate Pressure

• DSND: Factors to consider when assessing the legitimacy of the pressure:
  • Actual or threatened breach of contract
  • Good or bad faith of the person exerting the pressure
  • Whether the victim protested at the time
  • Affirmation and reliance on the contract

Illegitimate Pressure – Threatened Breach of Contract

• A threat to breach a contract is an unlawful threat.
• It will usually amount to illegitimate pressure.
• Carillion Construction Ltd v Felix (UK) and Atlas Express v Kafco Ltd are examples of threatened breaches of contract.

Illegitimate Pressure – Good or Bad Faith

• A threat to breach a contract for illegitimate ends is made in bad faith.
• This will almost inevitably lead to a finding of duress.
• Carillion and Atlas: threats were made to extort money.
• DSND: threat to suspend work was considered reasonable and in good faith, therefore not illegitimate pressure.
• Reasonable behaviour by a contractor acting bona fide in a very difficult situation is not illegitimate pressure.

Illegitimate Pressure – Victim Protest

• The victim should demonstrate protest at the time the alleged duress was exerted.
• Carillion: Carillion protested the demand in writing.
• North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd and Another (The Atlantic Baron): Failure to protest a threatened breach and delay in claiming the return of extra payment led to the claim failing.

Illegitimate Pressure – Victim Affirmation

• Delay in taking action to set aside the contract can imply affirmation.
• North Ocean Shipping Co: delay of eight months before claiming the return of extra payment meant the shipping company affirmed the variation to contract.

Significant Cause

• Establishing economic duress requires proving the agreement would not have been entered into without the duress.
• Huyton SA v Peter Cremer GmbH & Co: Illegitimate pressure must have actually caused the making of the agreement.
• The pressure must have been decisive or clinching.
• This contrasts with duress to the person, where duress only needs to be one influencing factor.

Economic Duress - An Example

• Carillion Construction Ltd v Felix (UK)
• Carillion had no practical choice as completion was needed on time.
• Felix refused to complete the work on time unless Carillion agreed to higher payments.
• The refusal to complete on time amounted to a threatened breach of contract.
• The threat was made in bad faith to extract money from Carillion.
• Carillion protested by writing a letter.

Economic Duress and Consideration

• Consideration relates to whether a promise to pay more is binding.
• If a party does no more than originally obligated, there is no consideration to make variation binding (Stilk v Myrick).
• If a party does something beyond original duties, it may be good consideration (Hartley v Ponsonby).
• Williams v Roffey Bros & Nicholls (Contractors) Ltd: Practical benefit can be good consideration.
• Economic duress is relevant even where practical benefit exists as consideration.

Undue Influence

• It addresses situations where consent to a transaction is not freely given.
• It aims to ensure influence is not abused.
• It developed in the courts of equity.
• It overlaps with duress.
• If coercion is suspected, consider both duress and undue influence.

Undue Influence - Key Definition

• RBS v Etridge (No 2): Undue influence exists where a person's consent to a transaction was produced such that the consent ought not fairly to be treated as the expression of their free will.
• RBS v Etridge (No 2): clarified much of the existing case law.

Two Types of Undue Influence

• Overt acts of improper pressure/coercion (similar to duress).
• Taking advantage of influence/ascendancy in a relationship.

Overt Acts of Improper Pressure or Coercion

• These cases are rare; many would now be decided as duress.
• Causation test for deceitful/fraudulent undue influence is the same as for duress to the person (influence only needs to be a factor).
• Causation test for non-deceitful/non-fraudulent undue influence is the 'but for' test (but for the influence, would the party have entered the contract?).

Taking Advantage of Influence or Ascendancy

• It is a more common type.
• It often involves trust and confidence between parties.
• Relationships where one party is vulnerable/dependent might also allow influence.
• Irrebuttable presumption of influence exists in relationships such as parent/child, guardian/ward, trustee/beneficiary, solicitor/client, doctor/patient (but not parent/adult child or husband/wife).
• Undue influence arises only when the relationship is taken advantage of.

Proof of Taking Advantage of Influence

• Proving undue influence requires showing a relationship of trust/confidence and a transaction that requires explanation.
• The burden then shifts to the defendant to prove there was no undue influence.
• A transaction requires explanation if it doesn't fit what would be expected in the relationship.
• A spouse offering their interest in the matrimonial home as security for a loan to their spouse's business is not always considered a transaction that requires explanation.

Proof - Supporting Case

• Allcard v Skinner: Lindley LJ stated that if a gift is so large as not to be reasonably accounted for on the ground of friendship, relationship, charity, or other ordinary motives on which ordinary men act, the burden is upon the donee to support the gift.

Factors That Can Help Prove

• Comprehensive, independent advice received by the innocent party.
• The court has made clear that even when someone fully understands a transaction having received independent legal advice, it is possible that their consent to it is still being given only as a result of undue influence.

Limits on Equitable Relief

• Relief for undue influence is equitable (discretionary).
• Relief may be denied if the innocent party delayed making the claim or if their conduct was underhand ('he who comes to equity must come with clean hands').

Undue Influence and Third Parties

• It arises when a victim enters a contract due to undue influence from a third party (particularly in marital relationships involving guarantee/surety contracts with banks).

Third Parties with Influence

• If the contracting party (e.g., the bank) has actual notice of the undue influence, the contract is affected.
• However, it is highly unlikely that the bank will have actual notice of undue influence.
• Circumstances might lead a bank to realize a transaction carries risk of undue influence giving rise to constructive notice.

Spousal Influence Reminders

• The relationship between spouses is not one where there is an irrebuttable presumption of a relationship of influence / ascendancy.
• Spouse needs to prove relationship where they placed trust and confidence in their spouse.
• Transactions where one spouse offers their interest in the matrimonial home as security for a loan to their spouse's business is not assumed undue influence needing explanation.

Barclays Bank plc v O'Brien

• This case deals with the tripartite problem involving spouses and a bank.
• The parties involved are the bank , the business owner, and the spouse.
• Key considerations: the business owner is getting a loan from the bank, the spouse is agreeing to their share in the home being used as security for the loan, the bank is aware that the people involved are husband and wife and had failed to take reasonable steps to warn the spouse, and there exists the possibility that the business owner exercised undue influence over the spouse in arranging their consent to giving security. The transaction would be set aside.

O'Brien - Key Considerations Summary

• A creditor is put on notice when a wife offers to stand surety for her husband's debts, the transaction is on its face not to the financial advantage of the wife, and there is a substantial risk in transactions that the husband has committed a wrong entitling the wife to set aside the transaction.

Post O'Brien Developments

• RBS v Etridge (No 2): Principles of constructive notice extended beyond cases of spouses to any non-commercial relationship where one party is surety for the other.
• CIBC Mortgages plc v Pitt: The lender had no notice so the wife's claim was rejected.
• The guiding question: when will the bank be fixed with constructive notice of the undue influence?

Reasonable Steps When Undue Influence is Suspected

• Lord Nicholls, in Etridge, states guidelines for reasonable steps:
  • The creditor need not see the wife if they rely on a confirmation from a solicitor that they have advised the wife in an appropriate manner, unless the creditor is aware that this has not been done.
  • The creditor must provide the solicitor with sufficient information about the transaction for the solicitor to be able to explain it fully to the wife.
  • If the creditor is aware that the wife may have been misled, then the creditor must tell the solicitor of this.

Solicitor's Position

• Lord Scott in Etridge states that a solicitor should start by warning the wife that his involvement may be relied upon by the bank.
• If the wife consents to advice being given, the minimum the advice should contain is explaining to her that: she may lose her home, advise on the seriousness of the risk (duration and terms of the security), and note that the wife has a choice.
• The solicitor should obtain any necessary information from the lender/creditor.
• If the solicitor fails, the wife has an action in negligence against the solicitor, but no recourse to the lender/creditor.