Saturday, August 06, 2005

Contract Law - Undue Influence

The equitable doctrine of undue influence typically provides relief from contract entered into under improper pressure not amounting to duress. It applies to cases where a claimant seeks to set aside a transaction based on the fact that the defendant had exercise undue influence to procure the transaction which is patently and strikingly unfavorable to the claimant. The courts will be willing to intervene where there is some relationship between parties which has been exploited and abused to gain an unfair advantage.

Sir John Salmond gave a useful pointer in Brusewitz v Brown [1923] NZLR 1106 at page 1109:

“The law in general leaves every man at liberty to make such bargains as he pleases, and to dispose of his own property as he chooses. However improvident, unreasonable, or unjust such bargains or dispositions may be, they are binding on every party to them unless he can prove affirmatively the existence of one of the recognized invalidating circumstances, such as fraud or undue influence.”

Equitable doctrines of undue influence

In recent development of equitable doctrine of undue influence in English law, there has been the tendency to categorize the different types of cases by reference to the precise relationship between the parties or the special situation of the weaker party. In Royal Bank of Scotland v Etridge1, a transaction can be set aside in equity if, because it had been procured by undue influence exerted by one party (A) on the other (B), where it cannot “fairly be treated as the expression of (B’s) free will.” Reliefs sought under undue influence are group into two categories:

1. Actual Pressure
2. Special Relationship

Actual Pressure

This refers to cases where there is no special relationship that exists between the contracting parties. Relief is given based on the ground of undue influence in which one party had induced the other to enter into the transaction by actual pressure which equity regard as improper but which does not amount to duress at common law because no element of violence to the person was involved. In this situation, it must be affirmatively proved that one party in fact exerted undue influence over the other and that the transaction resulted from that influence. For example, a promise to pay money can be set aside if obtained by a threat to prosecute the promisor or his close relative or his spouse for a criminal offence2. Undue influence can be exercised without making illegitimate threats or indeed any threats at all3. The party who claims relief on the ground of actual undue influence must show that such influence existed and had been exercised, and that the transaction resulted from that influence.

Special Relationship

This category refers to a special relationship that exists between the parties to the contract. Equity would also give relief for undue influence in which the relationship between the parties is such as to give rise to what has been called a “presumption of undue influence”4. Here, the equitable view is that undue influence must be presumed, that is, the undue influence may be presumed to exist or that it is presumed to have been exercised. Where the presumption applies, it is not necessary for the party claiming relief to show that the impugned transaction was in fact procured by undue influence. Relief can be given on the ground of undue influence even though the person to whom the promise was made obtained no personal benefit from it. A presumption is a rule of law by which, on proof of a specified fact or facts is taken to exist. Once that confidential relationship has been proved, the burden then shifts to the wrongdoer to prove that the claimant had actually entered into the contract based on his free exercise of independent will. The most usual way is to show that the claimant had received independent competent advice before entering into the transaction. Presumptions can be classified into two groups – irrebuttable presumption and rebuttable presumption. Irrebuttable presumption (or sometimes referred as conclusive presumption) are rules of substantive law which have nothing to do with ways of proving facts5. If the law says that, on proof of the basic fact, the presumed fact is irrebuttably taken to exist. A rebuttable presumption, by contrast, is a rule of law which, on proof of the basic fact (s), the presumed fact is assumed to exist in the absence of evidence negativing its existence. Such presumption may be those which requires the person against whom the presumption operates to show (on a balance of probabilities) that the presumed fact does not exist; and those which merely require that person to introduce some evidence to that effect, leaving it up to the proponent of the presumption to show that (on a balance of probabilities) that fact does, exist (often referred as evidential presumption).

To give rise to the “presumption of undue influence”, two basic facts must be established by the party claiming relief. The first is the existence of a relationship between (A) and (B) by virtue of which (B) either in fact reposed trust and confidence in (A), or is taken as a matter of law to have done so. The second fact relates to the nature of the impugned transactions. Once a relationship of trust and confidence is established, the transaction could be set aside on grounds of public policy, even though it was not in fact disadvantages to him. Where (A) stood in a fiduciary position to (B), the impugned transaction would not be allowed to stand and there will be no requirement to proof any form of “manifested disadvantage”.

Relationship presumption

Traditionally, the relationship in which the presumption applies is classified into two categories which became known as “class 2A” (where relationship is based on presumed trust and confidence) and “class 2B” (where relationships are based on actual confidence).

In the class 2A case refers to the existence of a relationship of trust and confidence between the wrongdoer and the claimant of such a nature that it is fair to presume that the wrongdoer abused that relationship in procuring the claimant to enter into the impugned transaction. The law presumes irrebuttably, that (A) had influence over (B) if their relationship is that of parent and child6, guardian and ward7, religious advisors and disciples8, doctor and patient9, solicitor and client10, and trustee and cestui que trust11. It does not apply to all relationships which are fiduciary in the sense that they give rise to a duty of disclosure. Examples are: husband and wife12, employer and employee13 & agent and principle14. The nature of the fiduciary relation must be such that it justifies interference. The presumption may apply even after the relationship has ceased if the influence continues, for example, between a solicitor and ex-client.

In the class 2B case, the claimant needs to prove a de facto existence of a relationship under which the claimant generally reposed trust and confidence in the wrongdoer, which will raise the presumption of undue influence that the wrongdoer has then to rebut. As long as the claimant succeeds by merely proving that he reposed trust and confidence in the wrongdoer, he need not have to prove that the wrongdoer had exerted actual undue influence. Thus, the relationship between (A) and (B) must be one in which (B) has in fact reposed trust and confidence in (A). It is necessary for (B) to establish this fact or that (A) has had acquired “domination” over (B).

In each such case, the main question that would be considered by the court would be whether the party seeking to set the transaction aside has reposed sufficient trust and confidence in the other.

Burden of prove

Where the necessary relationship is alleged to exist, the burden of proving that it does exist is on the party seeking to set aside the transaction15. Once this burden has been discharged, it is up to the party benefiting from the transaction to rebut the presumption of undue influence. The normal remedy in cases of undue influence is to set the impugned transaction aside. The court may make an award in the nature of damages giving the victim the difference between the amounts for which he parted with the subject matter and its fair value at the time of the transaction.

Rebuttal

The presumption of undue influence is rebutted if the party benefiting from the transaction shows that it was “the free exercise of independent will”. The usual way of doing this is to show that the other party had received independent advice before entering into the transaction. The independent advice must be given by a competent person and based on knowledge of all the relevant facts16.

Conclusion

The ratio decidendi in the case of undue influence is far from clear, but perhaps fair interpretation of the judgment is that the presumption will not arise unless the transaction is patently and strikingly unfavorable to the party who seeks its avoidance. The primary principle of equity was, and is, and is always more flexible in the way it grants or refuses relief. Equity has always acted in accordance to the principles of good consciousness.

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Roy D. Slater said...

Thanks for the post on utah contract law. The doctrine of undue influence is pretty interesting. This was an informative read.