Duress and Undue Influence Lecture

This chapter will examine the doctrines of duress and undue influence. These doctrines both provide a means for an individual to avoid an already concluded contract. These doctrines operate where the individual has been forced or coerced into a contract by threats, unfair pressures or unreasonable influences. The justification for these doctrines is fairly obvious, it is that it prevents one party taking unfair advantage of another. The effect of these doctrines on a contract is that it makes the contract voidable at the request of the aggrieved party. The chapter will start with the doctrine of duress, before moving on to undue influence.

Duress

Duress is defined as some kind of threat, violent or other action which is used to coerce somebody into doing something against their will. In the context of contract law, this refers to where a party uses duress against the other party in order for them to enter into a contract which they either do not want to, or where the terms of the contract are unfavourable to them.

History and development

The doctrine of duress has always been recognised in the English common law, here are some of the main examples of the forms it may come in:

• Duress by the threat of violence - Barton v Armstrong [1976] 1 AC 104
• Duress by threat of imprisonment - Williams v Bayley (1886) LR 1 HL 200
• Duress by creating a threatening environment - Antonia v Antonia [2010] EWHC 1199
• Duress by threat to damage property - Dimskal Shipping Co SA v International Transport Workers’ Federation, The Evia Luck [1991] 4 All ER 871
• Duress by economic pressure - D & C Builders v Rees [1966] 2 QB 617

The two categories this chapter will explore are threats of force or violence, and economic duress.

Duress by threat of violence

Duress by threat of violence is self-explanatory. If a party is able to prove they were coerced into a contract due to a threat of violence, the contract will be voidable. There are two main requirements of duress by threat of violence:

1. The nature of the threat must be sufficient to amount to duress
2. The effect of the threat must have been that it forced the claimant into the contract

The nature of the threat

The threat made must be sufficient in its nature to amount to duress. Usually, the indicator the courts have used is whether the threat is illegal. If the threat is illegal, there is a presumption that this will amount to a sufficient threat. The illegal act in question must be a criminal act, as opposed to one of a tortious nature. The case of Barton v Armstrong [1976] AC 104 is authority for this point. In this case, a threat of murder was one amounting to an illegal act of sufficient nature.

Effect of the threat

The distinction to make when ascertaining the effect of the threat is whether there is a threat which results in a claimant voluntary entering the contract, or whether the claimant involuntary entered the contract. In the first case, it is suggested that the claimant would have had another alternative to entering the contract, and would therefore not be sufficient to amount to duress, as the claimant must have no other alternative.

The criminal case of Northern Ireland v Lynch [1975] AC 653 provides an effective explanation of this. The judges accepted that even in extreme circumstances there is always usually an option, but it must be that only one option is realistically available.

In contract law, there has been unwillingness to accept the position in Northern Ireland v Lynch. It has been suggested that the claimants will must be overborne and he must have no choice. However, if we examine Barton v Armstrong, surely despite the threat of murder there was still a choice. Overall, it can be concluded that the threat must be one which is illegal

Economic duress

Economic duress refers to a threat to an individual’s financial interests. This was not suggested as a potential ground of duress until the case of Occidental Worldwide Investent Corporation v Skibs A/S Avanti, The Siboen and the Sibotre [1976] 1 Lloyd’s Rep 293. A typical scenario of such duress would be as follows:

• Party A and Party B negotiate a contract
• Party B threatens to breach the contract unless the contract is renegotiated
• Party A opt to renegotiate the contract in favour of Party B because of the potential outcomes in B were to breach the contract

In this situation, a breach of contract by Party B could have any number of unwanted consequential results for Party A. Perhaps the contract is a subcontract, and if Party B breach the contract, Party A will be liable in damages to another party.

This doctrine requires a fine balance with the commercial needs of society. Legitimate economic pressure can be recognised as a useful negotiation tool, and the courts risk going too far with the scope of economic duress.

The doctrine of economic duress was established in the case of Pao On v Lau Yiu Long [1980] AC 614. Lord Scarman set out these two requirements:

1. Coercion of the will that vitiates consent
2. The pressure or threat must be illegitimate

The first requirement, that requires a coercion of the will that vitiates consent, was highly criticized by academics such as Atiyah. It was also criticised in Dimskal Shipping Co SA v International Transport Workers’ Federation, The Evia Luck [1991] 4 All ER 871. The judges criticised the ‘coercion of the will that vitiates consent’ requirement on the ground that a victim of duress’ consent has not been vitiated, as they are completely aware of what they are doing, they consent intentionally. This has been recognised in the criminal law, where it is recognised that the party under duress does consent, but they do so with no other potential alternative. Therefore, when the opportunity arose in DSND Subsea Ltd v Petroleum Geo Services ASA [2000] BLR 530, Dyson J altered the requirement to be:

1. Pressure
2. The practical effect of the pressure is that there is compulsion, or lack of practical choice for the victim
3. The pressure is illegitimate
4. The pressure is a significant cause in inducing the claimant to enter the contract

Lack of practical choice

A practical example of this principle in operation can be found in B & S Contracts & Design Ltd v Victor Green Publications Ltd [1984] ICR 419. In this case, there was a contract to erect some exhibition stands. A week before the due date of the contract, the builders refused to work unless they were paid more money. If the claimant had not paid the extra money, they would have suffered serious loss as a result of the contract they had involving the completed exhibition stands. In this case, they had no realistic option but to pay the extra money to avoid the serious losses.

Here are some classic examples of conduct which can amount to economic duress:

• Threat to stop supply of components needed in manufacture process - Adam Opel GmbH v Mitras Automotive Ltd [2007] EWHC 3205 (QB). This was because there was no realistic choice other than to pay the higher price for the components
• Threats to withhold delivery once under contractual obligation - Carillion Construction Ltd v Felix (Ltd) [2001] BLR 1
• Revising a contract for carriage of goods where it would be impossible for the claimant to obtain alternative carriage quick enough for the goods if they require those goods for another contract - Atlas Express Ltd v Kafco (Importers & Distributors) Ltd [1989] 1 All ER 641.

Case in focus: Atlas Express Ltd v Kafco (Importers & Distributors) Ltd [1989] 1 All ER 641

In this case, Kafco were contracted with a third party for the supply for baskets. Kafco had an agreement with Atlas Express for delivery of the baskets. Atlas Expressed realised they had miscalculated the size of the baskets, and would have to spend more on delivery and cut their profits. Atlas told Kafco if they did not pay a higher price for delivery, they would not deliver the baskets at all. Kafco had no choice but to pay the higher price, as if they did not delivery the products to the third party they would go into liquidation. They paid the price and later claimed economic duress.

It was held that Kafco had no choice but to pay the price. If they had decided to claim damages for the failure of Atlas to delivery the goods, it would have not compensated them for missing the subsequent contract with the third party, and a claim forcing them to deliver under a specific performance remedy would have been too time consuming, due to the immediate requirement of delivery to the third party. Therefore, the only viable option for Kafco was to pay the higher price.

Illegitimate pressure or threat

The third requirement that the pressure must be illegitimate. It is difficult to distinguish between an illegitimate and a legitimate one, as there is expected to be a certain amount of pressure in commercial bargaining. As Dyson J described it - ‘illegitimate pressure must be distinguished from the rough and tumble of the pressures of normal commercial bargaining’ (DSND Subsea Ltd v Petroleum Geo Services ASA).

An example of lawful pressure is seen in R v HM Attorney-General for England and Wales [2003] UKPC 22.

Case in Focus: R v HM Attorney-General for England and Wales [2003] UKPC 22

This case involves an SAS member who was party to a specific patrol who were considered infamous due to an amount of controversy surrounding their actions. In light of this, the Ministry of Defence forced all members of the patrol to sign confidentiality agreements. The member in question refused to do so, and the Ministry of Defence threatened him with a demotion to a less important unit. The member signed the contract, but eventually claimed he was forced to sign it under duress.

The court explained that some demands may be lawful, but would constitute duress. However, if the demand is justified, the pressure would not amount to duress. In this case, the threat of a demotion amounted to legitimate pressure in light of the importance of the confidentiality agreement. The member in question still had a choice; he could have taken the demotion in order to opt out of confidentiality. The court described the pressure as ‘overwhelming’, but not illegitimate.

It was established in Kolmar Group AG v Traxpo Enterprises Pvt Ltd [2010] EWHC 113 (Comm) that generally speaking, a threat to break a contract would be regarded as illegitimate, especially in cases where they were aware this threat would result in a breach of contract.

The test to apply was confirmed in R v Attorney-General for England and Wales. Two things should be examined:

1. The nature of the pressure
2. The nature of the demand

The threat of a lawful action would not necessarily mean that the pressure was legitimate. For example, blackmail using a lawful threat would be an illegitimate threat.

Can duress be lawful?

It has been established in CTN Cash and Carry Ltd v Gallagher Ltd [1994] 4 All ER 714 that duress may be lawful under certain circumstances, despite the unreasonableness of the demands.

Case in focus: CTN Cash and Carry Ltd v Gallagher Ltd [1994] 4 All ER 714

In this case, CTN contracted with Gallagher for some goods. Unfortunately, CTN delivered the goods to the wrong place of business. Gallagher attempted to remedy this, but the goods were stolen before they could do so. CTN mistakenly believed the goods were at the risk of Gallagher, as they believed they had delivered them properly. CTN therefore invoiced Gallagher for the goods, with a threat of removal of credit facilities if the price was not paid. Gallagher opted to pay for the goods, and attempted the reclaim the money based on duress.

The courts held there was no duress, because of these three reasons:

• The parties dealt with each other at ‘arm’s length’
• The threat was lawful
• CTN legitimately believed they were entitled to the money, there was no intention to put pressure on Gallagher

These requirements are difficult to meet, when parties are dealing as commerce, it is rare they will be dealing at ‘arm’s length’. Nevertheless, this approach was confirmed in Progress Bulk Carriers Ltd v Tube City IMS LLC, The Cenk Kaptanoglu [2012] EWHC (Comm) 85. Withdrawing credit agreement was confirmed as a lawful threat in Bank of Scotland plc v Cohen, unreported, 16 January 2013.

The consideration of whether the parties have dealt in good or bad faith

Good faith on the part of the party pressuring the other party seems to be relevant for proving a lawful threat falls under the ambit of lawful duress. In CTN Cash and Carry Ltd v Gallagher Ltd the good faith element was that they were unaware the risk in the property had not passed due to their incorrect delivery address.

In relation to illegitimate threats, dealing in good faith seems of less relevance. Although it was confirmed that dealing in bad faith makes it more likely that the actions are considered illegitimate (Kolmar Group AG v Traxpo Enterprises Pvt Ltd [2010] EWHC 113), it does not bear much significance, the act itself will be focussed on.

Was the pressure a significant cause in inducing the claimant to enter the contract?

The case of Huyton SA v Peter Cremer GmbH & Co [1999] 1 Lloyd’s Rep 620 is the leading case for the degree to which the pressure must have induced the contract to the party in relation to economic duress. It must be a ‘decisive or clinching’ inducement. The correct test to apply in this context would be the ‘but for’ test; but for the duress, would the claimant have entered the contract on those terms?

The requirement of protest

In order for there to be an actionable claim for duress, the victim of the duress must take action to remedy or protest the duress at the time of the duress or shortly after.

An example of this principle in operation can be examined in North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd, The Atlantic Baron [1979] QB 705. In this case, the duress was a threat to breach the contract unless extra payment was made. The claimant made this extra payment, under duress, but only attempted to recover the extra payment under the principle of duress eight months later. The claim would have been an actionable claim for duress, but due to the lack of protest at the time of the duress, there was no remedy available. Eight months was seen as too long of a delay.

This requirement of protest is not required at the time of the contract formation. The courts have correctly recognised that in some cases it would be impossible to protest until performance is complete. Therefore, it is a requirement that if protest would not have been viable at the time of the contract being made, it must be made immediately after (Kolmar Group AG v Traxpo Enterprises Pvt Ltd [2010] EWHC 113.

In the event there is continuing duress, the protest may come at any point during the duress or after it has stopped, it is irrelevant whether duress continues long after the contract formation, as long as the protest is made when possible after the duress ceases (Antonio v Antonio [2010] EWHC 1199 (QB)).

Bars to duress claims

It should be noted that the bars to rescission can apply in relation to claims for duress. These are covered in depth in the previous chapter, Mistake, but a quick run through of those is as follows:

• Lapse of time
• Third party rights
• Affirmation
• Restitutio in integrum (no longer possible due to a change in the goods)

Undue influence

The doctrine of undue influence provides a remedy where contracts have been entered into as a result of improper pressure. This usually occurs due to a relationship between the parties being exploited to gain an advantage.

Undue influence is similar to duress in nature, but the doctrine of undue influence is an equitable doctrine as opposed to the common law basis of duress. The key differing factor is the duress is based on a threat, whilst undue influence will be based on a relationship that has been exploited.

The types of undue influence

Lord Browne-Wilkinson identified two distinct classes of undue influence in Barclays Bank Plc v O’Brien [1994] 1 AC 180:

1. Actual undue influence
2. Presumed undue influence which can be categorised as:
   • Protected relationships - pre-determined presumptions as to relationships which will give rise to a presumed influence
   • Other cases - relationships in which influence can be presumed, but is not automatically done so

The evidential burdens of the different types

Before exploring the exact requirements of the differing types of undue influence, the importance of the different types of evidential burdens should be outlined briefly for a full understanding of the doctrines when we go on to explore them in greater detail.

In relation to category ‘2a’, protected relationships, there is no burden on the claimant to prove that the relationship was one that gives rise to presumed influence, but virtue of the relationship this is already proven. Therefore, the claimant must simply prove that that party exploited the nature of this relationship.

In category ‘2b’, only if the relationship is one where influence cannot be proved will the claimant have to provide evidence that the relationship was one where influence arose. Following, the courts will assess whether the conduct amounts to undue influence.

In category 1, the claimant does not have to prove there is an existence of any special relationship. The evidential burden they are subject to is proving that their free will to enter a particular contract was overcome, which is not easy to establish, this is the same standard as a claim for duress, and was established in Huyton SA v Peter Cremer GmbH & Co [1999] 1 Lloyd’s Rep 620.

Actual undue influence

This class of undue influence can be seen to be an alternative manifestation of duress, being conceptually similar. Actual undue influence has been described as acts of improper pressure or coercion such as unlawful threats, which seems to draw a parallel with duress.

As can be seen from the assessments of the burdens of proof, in a claim for undue influence it has to be proven that the undue influences overcome their free will. This is similar to the standard of duress, but of course in cases of duress it is much easier to prove. It will be an extremely high threshold to prove that undue influence left the claimant with no choice at all. In cases of presumed undue influence, all the claimant has to do it prove that one party exploited the nature of the relationship, which is a much lower evidential standard.

Therefore, you may be questioning why a party would pursue a claim for actual undue influence with such a high burden of proof. As mentioned, there is no need for an existing relationship between the parties to prove actual undue influence, which is advantageous in the event this is the case, as it would prevent a claim for presumed undue influence from operating. Furthermore, the contract attempting to be voided  for undue influence does not have to be of manifest disadvantage to the claimant, as per CIBC Mortgages plc v Pitt [1994] 1 AC 200, whereas in proving duress the contract must be of manifest disadvantage.

Case in focus: CIBC Mortgages plc v Pitt [1994] 1 AC 200

In this case, Pitt wanted to purchase some shares. In order to fund this purchase, he put pressure on his wife to sign a second mortgage over the family home. The application for the loan stated the purpose was to purchase a holiday home and pay off the existing mortgage. Following, the husband used the money to purchase the shares. When the bank sought to enforce their security under the mortgage, the wife attempted to claim undue influence against her husband.

It was held that there was no requirement to demonstrate manifest disadvantage where actual undue influence was established. Therefore there could be a claim for actual undue influence. Unfortunately, due to other issues relating to notice of the bank, the claim failed, but the key principle of no requirement of manifest disadvantage remains for presumed undue influence.

Presumed undue influence

In Daniel v Drew [2005] EWCA Civ 507 the approach of the courts in relation to both categories of presumed undue influence was confirmed. As mentioned above, the claimant does not have to prove that the undue influence left them with no choice, all that needs to be proven is that they exerted some influence over them, enough so that the transaction was not the exercise of their independent free will. Royal Bank of Scotland plc v Etridge (No. 2) [2002] UKHL 44 clarified the approach to presumed undue influence; the relationship between the party would give a presumption of influence, but not necessary undue influence, this was for the claimant to prove.

The key test for presumed undue influence was set out in Turkey v Awadh [2005] EWCA Civ 382:

1. Do the facts give rise to either the existence of a protected relationship, or a relationship in which evidence could prove that one party exerted influence on the other?
2. If so, could the transaction be shown to be one that could not be explained by ordinary motives, therefore suggesting some kind of undue influence resulted in the transaction.
3. Can the defendant rebut this presumption by establishing there was no abuse of trust?

Category 2A - Protected relationships

The law has deemed certain relationships special, meaning influence between them can automatically be presumed in the absence of any other facts. The effect of the case of Royal Bank of Scotland plc v Etridge (No 2) is that this presumption is irrebuttable. Here are some examples of such relationships:

• Parent and child (but not between a parent and an adult child - Avon Finance Co Ltd v Bridger [1985] 2 All ER 281
• Solicitor and client
• Doctor and patient

Once the existence of one of these relationships has been established, the claimant must prove that the influence exerted was undue. The court will assess the evidence and decide whether the transaction was suspicious, and if so, undue influence will be presumed. It is then up to the party who exerted the undue influence to prove no undue influence was exercised.

Category 2B - Other cases

If the relationship does not fall into any of the special relationships within category 2A, if it can be shown that the relationship was based on trust and confidence, it may be presumed to be a relationship of influence. The difference in comparison with Category 2A is that this presumption is rebuttable by the other party if they prove there was no trust or confidence.

Courts have considered a number of specific relationships that do not amount to category 2A relationships, but may well amount to category 2B relationships. In the following section the most important of these relationships are explained and examined with reference to case law.

Husband and Wife

In Barclays Bank plc v O’Brien [1994] 1 AC 180 it was confirmed that the relationship of Husband and Wife may amount to a relationship which satisfies the requirements of category 2B. Whether or not this relationship gives rise to one where there is presumed influence is dependent on the closeness of the relationship and whether total trust and confidence has been put in each other. It has been noted that the same will apply to other cohabitees as long as the trust and confidence element can be recognised.

Due the nature of the husband and wife relationship, it is not enough to merely show that there has been influence relating to a transaction which is not to the claimant’s advantage. It has been shown that husband and wife will often do selfless acts not to their advantage, and then later attempt to reverse them under duress. The courts will focus on the extreme circumstances, therefore it is suggested the ‘manifest disadvantage’ test may apply here, putting a higher evidential burden on the claimants.

Other cohabitees

The application of the husband and wife presumption was also said to extend to other cohabitees who were in an emotional relationship with each other, this is applicable regardless of marriage status or sexuality. In Massey v Midland bank plc [1995] 1 All ER 929 it was also ruled that individuals in long term emotional relationships who had children would qualify under this category, even if they did not cohabit. This presumption can also extend to cohabiting adult children and parents (Avon Finance Co Ltd v Bridger [1985] 2 All ER 281).

Bank and customer

The relationship between a bank and a customer is one which is possible to fall under category 2B. The presumption was successfully proven in Lloyds Bank Ltd v Bundy [1975] QB 326, in which the decisive factors were:

• The customer had banked at the branch for a long time and relied on the bank manager for all his financial advice
• The manager recognised the fact the customer did put this confidence in him
• The transaction was not in the interests of the customer

Therefore, it would seem the test for whether a bank and customer relationship could fall under category 2B is based first on the previous dealings between the two, considering whether there was evident trust and confidence. Secondly, the courts will assess whether the transaction was in the interests of the customer or not.

Commanding officer and solider in the army

We touched on the case of R v HM Attorney-General for England and Wales [2003] UKPC 22 in the duress chapter. To remind us, the solider was refusing a sign a confidentiality agreement, and was threatened with being removed from his special unit if he did not sign the agreement. This did not give rise to a claim for duress, but the courts did suggest there could be a degree of undue influence involved in the transaction.

Due to the degree of trust and confidence the solider placed in his commanding officer, the relationship fell under category 2B of one with a presumed influence. There was mixed opinions from the judges, with some arguing that there could not be trust and confidence in somebody who was attempting to coerce him. It was concluded there was no undue influence, but it is clear the relationship between soldiers and their superiors may amount to a relationship of presumed influence for the purposes of category 2B.

Evidential burdens in relationships of presumed influence

The evidential burdens were briefly mentioned earlier in this section, however, this section will discuss the evidential burdens for category 2A and 2B presumptions with reference to specific case law.

The requirement that a transaction must be a ‘manifest disadvantage’ to the claimant

In earlier cases of presumed influence it was presumed that the transaction needs to be of a manifest disadvantage to the claimant. This was first suggested in National Westminster Bank Ltd v Morgan [1985] AC 686. Through subsequent case law this was criticised at it was recognised as being difficult to prove (Royal Bank of Scotland v Etridge (No. 2). Unfortunately, the cases which criticised it were bound by the higher court to apply the manifest disadvantage test.

The case of Goodchild v Bradbury [2006] EWCA Civ 1868 finally moved the interpretation of ‘manifest disadvantage’ to focus more on whether the transaction was advantageous or disadvantageous to the claimant. This approach was confirmed in Mackin v Dowsett [2004] EWCA Civ 904, and the requirement of ‘manifest disadvantage’ was removed. The new focus and the current test is whether the transaction is ordinary and explainable in the context of the relationship between the parties, or whether there was some concern for the legitimacy of the contract due to its suspicious nature. It should be noted that whether the contract was of a ‘manifest disadvantage’ may be considered as evidence to show that the contract is not ordinary and explainable, but it is no longer a requirement (Thompson v Foy [2009] EWHC 1076 (Ch)).

Be careful in distinguishing a disadvantageous contract from one that is suspicious. There will often be contracts where one side of the bargain is inherently better, but this does not mean it is suspicious for the purposes of proving undue influence.

Rebutting the presumption of undue influence

Once it has been proven by the claimant that there was influence of an undue nature, the defendant may rebut the presumption of undue influence by proving that the claimant entered into the contract freely without influence.

The most common way in which this presumption may be rebutted is where the claimant has undertaken independent advice with regards to the transaction in which undue influence has been claimed. In Howard v Howard-Lawson [2012] EWHC 3258 (Ch) the claimant sought and received independent legal advice in relation to signing some deeds. The courts concluded due to this independent advice, the undue influence would not be the key factor and influence in entering the transaction, meaning a claim for undue influence would not be actionable.

However, receiving independent advice may not always be conclusive. The facts of each case will need to be assessing to consider whether the undue influence was still the inducing factor or whether the independent advice was significant in this regard (Royal Bank of Scotland v Etridge (No 2).

Can undue influence be actionable against a third party?

It has been confirmed that undue influence by a third party on a claimant may give rise to a claim for undue influence, which can result in the contract between the claimant and the party they are contracting with being voidable. This may seem unfair on the contracting party, but a claim for undue influence under these circumstances may only arise where the contracting party has knowledge that a third party is exercising undue influence on the claimant. This may seem confusing, so here is a basic example:

• Party A, a bank, are contracting with Party B, to guarantee the loan for the third party, Party C.
• Party C have used undue influence in order to force Party B to guarantee their debt
• This contract is voidable so long as Party A are aware of this undue influence

The case of Barclays Bank v O’Brien [1994] 1 AC 180 confirmed this rule, making reference to the ‘doctrine of notice’. The first category of notice is actual notice, which is clearly easy to prove, where Party A in our example have actual knowledge of the undue influence. The other category is constructive notice. In order to prove this type of notice, there are two things the courts will consider:

1. Whether the contracting party has been “put on inquiry”
2. If “put on inquiry”, has the contracting party avoided notice of the undue influence?

Have the contracting party been “put on inquiry”?

Being “put on inquiry” refers to where the contracting party should be aware that the contract seems unusual, and therefore should make inquiries as to the nature of the transaction. Factors in Barclays Bank v O’Brien that put the contracting party on inquiry were that the transaction they were entering into was not financially advantageous for the claimant, and that there was a substantial risk in transactions of that nature.

If on inquiry, has the contracting party avoided notice?

In order to avoid notice, and make the relevant inquiries, it is suggested that the contracting party should privately meet with the claimant, or that the contracting party should advise the claimant to seek independent advice of some kind. This would absolve the contracting party of liability, as they may presume that the independent advice given will prevent the operation of undue influence (Banco Exterior Internacional v Mann (1955) 27 HLR 329).

If the contracting party can absolve themselves via one of these two considerations, the contract will not be voidable for any undue influence.

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