Duress and Undue Influence

In a contractual agreement, a party who has accepted an offer is usually bound by such a contract. However, there are some situations which will entitle a party who has entered a contract to escape contractual liability. Two things which will allow a party to a contract to escape otherwise binding contractual liability are the presence of duress and undue influence in such a contract.

Duress at common law

The scope of duress at common law was a very narrow one, with the concept of undue influence coming under equity to cover some other areas not covered by common law. Duress under common law formerly only applied to contracts entered under threat of injury or imprisonment of a person’s body or to the person’s spouse, parent, child or other near relative. However, duress at common law has become wider to cover economic duress and duress of goods.

As a general rule, duress from a third party cannot be the basis of an action. In Latter v Bradell, a housemaid was ordered by her mistress to submit to a medical examination on suspicion of pregnancy which turned out to be unfounded. She cried and protested but submitted. She claimed damages for assault, but the court refused the claim for damages because she consented to the examination and the duress was not from the hospital.

Types of duress

Duress to person: This is the most obvious kind of duress. This may constitute of violence to the claimant, threat of violence, threat to the claimant’s freedom, or threat to any members of his family. Common law always had no difficulty in setting aside contracts for duress to person. In Barton v Armstrong, where threats to kill were uttered, the Privy Council held that the threat need not be the sole reason for entering into the contract and it was sufficient that the threat was one of the factors which influenced the victim to enter the contract. It was also stated in the case that contracts made under duress are void and not voidable.

Duress of goods: Duress of goods was not regarded as constituting duress initially at common law. In Skeate v Beale, it was held that unlawful detention of another’s goods did not constitute duress. This decision has however been severely criticized, and it has been departed from in cases that came after. In Maskel v Horner, the plaintiff was able to have the contract set aside for duress to goods.

Economic duress: The most difficult kind of duress, which is also the most difficult to crystalize, is economic duress. Economic duress is when one party uses their superior economic power in an illegitimate way so as to coerce the other contracting party to agree to a particular set of terms. The existence was first recognized in England by Kerr J in Sibeon v the Sibotre where he held that “a plea of compulsion or coercion would be available where a person was forced to enter into a contract under an imminent threat of having his house burnt down or a valuable picture slashed.”

In cases like Universe Tankships of Monrovia v International Transport Workers Federation and North Ocean Shipping Co. Ltd. v Hyundai Co. Ltd., it has been settled that economic duress is a valid reason to have a contract set aside.

Undue influence

Due to the narrow scope of the traditional doctrine of duress, equity developed its own doctrine of undue influence which is far more comprehensive than duress at common law. Although undue influence is a well-known phrase, no clear-cut definition of the phrase has been provided by the courts. Questions pop up, of whether “undue” means illegitimate or too much, and whether influence means pressure or something subtler.

One of the first attempts to define undue influence was provided by Lindley L.J. in Alcard v Skinner, where he described it as “some unfair or improper conduct, some coercion from outside, some personal advantage obtained by the guilty party.”

Undue influence comes up under two circumstances:

• Where there is no special relationship
• Where there is a special relationship

- Where there is no special relationship

Where there is no special relationship between the parties, undue influence has to be proved by the party alleging that he is a victim of undue influence. Thus, if the victim can show that the other party exercised dominion which undermined their independence to make decisions substantially, the court would most likely set the contract aside for undue influence.

In Williams v Bayley, a son gave his bank several promissory notes in which he had forged his father’s signature. At a meeting between the banker, the father and the son to resolve the problem, the banker made it clear to the father without actually making a direct threat that he had the power to prosecute the man’s son for forgery and that there would be dire consequences. Frightened by the implications of these words, and in order to avoid the threat to his son’s liberty and future, the father executed a mortgage in favour of the bank in return for delivery to him of the promissory notes. The contract was set aside, as the bank had clearly exploited the father’s fears.

- Where there is a special relationship

When a special relationship exists between two parties, equity will presume that there was undue influence in the making of the contract. The onus is therefore on the other party to show that there was no undue influence. This was the case in Sullwan v Management Agency & Music Ltd where the court presumed that there was undue influence in a contract between a young and unknown composer and performer of music and his manager. There is also the case of Tate v Williamson where the defendant became a financial adviser to an extravagant Oxford student who sold his estate to the defendant for half the value and drank himself to death. The executors successfully claimed that the agreement should be set aside for undue influence.

However, the plea would be unsuccessful where the acclaimed victim of undue influence had independent advice, as in Williams v Franklin and where there has been significant lapse of time after the undue influence stopped as in Allcard v Skinner where the plaintiff waited six years after leaving the undue influence to bring an action.

Unconscionable bargains

There are some contracts which the court would set aside because they are in some way unfair. Here, the victim of the unfairness of the contract is inviting the court to not enforce the contract because the terms are manifestly unfair, onerous or oppressive. The case of Lloyds Bank v Bundy is illustrative. The defendant was an elderly farmer not highly knowledgeable in business. He had a son who owned a plant-hire company. In 1966, the company ran into financial difficulty and sought to obtain a loan of 1,500 pounds. The father agreed that the house should be used as security. In 1967, the bank asked for a further security and the father executed a further guarantee of 6,000 pounds and charged the house to secure the money. When the financial difficulty of the son worsened, the bank once again requested the father to raise the guarantee to 11,000 pounds higher than the value of the house. When the son failed to pay, the bank brought an action for possession of the house against the father. The court held that the guarantee of 11,000 was not valid, as there was undue influence since the bank knew that the father relied upon them to advise him.

Factors which tend to influence the court on whether or not the contract should be set aside include the following.

• The substantive unfairness of the contract.
• Any unfairness in negotiating process.
• Weakness or disability on the part of the person seeking to enforce the contract.
• Wrongdoing on the part of the person seeking to enforce the contract.
• Lack of independent advice.

This doctrine is usually called “inequality of bargaining power”, and it grants relief to those who, without independent advice, enter contracts with grossly unfair terms when the victim’s own desires or needs grossly impairs the victim’s bargaining power.