UDUE INFLUENCE
BY Ellie Palmer
The following note supplements the lecture on undue influence -
It deals with the second aspect of Policing the Contract (2): Duress, Undue Influence, Inequality of Bargaining Power and Unfair Terms. (See class outline, p 18)
Introduction
Undue influence like misrepresentation and economic duress renders a contract voidable. This means that one party can seek to rescind ‘or set aside’ (avoid) the contract, either as a claimant, or by way of a defence. For example, the claimant may seek the return (restitution) of a gift that has been ‘tainted’ by undue influence; or may rely on undue influence as a defence, to resist the enforcement of an oppressive contract.
McKendrick notes that two approaches have been taken in the cases to establishing undue influence. In some cases the stress has been on the vulnerability of the complainant leading to an impairment of consent. In other cases the courts have emphasised the wrong-doing of the defendant, ie the deliberate abuse of trust or exploitation of a position of confidence by the more powerful party in the relationship. Cases where there is actual evidence of undue influence can appear to overlap with common law duress because, as pointed out by Lord Nicholls in Etridge, actual undue influence necessarily involves pressure such as unlawful threats.
See the following extracts from three cases referred to in the class outline:
‘R v Attorney General for England and Wales (2003):
‘Like duress at common law, undue influence is based upon the principle that a transaction to which consent has been obtained by unacceptable means, should not be allowed to stand. Undue influence has concentrated in particular on the unfair exploitation of one party of a relationship which gives him an ascendancy or influence over the other.’
National Commercial Bank (Jamaica) v Hew [2003]
‘Undue influence is one of the grounds on which equity intervenes to give redress where there has been unconscionable conduct on the part of the defendant…….’
But compare Mummery LJ in the Court of Appeal in Pesticcio v Huet (2004) (see below) where his lordship suggested that undue influence does not require the wrongful conduct of the defendant as an essential ingredient.
‘Although undue influence was sometimes described as an ‘equitable wrong’ or even as a species of equitable fraud, the basis of the court’s intervention was not the commission of a dishonest or wrongful act by the defendant, but that, as a matter of public policy, the presumed influence arising from the relationship of trust and confidence should not operate to the disadvantage of the victim, if the transaction was not satisfactorily explained by ordinary motives: (Allcard v Skinner) The court scrutinises the circumstances in which the transaction, under which benefits had been conferred on the recipient, had taken place, and the nature of the continuing relationship between the parties, rather than any specific act or conduct on the part of the recipient.’ (Mummery LJ)
The judge went on to say that,
‘a transaction may be set aside by the court even though the actions and conduct of the person who benefits from it could not be criticised as wrongful’.
Thus, in Pesticcio it was essentially decided that, whether or not the defendant’s conduct could be described as ‘wrongful’, it had to be ‘affirmatively established that the donor’s trust and confidence in the donee had not been betrayed or abused’.
However to date the House of Lords decision in Royal Bank of Scotland v Etridge (no 2) [2001] UKHL 44 is the leading case on undue influence.
'Actual undue influence, is an equitable wrong, committed by the dominant party against the other, which makes it unconscionable for the dominant party to enforce his legal rights against the other'. (per Lord Hobhouse in Etridge)
The House of Lords chose not to attempt a watertight definition of undue influence. It was emphasised that it is always important to have regard to the facts and the circumstances of the case. It was accepted that undue influence can take many different forms for example, coercion, domination, victimisation and 'other unacceptable forms of persuasion'.
Problematically there is often no concrete evidence of undue pressure, because it frequently occurs subtly within a relationship of trust. Take for example Allcard v Skinner where there was certainly no direct evidence of domination by the Mother Superior of a convent over a novice who was in her care. Compare that case with Williams v Bailey where there was evidence of acute emotional pressure on the victim.
In Williams v Bailey a father sought to rescind a mortgage which he had executed in favour of a banker. He successfully proved that he had executed the mortgage because he was frightened by the banker’s warning or threat, that he had it in his power to prosecute his son for forgery. It was therefore held that that the claimant was entitled to rescind the mortgage he had executed on grounds of undue influence. In that case his distress on being told by the creditor that his son would go to prison was dramatic and palpable.
(Note: that today Williams v Bailey might be treated as a duress case. Why?
Various requirements for establishing undue influence can be extrapolated from the cases:
(i) A relationship between the parties;
(ii) Generally one of trust and confidence reposed in the other or vulnerability and dependency of one party, that;
(iii) Predated the contract or gift between them;
(iv) And which one party has exploited for his own advantage.
B Two Categories of Undue Influence: Actual and Presumed Undue Influence
Because of the difficulty of finding evidence that there had been subjective psychological pressure, (actual undue influence) courts gradually began to give relief on the alternative ground that evidence of undue influence could be presumed on the facts, unless there was contrary evidence to rebut the presumption. So gradually actual and presumed undue influence came to be treated as if they were separate causes of action.
Following Allcard v Skinner it was said that undue influence could be presumed from:
(a) The nature of the relationship between the parties, combined with
(b) A ‘suspicious transaction’
However, the presumption could be rebutted if there was evidence that the party ‘presumed to have been influenced’ had entered the transaction with full and informed consent.
What is a ‘suspicious transaction’ for purposes of undue influence?
……….if the gift is so large as not to be reasonably accounted for on the ground of friendship, relationship, charity, or the ordinary motives on which ordinary men act, the burden is on the donee to support the gift’ (Allcard v Skinner)
2 Actual and presumed undue influence gradually came to be treated formally as if they were distinct causes of action, known as class (i) and class (ii) undue influence:
(a) Class (i) Actual Undue Influence - In class (i) the emphasis was on the defendant’s wrongdoing.
(b) Class (ii) Presumed Undue Influence - In class (ii) the action was said to be ‘victim based’. In other words the focus was on the claimant’s ‘impaired consent’, a presumption that was required o be successfully rebutted.
In presumed undue influence cases, it also began gradually to be necessary for the transaction to be patently or manifestly ‘disadvantageous’ to the claimant in economic or social terms (for example leaving the victim penniless) rather than merely a ‘suspicious’ transaction such as a disproportionate gift as in Allcard v Skinner.
However in Etridge the House of Lords suggested that ‘manifest disadvantage’ to the claimant is now a necessary ingredient to be proved in BOTH types. It was held that 'the exercise of undue influence’ is unlikely to occur where 'the transaction is innocuous'.
Thus, in Etridge it was made clear that courts and lawyers must pay careful attention to the facts and the circumstances of the case; and to the proof of matters alleged by the claimant; and ‘the need to prove these matters should not be hidden behind so-called presumptions, which relieve the victim of the burden of proving there had been the necessary domination and oppression and that he has been seriously disadvantaged’.
However, there are continuing problems with the terminology of ‘manifest disadvantage’. How do you measure a manifestly disadvantageous gift or transaction?
In BCCI v Aboody the Court of Appeal explained that ‘the overall disadvantageous nature of a transaction cannot be said to be “manifest”, if it only emerges after a fine and close evaluation of its various beneficial and detrimental features.’ (See class outline at p. 19)
Overall the general effect of Etridge has been to reduce the practical significance of the presumption of undue influence, and to focus the attention of lawyers on the need for the claimant to prove the elements of the case. It appears that the claimant must affirmatively PROVE that there is scope for undue influence
(a) By evidence of what went on in the relationship and
(b) The questionable nature of the transaction.
Notwithstanding, there have continued to be cases where the disadvantage to the claimant is not necessarily obvious but has still attracted the presumption of undue influence.
It appears from Pesticcio that undue influence can still be presumed where:
(1) There is proof that the complainant placed trust and confidence in the other party in relation to the management of the complainant's financial affairs;
(2) Coupled with a transaction which calls for explanation (not necessarily extremely disadvantageous on its face)
(3) Unless rebutted by satisfactory evidence to the contrary, that the alleged victim entered the transaction with full and informed consent.
Rebutting the presumption?
There is no finite list of the ways in which the presumption can be rebutted by the alleged wrongdoer. It may be rebutted by showing that the donor of the gift had acted independently of any influence of the recipient, and with full appreciation of what he was doing.
The most usual, although not the only way of rebutting the presumption, is to show that the donor had received competent and independent advice before acting. The presumption may also be rebutted, by showing that the act of the donor in making the gift had been a spontaneous and independent act.
C Relationships Giving Rise to the Presumption of Undue Influence:
Relationships attracting the presumption of undue influence, were traditionally organised into two categories (described as class (ii) (a) and class (ii) (b)
Class (ii) (a)
Contains a list of standard relationships, assumed by law to be based on trust. These are known as fiduciary relationships, for example, doctor/patient solicitor/ client
Class (ii) b:
Any other kind of relationship has been regarded as sufficient to give rise to presumed undue influence, if, on the facts of the case it is one which is based on trust and confidence or vulnerability and dependence. In O’ Sullivan v Management Agency and Music Ltd (1985) the relationship between a young pop star called Gilbert O’Sullivan and his manager constituted a relationship of trust sufficient to give rise to a presumption of undue influence. See also the case of Pesticcio v Huet (2004) which was concerned with the relationship between a sister and her disabled brother.
Problematic Relationships:
The stereotypical case of wives giving guarantees, or mortgaging the matrimonial home to secure the debts of their husbands has given rise to greatest problems. The transaction may turn out to be disadvantageous to the wife. Yet at the time there may have been a very good reason for the wife to enter into the transaction- especially where the transaction is linked to the husband’s business which might thrive as a result of the security taken on the family home.
The House of Lords recognised these difficulties in Etridge and disapproved of the language of ‘manifest disadvantage’ preferring the ‘suspicious transaction’ test one that calls for an explanation. It appears from that case (a husband and wife case) to be the combination of the relationship and anything unusual about the terms of the transaction that should set alarm bells ringing for a potential defendant. The defendant (donee of a gift or the creditor/bank manager in a three party situation) should take steps to ensure that the claimant is acting voluntarily, or surrender the benefits of the transaction.
In Etridge it was said that:
‘it would be absurd for the law to presume that every gift by a child to a parent or every transaction between a patient and doctor was brought about by undue influence unless the contrary is affirmatively proved………….. The law would be out of touch ….if the presumption were to apply to every Christmas gift or birthday gift by a child to a parent…or an agreement whereby a client or patient agrees to be responsible for the reasonable fees of the legal adviser or medical adviser. ….So something more is needed before the law reverses the burden of proof.’
The ‘Alarm bells’ explanation is also useful in class (ii)(a) cases. Alarm bells should ring where there are dealings between fiduciaries and those to whom they owe fiduciary duties (accountant, solicitor, financial adviser etc) Lord Browne Wilkinson in CIBC Mortgages v Pitt (1994) noted that in such cases the very existence of a fiduciary duty should ring its own alarm bells, so that the donee ought to recognise the risks of entering into such a transaction however apparently innocuous.
CIBC Mortgages v Pitt (1994) was a three-party case in which Mrs Pitt, once a famous horror film actress established she had been subject to the actual undue influence of her husband when mortgaging her home to fund his grossly speculative share transactions. In that case the mortgagee bank did not have actual or constructive notice of undue influence because Mr Pitt had falsely stated on his loan application form that he wished to borrow the money to purchase a holiday home for himself and his wife so the transaction appeared on its face perfectly unobjectionable.
D Three Party Cases
Undue influence can arise in simple two party cases where A unduly influences B to contract with A (Allcard v Skinner –Mother Superior and novice who transfers all her wealth to the convent) and in more complex 3-party cases:
A (wife/guarantor) ------ B (debtor/husband) ---------- C (creditor bank/bank)
See Etridge, Barclays Bank v O’Brien p. 19 of class outline.
Thus far we have concentrated on simple 2-party cases, in which A unduly influences B into contracting with or making a gift to A. However, as noted above many cases actually involve three parties
A unduly influences B into contracting with C
Typically a husband (B) unduly influences A (wife) to enter the impugned transaction (guarantee or mortgage). Can the guarantor/ surety (wife) set aside the contract as against the creditor bank.
The seminal House of Lords decision in Barclays Bank v O’ Brien established that this depends on whether the creditor had notice (actual or constructive) of the husband’s undue influence.
In 3-party cases there are three stages of enquiry:
(i) Is there a vitiating factor in the dealings between A and B (undue influence)?
(ii) Does the third party have notice actual or constructive of the vitiating factor, ie of undue influence or misrepresentation?
(iii) If yes, then the third party will be bound by the undue influence unless reasonable steps have been taken to avoid it.
Note: Many of the 3 party cases also involve allegations of misrepresentation. The wife claims to have entered the transaction as a result of the husband’s actionable misrepresentation or undue influence and it is similarly claimed that the bank had actual or constructive notion of the misrepresentation.
E Continuing uncertainty?
In Pesticcio v Huet and others [2004] EWCA Civ 372 it was said by the Court of Appeal (per curiam)
‘The striking feature of the instant appeal is that fundamental misconceptions as to the circumstances in which gifts or other transactions will be set aside on the ground of presumed undue influence persist, even though the doctrine is over 200 years old and its basis and scope were examined by the House of Lords in depth in the well known case of Royal Bank of Scotland plc v Etridge (No 2) less than three years ago.
The facts of Pestuccio were complicated.
The claimant, Bernard (aged 70) was of significantly lower than average intelligence and understanding. In August 1981, his mother had made a gift of the family home (the house) to the claimant. In 1997 Bernard was admitted to hospital, where he stayed for six months. On his discharge from hospital, he was transferred to a nursing home, where he still lived. Following advice from a solicitor who had been contacted by the claimant’s sister, Maureen, (the first defendant) the claimant executed a deed of gift of the house to the third defendant.
The third defendant later sold the house to the first defendant, who had obtained a mortgage from the second defendant. Maureen bought another house with the proceeds. One of the claimant’s brothers was appointed receiver of his affairs by the Court of Protection, and was authorised, as the claimant’s litigation friend, to bring proceedings against the 3 defendants to set aside the deed of gift.
The first instance judge declared (i) that the deed of gift had been procured by undue influence and was void as against the third defendant. (ii) He made an interim order that, inter alia, until the determination of tracing proceedings or further order, the property purchased by the third defendant after the disposition by her of the house should be charged with the sum of £50,000 and interest. The third defendant appealed.
ON APPEAL It was submitted for the third defendant that the solicitor had been instructed to act as solicitor for the claimant in relation to the deed of gift; that there was no presumption against a gift to the third defendant; that, unless there were exceptional circumstances, undue influence on the part of the third defendant could not be established; and that the claimant’s wishes, which had been effected by the deed of gift, should be respected. It was emphasised that the third defendant ‘had done nothing wrong’.
Held: the Appeal would be dismissed on the following grounds:
(i) A transaction might be set aside by the court, even though the actions and conduct of the person who benefited from it could not be criticised as wrongful.
(ii) Although undue influence was sometimes described as an ‘equitable wrong’ or even as a species of equitable fraud, the basis of the court’s intervention was not the commission of a dishonest or wrongful act by the defendant, but that, as a matter of public policy, the presumed influence arising from the relationship of trust and confidence should not operate to the disadvantage of the victim, if the transaction was not satisfactorily explained by ordinary motives.
(iii) The court scrutinised the circumstances in which the transaction, under which benefits had been conferred on the recipient, had taken place, and the nature of the continuing relationship between the parties, rather than any specific act or conduct on the part of the recipient. Whether or not the third defendant’s conduct could be described as ‘wrongful’, the requirement of the doctrine of undue influence was that it had to be ‘affirmatively established that the donor’s trust and confidence in the donee had not been betrayed or abused’. The judge had correctly applied the law of undue influence to the facts found by him and had reached an unimpeachable decision. Royal Bank of Scotland plc v Etridge (No 2) , Hammond v Osborn [2002] WTLR 1126 applied.
The following note supplements the lecture on undue influence -
It deals with the second aspect of Policing the Contract (2): Duress, Undue Influence, Inequality of Bargaining Power and Unfair Terms. (See class outline, p 18)
Introduction
Undue influence like misrepresentation and economic duress renders a contract voidable. This means that one party can seek to rescind ‘or set aside’ (avoid) the contract, either as a claimant, or by way of a defence. For example, the claimant may seek the return (restitution) of a gift that has been ‘tainted’ by undue influence; or may rely on undue influence as a defence, to resist the enforcement of an oppressive contract.
McKendrick notes that two approaches have been taken in the cases to establishing undue influence. In some cases the stress has been on the vulnerability of the complainant leading to an impairment of consent. In other cases the courts have emphasised the wrong-doing of the defendant, ie the deliberate abuse of trust or exploitation of a position of confidence by the more powerful party in the relationship. Cases where there is actual evidence of undue influence can appear to overlap with common law duress because, as pointed out by Lord Nicholls in Etridge, actual undue influence necessarily involves pressure such as unlawful threats.
See the following extracts from three cases referred to in the class outline:
‘R v Attorney General for England and Wales (2003):
‘Like duress at common law, undue influence is based upon the principle that a transaction to which consent has been obtained by unacceptable means, should not be allowed to stand. Undue influence has concentrated in particular on the unfair exploitation of one party of a relationship which gives him an ascendancy or influence over the other.’
National Commercial Bank (Jamaica) v Hew [2003]
‘Undue influence is one of the grounds on which equity intervenes to give redress where there has been unconscionable conduct on the part of the defendant…….’
But compare Mummery LJ in the Court of Appeal in Pesticcio v Huet (2004) (see below) where his lordship suggested that undue influence does not require the wrongful conduct of the defendant as an essential ingredient.
‘Although undue influence was sometimes described as an ‘equitable wrong’ or even as a species of equitable fraud, the basis of the court’s intervention was not the commission of a dishonest or wrongful act by the defendant, but that, as a matter of public policy, the presumed influence arising from the relationship of trust and confidence should not operate to the disadvantage of the victim, if the transaction was not satisfactorily explained by ordinary motives: (Allcard v Skinner) The court scrutinises the circumstances in which the transaction, under which benefits had been conferred on the recipient, had taken place, and the nature of the continuing relationship between the parties, rather than any specific act or conduct on the part of the recipient.’ (Mummery LJ)
The judge went on to say that,
‘a transaction may be set aside by the court even though the actions and conduct of the person who benefits from it could not be criticised as wrongful’.
Thus, in Pesticcio it was essentially decided that, whether or not the defendant’s conduct could be described as ‘wrongful’, it had to be ‘affirmatively established that the donor’s trust and confidence in the donee had not been betrayed or abused’.
However to date the House of Lords decision in Royal Bank of Scotland v Etridge (no 2) [2001] UKHL 44 is the leading case on undue influence.
'Actual undue influence, is an equitable wrong, committed by the dominant party against the other, which makes it unconscionable for the dominant party to enforce his legal rights against the other'. (per Lord Hobhouse in Etridge)
The House of Lords chose not to attempt a watertight definition of undue influence. It was emphasised that it is always important to have regard to the facts and the circumstances of the case. It was accepted that undue influence can take many different forms for example, coercion, domination, victimisation and 'other unacceptable forms of persuasion'.
Problematically there is often no concrete evidence of undue pressure, because it frequently occurs subtly within a relationship of trust. Take for example Allcard v Skinner where there was certainly no direct evidence of domination by the Mother Superior of a convent over a novice who was in her care. Compare that case with Williams v Bailey where there was evidence of acute emotional pressure on the victim.
In Williams v Bailey a father sought to rescind a mortgage which he had executed in favour of a banker. He successfully proved that he had executed the mortgage because he was frightened by the banker’s warning or threat, that he had it in his power to prosecute his son for forgery. It was therefore held that that the claimant was entitled to rescind the mortgage he had executed on grounds of undue influence. In that case his distress on being told by the creditor that his son would go to prison was dramatic and palpable.
(Note: that today Williams v Bailey might be treated as a duress case. Why?
Various requirements for establishing undue influence can be extrapolated from the cases:
(i) A relationship between the parties;
(ii) Generally one of trust and confidence reposed in the other or vulnerability and dependency of one party, that;
(iii) Predated the contract or gift between them;
(iv) And which one party has exploited for his own advantage.
B Two Categories of Undue Influence: Actual and Presumed Undue Influence
Because of the difficulty of finding evidence that there had been subjective psychological pressure, (actual undue influence) courts gradually began to give relief on the alternative ground that evidence of undue influence could be presumed on the facts, unless there was contrary evidence to rebut the presumption. So gradually actual and presumed undue influence came to be treated as if they were separate causes of action.
Following Allcard v Skinner it was said that undue influence could be presumed from:
(a) The nature of the relationship between the parties, combined with
(b) A ‘suspicious transaction’
However, the presumption could be rebutted if there was evidence that the party ‘presumed to have been influenced’ had entered the transaction with full and informed consent.
What is a ‘suspicious transaction’ for purposes of undue influence?
……….if the gift is so large as not to be reasonably accounted for on the ground of friendship, relationship, charity, or the ordinary motives on which ordinary men act, the burden is on the donee to support the gift’ (Allcard v Skinner)
2 Actual and presumed undue influence gradually came to be treated formally as if they were distinct causes of action, known as class (i) and class (ii) undue influence:
(a) Class (i) Actual Undue Influence - In class (i) the emphasis was on the defendant’s wrongdoing.
(b) Class (ii) Presumed Undue Influence - In class (ii) the action was said to be ‘victim based’. In other words the focus was on the claimant’s ‘impaired consent’, a presumption that was required o be successfully rebutted.
In presumed undue influence cases, it also began gradually to be necessary for the transaction to be patently or manifestly ‘disadvantageous’ to the claimant in economic or social terms (for example leaving the victim penniless) rather than merely a ‘suspicious’ transaction such as a disproportionate gift as in Allcard v Skinner.
However in Etridge the House of Lords suggested that ‘manifest disadvantage’ to the claimant is now a necessary ingredient to be proved in BOTH types. It was held that 'the exercise of undue influence’ is unlikely to occur where 'the transaction is innocuous'.
Thus, in Etridge it was made clear that courts and lawyers must pay careful attention to the facts and the circumstances of the case; and to the proof of matters alleged by the claimant; and ‘the need to prove these matters should not be hidden behind so-called presumptions, which relieve the victim of the burden of proving there had been the necessary domination and oppression and that he has been seriously disadvantaged’.
However, there are continuing problems with the terminology of ‘manifest disadvantage’. How do you measure a manifestly disadvantageous gift or transaction?
In BCCI v Aboody the Court of Appeal explained that ‘the overall disadvantageous nature of a transaction cannot be said to be “manifest”, if it only emerges after a fine and close evaluation of its various beneficial and detrimental features.’ (See class outline at p. 19)
Overall the general effect of Etridge has been to reduce the practical significance of the presumption of undue influence, and to focus the attention of lawyers on the need for the claimant to prove the elements of the case. It appears that the claimant must affirmatively PROVE that there is scope for undue influence
(a) By evidence of what went on in the relationship and
(b) The questionable nature of the transaction.
Notwithstanding, there have continued to be cases where the disadvantage to the claimant is not necessarily obvious but has still attracted the presumption of undue influence.
It appears from Pesticcio that undue influence can still be presumed where:
(1) There is proof that the complainant placed trust and confidence in the other party in relation to the management of the complainant's financial affairs;
(2) Coupled with a transaction which calls for explanation (not necessarily extremely disadvantageous on its face)
(3) Unless rebutted by satisfactory evidence to the contrary, that the alleged victim entered the transaction with full and informed consent.
Rebutting the presumption?
There is no finite list of the ways in which the presumption can be rebutted by the alleged wrongdoer. It may be rebutted by showing that the donor of the gift had acted independently of any influence of the recipient, and with full appreciation of what he was doing.
The most usual, although not the only way of rebutting the presumption, is to show that the donor had received competent and independent advice before acting. The presumption may also be rebutted, by showing that the act of the donor in making the gift had been a spontaneous and independent act.
C Relationships Giving Rise to the Presumption of Undue Influence:
Relationships attracting the presumption of undue influence, were traditionally organised into two categories (described as class (ii) (a) and class (ii) (b)
Class (ii) (a)
Contains a list of standard relationships, assumed by law to be based on trust. These are known as fiduciary relationships, for example, doctor/patient solicitor/ client
Class (ii) b:
Any other kind of relationship has been regarded as sufficient to give rise to presumed undue influence, if, on the facts of the case it is one which is based on trust and confidence or vulnerability and dependence. In O’ Sullivan v Management Agency and Music Ltd (1985) the relationship between a young pop star called Gilbert O’Sullivan and his manager constituted a relationship of trust sufficient to give rise to a presumption of undue influence. See also the case of Pesticcio v Huet (2004) which was concerned with the relationship between a sister and her disabled brother.
Problematic Relationships:
The stereotypical case of wives giving guarantees, or mortgaging the matrimonial home to secure the debts of their husbands has given rise to greatest problems. The transaction may turn out to be disadvantageous to the wife. Yet at the time there may have been a very good reason for the wife to enter into the transaction- especially where the transaction is linked to the husband’s business which might thrive as a result of the security taken on the family home.
The House of Lords recognised these difficulties in Etridge and disapproved of the language of ‘manifest disadvantage’ preferring the ‘suspicious transaction’ test one that calls for an explanation. It appears from that case (a husband and wife case) to be the combination of the relationship and anything unusual about the terms of the transaction that should set alarm bells ringing for a potential defendant. The defendant (donee of a gift or the creditor/bank manager in a three party situation) should take steps to ensure that the claimant is acting voluntarily, or surrender the benefits of the transaction.
In Etridge it was said that:
‘it would be absurd for the law to presume that every gift by a child to a parent or every transaction between a patient and doctor was brought about by undue influence unless the contrary is affirmatively proved………….. The law would be out of touch ….if the presumption were to apply to every Christmas gift or birthday gift by a child to a parent…or an agreement whereby a client or patient agrees to be responsible for the reasonable fees of the legal adviser or medical adviser. ….So something more is needed before the law reverses the burden of proof.’
The ‘Alarm bells’ explanation is also useful in class (ii)(a) cases. Alarm bells should ring where there are dealings between fiduciaries and those to whom they owe fiduciary duties (accountant, solicitor, financial adviser etc) Lord Browne Wilkinson in CIBC Mortgages v Pitt (1994) noted that in such cases the very existence of a fiduciary duty should ring its own alarm bells, so that the donee ought to recognise the risks of entering into such a transaction however apparently innocuous.
CIBC Mortgages v Pitt (1994) was a three-party case in which Mrs Pitt, once a famous horror film actress established she had been subject to the actual undue influence of her husband when mortgaging her home to fund his grossly speculative share transactions. In that case the mortgagee bank did not have actual or constructive notice of undue influence because Mr Pitt had falsely stated on his loan application form that he wished to borrow the money to purchase a holiday home for himself and his wife so the transaction appeared on its face perfectly unobjectionable.
D Three Party Cases
Undue influence can arise in simple two party cases where A unduly influences B to contract with A (Allcard v Skinner –Mother Superior and novice who transfers all her wealth to the convent) and in more complex 3-party cases:
A (wife/guarantor) ------ B (debtor/husband) ---------- C (creditor bank/bank)
See Etridge, Barclays Bank v O’Brien p. 19 of class outline.
Thus far we have concentrated on simple 2-party cases, in which A unduly influences B into contracting with or making a gift to A. However, as noted above many cases actually involve three parties
A unduly influences B into contracting with C
Typically a husband (B) unduly influences A (wife) to enter the impugned transaction (guarantee or mortgage). Can the guarantor/ surety (wife) set aside the contract as against the creditor bank.
The seminal House of Lords decision in Barclays Bank v O’ Brien established that this depends on whether the creditor had notice (actual or constructive) of the husband’s undue influence.
In 3-party cases there are three stages of enquiry:
(i) Is there a vitiating factor in the dealings between A and B (undue influence)?
(ii) Does the third party have notice actual or constructive of the vitiating factor, ie of undue influence or misrepresentation?
(iii) If yes, then the third party will be bound by the undue influence unless reasonable steps have been taken to avoid it.
Note: Many of the 3 party cases also involve allegations of misrepresentation. The wife claims to have entered the transaction as a result of the husband’s actionable misrepresentation or undue influence and it is similarly claimed that the bank had actual or constructive notion of the misrepresentation.
E Continuing uncertainty?
In Pesticcio v Huet and others [2004] EWCA Civ 372 it was said by the Court of Appeal (per curiam)
‘The striking feature of the instant appeal is that fundamental misconceptions as to the circumstances in which gifts or other transactions will be set aside on the ground of presumed undue influence persist, even though the doctrine is over 200 years old and its basis and scope were examined by the House of Lords in depth in the well known case of Royal Bank of Scotland plc v Etridge (No 2) less than three years ago.
The facts of Pestuccio were complicated.
The claimant, Bernard (aged 70) was of significantly lower than average intelligence and understanding. In August 1981, his mother had made a gift of the family home (the house) to the claimant. In 1997 Bernard was admitted to hospital, where he stayed for six months. On his discharge from hospital, he was transferred to a nursing home, where he still lived. Following advice from a solicitor who had been contacted by the claimant’s sister, Maureen, (the first defendant) the claimant executed a deed of gift of the house to the third defendant.
The third defendant later sold the house to the first defendant, who had obtained a mortgage from the second defendant. Maureen bought another house with the proceeds. One of the claimant’s brothers was appointed receiver of his affairs by the Court of Protection, and was authorised, as the claimant’s litigation friend, to bring proceedings against the 3 defendants to set aside the deed of gift.
The first instance judge declared (i) that the deed of gift had been procured by undue influence and was void as against the third defendant. (ii) He made an interim order that, inter alia, until the determination of tracing proceedings or further order, the property purchased by the third defendant after the disposition by her of the house should be charged with the sum of £50,000 and interest. The third defendant appealed.
ON APPEAL It was submitted for the third defendant that the solicitor had been instructed to act as solicitor for the claimant in relation to the deed of gift; that there was no presumption against a gift to the third defendant; that, unless there were exceptional circumstances, undue influence on the part of the third defendant could not be established; and that the claimant’s wishes, which had been effected by the deed of gift, should be respected. It was emphasised that the third defendant ‘had done nothing wrong’.
Held: the Appeal would be dismissed on the following grounds:
(i) A transaction might be set aside by the court, even though the actions and conduct of the person who benefited from it could not be criticised as wrongful.
(ii) Although undue influence was sometimes described as an ‘equitable wrong’ or even as a species of equitable fraud, the basis of the court’s intervention was not the commission of a dishonest or wrongful act by the defendant, but that, as a matter of public policy, the presumed influence arising from the relationship of trust and confidence should not operate to the disadvantage of the victim, if the transaction was not satisfactorily explained by ordinary motives.
(iii) The court scrutinised the circumstances in which the transaction, under which benefits had been conferred on the recipient, had taken place, and the nature of the continuing relationship between the parties, rather than any specific act or conduct on the part of the recipient. Whether or not the third defendant’s conduct could be described as ‘wrongful’, the requirement of the doctrine of undue influence was that it had to be ‘affirmatively established that the donor’s trust and confidence in the donee had not been betrayed or abused’. The judge had correctly applied the law of undue influence to the facts found by him and had reached an unimpeachable decision. Royal Bank of Scotland plc v Etridge (No 2) , Hammond v Osborn [2002] WTLR 1126 applied.
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