Duress and undue influence

At common law, duress arose when a party was induced to enter a contract by force or the threat offeree. His consent was not freely given. Today, economic coercion can also be duress.

In Universe Tankships Inc. v. ITF (1982), a trade dispute arose involving a ship, the Universe Sentinel. The union stopped it from leaving port, and eventually only allowed it to do so on condition that the owners paid money into a welfare fund. This agreement was held voidable for duress, and the owners recovered the money.

However, the economic pressure must be such that the courts regard it as improper. There can be a narrow line between economic duress and legitimate commercial pressure.

In D & С Builders Ltd v. Rees (1966) (Unit 1), it was suggested, obiter, that even if there had been a valid contract, it would have been voidable for duress. Mr and Mrs Rees almost held the builders to ransom; the builders needed the money quickly, and the Rees family (who owed £ 482) said in effect, 'either agree to accept only £ 300 or we delay still further'.

In Atlas Express Ltd v. Kafco Ltd (1989), K, a small manufacturer, received a good order from a retail chain, Woolworth's. К contracted with Atlas, a road carrier, to deliver the goods at an agreed fee. After the first load, Atlas realized that it had miscalculated the delivery costs, and therefore told К that it would not make any further deliveries unless К almost doubled the agreed fee. K, desperate to fulfil its Woolworth's order and unable to find another carrier in time, had to agree—but later refused to pay the extra. It was held that К was not liable for the extra charge, which had been extorted from it by duress (Moreover, there was no consideration for its promise to increase the fee; contrast Williams v. Roffey, Unit 1.)

On the other hand, in Pao On v. Lau Yiu Long (1979) (Unit 1), the defendant was the major shareholder in Fu Chip Ltd. He was persuaded to give a guarantee to Pao On by the latter's threat to break his contract with Fu Chip Ltd. This could have harmed the defendant. Nevertheless the guarantee was held valid. The full facts were complex, and Pao On's threat was ultimately regarded as legitimate commercial pressure.

Equity has long recognized less direct pressures, particularly where confidential or professional relationships are abused. Generally, improper pressure has to be proved.

In Williams v. Bayley (1866), a father was induced to give security for his son's debts to the bank by the bank's threats to prosecute the son. On proof of this, the father was held not to be bound.

In some instances equity goes further and presumes undue influence unless the contrary is proved. This can arise from the relationship between the parties: it is presumed there is such influence by a doctor over his patient, solicitor over his client, religious adviser over follower, parent over young child (but not necessarily by husband over wife or vice versa). The presumption can only be rebutted by proof that the weaker party used his own free will, fully understood the proposed transaction, and preferably had had independent advice.

There are also situations where, although the relationship does not necessarily suggest undue influence, the circumstances do. For example, there have been very many debt cases where wives (or husbands) have agreed to mortgage the family home as security for the spouse's business debts, or elderly parents have similarly been persuaded by adult children to give unwise security for the children's business debts. The undue influence will not always be exerted directly by the other party to the contract here, who is usually the bank (the creditor). Nevertheless, in these situations, the bank should foresee the possibility of its client (the debtor) putting undue pressure on the spouse or elderly parent to give some sort of security to the bank, and even telling lies in the process. Therefore, such a creditor has a duty to see that the person being asked to provide security is fully aware of what he or she is doing, and is free from undue influence either by the bank itself or by the main debtor. The bank should generally ensure that the guarantor takes independent advice, particularly where there might be manifest disadvantage. Documents should not normally be entrusted to the debtor himself to obtain the spouse or parent's signature. Unless the creditor can prove that it has taken all reasonable steps to safeguard the potential victim, then the guarantee or mortgage will be voidable.

In Lloyd's Bank Ltd v. Bundy (1975), a son was in financial difficulty. The bank manager visited the father and persuaded him to give the bank a guarantee of the son's debts and a mortgage of the father's house as security. The father was old and was given no warning or opportunity to seek independent advice (which might have been against the contracts). Undue influence was presumed, and the contracts were set aside when the bank could not rebut the presumption.

In Barclay's Bank plc v. О'Brien (1993), a husband persuaded his wife to mortgage the family home as security for his present and future business debts. He misled her into believing that her liability could be no more than £ 60000, and she signed on that basis. In fact, the documents eventually enabled the bank to claim roughly double that amount. She was held liable for only £ 60000. On equitable principles, the creditor who takes from a married person security for the spouse's business debts must take all reasonable steps to see that the potential liability is fully understood. The bank could not prove that it had done this.

In Credit Lyonnais Bank v. Burch (1997), an employer required its employee to mortgage his flat to the Bank as security for all of the employer's debts, present and future. It was held that (1) the employment relationship did not raise the presumption of undue influence, but (2) the circumstances did. The mortgage was set aside.

There are other situations where the circumstances can raise a presumption of undue influence.

In О'Sullivan v. MAM Ltd (1985), a young singer and composer (Gilbert O'Sullivan) made several contracts with a management company at a time when he had no business experience. Many of the contracts were unduly harsh, and they were later set aside as having been obtained by undue influence.

However, the court will only presume undue influence if the circumstances do make it seem likely. For example, a bank or building society which lends money to a married couple jointly, and takes a mortgage of the jointly owned family home as security, need not normally advise each of them to take independent advice. If the money is apparently sought by both, for the benefit of both, there is nothing to suggest that either of them is unduly pressurizing the other. The heavy burden of having to disprove undue influence only falls on the lender who should have suspected it, as where the lender knows that the home is being used to secure the business debts of only one of them.

In National Westminster Bank рlс v. Morgan (1985), a couple in financial difficulty remortgaged their home to the bank. The house was jointly owned, and the bank manager had to visit the wife to persuade her to sign. She did not realize that the new mortgage could also cover her husband's business debts, but this was not the main purpose of the loan. She received no independent legal advice at this stage. Nevertheless the mortgage was binding on her. The loan was in fact used to pay off earlier mortgagors of the house, so as to save the family home, albeit temporarily. The husband died leaving no business debts to the bank. The wife herself had wanted the loan and had benefited from it. Therefore equity would not intervene.

In CISC Mortgages plc v. Pitt (1993), a married couple borrowed money jointly, and jointly told the lender that it was to be used to pay off their existing mortgage, and to buy a holiday home. In fact, unknown to the lender, the wife reluctantly allowed her husband to use the money to speculate in shares in a very risky manner. The court refused to set aside the mortgage. There was nothing in the circumstances known to the lender to make it presume undue influence.

Where undue influence is deemed to exist, either by proof or presumption, the contract is voidable either wholly or partly (see Barclays Bank v. O'Brien above). However, the right to rescind/avoid a contract is an equitable one, and it must therefore be exercised within a reasonable time.

In Allcard v. Skinner (1887), Miss Allcard joined a religious order and gave about £ 7000 to its leader during the years when she was a member. After leaving the order, she waited several years and then sued to recover the money. It was held that she had delayed for too long after the end of the undue influence, and her action failed.