Contract Law - Undue Influence
[STEP 1] Is there undue influence? Examine the relationship between the surety
and debtor
This scenario concerns undue influence to provide security for another person’s loan.
[INSERT SURETY] is a surety for [INSERT DEBTOR’S] loan from [INSERT BANK /
CREDITOR]. There is a loan contract between [INSERT DEBTOR] and [INSERT
CREDITOR], and a security contract between [INSERT DEBTOR] and [INSERT
SURETY].
C may seek to set aside the security contract on grounds of undue influence. To do so,
they must show:
1) Undue influence by the debtor; and
2) That the bank had notice of this undue influence.
Is there undue influence?
Undue influence is where one party is in a position to influence another and takes unfair
advantage of that position. It can be actual or presumed.
Actual?
This is difficult for C to prove, as it is their word against another’s.
- The threat can be legal. This scenario is similar to / distinguished from Daniel v
Drew, a successful claim where an elderly lady who disliked confrontation and
was afraid of her nephew felt forced to enter into a contract by threat of court
action. STATE HOW ON FACTS
Presumed?
Undue influence is presumed if (as per RBS v Etridge (No 2)):
1) There is a relationship of trust and confidence; and
2) The transaction calls for an explanation.
Relationship of trust and confidence
, This means a relationship of influence, where one party trusts the other, and the other
conducts their business independently (i.e. a fiduciary relationship).
Irrebutably presumed:
In some categories of relationship, there is an irrefutable presumption that one party
places trust and confidence in another:
- Parent - child under 18
- Religious advisors - followers
- Solicitor - client
- Doctor - patient
Husband-wife and cohabitee relationships do not raise an irrefutable presumption of a
fiduciary relationship.
Depend on the facts:
Don’t call it a rebuttable presumption, it depends entirely on the facts
For other categories of relationship, the innocent party will need to prove a fiduciary
relationship exists on the facts.
- E.g. Tate v Williamson - financial advisor held to have a relationship of trust and
confidence with an Oxford undergraduate whose estate they were advising on.
- E.g. O’Sullivan v Management Agency Ltd - relationship of trust and confidence
found between a young singer/songwriter and their manager
Transaction calls for an explanation
The transaction must not be readily explicable by the relationship between the parties
(RBS v Etridge (No 2)).
Rebuttal?
D can rebut the presumption of undue influence if they can show that C exercised their
own free informed mind in agreeing to sign.
- E.g. if there was evidence that the innocent party took independent advice.
[CONCLUDING LINE] There has / has not been undue influence.
[STEP 2] Did the bank have notice of the undue influence?
[STEP 1] Is there undue influence? Examine the relationship between the surety
and debtor
This scenario concerns undue influence to provide security for another person’s loan.
[INSERT SURETY] is a surety for [INSERT DEBTOR’S] loan from [INSERT BANK /
CREDITOR]. There is a loan contract between [INSERT DEBTOR] and [INSERT
CREDITOR], and a security contract between [INSERT DEBTOR] and [INSERT
SURETY].
C may seek to set aside the security contract on grounds of undue influence. To do so,
they must show:
1) Undue influence by the debtor; and
2) That the bank had notice of this undue influence.
Is there undue influence?
Undue influence is where one party is in a position to influence another and takes unfair
advantage of that position. It can be actual or presumed.
Actual?
This is difficult for C to prove, as it is their word against another’s.
- The threat can be legal. This scenario is similar to / distinguished from Daniel v
Drew, a successful claim where an elderly lady who disliked confrontation and
was afraid of her nephew felt forced to enter into a contract by threat of court
action. STATE HOW ON FACTS
Presumed?
Undue influence is presumed if (as per RBS v Etridge (No 2)):
1) There is a relationship of trust and confidence; and
2) The transaction calls for an explanation.
Relationship of trust and confidence
, This means a relationship of influence, where one party trusts the other, and the other
conducts their business independently (i.e. a fiduciary relationship).
Irrebutably presumed:
In some categories of relationship, there is an irrefutable presumption that one party
places trust and confidence in another:
- Parent - child under 18
- Religious advisors - followers
- Solicitor - client
- Doctor - patient
Husband-wife and cohabitee relationships do not raise an irrefutable presumption of a
fiduciary relationship.
Depend on the facts:
Don’t call it a rebuttable presumption, it depends entirely on the facts
For other categories of relationship, the innocent party will need to prove a fiduciary
relationship exists on the facts.
- E.g. Tate v Williamson - financial advisor held to have a relationship of trust and
confidence with an Oxford undergraduate whose estate they were advising on.
- E.g. O’Sullivan v Management Agency Ltd - relationship of trust and confidence
found between a young singer/songwriter and their manager
Transaction calls for an explanation
The transaction must not be readily explicable by the relationship between the parties
(RBS v Etridge (No 2)).
Rebuttal?
D can rebut the presumption of undue influence if they can show that C exercised their
own free informed mind in agreeing to sign.
- E.g. if there was evidence that the innocent party took independent advice.
[CONCLUDING LINE] There has / has not been undue influence.
[STEP 2] Did the bank have notice of the undue influence?
