Student no. R1701D2280418
The Law of Obligations Module (LC4S188)
Tutor’s name: Ugochukwu Obibuaku30TH SEPTEMBER, 2018
Anyone who seeks to understand the intricacies of a contract must not only begin by defining the term ‘contract’; but delve further and ascertain the salient relations created by the term as well as frustrations that may arise as a result of the relations. This paper will mainly focus on the latter and more specifically duress and undue influence and whether they should be considered – jointly or separately – as components that constitute appropriate law against unconscionable contracts.
A classical conception of contract holds it to be a legally enforceable obligation created by the agreement of the obligor and obligee. The obligation is usually formed by the parties’ mutual assent to a bargain, an exchange of the obligor’s promise in return for a consideration given by the obligee.Consequently, a contract may be said to be in existence if an offer is met by acceptance pegged on consideration or promise from both parties and there exists an intention to create legal relations. It is worth noting that similar to any other relationship, relations created by contracts may at times be frustrated by the voluntary or involuntary actions of either contracting parties. Moreover, the law recognizes that a contract may be void or voidable thereby creating an opportunity for the claimant to mitigate the disadvantage.
A void contract, implies a contract which lacks enforceability by law, whereas voidable contracts, alludes to a contract wherein one party has the right to enforce or to put the contract to end. When the consent of the parties to the contract is not freely obtained, the contract becomes voidable at the option of the party whose consent is not free. According to Andrew Phang (2005) the factors leading to void and voidable contracts include misrepresentation, mistake, illegality, duress and undue influence. The aforementioned factors have the effect of rendering a contract unconscionable. An unconscionable contract has been defined as one that is so one-sided that it is unfair to one party and therefore unenforceable under law: It is a type of contract that leaves one party with no real, meaningful choice, usually due to major differences in bargaining power between the parties. Andrew Phang (2005) points out that the vitiating factors aforementioned tend to focus on achieving fairness rather than certainty.
Consequently, the succeeding discussions shall analyse whether duress and undue influence constitute an appropriate law against unconscionable contracts.
Demystifying Duress and Undue Influence
Duress and undue influence address two separate sorts of contracting imperfections.
Duress is a common law doctrine which was traditionally associated with intimidation that was real or at least sufficiently real and threatening to vitiate the consent of the other party, and mean that he was prevented in effect from acting with free will when reaching the agreement. Where a party enters a contract because of duress they may have the contract set aside. Originally, the common law only recognised threats of unlawful physical violence; however, in more recent times the courts have recognised economic duress as giving rise to a valid claim. Where the threat is to goods, the courts have been less willing to intervene, although analogous claims in restitution suggest that this position of the law may change. The basis of duress as a vitiating factor in contract law is that there is an absence of free consent. Pressure not amounting to duress may give rise to an action for undue influence in equity. The test for the existence of duress reflects the policy balance between fairness and the freedom of contract.According to C Elliot and F Quinn (2017), five conditions need to be satisfied in order for there to be a finding of duress:
1. Pressure was exerted on the contracting party- this amounts to compulsion of the will. To constitute economic duress, economic pressure must go a great deal further than the ordinary pressure of the market.
2. This pressure was illegitimate – A threat to do an unlawful act (which includes breaking a contract) will always be illegitimate, but a threat to do a lawful act will only be illegitimate if the threat is unreasonable, which will depend on the circumstances.
3. The pressure induced the claimant to enter the contract – Duress must be one of the reasons for entering (or modifying) a contract, but it does not have to be the only or even the main reason.
4. The claimant had no real choice but to enter the contract
5. The claimant protested at the time or shortly after the contract was made – In The Atlantic Baron 1979 case, it was because the claimant waited eight months after the ship was delivered that the claim for duress was unsuccessful.
Over the past 25 years, the courts have extended the scope of the duress doctrine to include what has come to be known as economic duress. Although still a relatively new doctrine, in modern times it appears to have more practical significance than the traditional concept of duress.
On the other hand, undue influence is an equitable doctrine that exists where a contract has been entered as a result of pressure which falls short of amounting to duress. Undue influence operates where there exists a relationship between the parties which has been exploited by one party to gain an unfair advantage. Since equity is inevitably more flexible than common law, the doctrine could be applied whenever a party has exploited the other party to gain an unfair advantage. Clearly, there is nothing wrong with trying to induce another person to enter a contract; this is in essence no more than basic bargaining. It is the degree of influence applied and also the context in which it occurs that the court is actually concerned with in determining what is and is not acceptable.
There are two types of undue influence: actual and presumed. Actual undue influence applies where no special relationship existed between the parties. In such circumstances the party alleging the undue influence would be required to prove the undue influence. To do this they would need to show that the other party was in a position of dominant influence over them at the time the contract was formed so that they were unable to exercise free will or choice or to behave independently in entering into the contract.This position was reflected in the case of Williams v Bayleywhere the bank approached the debtor’s father and demanded that the father should mortgage his farm to the bank in order to cover the son’s debt to it. The bank further threatened to prosecute the son unless the father complied. The House of Lords considered that it had no choice but to hold that the pressure was illegitimate and amounted to undue influence, vitiating the agreement and allowing the father to avoid his obligations under it.
Presumed undue influence suffices where a special relationship existed between the two parties there was no need to prove undue influence. In such instances, an evidentiary presumption will be applied that shifts the burden of proof from the claimant to the defendant, so that it is up to the defendant to disprove the existence of undue influence. A special relationship could include parents and their children; doctors and their patients; trustees and the beneficiaries that they acted for; solicitors and their clients and also the spiritual advisers of those with specific religious leanings. In the Court of appeal decision Lloyds Bank v Bundy- where a father had secured his son’s debts – the court held that there was a relationship of trust and confidence between the father and the bank manager giving rise to a presumption of undue influence. The bank manager in giving evidence admitted that the father relied implicitly and solely on the advice given by him and the father stated that he had trusted the bank and had a long relationship with the bank and generally acted on advice given. The charge and guarantee were therefore set aside. This position should however be contrasted with the later decision of National Westminster Bank v Morgan where the court held that the normal relationship between banker and client is not one of trust and confidence. Equally, the relationship between husband and wife was held to be expressly excluded from the presumption of undue influence. Following the aforementioned decision, it became clear that banks were not acting in a fiduciary capacity so as to give rise to a presumption of undue influence. There had to exist another factor in order to have the contract set aside as against a bank. Barclays Bank v O’Brien introduced the concept of constructive notice which arises where the bank is;
1. Put on enquiry
2. Fails to take reasonable steps to ensure that the transaction was entered freely without the exercise of undue influence.
With respect to special relationships – as captured above – in order for the dominant party to disprove any undue influence on his part it would be necessary to show two things:
That the other party entered the agreement with full knowledge of its character and potential effects.
That the other party took independent and impartial advice before entering the contract.
It is imperative to note that the Contracts (Rights of Third Parties) Act 1999 creates an entitlement for a person, who is not party to a contract, to enforce a term of that contract in his own right where the contract confers or purports to confer a benefit on the third party.
This far, it is evident that whether jointly or separately, duress and undue influence need to be considered to protect disadvantaged parties from exploitive contracts. The part that follows shall highlight the effects of duress and undue influence in a contract.
The effect of a finding on duress and undue influence
Since duress operates to deflect the will of the party rather than vitiate consent, the effect of a finding of duress is always to make the contract voidable not void. These words were echoed in IFR ltd v Federal Trade Spa where the court held:
“The basis of duress is not the absence of consent; when acting under duress the actor will give consent for the contract. The contract is therefore initially valid. It is the absence of choice that renders the contract voidable.”
It is worth noting that duress on its own will not render the contract voidable, it will need to be shown that the party would not have entered into the contract had it not been for the duress in which the party suffered. If one party has entered into the contract under duress then the contract is voidable by the injured party.
In Royal Bank of Scotland v Etridge (No 2) 2002 2 AC 773, it was held by the court that; “undue influence includes cases of coercion, domination, victimisation and all the insidious techniques of persuasion.” Consequently, illegitimate pressure placed upon a party in order to enter into a contract results to undue influence if that pressure does not involve a serious threat. Nevertheless, in demonstrating that undue influence has occurred one must demonstrate that the transaction entered into was “manifestly disadvantageous” in order for the innocent party to succeed because as said by Birks (2004); “not all cases of undue influence can be regarded as cases of wrongs.” This was highlighted in Macklin v Dowsett where it was held that; “a transaction that is so manifestly unfair to the transferor can itself be evidence of a relationship of ascendency or dependency.” This decision provides an example of how the court will intervene in order to “protect the vulnerable from exploitation”. A contract will thus be rendered voidable if undue influence is established as shown in Dunbar Bank Plc v Nadeeem 1997 2 All ER 253.
Some of the common law remedies available to an aggrieved party where duress and undue influence is upheld by the court include; Unliquidated damages, Liquidated damages, Restitution of payments made in advance of a contract and Quantum meruit – while the equitable remedies include; Specific performance, Injunctions, Rescission and Rectification.
Duress and undue influence doctrines can serve the valuable goal of protecting the concept of voluntary action in entering into bargains. The two doctrines both condemn situations in which choice is particularly egregiously constrained. The question should not however be whether the threatened party exercised free will, but rather whether that party had any reasonable alternative. This position of the law creates further difficulty especially in determining the presence of free will. However, the notion of “no reasonable alternative” better captures the idea of constrained choice and is a standard court has the ability to apply once courts understand the idea of reasonableness in context.
Moreover, although duress and undue influence place a weaker party at a disadvantage, the law as discussed above has put in place mitigating and remedial measures of the disadvantaged party to recover from an exploitive contract. This is however subject to the vigilant actions of the claimant following the act of duress and undue influence. After all, even in equity, we can see the maxim ‘delay defeats equity’ operating so that a claimant who delays too long in bringing a claim will be prevented from succeeding.
In light of the aforementioned discussions, the doctrine of duress and undue influence – whether jointly or separately – cannot by itself constitute an appropriate law against unconscionable contracts since other factors such as subsequent conduct of the disadvantaged party have to be considered prior to making a finding that the contract is unconscionable.
Table of Cases
Allcard v Skinner (1887) 36 ChD 145
Atlas Express Ltd v Kafco (Importers and Distributors) Ltd 1989 1 All ER 641 (QB)
Bank Of Scotland v Bennett ; Anor 1998 EWCA Civ 1965
Barclays Bank v O’Brien 1993 109 QBBerardi v. Meadowbrook Mall Co. 2002 Supreme court of Appeal of West Virginia, 572 S.E.2d 900
Dunbar Bank Plc v Nadeeem 1997 2 All ER 253.IFR ltd v Federal Trade Spa 2001 EWHC 519 (QB)
Lloyds Bank v Bundy1975 QB 326
Macklin v Dowsett 2004 EWCA Civ 50
Maskell v Horner 1915 3 KB 106
Midland Bank v Shepherd 1988 3 All ER 17
National Westminster Bank v Morgan
North ocean shipping Co v Hyundai Construction Co (The Atlantic Baron ) 1979 QB 705
Royal Bank of Scotland v Etridge 2001 3 WLR 1021
Royal Bank of Scotland plc v Etridge (No 2) 2001 UKHL 44
Royal Bank of Scotland v Etridge (No 2) 2002 2 AC 773
Skeate v Beale 1840 11 Ad & El 983
SL Huyton SA v Peter Cremer GmbH & Co 1999 1 Lloyds Rep 620
Williams v Bayley 1866 LR 1 HL 200
Table of Statutes
Contracts (Rights of Third Parties) Act 1999
Elliot C and Quinn F, Contract Law (11th edn, Harlow:Pearson Education 2017)
Turner C, Unlocking Contract Law (4th edn, London ; New York : Routledge 2014)
Birks P, ‘Undue Influence as Wrongful Exploitation’ (2004) 120 Law Quarterly Review 34
DeLong S, ‘What is a contract'(2015) 67 South Carolina Law Review 99
Giesel G, ‘A Realistic Proposal for the Contract Duress Doctrine’ (2005) 107 West Virginia Law Review 443
Phang A, ‘Vitiating Factors in Contract Law – Some Key Concepts and Developments’ (2005) 17 Singapore Academy of Law Journal 148
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