Unfairness: undue influence, non-commercial guarantees, unconscionable bargains

English law currently adopts a piecemeal approach to the problems of unfairness in preference to a general overriding principle.

Undue influence

1. Undue influence concerns the exploitation of a relationship of influence to obtain an undue advantage. The doctrine has been justified on the basis of: (a) the complainant’s defective consent; or (b) the defendant’s unconscientious conduct. (b) has the support of recent cases.

2. Pre-Etridge, undue influence comprised:

  • Class 1: actual undue influence
  • Class 2: presumed undue influence, further subdivided into:
    • Class 2A : specified relationships triggering an automatic presumption of a relationship of influence; and
    • Class 2B: other relationships where the existence of influence must be proved.
  • The complainant’s proof of a relationship of influence (2A or 2B) and a manifestly disadvantageous transaction raises a presumption of undue influence, which the defendant can rebut by showing that the complainant entered the contract freely, usually by evidence that she had independent advice.

3. Post-Etridge, there is only one category of undue influence, restated as a ‘failure to protect’ in the context of the parties’ relationship. The burden of proof is on the complainant throughout and this may be discharged by proving the defendant’s:

  • exertion of undue pressure in the context of the parties’ relationship, for example bullying or emotional blackmail (this mirrors the old Class 1, minus the pressure cases which belong in lawful act duress); or
  • failure to safeguard the complainant’s interests and preferring her own in the transaction (this mirrors the old Class 2).

4. Undue influence may still be ‘presumed’, but a distinction is drawn between:

  1. a legal presumption which reverses the burden of proof in certain specially protected relationships (the old Class 2A); and
  2. an evidential presumption analogous to the operation of res ipsa loquitur, which is merely the courts drawing legitimate inferences from proof of a relationship of influence and a transaction calling for explanation; the evidential burden then shifts on to the defendant to show that the complainant’s consent to the transaction was ‘informed and free’. There is no reversal of burden of proof; this remains with the claimant throughout.

5. The remedy for undue influence is rescission subject to the usual ‘bars’. Doubts remain about the extent to which impossibility of precise restitution can be overcome by substitution in money and the applicability of the change of position defence.

Non-commercial guarantees

1. Where someone is induced into a non-commercial guarantee of another’s debt by the debtor’s undue influence, misrepresentation or duress and the lender knows the guarantor is not acting commercially, the lender cannot enforce the guarantee unless it has taken reasonable steps to: (i) communicate directly with the guarantor about her need for independent advice and ascertain the identity of her adviser; (ii) disclose the necessary financial information to the adviser; and (iii) obtain a confirmation from the adviser that the guarantor has been advised about the nature and effect of the transaction.

2. This doctrine is justified by the special features of the case, namely the lender’s awareness of the one-sided and non-commercial nature of the transaction.

3. The remedy here is rescission, which cannot be partial. Again, it is unclear whether and how the change of position defence may apply to rescission.

Unconscionable transactions

1. A contract is unconscionable if:

  1. the complainant is under an operative bargaining disability, placing her at a serious disadvantage;
  2. which is actively or passively exploited by the defendant in a morally culpable manner;
  3. the resulting transaction is manifestly improvident to the complainant; who
  4. lacked adequate independent advice.

2. The justification for the unconscionable bargain jurisdiction is based on the exploitation of weakness which, in practical terms, is largely evidenced by the substantive unfairness of the transaction.