Chapter 15 Outline answers to end-of-chapter questions

Undue influence, unconscionability and equality of bargaining power

1. Evaluate the extent to which the law protects wives (or equivalent) from the abuse of influence by their husbands (or equivalent).

Introduce the answer by identifying the issue of undue influence, specifically between spouses and equivalent partners and effectiveness of the protection provided by the rules.

Explain undue influence as a concept and the effect it has on a contract as a vitiating factor and mention the claimant /defendant – sided approaches with reference to some of the academic comments noting Royal Bank of Scotland v Etridge [2001] in this context.

Now, address the fact that the status of the parties is not an issue in relation to actual undue influence (Bank of Credit and Commerce International SA v Aboody [1990]) and so the question about the extent of the protection is really about the presumption of undue influence.

Briefly explain presumed undue influence (Allcard v Skinner (1887)) and the stages to be satisfied (Etridge) – relationship of trust and confidence; abuse of influence /transaction calling for an explanation which gives rise to a presumption of undue influence; and, the remaining question of whether the presumption has been rebutted.

Take the first issue of spouses and acknowledge that such relationships are not presumed to be based on trust and confidence (Howes v Bishop [1909]; Barclays Bank v O’Brien [1994] and Etridge). But explain the basis of this and that is just creates a greater evidential burden between couples i.e. the victim needs to show trust and confidence in financial matters, for example. However, the requirement of the transaction calling for an explanation can be difficult as highlighted in the context of vicarious situations.

Now, turn to the key issue of vicarious situations which in practice had been criticised over the level of protection given to the vulnerable spouses. Explain the ‘typical’ bank/wife surety contracts that caused so much concern in the earlier days. Address the dilemma faced by the courts with two innocent parties and the policy balance stated by Lord Brown-Wilkinson in Barclays Bank v O’Brien.

This takes you to the use of constructive notice initially from O’Brien and how it was made more protective in Etridge.

Acknowledge that the mechanism is excellent in terms of balancing the interests of the parties to the contract in terms of the bank being on notice. The criticism here is the legal advisor really carrying the burden of the assessment but arguably they are in a better position to do so compared with a bank.

Now, turn to the significant problem. That if the bank is on notice and goes ahead, the transaction is it is subject to the rights of the vulnerable spouse. Explain the conditions of those rights. Trust and confidence has to be established which, as a requirement is acceptable. However, the transaction has to call for an explanation i.e. it can’t be explained by ordinary motives in such a relationship. On this point summarise the relevant comments from Lord Nicholls and Lord Scott from Etridge but also address the academic criticism and how it creates a need for more obvious wrongdoing rather than the more common but subtle pressure.

Finally, conclude with a direct reference to the question. Ultimately, in principle the law does provide vulnerable spouses with protection from undue influence from their dominant spouse. However, even when influence is presumed there is a real difficulty in the context of the second requirement. Furthermore, a great deal is resting on the competence of the relevant legal advisor.

2. Explain the extent to which Royal Bank of Scotland v Etridge [2001] clarified the law on undue influence.

Introduce your answer by acknowledging that the case is the leading case on undue influence and did provide a comprehensive account of the area. You will address and explain the points that were clarified and also the relevant criticism.

Briefly mention the role of the law of undue influence – what it does and the basic requirements (stages) that were established over the years before Etridge.

The order of the issues is not really important. You might like to start with the significant issue of the change to constructive notice. Explain the vicarious situations that became a clear problem in the 80’s along with the solution by Lord Browne-Wilkinson in Barclays Bank v O’Brien [1994], the policy balance (which was also restated in Etridge) and the requirements. Crucially, detail how the requirements were simplified in Etridge and the merits of that in terms of certainty for the parties. The introduction of clear advice for banks and legal advisors is another key aspect of this. Address the merits of this guidance and how in practice they set the benchmark for the standards to be met.

Next, on abuse of influence, take the requirement of a manifest disadvantage (National Westminster Bank v Morgan [1985]. Detail the problem arising from this requirement and how it was resolved in Etridge.

Now, turn to the previously established categories of undue influence (1,2a and 2b) and how these were not helpful and instead, for presumed undue influence trust and confident (relationship of influence) has to be proven. Explain the practical significance of that spectrum as an evidential burden.

You are now in a position to criticise the case for points that could have been clarified. Address the language of abuse of influence but that it did not clarify whether the law is claimant or defendant focused. Explain the difference and the conflicting academic views along with the cases relied upon (Birks & Chin, Bigwood, Pesticcio v Huet [2004]; Macklin v Dowsett [2004]; Allcard v Skinner (1887)) as the foundation case to conform to, and then the language of Etridge. Expand on the significance of this issue and it can be observed that more could have been done to make the position clear.

Also, address the position in relation to vulnerable spouses/or equivalent on the second requirement on the transaction having to call for an explanation. Explain the academic criticism. while the problem was acknowledged by Lords Nicholls and Scott, more should have been done.

Finally, conclude with a direct reference to the question recognising that while certain important aspects were clarified and improved by the House of Lords in Etridge, a number of issues were not and have resulted in some uncertainty.

3. Abi has been in a long-term relationship with Beena and they own a flat together. Abi wants to use the flat as security for a loan to enable her to open a coffee shop. She then tells Beena to go to the bank and sign a document. Realising that Beena is not keen on the idea, Abi tells Beena that if she really loved her, she would agree. The bank tells Beena about the transaction and about the requirement for her to get legal advice. Beena then visits a solicitor (Cheryl) who Abi was using to help set up her business. During the meeting, at which Abi was present, Beena is told of the risks. Cheryl then sends a letter to the bank explaining that Beena understands the risks but will do anything to keep Abi happy. After Beena signs the document, the bank provides the loan. Following Abi’s failure to meet the repayments, the bank seeks possession of the flat. Advise Beena.

Introduce your essay by identifying that in the circumstances, the question is whether Beena can defend the action by the bank by arguing that the contract they have should be rescinded for undue influence. Explain your approach of addressing an applying the requirements in turn.

Start by acknowledging what undue influence is (Allcard v Skinner (1887), Royal Bank of Scotland v Etridge [2001]) and address the three main requirements- a relationship of influence; and the influence being undue as a result of it calling for an explanation. Those result in the presumption of undue influence, but that can be rebutted (the third element). 

Observe that here the contract is with Beena and the Bank and the potential influence is from Abi, a third party. On that basis, you need to determine if the bank’s transaction is subject to Beena’s rights anyway. In the event that this might be established, Beena’s rights need to be explored.

Explain the vicarious situation and the problem of having two innocent parties. Detail how the courts solve this problem using constructive notice (the test from Etridge, based on Barclays Bank v O’Brien [1994]).

You can now apply the test. Since Beena and Abi are in a non-commercial relationship the bank would have been on enquiry which is why they instructed Beena to get legal advice.

Next, it is useful to summarise the guidance for banks from Etridge.

Now, apply it to the way the bank went ahead with the contract. They know that Beena would do anything to keep Abi happy. Explain how it could be argued that not enough was done by the bank in the circumstances. Note, the bank is not concerned with how the advice was given, unless they have notice of that.

If the bank is deemed to have constructive notice of undue influence, it just means the transaction is subject Beena’s rights so the next step is to address those rights.

The question is, can Beena show that she satisfied the requirements in terms of her relationship with Abi and the nature of the transaction?

Explain the evidential burden in the first requirement relating to a relationship of influence using the points from Howes v Bishop [1909]; but how it can be established on the facts: Barclays Bank v O’Brien [1994] and Etridge). Explain the significance of emotional and sexual ties as a factor addressed by Lord Browne-Wilkinson in O’Brien. The nature of the influence can arise from love and affection and reliance in financial matters (Leeder v Stevens [2005]).

Apply it here. Abi might well take care of the financial side of things given that she wants to open a business and Beena complied, though the position is not clear. What is certain is their emotional ties and influence from the way Abi dealt with Beena’s initial reluctance.

If influence can be established, the next requirement is about whether it was undue i.e. does the transaction call for an explanation. On this explain the points observed By Lord Nicholls and Scott in Etridge about the difficulty of wives establishing this.

Apply it here. A business might appear to their mutual benefit. It might appear to be normal given their relationship. However, perhaps it could be viewed as an unacceptable risk beyond the usual relationship if in the circumstances, there are significant risks associated with it. Is Abi qualified in any way to start such a business? Is it obvious that such a business would have little chance of success? These factors might be relevant.

Even if undue influence is presumed, there will be a question over whether the presumption of influence can be rebutted. Explain how this can be done (Allcard v Skinner (1887); Etridge and note the relevant point by Lord Hoffman in R v Attorney-General [2003] on legal advice).

Is it possible that if the presumption applies, it has not been rebutted?

Finally, if the transaction is not set aside, Beena might have action against the solicitor in negligence. Briefly summarise the guidance from Etridge to advisors.

Apply the guidance. The fact that Cheryl represents Abi might not be an issue but arguably Abi’s presence is. However, can it be said that the advice / risks were understood even though Beena would have done anything to keep Abi happy? It might be argued that these are two different things.

Finally, conclude by explaining that Beena’s chances are really determined by the outcomes of the various tests. Establishing that any influence was ‘undue’ would be difficult.