Actual undue influence

This arises where the claimant can prove that they entered the transaction as a result of undue influence from the other party. In these cases, the influence tends to be of a kind which is similar to, but falls short of, duress.

The party claiming actual undue influence must prove that they were influenced, and that the contract resulted from that influence. It is not necessary in the case of actual undue influence to prove that the contract was manifestly disadvantageous to the party influenced. This was the position in CIBC Mortgages v Pitt (1993).

Presumed undue influence

Undue influence may be presumed where there is a pre-existing relationship of confidence between the two parties to a contract, as a result of which one places trust in the other, and the contract between them is manifestly disadvantageous to the party who places trust in the other.

Such a relationship of trust is called a fiduciary relationship, and it may arise in two ways;

• First, it may fall into several categories in which a relationship of trust is automatically presumed to exist. These categories are parent and child, religious adviser and disciple, guardian and ward, solicitor and client, trustee and beneficiary, doctor and patient.
• Second, where the relationship does not fall within any of the above categories, a relationship of trust may nevertheless be established on the facts and will be justified by the circumstances of each case. This was the position in the case of Lloyds Bank v Bundy (1974).

A manifestly disadvantageous transaction

The transaction must be manifestly disadvantageous to give rise to a presumption of undue influence. This will be found to be the case where it would have been ‘obvious as such to any independent and reasonable persons who considered the transaction at the time with knowledge of all the relevant facts’. This was the position held by the courts in Bank of Credit and Commerce International SA v Aboody (1989).

Determining whether there is a manifest disadvantage is a matter of weighing the advantages and disadvantages of the transaction in question. This position was however question by the House of Lords in the case of CIBC Mortgage Ltd v Pitt Morgan (1993).

The courts are however concerned with whether there has been constructive knowledge of impropriety on the part of the innocent party or not. Under what circumstances can constructive knowledge of impropriety be said to be gotten?

• Placed on inquiry: This is very common in the case of a Bank involved in a mortgage transaction over a property who will be placed on inquiry of an impropriety by a third party in the following three situations;

. The transaction is so extravagantly improvident that it is difficult to explain in the absence of some impropriety;

. The bank knew that the other contracting party was agreeing to a charge over property which was jointly owned with someone with whom he or she was automatically presumed to be in a relationship of trust; or

. The bank knew that the contracting party was accustomed to placing trust and confidence in the joint owner of the property in relation to his or her financial affairs.

• Avoiding constructive notice: Where a contracting party is placed on inquiry as to the existence of undue influence, they will only be able to enforce the contract if they can avoid being fixed with constructive notice of the undue influence. A contracting party will avoid having constructive notice by taking reasonable steps to satisfy itself that the other party’s agreement had been freely given.

Described as the doctrine of privity, this principle meant that third parties could neither sue nor be sued under a contract. Even where a contract was made for the benefit of a third party, the party still had no rights under it as was illustrated in the case of Tweddle v Atkinson (1861).

A large number of exceptions to the privity rule had been developed over the years, to avoid extreme cases of injustice, but these numerous exceptions rendered the privity doctrine quite complex.

There are two main aspects to the rule of privity;

•  The first is that the third party cannot be made the subject of a burden imposed by the contract, and
• The second is that a third party cannot enforce a benefit purported to be granted by the contract.

Contractual rights conferred on third parties

Contractual rights conferred on third parties have the character of statutory exception to the common law doctrine of privity. The range of third party rights can arise under statute, common law or equity.

Under common law an illegal contract is void and courts will not order it to be performed. A court will never enforce an illegal contract, in the sense of ordering a party actually to do something that is unlawful or contrary to public policy. Illegal contracts are not devoid of legal effect but no action on the contract can be maintained. Illegality, where operative, acts as a defence to the general right that a party would otherwise have to enforce a contract (that is, it acts as a defence to what would otherwise be a valid claim for damages for breach of contract, or to an action for the agreed price).

Contracts illegal at time of formation

In this case the contract is treated as if it was never made, so the illegal contract is unenforceable by either party.

Because the contract is unenforceable, property handed over under an illegal contract cannot be recovered. This position was illustrated in the case of Parkinson v College of Ambulance Ltd and Harrison.

There are two main exceptions to the general principle that the contract is unenforceable.

• The first is that a person will be able to recover their property if they can rely on some other cause of action which does not involve the illegal contract.
• The second exception to the general rule applies where one party is more at fault than the other (they are described as not being in pari delicto). In such a situation the courts may be prepared to view the less guilty party as the victim of the transaction and allow them to recover property transferred to the more guilty party.

Contracts illegal as performed

A contract perfectly lawful when made, may be carried out in an illegal manner. It will be possible to enforce the illegal contract if the illegal act was merely incidental to the performance of the contract.

Where the contract is merely illegal because of the way it has been performed, it is possible for either both or only one of the parties to intend illegal performance. It is customary to distinguish between the situation where the legally objectionable features were known to both parties and where they were known to only one of them.

• Both parties aware of illegal performance

If both parties are aware that its performance is illegal, the consequences for this type of contract are the same as for a contract that is illegal at the time of its formation: neither party can enforce it. This was the position in the case of Ashmore, Benson, Pease & Co Ltd v AV Dawson Ltd (1973).

• Only one party aware of illegal performance

When one party did not know of the illegal performance of the contract by the other party, the innocent party can enforce it. Where the innocent party has provided any performance of the contract, they may sue on a quantum meruit for its value.

Where one party is completely innocent, the guilty party in these circumstances cannot sue on the contract for damages, or recover any property handed over, unless this can be done without relying on the illegal contract.

Severance

In some cases, it is possible to divide the illegal part of a contract from the rest, and enforce the provisions which are not affected by the illegality – this is called severance. It appears that the illegal parts of a contract can be severed if they are relatively unimportant to the contract and if the severance leaves the nature of the contract unaltered, because the words simply lifted out of the contract with no rewording required. If the unlawful part of a contract cannot be severed, the whole contract will be void.

Breach of common law

There are a number of factors which may make a contract illegal at common law, the most important being where there is a contract to commit a crime or tort. Our particular interest in practice are contracts in restraint of trade.

Contracts in restraint of trade

The issue of restraint of trade concerns contracts which limit an individual’s right to use his or her skills for payment, or to trade freely. Such contracts fall into four groups:

• Contracts for the sale of a business where the vendor promises not to compete with the purchaser.
• Contracts between businesses by which prices or output are regulated.
• Contracts in which an employee agrees that on leaving the company, they will not set up in business or be employed in such a way as to compete with that employer. This is common in businesses where personal skills and reputation attract customers, such as hairdressing or advertising. Such contracts tend to provide that the employee should not set up a competing business, or take a job with a competitor, within a certain geographical area and/ or within a certain period of time after leaving. The main reason for such contractual terms is the concern that the employee may take customers with them to the new employer or business.
• Contracts where a person agrees to restrict their mode of trade. This is sometimes called a solus agreement.

Any of the above types of contracts may amount to what is called a general restraint, if the contract completely prohibits trading, or a partial restraint if it limits trading to a certain time or area.

The court must be satisfied that the party making the restriction actually needs to protect their interest. The only legitimate interests employers may seek to protect are their relationship with customers and their trade secrets.

Restrictions designed simply to prevent competition will not be upheld by the courts.

In considering reasonableness, the court must be satisfied that the agreement is no wider than is necessary to protect those interests and the scope of the restraint and the area and period of time it covers are all properly balanced against one another. Thus a restriction might be held void if applied over a large geographical area, or for a long time, but it might equally be valid if it only covered a small area or was to last for a short time.

• The contract expressly provides that they may do so; or
• The contract purports to confer a benefit upon them, unless it is clear that the term was not intended to be enforced by the third party.

Express provision in the contract

This is where statute gives third parties a right to enforce the contract if the contract expressly provides that he may. Therefore, this enables the contracting parties to provide expressly for a third party to be able to enforce a term of the contract.

The contract purports to confer a benefit

This applies when the term of the contract purports to confer a benefit on the third party. The aspect of benefit under such circumstances can include any performance due under the contract, such as a payment of money, a transfer of property, the rendering of a service, or the benefit of an exemption or limitation clause. The term must, moreover, purport to confer the benefit on the third party, so that it is not enough for third parties to show that they would happen to benefit from its performance.

Identifying the third party

It is not necessary for the third party to be specifically named: it is sufficient for him or her to be expressly identified in the contract by name, as a member of a class or as answering a particular description. Therefore, the phrases such as successors in title, future owners and occupiers will be capable of conferring rights of enforcement upon these people in appropriate circumstances. Nor need the person to be in existence at the time of the contract: rights could be conferred on a company, which is yet to be incorporated, an unborn child or a future spouse.

Consent to variations

Under this principle, unless a contract provides otherwise, the parties to the contract may not rescind the contract, or vary it so as to extinguish or alter the third party’s rights, without his or her consent if the third party has either:

• Communicated to the promisor their assent to the relevant term;
• Relied on the term and the promisor knows of that reliance; or
• Relied on the term and the promisor can reasonably be expected to have foreseen that reliance.

If one of these three situations applies, then any variations or cancellation can only take place with the consent of the third party.

The need for consent to variations can be dispensed with by the court if the third party cannot be traced or is incapable of giving consent, and if this occurs the court can order compensation to be paid to the third party.

Enforcement

Third parties have the same remedies as would be available to them if they were contracting parties, including the rights to damages and specific performance. Although the contract can be enforceable by the promisee as well as the third party, there cannot be double liability for the promisor.

Defences

In an action by the third party, the promisor is able to rely on any defence arising out of the contract which would have been available to him or her had the claim been by the promisee. Thus, if the promisee induced the promise by misrepresentation or duress, the promisor can use that as a defence to an action by the third party.

Insurance

The Married Women’s Property Act 1882 provides that where a husband or wife takes out a life insurance policy for the benefit of their spouse or children, the contract can be enforced by the beneficiary.

Under a third party insurance policy, where a person incurs liability to another, and is covered for that liability by an insurance policy, the other person can, in certain circumstances, claim on the policy.

Bills of exchange

A third party and sue the giver of a bounce cheque even if he did not have a direct contract with the giver.

Non est factum

As a general rule, a person who signs a contractual document is bound by it, regardless of whether he or she has read or understood it (L’Estrange v Graucob (1934). However, where a person signs a document believing it to be something totally different from what it actually was, the common law remedy of non est factum (Latin for ‘this is not my deed’) may make the contract void. In order to do this, the person seeking the remedy must prove three things:

• That the signature was induced by a trick or fraud;
• That they made a fundamental mistake as to the nature of the document; and
• That they were not careless in signing it.

The mistake made by the signer must concern the actual nature of the document, not just its legal effect. Lord Reid stated in the case of Saunders v Anglia Building Society (1971) that the plea (non est factum) cannot be available to anyone who was content to sign without taking the trouble to find out at least the general effect of the document …… the essence of the plea non est factum is that the person signing believed that the document he signed had one character or one effect, whereas in fact its character or effect was quite different. He could not have such a belief unless he had taken steps or had been given information which gave him some grounds for his belief. The amount of information he must have and the sufficiency of the particularity of his belief must depend on the circumstances of each case.

Rectification

Where some aspect of a written document is alleged not to reflect accurately the will of the parties, the equitable remedy of rectification may in certain circumstances allow the written document to be altered so that it coincides with the true agreement of the parties. In order for this remedy to be applied, three conditions must be satisfied:

• The parties must have agreed about the point in question,
• Their agreement on that aspect of the contract must have continued unchanged up to the time it was put into writing, and
• The written document must fail to express the parties’ agreement on that point.

If all three conditions are satisfied, equity will rectify the written document, and order specific performance of the rectified document.

Rectification is an exception to the parol evidence rule, as oral evidence can be admitted in order to show that the written document is in error.

Rectification will not be available where the written document accurately records the agreement, but the agreement is based upon a mistake.

Illegal at time of formation

Contracts may be illegal when entered into because they cannot be performed in accordance with their terms without the commission of an illegal act. This type of illegality was illustrated in the case of Levy v Yates (1838).

Illegal mode of performance

In some cases, a contract may be perfectly legal when it is made, but may be carried out in an illegal manner. This was the case in Anderson Ltd v Daniel (1924).

Violation of legal rules and public policy

A contract is clearly illegal where its formation, purpose or performance involves the commission of a legal wrong. But the law relating to illegal contracts extends beyond this as it also involves conduct which the law disapproves of as contrary to the interests of the public, even though that conduct is not actually unlawful.

However, in the case of Green v Russell (1959), the courts have shown unwillingness to assume such a trust unless there is a clear intention to that effect, as they intimate that mere intention to benefit a third party is not enough by itself.

Restrictive Covenants

Restrictive covenants concerning land avoid the privity doctrine just like statutes. The case of Tulk v Moxhay (1848) is illustrative of this position.

Traditionally, the common law doctrine of duress would only make a contract voidable where on party had obtained the other’s consent by means of physical violence or threats of it, or unlawful constraint. Over the years, the courts have extended the scope of the doctrine to include economic duress.

Economic duress occurs where one party was forced into the contract due to economic pressure. Economic pressure must go a long way further than the ordinary pressure of the market, and most of the cases on the subjects have been attempts to define just how much further.

Economic duress first arose in North Ocean Shipping Co v Hyundai Construction Co (The Atlantic Baron) (1979) and was further confirmed in the case of Pao On v Lau Yiu Long (1979) in which Lord Scarman explained that a threat to break a contract was not in itself enough to constitute duress: ‘it must be shown that the payment made or the contract entered into was not a voluntary act’.

Economic duress will be present where there is compulsion of the will to the extent that the party under threat has no practical alternative but to comply, and the pressure used is regarded by the law as illegitimate.

Duress need not be the sole inducement

Duress must not 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. This was the position held by the Privy Council in the case of Barton v Armstrong (1975).