Contract Law - Duress, Undue Influence, And Illegality Super Review

essential characteristic of contract law that parties enter into an agreement voluntarily; a party who has been coerced into a contract may be able to avoid the obligations of the contract by reliance upon duress

• C was managing director of a company of which D was former chairman; D threatened to kill C if he did not purchase shares from D; C purchased shares but sought declaration that transaction was void for duress; evidence suggested C had been partly influenced by threats and partly motivated by business considerations as the purchase of shares was a good move for him and company
• court held contract voidable because threats of personal violence were a factor in C's decision to purchase shares even though he may have entered into contract without the threats; in cases involving threats of violence, onus is on D to establish threats made no contribution to C's decision to enter into contract

• C threatened not to proceed with sale of shares unless D agreed to renegotiations on other peripheral issues; D wanted to avoid litigation and were anxious to reach agreement for sale of the shares so agreed; C tried to enforce agreement but D resisted on basis of duress; Privy Council found in favour of C on basis that facts disclosed ordinary commercial pressure was not sufficient to amount to duress
• Privy Council stated duress requires "coercion of the will which vitiates consent" so that any seeming agreement was given involuntarily
• SCARMAN list of factors:

1. Did the person who claims to have been coerced protest at the time?
2. Did he have an alternative course of action open to him?
3. Did he have access to independent advice?
4. Did he take steps to avoid the contract after it was formed?

• strike organised by ITWF was delaying production of a ship that was being built for C; ITWF agreed to end strike if payments were made into its funds; C made a payment but sought to recover the payment on the basis that it was obtained by duress
• held it was not appropriate to talk about duress in terms of involuntary agreement and absence of choice as the innocent party always had a choice even if this was between two unpleasant alternatives (either pay into union funds or lose income because production of the boat is delayed); DIPLOCK stated that it was more appropriate to formulate a test in terms of whether the innocent party was given any practical alternative other than to comply with the other party's demands.

2 general rules, with exceptions:

1. a threat to do anything which is illegal (a threat of unlawful action) is illegitimate pressure.
2. a threat to do something which the defendant has the right to do (threat of lawful action) is not illegitimate.
   

THREATS

threat to do that which defendant has a right to do is not normally illegitimate; however threat to do something that you have the right to do can sometimes be unlawful...blackmail (where threat of lawful action is unlawful)

CAUSATION

Pressure must have caused complainant to enter into the contract - causation test differs according to the type of duress (duress to the person, economic duress).

• Contractor who had undertaken to erect stands for an exhibition told his client, less than a week before exhibition that contract would be cancelled unless client paid an additional sum to meet claims which were being made against the contractor by his workforce. Consequence of not having stands erected in time would be disastrous for client, gravely damaging his reputation and exposing him to heavy claims for damages from exhibitors to whom space on stands had been let;
• held that payment had been made under duress and client was entitled to recover it back.
  

• D supplied leading brands of cigarettes. A consignment of cigarettes ordered by C went astray and D agreed to re-deliver but goods were stolen prior to delivery; replacement consignment was delivered to C but D demanded payment for these and the stolen ones; C were told that their credit facilities would be withdrawn if they did not agree to pay for the stolen cigarettes so they agreed but subsequently claimed the agreement was obtained by duress
• court held threat of lawful action (to withdraw credit facilities) could amount to illegitimate pressure but that it did not in this situation;
• would require extreme circumstances before lawful act duress would be recognised in commercial contract law

• threatening not to pay for consignment of wheat unless Cremer (seller) agreed to submit to arbitration - Court held entitled to not pay in this case

• significant cause - decisive & clinching *no feasible alternatives from perspective of the defendant *good faith could be considered but not decisive ---important dictum-- standard for economic duress should be a significant cause and in circumstances such that there were not feasible alternatives from the perspective of the defendant
  

• first, ‘illegitimate pressure by one party’, and secondly the requirement that this should be ‘a significant cause inducing the other party to act as he did’.
  

Saw the use of the four factors test…a threat of lawful action was decided as illegitimate and constituted duress…first case for this…claimant and defendant were medical practitioners/doctors…running practice as a number of companies they owned together…persistent rumours that Tam Tak Chuen, married, was having an affair with an employee of the company…so his partner asked several times about the affair and he denied everything…partner behind his back installed CCTV cameras in the medical practice…cameras picked up Tam Tak Chuen having sexual relations with the employee in question in one of the consulting rooms…printed still photos and spent three months thinking what to do…decided this was opportunity for him to obtain Tam Tak’s shares at a cheap rate…consulted lawyers and asked them to draw up purchase agreement for shares and then confronted Tam Tak with video evidence, threatening to go to court for wind up proceedings to close up the practice and the video would have to be public then…Tam Tak forced to sell his shares at price dictated by partner of only 25%of real value…Tam Tak agreed and signed all documents and resigned from the company…Tam Tak went home to his wife…the other partner’s wife had come into possession of video and showed it to Tam Tak’s wife…so when Tam Tak returned home his wife was waiting for him…now that his secret was out he might as well report the matter to the police…police seized all video evidence from partner…whether partner had committed possible criminal offence of blackmail…police decided no criminal offence had been committed…nevertheless Tam Tak decided he wanted his shares back and brought proceedings claiming he had signed transfer agreement under duress…defendant’s argument was that there was no duress in this case as it was threat of lawful action…judge held that nevertheless that threat of lawful of action could be illegitimate and constitute duress…court used four factor test and found agreement signed under duress…was held there was abuse of legal process because partner legal proceedings for his own selfish interest…was not acting in good faith because he knew he was getting the shares at a price well below market value…was an unreasonable demand because was asking too much to ask Tam Tak to sell shares, leave practice, and resign from company…was unconscionable in light of all the circumstances of the case because conduct of defendant was calculated to abuse circumstances presented by his discovery…

• Royal Boskalis Westminster v Mountain [1999] 1st Gulf War, dredging fleet held as human shields, arbitration in Paris, paying ransom through Jordan to reach Iraq, trying to claim ransom under insurance
  
• Maskell v Horner [1915] no legal basis for a toll fee for market stall; not in line with law on duress of goods, C recovered
  
• D & C Builders Ltd v Rees [1966] mean wife holds sad builders to ransom, duress
  
• Dimskal Shipping Co v ITWF [1992] strike threat, agreed to demands to avoid massive costs, claimed under duress; decide between English and Swedish law due to location of ship, applied English law, duress, unlawful and illegitimate strike threat
• Hennessy v Craigmyle & Co [1986] dismissal of employee or made redundant + package; Employee had a chance to take legal proceedings but did not If it is reasonable to take legal proceedings and resist a threat, there will have been no duress.
  
• R v Attorney Genera for England and Wales [2003] A lawful demand may constitute illegitimate pressure where the demand is not justified. However, there must still be absence of choice. R was not acting under military orders to sign the agreement. He may have been faced with overwhelming pressure, but he still had choice. The MOD were justified in introducing the confidentiality agreement therefore the demand was both lawful and justified and thus did not amount to illegitimate pressure.
  
• Lemoine v Griffith [2012] Prenuptial agreement that was both found and admitted to be unenforceable because of undue influence and a lack of independent legal advice.
  

1. ACTUAL UNDUE INFLUENCE
2. PRESUMED UNDUE INFLUENCE

• PRESUMED UNDUE INFLUENCE arising from a special relationship between parties
• PRESUMED UNDUE INFLUENCE no special relationship from above BUT relationship of trust and confidence
• actual and presumed undue influence...actual requires that the complainant’s free will must have been impaired bythe defendant’s unconscionable conduct AND that the undue influence must have caused the victim to enter into the transaction
  
• PRESUMED UNDUE INFLUENCE Purpose: fill in an evidential gap; 2 requirements: a pre-existing relationship between the parties in which one party has acquired influence over the other – a relationship of influence. the transaction complained of must be one that calls for explanation.

where there is no presumption of influence:

• husband and wife
• unmarried cohabitants
• Leeder v Stevens [2005] The parties had lived together but were now separated and sought orders as to their property. A presumption of undue influence arose because of a trust deed executed without having taken independent advice; test was not whether L knew what she was doing but rather why she was doing it and, on that basis, a presumption of undue influence arose that could not be rebutted.
  
• non-cohabiting lovers
• employer and employee
• Credit Lyonnais Bank v Burch [1997] close relationship between Burch and her boss, boss asked her to put up her flat as security when company in difficulty; agreement of Miss Burch had been obtained by undue influence and the bank had notice of this as the transaction was so obviously to her disadvantage. The bank had taken insufficient steps to avoid constructive notice. Therefore the transaction could be set aside
  
• banker and customer
• Lloyd's Bank v Bundy [1975] A father secured the debts of his son's business on his farm; father agreed to sign in order to help his son. He was not given the opportunity to think it over or to obtain legal advice; relationship of trust and confidence between the father and the bank manager giving rise to a presumption of undue influence under class 2 b; the normal relationship between a banker and customer is not one of trust and confidence but a business relationship whereby the bank is looking out for its own interest
  
• no disadvantage
• Dunbar Bank plc v Nadeem [1998] husband, H, and the wife, W, signed a joint loan facility with DB for the purchase of a lease in their joint names; transaction was not manifestly disadvantageous to W because she had obtained a beneficial joint interest in the equity of redemption, and proof of manifest disadvantage was essential in the case of presumed, rather than actual, undue influence,
  

where there is presumption, special relationship:

• parent and child (Lancashire Loans Ltd v Black [1933] Woman induced daughter to stand guarantor. Daughter claimed undue influence successfully – she had no independent advice.)
• religious leader and disciple (Allcard v Skinner (1887) Woman encouraged to give up all property to order of religious sect. On claiming back railway stock after leaving, court accepted presumed undue influence but 5 year wait prevented her claim – delay defeats equity.)
• trustee and beneficiary
• doctor and patient (Dent v Bennett [1839] Agreement obtained by a surgeon from a deceased patient set aside, upon the ground that the Court was satisfied that the patient never did agree to)
• solicitor and client (Wright v Carter [1902] The plaintiff sought to set aside a gift that he had made to his solicitor asserting undue influence. these fiduciary relations the moment the relation is established, there arises a presumption of influence, which presumption will continue as long as the relation, such as that of solicitor and client, continues)

• bank had taken charge over wife's property as security for a loan for her husband's business overdraft; wife signed charge in presence of husband; she had taken advice from solicitor appointed by the bank, although she thought the solicitor was instructed by her husband; bank tried to enforce the charge and wife claimed undue influence
• HoL considered that where a bank hopes to be protected by fact that the wife will be advised by solicitor it should communicate directly with the wife informing her that for her own protection it will require written confirmation from solicitor that solicitor has explained to her nature of documents and practical implications of the transaction
• in order for banks to have a valid security interest,they must ensure that their customers have independent legal advice, if they are in a couple where the loan will be used solely for the benefit of one person.

• husband got wife to sign with him to use matrimonial home as security...husband misrepresented facts to her; manager of bank told clerk to give documents to wife and tell her to seek independent advice...clerk failed to do so
• defence based on undue influence failed because the wife was held to exercise independence of thought on financial matters and was used to dealing with the family finances whilst her husband was working away. The wife was successful with regards to misrepresentation.
  

• A husband exerted actual undue influence over his wife in order to get her to sign a charge securing the family home on the debts owed by the company in which the husband and wife owned shares. The couple were unable to repay the mortgage and the bank sought to repossess the home. The wife sought to have the mortgage set aside on the grounds that it was procured by actual undue influence of the husband.
  
• The husband had exerted actual undue influence on the wife. However, the transaction was not to the manifest disadvantage of the wife since she owned shares in the company. In considering whether a transaction was to the manifest disadvantage the court was to have regard to any benefits received in addition to the risks undertaken. Therefore the bank were granted possession. NB - it is no longer necessary to establish manifest disadvantage in cases involving actual undue influence.
• The Court of Appeal set out the classes of undue influence:
• Class 1 - Actual undue influence (requires proof of the influence)
• Class 2 a - presumed undue influence (relationship as a matter of law gives rise to presumption that influence was exerted)
• Class 2 b - presumed undue influence (requires proof of relationship of trust and confidence if established the presumption of influence arises)
  

• deliberate concealment of material facts
• Hewlett v First Trust Financial Group plc [2010] husband persuaded his wife to join with him in a charge against their matrimonial home as security for his separate debts. At the time the husband was having an affair, which led in due course to his separation and divorce from his wife. the concealment of the affair did amount to the exercise of undue influence sufficient to vitiate the re-mortgage transaction. The affair was a material fact calling for disclosure.
  
• Bank of Scotland v Bennett [1999] bank held a guarantee and charge on the Bennett family home securing the debts of a business in which the husband was the director and 47% shareholder. The wife also held shares (11%); she did not want to sign the charge but her husband pressured her and threatened to end the relationship if she did not sign; The charge was procured by actual undue influence
  
• domination
• Re Craig [1971] 84 year old man employed Mrs M, relationship of trust and confidence, gave her a lot of gifts; all gifts raised presumption of undue influence, M failed to discharge onus on her that gifts were made full free and informed, could not rebut presumption
  
• Barclays Bank v Coleman [2002] manifest disadvantage remains necessary ingredient but HoL says may not be indefinitely; wife, husband, bank's charge over matrimonial home
  
• causation
• UCB Corporate Services v Williams [2002] Toyota dealership, father convinces daughter in law to help secure loan for extension of dealership; undue influence...requires only that equitable wrong has been committed, for misrepresentation only that party relied on false statement
  

A relationship of trust and confidence to safeguard one's interests.

• Rebutting the presumption
  
• Zamet v Hyman [1961] In the case of engaged couples, it should be proved, as distinct from being presumed, that the engaged person making the transaction was not exercising a free and independent will; Three days before they married, a widower aged 79 and a widow aged 71 entered into a deed whereby she gave up her rights in return for GBP 600 to be paid to her on his death. They married and he died intestate leaving an estate worth GBP 10,000, whereupon she sued to set aside the deed as having been obtained by undue influence.
  
• Hammond v Osborn [2002] Following the death of relatives, a man became friends with his neighbour, who saw him frequently and helped him out The man made significant gifts to the neighbour; no wrongdoing on her part could not rebut the presumption of undue influence.
  
• 
  

• Erlanger v New Sombrero Phosphate co (1878) (restitutio in integrum) held that promoters of a company stand in a fiduciary relationship to investors, meaning they have a duty of disclosure. Further, they held, by majority (Lord Cairns LC dissenting), that the contract could be rescinded, and that rescission was not barred by laches.

• Halpern v Halpern [2007] (restitutio in integrum) children of a rabbi; It was not possible or appropriate to answer the question whether a party could avoid a contract procured by duress in circumstances where he could not give counter-restitution until the facts had been found.
  

• O'Sullivan v Management Agency and Music Ltd [1985] (rescission) The plaintiff sought to set aside for undue influence a number of management, sole agency, recording and publishing agreements and transfers of copyright. The defendant argued that the appropriate remedy, namely restitutio in integrum, was inapplicable in the circumstances because the agreements had all been performed and the parties had irrevocably altered their positions, and that therefore the plaintiff was limited to obtaining damages instead of reconveyance of the copyrights and delivery up of the master tapes; plaintiff was not barred from having the contracts set aside by the fact that restitutio in integrum was impossible because the contracts had been performed. A contract entered into by a person in breach of a fiduciary relationship could be set aside in equity even though it was impossible to place the parties in the precise position in which they had been before, provided the court could achieve what was practically just between the parties by obliging the wrongdoer to give up his profits and advantages, while at the same time compensating him for any work he had actually performed under the contract.
  

• Allcard v Skinner (affirmation)
  

• Nicholl v Ryder [2000] (estoppel) Estoppel and/or affirmation were both available in answer to an allegation that an agreement was unenforceable by reason of undue influence or unreasonable restraint of trade; Negotiations in relation to a management agreement were initially conducted between the Appellant’s solicitor and the Respondents’ solictors. The First Respondent then approached the Appellant directly. The Appellant signed the agreement put to him by the Respondent. This soon came to the knowledge of the Appellant’s solicitor, who considered the agreement to be unreasonably in restraint of trade,
  

The doctrine of illegality is said to be based on a number of policy reasons:

(i) to further the purpose of the rule which the illegal conduct has infringed;

(ii) to ensure consistency between different branches of the law (e.g. criminal law and contract law);

(iii) to deter people from engaging in illegal conduct;

(iv) to ensure that no one should profit from his or her own wrong and to maintain the integrity of the legal system.

The traditional approach is to ask to main questions. The first is whether the contract is affected by the illegal conduct. If so, the second question is, what are the consequences of illegality on the contractual rights of the claimant?

(a) it is so provided by statute (statutory illegality) or,

(b) even if not illegal under statute, it involves turpitude or

(c) it is otherwise contrary to public policy.

Where a contract involves the contravention of the provisions of a statute the consequence of the contravention may be either that

(i) the contract is illegal and unenforceable by both parties,

(ii) the contract is unenforceable by one party only or

(iii) the contract remains perfectly valid. The precise effect of the infringement of a statute on a contract depends on the terms of the statute.

A contract that is not prohibited by statute may be illegal

(i) as formed, or

(ii) because of the unlawful purpose of the parties or

(iii) because of illegality in the manner of performance.

• contract terms require commission of a criminal act
  
• JM Allan (Merchandising) Ltd v Cloke [1963] rules described illegal use of roulette table, table still used illegally; no defence to say they did not know the law, contract illegal as formed
• Contract terms require the commission of a tort
• Les Laboratoires Servier v Apotex Inc [2014] pharmaceutical patents, injunction invalid, loss of profits; “turpitude” involves a breach of the public law of the state and additionally includes certain “quasi-criminal” acts such as dishonesty; patent is private right
  
• contract illegal because of unlawful purpose
  
• Pearce v Brooks (1866) prostitute sued by coach-builders in hire of a brougham, they knew she was a prostitute; If unaware of the other’s unlawful purpose, then the innocent party will not be prevented from enforcing the contract.35 But where he or she has “participated” in the unlawful purpose, it seems that the claim becomes tainted by the illegality and contractual relief will be denied.
  
• Anglo Petroleum Ltdv. TFB (Mortgages) Ltd [2007] company in trouble, undergoing restructuring, undertook to pay back money after its acquisition; seller of shares demanded payment, not financial assistance just artificially reducing price of share

• knowledge and participation of the other party
• Pearce v Brooks (1866) letting prostitute hire a brougham for her work
• Anglo Petroleum Ltdv. TFB (Mortgages) Ltd [2007] artificially keeping share price cheap
• closeness of the contract to the unlawful purpose
• Alexander v. Rayson [1936] defrauding local rating authority through rent scheme, could not enforce contract
• 21st Century Logistics Solutions Ltd Madysen Ltd [2004] VAT Fraud, attempting to pocket VAT and disappear; ourt held that the sale contract was enforceable as the company’s illegal purpose was too remote to have any effect on it.
  
• Lloyd v Johnson [1789] claim for payment for laundering clothes belonging to a prostitute
  

there is an intention to perform it in an unlawful manner or it is actually performed in an unlawful manner

• Where only one party performs in an unlawful manner
  
• Ashmore, Benson, Pease & Co Ltd v Dawson [1973] overloading lorry such that it flips, over what was stipulated; court considered whether the claimant had “participated” in the unlawful performance of the other party and having done so was unable to enforce the contract.
  
• need for intention to act unlawfully at the time the contract was concluded
  
• Coral Leisure Group v Barnet [1981] A contract for sexually immoral purposes is an illegal contract and cannot form the basis of a claim for unfair dismissal. B was employed as a public relations executive by a casino, but his real job involved finding prostitutes for punters. B complained of unfair dismissal,
  
• Newland v Simon &Willer (Hairdressers) Ltd [1981] court was asked whether an employee could complain of unfair dismissal where the tribunal had held that the employee knew or ought to have known that her employer had failed to pay tax and national insurance contributions in respect of her wages.
  
• knowledge alone not enough: active participation is necessary
  
• Hall v Woolston Hall Leisure [2001] The fact that an employment contract was tainted with illegality of which the employee was aware, did not deprive the employee of the possibility of claiming rights which were due to her under a statute which created rights associated with but not dependent upon the contract.
  
• Wheeler v. Quality Deep Ltd [2005] Court of Appeal quashed decision on the grounds that the applicant had only limited knowledge of the English language and ofEnglish tax provisions. There was no evidence that she knew of her employer’s fraud.
  

• Richardson v Mellish [1824] Burroughs J.: public policy is “a very unruly horse, and when once you get astride it you never know where it will carry you. It may lead you from the sound law

• Enderby Town FC Ltd v The Football Association Ltd [1971] Lord Denning, public policy use as grounds for decisions: “With a good man on the saddle, the unruly horse can be kept in control. It can jump over obstacles.” Football Association Ltd controlled association football, while county associations were affiliated to it. Enderby Town FC were fined by the county association, and they appealed to the FA. Court of Appeal held that rule 38(b) was not invalid. However, it was noted that rule 40(b) which purported to prevent legal proceedings without the consent of the council was contrary to public policy and invalid.
  

• School had been damaged by bad weather. Headmaster of school asked builder to provide estimate of the cost of repairs. The repairs were going to be funded by an insurance company. Headmaster agreed with contractor to inflate price so they could pocket money together, contractor did work, headmaster refused to pay, sued by contractor
  
• Court will not assist him in getting the contract price. So builder got nothing.Sanction for getting into an illegal contract is that you will not be able to enforce the contract. Unsatisfactory aspects of the general rule…allows the other party to the illegal contract to keep the benefit of performance. And to keep that benefit even though the defendant himself was guilty of the illegality since he was a party to it…General rule makes no distinction between degree of fault/culpability between the two parties. As a result of these unsatisfactory aspects, court developed exceptions to address the weaknesses.
  

• where the claimant is innocent
• Archbolds (Freightage) Ltd. v. Spanglett Ltd [1961] D carried whiskey in illegal van, C did not know this; where one party was ignorant of the circumstances that would produce the illegality, he or she should not be denied relief.
  
• where the parties are not equally guilty
• Mohamed v. Alaga & Co. [1999] Somalian translator had agreed with a firm of solicitors that he would introduce clients to the firm, translate for them and help in preparing cases. In return he would receive half the solicitors’ fees...illegal scheme, solicitors more guilty, should know better, C ignorant of rules of solicitors trade
  
• where the illegality is of a trivial nature
  
• St John Shipping Corporation v. Joseph Rank Ltd [1957] carriage of wheat, overloading of ship contrary to statute, D trying to withhold payment for illegal performance; claimant will be allowed to enforce the contract and recover payment for goods and services rendered…claimant alone had performed contract in an illegal manner but the illegality was not serious and trivial
  
• where illegal conduct is not deliberate
  
• Marles v Philip Trant & Sons Ltd [1954] farmer bought some wheat seed, failure to supply statement seed was according to statute; supplier lost; farmer sued merchant who sued supplier;
  
• where the claim is brought under a different head (ie tort)
  
• Hounga v Allen [2014] hiring of Nigerian girl, illegal immigrant, poorly treated and unpaid/underpaid; The Supreme Court considered illegality as a defence to a claim in tort. It was necessary to consider the aspect of public policy that founded the defence, but also to consider whether there was another aspect of public policy to which application of the defence would run counter.
  
• where the claimant withdraws before the illegal purpose is carried out
  
• Tribe v. Tribe [1996] A father transferred company shares to his son (presumption of advancement) to preserve them for the family’s benefit because he could be soon liable for dilapidations under commercial leases. It turned out he was not liable. The son refused to re-transfer shares. Father could recover shares since illegal scheme not carried out.
  
• where the claimant does not need to rely on the illegality
  
• Tinsley v. Milligan [1994] Miss Tinsley sought possession of a house that was solely in her name. Her relationship with her partner, Miss Milligan, had come to an end. Miss Milligan had been living there and had contributed to the purchase price. It had been in Tinsley’s name alone when they bought it, as a way of claiming more in social security. Milligan later repented and confessed to the benefit fraud. Then Tinsley moved out and sought possession of the house, arguing she was solely entitled. Miss Milligan pleaded that it was the common intention that the property should belong to both of them (and so did not need to rely on the illegality); Miss Milligan could invoke the presumption of a resulting trust without relying on the illegal purpose, she did have a share in the house. Miss Tinsley would have to rely on her intention to defraud the social security system to rebut the presumption of a resulting trust and get the property in her own name.

• Nayyar v. Denton Wilde Sapte [2009]

• Les Laboratoires Servier v Apotex Inc [2012]

• “...what is required in each case is an intense analysis of the particular facts and of the proper application of the various policy considerations underlying the illegality principle so as to produce a just and proportionate response to the illegality.This is not the same as an unbridled discretion.” “[It] does not mean that that the illegality defence will always apply where one or more of those policy rationales is relevant. It means that, if the illegality defence applies at all, it must find its justification firmly in one or more of them."