“Unconscientious use by one person of power possessed by him over another” – typically, vitiation of consent by the abuse of a relationship of trust and confidence
One person is in a “position to dominate the will” of another, the other person is disabled from acting independently
No need to prove actual exertion of undue influence
Class 2A: legal presumption in certain relationships
Class 2B: Relationship of Trust and Confidence has to be proven: existence of such a relationship assumption of undue influence
If a someone uses undue influence to get a party into a contract with a 3rd party (i.e. a bank), then court voids the contractunless there is “constructive notice” (Lloyds Bank, Barclays Bank)
(In CVL the third party is only responsible if he knows about the induced fear) CML - Lloyds Bank Ltd. V. Bundy – Undue Influence, Duress, Unconscionability
Overview of situations in which CML recognizes situations of pressure as problematic
Note the dimension of economic pressure in the traditional category of “duress of goods”
Majority calls the case one of undue influence, but Denning says common denominator: “inequality of bargaining power”
Note the importance of the relationship: motive of “undue influence”
“… rather […] a demonstration that the categories of grounds for rescission are interrelated and based on a common foundation.” J.A. Lambert in Harry v. Kreutzinger
CML – Lloyds Bank Ltd. v. Bundy, [1975] QB 326 (CA), CB2:47
Jurisdiction
UK
Facts
Bundy entered a contract with Lloyd’s Bank, with whom he had a relationship going back many years, to guarantee his son’s company’s overdraft. Bundy’s first guarantee contract was made with the advice of a solicitor. His son’s company got into worse and worse financial trouble, however, and another bank manager came over to persuade Bundy to sign a new guarantee mortgaging his farm to the hilt. Bundy trusted the bank manager, and signed the new guarantee then and there with no independent advice.
Issues
Was the new guarantee valid?
Holding
No Bundy.
Reasoning
Denning J:
General rule: “no bargain will be upset which is the result of the ordinary interplay of forces” – common law does not usually interfere in people’s agreements.
Exceptions can be made in cases where there is a great disparity in bargaining power – this judgment seeks “to find a principle to unite them”
“Duress of goods” – holder of goods exacts unfair terms from party who needs the goods – voidable; “colore officii” – strong bargaining position of one because of his official position – both used to gain more than is justly due from the other party
“Unconscionable transaction” – person in need of special care and protection exploited from another far stronger person to get property at gross undervalue – any case where an unfair advantage has been gained by the unconscientious use of power by a stronger party
“Undue influence” – either fraud/wrongful act or exploitation of a special relationship between the parties in order to gain some gift or advantage from the weaker party
“Undue pressure” – coercion – one party has no choice but to submit – no consideration
Salvage agreements – rescuer exacting terms from party in distress
Unifying thread – inequality of bargaining power
No necessity of any wrongdoing – “the one who stipulates for an unfair advantage may be moved solely by his own self-interest, unconscious of the distress he is bringing to the other.”
Consideration moving from bank “grossly inadequate” – no actual benefit flowing to the father or to the son.
Relationship of trust and confidence between the bank and the father. The bank knew the father was relying on them for advice.
The relationship between the father and the son also greatly influenced the father.
Conflict of interest on the part of the bank which should have prompted them to suggest he get independent advice.
Ratio
“The English law gives relief to one who, without independent advice, enters into a contract on terms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences or pressures brought to bear on him by or for the benefit of the other.”
Comments
Kerwin’s point in class: the bank knew that the son’s business was a “sinking ship” and got the father to back it anyway, by mortgaging his property “to the hilt”
Father was being given advice by the bank that was not in his best interest
Denning does not take the traditional doctrinal approach towards unbinding Ks – tries to bind all types of voidable Ks into a “unifying thread” – not followed by those after him (but still useful)
Methodologically, we continue to apply the separate categories, which have some analytical value: we can imagine undue influence in a particular relationship where we might not find it helpful to think of a disproportion of bargaining power (e.g. solicitor/client relationship)
The process of signing a K can be given strength by the presence of independent legal advice (Bundy, O’Brien), because it means that the person had a clear sense of what they’re taking on, and what consequences ensue (if they consulted and did it anyways, they’re more likely to be held to the K)
If we’re willing to void a K even where there was advice, we’re being substantive
Considerable slippage on whether Denning is intervening on procedural or substantive grounds (“independent advice” is procedural; “unfair terms” are substantive; “grossly inadequate consideration” is substantive; “impaired bargaining power” is procedural; “undue influence” is procedural)
All of these adjectives are very strong, as capitalism assumes that people can make bargains and should make them freely big range of acceptable influence, acceptable unfairness, but here we see the outer limits: the adjectives are strong because we don’t want to start policing “inadequate” consideration, but we can police “grossly inadequate” consideration
Denning is at pains to show that he’s dealing with an exceptional case, but we only know the scope of these adjectives when the case is applied
Late in the case, discussion of a relationship of “trust and confidence” between LBL and B: “fiduciary relationship” is when one person is expected to act in consideration of this trust finding hints of a fiduciary relationship between LBL manager and client takes the relationship far from the expected/typical relationship between bank and client
