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Allan, Barry --- "Duress, Undue Influence and Unconscionable Dealing, by Nelson Enonchong" [2007] OtaLawRw 12; (2007) 11 Otago Law Review 527

Duress, Undue Influence and Unconscionable Dealing

(by Nelson Enonchong, Sweet and Maxwell, London, 2006)

One of the more common questions asked by students of contract law is how to differentiate between the three doctrines addressed by this book, given their tendency to overlap and to be applied indiscriminately. Professor Enonchong’s stated aim is “to help the practitioner to understand the essence of the three vitiating factors and how each applies in different situations”. A second objective is to consider how they are deployed to resolve difficulties arising from third party wrongdoing. He achieves these tasks admirably, with a lucid style and does not shrink from detailed analysis when necessary. The book is broken into five Parts: one for each of the doctrines identified in the title; a very welcome separate discussion of the issues arising from third party conduct which vitiates the consent of a contracting party and; finally, the available remedies. Contracts are the central focus, but there is some consideration of gifts and wills as appropriate.

Rather than attempt to fit duress into any sort of formal taxonomy, the approach taken is to recognise that duress is simply a combination of defective consent and illegitimate pressure, with relief granted because the apparent consent has been induced by the pressure. Consistent with this approach, he sees no room to make it more difficult for a plaintiff to succeed by altering the burden of proof or rules of causation simply because the particular pressure might be characterised as economic duress, as Mance J had sought to do in Huyton SA v Peter Cremer GmbH & Co [1999] 1 Lloyd’s Rep 620.

The most difficult question is, of course, deciding when the pressure is illegitimate. It has long been accepted that despite the legality of threatened behaviour, it might still be illegitimate, although no precise test has yet been determined. The New Zealand Court of Appeal has recently declared that threats of unlawful behaviour are to be equated with illegitimacy. Despite noting this and a general lack of compelling authority, he addresses the potential for such threats, particularly threats to breach a contract, to nonetheless be legitimate. As has been recognised in recent High Court decisions in England, a threat to breach might be made in order to bring about commercially reasonable and advantageous outcomes for both parties.

This appears to be when some change of circumstances makes it difficult to the point of being uneconomic for the party making the threat to continue performance, but where the change is not so significant as to allow for frustration.

This is a path potentially beset with extraordinary difficulties yet, without providing any reason for doing so, Professor Enonchong endorses the possibility, and grapples with the problem of when it would be appropriate to regard a threat to breach a contract as legitimate. No single test provides the answer: instead, he prefers a nuanced approach, in which a number of factors are considered; such as whether the circumstances are of the defendant’s own making, whether they have rendered him unable to perform, the presence of bad faith or substantive unfairness of the resulting agreement. Curiously, he sees the same elements that would disentitle someone from relying on frustration – foreseeability or an attempt to avoid the consequences of poor bargaining – as preventing legitimacy.

As for the effect of the threat, his analysis is much less provocative. He quite rightly asserts that the law must look to whether the plaintiff has been subjectively coerced, instead of expecting a reasonable standard of resistance, otherwise those who most needed the protection of the law would be least well served by it. The presence or absence of protest, legal advice or practical alternatives are only to be considered as part of a process of determining whether the threat subjectively caused the complainant to succumb.

Generally, a complainant is under pressure when he is in a situation where succumbing to the illegitimate demand is the lesser of two evils. If the legal remedy available as an alternative is so unattractive that giving in to the illegitimate pressure is the lesser of the two unattractive alternatives, a court should be willing to infer that the complainant yielded to the demand because of the illegitimate pressure. (page 53)

The Part devoted to undue influence is necessarily heavily influenced by Royal Bank of Scotland v Etridge [2001] UKHL 44; [2002] 2 AC 773, although he sets aside the use of influence in a testamentary context for separate treatment, to reflect its origins in the probate jurisdiction. Modern duress is shown to be very similar to equitable undue influence, the primary distinction being that the latter can arise in the context of relationships of ascendancy, with no overt act of pressure necessary. Here, too, there are problems in giving meaning to core concepts, particularly in identifying what it is that will make influence “undue”. While Professor Enonchong does not get much traction on the question, he does regard Etridge as making it clear that “undue influence is both complainant-sided and defendant-sided”, so that attention is to be paid to both the effect of the influence (it must produce a state of impaired free will) and the manner in which it was exercised (there must be something “unconscionable” about the defendant’s conduct). He rejects any possibility of “innocent undue influence”.

The language of “actual” and “presumed” undue influence has been present ever since the case of Allcard v Skinner (1887) 36 Ch D 145. Etridge has not done away with the terminology; indeed the analysis contained in this text is structured according to that dichotomy, with a clear explanation both of what the terms now mean and the ways in which they have been prone to misuse. Of particular interest is the discussion of the status of a deliberate concealment of material facts following which the plaintiff enters into a contract. Normally such a concealment would have no impact upon a contract, unless it amounted to a misrepresentation, but the claim is made that it could provide affirmative evidence of the use of undue influence. This is apparently even in the absence of any relationship between the parties. There are unexplored difficulties arising from that contention. Furthermore, Etridge seems to contemplate situations where parties proceed on the basis of one not communicating material information to the other; so long as the party “concealing” the information does not put his own interests before those of the other, there will not be the necessary quality of wrong-doing.

Because the notion of a presumption of undue influence has proven so confusing, much time is spent on clarifying its nature as no more than a different mode of proof of wrongdoing. Subsequent chapters then analyse the two requirements, ie a relationship of influence (not necessarily to be equated with one of trust and confidence) and a transaction calling for explanation (in the sense that it cannot reasonably be accounted for by the relationship). Great care is taken to point out that while a relationship of influence might be presumed, even irrebuttably so, that does not create a presumption of the exercise of undue influence. The failing of Barclays Bank Plc v O’Brien [1993] UKHL 6; [1994] 1 AC 180 was in not maintaining this distinction. The evidentiary presumption of undue influence only arises when there is a transaction calling for an explanation in addition to a relationship of influence. If the defendant can satisfactorily explain the transaction, in the sense of being able to justify it, then the presumption will not arise. This approach is, of course, a severe retraction from O’Brien as the very relationship which provides scope for abuse might also provide a motive for the transaction, and thus it would not call for explanation. It is only the extreme situations, such as a disposition of a substantial part of one’s assets or exposure to risks beyond those which are accounted for by the relationship, which will qualify.

Although he draws a line between a relationship of influence and a fiduciary relationship, he concludes this Part with a chapter on abuse of confidential (fiduciary) relationships. The differentiation between the two, as he puts it, is that a confidential relationship generates a presumption of invalidity.

Three criteria must be satisfied in order to render a bargain unconscionable: a relational imbalance, impropriety and a transactional imbalance. One immediate difficulty to be faced is that by the methodology employed in this book, unconscionability is a required factor in both duress and undue influence, albeit in what is called a “reduced sense”. On the face of it, situations which satisfy the elements of undue influence might simultaneously amount to an unconscionable bargain – the relational imbalance might well be equivalent to a relationship of ascendancy, for example. Indeed, the Australian approach is to eschew reliance on undue influence in favour of a general principle of unconscionability.

Nonetheless, courts in England (and New Zealand) have maintained a separation between the two doctrines, no matter how artificial it might appear. Individual chapters work through the three elements. The suggestion is made that the “special disadvantage” required for the relational imbalance requires someone to be “very vulnerable”, but not to the point that they are so disabled as to be unable to judge their own best interests. Powerlessness to pursue those interests as against the stronger party is the standard proffered, which smacks of duress. The only reason some of the situations referred to here came to be unconscionable bargains was the limited application of duress prior to the recognition of economic duress.

Although impropriety is a second ingredient, this might well be inferred from a sufficient transactional imbalance, at least in English law. In New Zealand, Hart v O’Connor [1985] UKPC 1; [1985] 1 AC 1000 held that substantive unfairness of a transaction with a “lunatic” was insufficient to vitiate that transaction. Knowledge of the disability was required: that disability might then be seen to have been taken advantage of (and thus satisfying the impropriety requirement).

The transactional imbalance has to be such that it displaces the ordinary rule that consideration need not be adequate. As Professor Enonchong points out, the requirement of substantive unfairness is set so high that, while it can be a stand-in for one or both of the other requirements, it is rarely met: “relief on this ground has been refused in virtually all the recent cases where it has been pleaded [in England]“.

The Part concludes with a courageous attempt at providing a means for distinguishing an unconscionable bargain from a situation of undue influence, despite the similarities in the requirements for relief, in remedies and in results for either doctrine when both are pleaded. The Privy Council, in R v A-G for England & Wales [2003] UKPC 22, [29] went so far as to say that since the confidentiality agreement had not resulted from undue influence, “it must follow that the transaction cannot be independently attacked as unconscionable”.

One is left wondering if the author himself is convinced that there is any rational division between the two, when all he can point to is a traditional concern with freedom of consent in undue influence while unconscionability looked to the conduct of the defendant. In practice, both doctrines have become defendant and plaintiff sided. One difference is in the fact patterns: a pre-existing relationship is important for presumed undue influence, whereas unconscionability has regard to the wider context of a transaction.

In recognition that “one of the most difficult issues” in this context for the last three decades has been where third party conduct vitiates consent of a contracting party, a specific Part is devoted to the problem. The most obvious conundrum is in striking an appropriate balance, as it would neither be acceptable to give total protection to a victim on the basis of undermined consent nor for there to be a total absence of protection.

Of course, for quite some time, a very liberal approach was taken to finding an agency relationship between the third-party wrongdoer and the party against whom the victim sought relief, thanks to Turnbull v Duvall [1902] AC 429. This approach was finally rejected in O’Brien on the basis that it had become “artificial”. So, there is no longer an agency relationship construed solely from the fact of a creditor sending documents to a debtor for execution by the guarantor after telling the potential debtor it would accept a loan application if a surety was in place. This is not to say agency will never lead to a loss of rights by the lender in consequence of debtor wrongdoing: the question is one of whether a lender allowed the debtor to act as agent to procure the surety’s consent. As is pointed out in the text, this will be sufficient to saddle the lender with responsibility for any wrong-doing by the debtor; there is no need for the latter to have been appointed for the purpose of exerting pressure.

As was decided in O’Brien, an adaptation of the doctrine of notice is a more appropriate mechanism to resolve issues surrounding the lender ’s right to enforce. The author locates his discussion of this principle against the importance to be given to the doctrine of apparent consent “so, if a party, by his conduct, appears to be consenting freely, the fact that due to some secret pressure his consent in reality is not free is of no significance”. One benefit of this approach is that the factors creating constructive notice can be regarded as undermining that appearance of consent, but by adopting appropriate steps the lender canrestore itself to being able to rely upon the appearance of consent.

As is to be expected, there is a close examination of the implementation of the notice-based approach in O’Brien and the clarifications provided by Etridge. He deals thoroughly with the two questions arising under Etridge as to when a lender will have constructive notice: ie the ambit of the non-commercial relationship and the relevant sorts of transactions. Suretyships will always qualify and situations where the complainant is genuinely a borrower in her own right will not, but he identifies a range of transactions where the lines are not clearly drawn, such as where the guarantor has some financial interest in a company borrower but has been pressured by a spouse to go along with a plan to borrow. A further chapter is then devoted to the consequences of notice, with a very detailed examination of just when a lender can rely upon the advice given by a solicitor. The Part concludes with a comparative analysis of the Australian and Scottish approaches to the problem, which differ both in terms of doctrinal basis and results.

Barry Allan, Faculty of Law,

University of Otago.

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