6.7 Undue influence

In certain circumstances, one party may, due to trust and confidence vested in them, be in a position to influence another party to such an extent that the latter’s actions cannot be said to be truly free and voluntary. Such situations need not necessarily amount to placing the victim under duress but may nevertheless severely undermine the quality of the consent given. In recognition of this, the law has adopted equitable principles seeking to correct the abuse of such influence. These principles are referred to as the equitable doctrine of undue influence.

The law distinguishes between different forms of undue influence. First, a distinction is drawn between actual undue influence (see Rule 20, Article 4) and presumed undue influence (see Rule 20, Articles 2 and 3). There are certain types of relationships in which undue influence is presumed. In the context of such relationships, it is for the party seeking to rely upon the undue influence (the “weaker” party) to prove the existence of a relationship giving rise to a presumption of undue influence. Where that is done, it is then for the other party (the “stronger” party) to rebut the presumption by proving that the “weaker” party’s actions were purely voluntary and well understood. In contrast, in cases of actual undue influence, the party arguing that a particular contract is voidable due to undue influence must prove the existence of undue influence.

Second, the law distinguishes between two types of situations giving rise to a presumption of undue influence. A manifestly disadvantageous transaction between:

(a) a parent and child;^[1] or

(b) a guardian and warden;^[2] or

(c) a religious advisor and disciple;^[3] or

(d) a solicitor and client;^[4] or

(e) an express trustee and beneficiary;^[5] or

(f) a doctor or a medical assistant and patient.^[6]

is presumed to involve undue influence. Further, a presumption of undue influence also arises where there is a sufficiently special relationship of trust and confidence between the parties, at the time of contract formation.

6.7.1 Presumed undue influence

Situations involving presumed undue influence, based on the type of relationship between the parties, is exemplified in Allcard v Skinner.^[7]  In that case, the plaintiff sought to recover property given to a religious order to which she had been a member at the time the property was donated. The Court found that, while the donation was made under undue influence, the plaintiff was unable to recover the gift as six years had lapsed since the undue influence ceased:

It was urged that the Plaintiff did not know her rights until shortly before she asked for her money back. But, in the first place, I am not satisfied that the Plaintiff did not know that it was at least questionable whether the Defendant could retain the Plaintiff’s money if she insisted on having it back. In the next place, if the Plaintiff did not know her rights, her ignorance was simply the result of her own resolution not to inquire into them. She knew all the facts; she was in communication with her present solicitor in 1880, his remark that “it was too large a sum to leave behind without asking for it back”, was a clear intimation to her that she ought to ask for her money back, and was a distinct invitation to her to consider her rights. She declined to do so; she preferred not to trouble about it. Under these circumstances it would, in my opinion, be wrong and contrary to sound principle to give her relief on the ground that she did not know what her rights were. Ignorance which is the result of deliberate choice is no ground for equitable relief; nor is it an answer to an equitable defence based on laches and acquiescence.^[8]

Another case of undue influence in a religious context is McCulloch v Fern.^[9]  The dispute related to the plaintiff’s wife who had, on a number of occasions, been told that her paying the mortgage for a property owned by the defendants, who were leaders of a sect to which the plaintiff’s wife was a devoted member, was part of a divine plan. The plaintiff’s wife followed the instructions, and later died. After her death, the plaintiff sought to recover the money. The evidence showed that, at the time of the payment, the plaintiff’s wife was isolated, frail, in poor health and undergoing a physically taxing “initiation” procedure. The Court had no problem finding a presumption of undue influence, and the defendants failed to rebut that presumption.

As is made clear above (and through Article 3), the presumption of undue influence is by no means limited to the type of relationships listed in Article 2. However, where the relationship does not fall within one of the categories of Article 2, the claimant needs to establish that the relationship was such that she/he reposed such a degree of trust and confidence in the other person that the presumption of undue influence is motivated. Thus, for example, it has been held in some cases that the relationship between spouses was a sufficiently special relationship of trust and confidence for undue influence to be presumed.

In Johnson v Buttress,^[10] the plaintiff/respondent sought to have a document, transferring ownership in a piece of land to the defendant/appellant, set aside. Mr Buttress was described by the Court as being of “less than average intelligence” and having “little or no experience or capacity for business”. The defendant, Johnson, was a friend of Buttress’s wife, and, after Mr Buttress’s wife died, Mr Buttress relied upon the defendant for advice and support in financial and emotional matters. Before his death, Mr Buttress transferred ownership in a piece of land to the defendant. Mr Buttress’s son sought to have the transfer set aside, and the Court found that the relationship between Mr Buttress and the defendant was of the kind motivating the presumption of undue influence, and that the defendant had not managed to rebut the presumption.

Further, in Lloyds Bank v Bundy,^[11] it was held that, while there is no general automatic fiduciary relationship between a banker and its clients, such a relationship existed in the special circumstances of the case.  In that case, the plaintiff and defendant had a relationship of trust and confidence due in part to the length of the relationship. The plaintiff agreed to guarantee the debts of his son without being advised of his son’s financial difficulties by the defendant. The Bank was unable to rebut the presumption of undue influence.

It may not be possible to make an exhaustive list of the factors to be taken into account in evaluating whether a particular case involves the type of special relationship that justifies the presumption of undue influence. However, based on Union Fidelity Trustee Co of Australia Ltd v Gibson,^[12] it seems clear that factors such as emotional dependence, level of education, intelligence and business sense, character, personality, gender, age, presence of independent advice, and the general nature of the relationship ought to be considered.

As is clear from Article 1 of Rule 20, where the consenting party did not, solely or in part, make its decisions based on undue influence, the resulting agreement is not voidable. Thus, the fact that the relationship between the parties is of a kind that gives rise to a presumption of undue influence is no absolute guarantee that the consenting party successfully can argue that it acted under undue influence.

In Westmelton (Vic) Pty Ltd v Archer and Schulman,^[13] the plaintiff had acted as the defendant’s solicitor for some time. He continued doing the company’s legal work after being appointed as a director and chairman of the company’s board. At the time, the company was to pay for his legal services, the plaintiff suggested that instead of paying the full amount, the company should give him a share of the company’s profit. This proposal was discussed and agreed to by the company in the plaintiff’s absence. The company paid a reduced amount for the legal services but refused to give the plaintiff any share of the profits. The Court held that:

The extent and weight of the burden cast upon the person in whom the confidence was reposed, and the matter (where the presumption applies) of which the court will be required to be satisfied before it will regard the presumption as having been negatived, must vary enormously with all the circumstances of the case.^[14]

Having made this observation and having noted that the company had more expertise in commerce and finance than most solicitors, the Court was satisfied that the company had not relied upon any confidence or trust in the plaintiff. Thus, there was no undue influence.

The House of Lords have held that, for undue influence to be presumed,  the weaker party must show that the transaction resulting from the consenting party’s consent is manifestly disadvantageous to the consenting party (or alternatively, in the case of actual undue influence, that there had been an abuse of confidence by the other party).^[15] In Australia, this approach was followed in Farmers’ Co-Op Executors & Trustees v Perks,^[16] but in Barburin v Barburin^[17] Kelly S.P.J. stated that:

The Australian authorities do not go this far and I would not think that the proposition as there expressed [in Midland Bank plc v Shephard,^[18] referring to National Westminister Bank Plc v Morgan^[19]] represents the law of this country.^[20]

It is clear that Kelly S.P.J. took the view that there is no need for the resulting transaction to be manifestly disadvantageous to the consenting party. However, his Honour could not point to any case law supporting this view and relied exclusively on the unsupported views expressed in a leading textbook. Furthermore, as Kelly S.P.J. did not find that the case at hand involved any actual undue influence, and any potential presumed undue influence had been rebutted, it was not necessary to address the issue of whether the resulting transaction had been manifestly disadvantageous to the consenting party. Thus, the views expressed on that issue are obiter dicta leaving the exact requirements under Australian law somewhat unclear.

Nevertheless, requiring the resulting transaction to be manifestly disadvantageous to the consenting party rests on a sound and logical foundation, particularly when bearing in mind that a claimant may still prove actual undue influence where a presumption of undue influence is not fully justified.

6.7.2 Actual undue influence

A situation of actual undue influence arose in Bank of Credit and Commerce International SA v Aboody.^[21]  That case involved a husband and wife who were directors and shareholders of a company. In reality, it was the husband who ran the company and the wife signed documents without asking questions. On the husband’s initiative, the wife signed several guarantees and charges in favour of the plaintiff bank. The wife argued that these were signed under actual undue influence. While the Court found that the documents were in fact signed under undue influence, the wife had not established that the transaction was manifestly disadvantageous to her. Importantly, the Court outlined what must be proven in a case of actual undue influence:

Leaving aside proof of manifest disadvantage, we think that a person relying on a plea of actual undue influence must show that (a) the other party to the transaction (or someone who induced the transaction for his own benefit) had the capacity to influence the complainant; (b) the influence was exercised; (c) its exercise was undue; (d) its exercise brought about the transaction.^[22]

In Farmers’ Co-Op Executors & Trustees v Perks,^[23] the evidence showed a long history of violence perpetrated by a husband against his wife, ending in him murdering her. The Court held that the wife’s transfer of her interest in a farming property to her husband was a result of actual undue influence. The plaintiff argued that the transfer was also result of duress, however the Court found that the circumstances could be subsumed as an extreme example of actual undue influence and therefore a matter that was unnecessary to determine.

Public Service Employees Credit Union Co-op Ltd v Campion^[24] is another case where the plaintiff argued both duress and undue influence. In that case, a father had executed a guarantee of repayment in relation to a loan agreement between his son and the plaintiff. The loan was to cover the repayment of moneys illegally obtained by the son from the plaintiff, and the plaintiff had informed the father that if he was unwilling to execute the guarantee of repayment, the police would be notified. Justice Kelly noted that: “It is clear that the defendant entered into the agreement under threat that if he did not his son would be prosecuted. That, in my opinion, constituted undue influence but not duress”.^[25] This case has obvious similarities with Scolio Pty Ltd v Cote,^[26] discussed above (6.4). In that case, Ipp J made some illustrative observations as to the differences between the Scolio case and the Campion case:

In the particular circumstances of [the Campion case] … the defendant, to the plaintiff’s knowledge, gained very little benefit from undertaking the liability to pay for his son’s debt. That is to be contrasted with the present case where the deed must be taken to record liability for an existing debt and further to provide to the respondent time to pay which he would otherwise not have had. Moreover, the defendant in [the Campion case] … believed that, if he did enter into the agreement to pay, the prosecution would be stifled.^[27]

6.7.2 Appeals in cases of undue influence

Finally, it is interesting to note that, both in relation to undue influence and unconscionability (discussed directly below), appeal courts may be reluctant to interfere with the assessment made by the trial judge:

In a case such as this the assessment by the learned trial judge of the character of the principal players is of vital importance, and here a very experienced trial judge had the opportunity over some days of assessing those persons. In particular the trial judge’s assessment of the appellant was of critical importance … Judges concerned with allegations of undue influence or unconscionable dealing frequently speak in terms of “the weaker party”, “the stronger party”, and persons under a disability … The trial judge is in a peculiarly advantageous position in making such a comparison between the disputing parties, and in such cases the advantage of seeing and hearing the witnesses assumes even greater significance.^[28]