CONTRACT LAW

LARGE GROUP 9
Student Guide

Duress and Undue Influence

Context

The essence of agreement, upon which contract law is based, is that the parties freely
consent to the agreed terms. So it follows that a party who has been forced into a
contract or variation of a contract by threats or undue pressure should not necessarily
be bound by it. Where there has been duress or undue influence exerted upon an
innocent party it is right to think that a contract should be capable of being set aside.

Cases which involve threats of actual physical violence are quite rare. In the modern
commercial world, threats to a party’s economic or business interests are far more
common. Both of these can amount to duress.

The principle of undue influence is similar to duress in contract law, but there are some
important differences. Undue influence consists not of threats or violence but of
influence which goes beyond what is regarded as acceptable. The effects of both and
the remedy available for each, are the same. However, it can be difficult to decide
where legitimate commercial pressure ends and economic duress begins; similarly, it
can be difficult to say at what point acceptable influence becomes ‘undue’ influence.
The approach adopted by the law for both principles is to identify relationships which
are unequal and then to consider whether the transaction resulted from the dominant
party abusing that relationship.

Outcomes

By the end of this Large Group you should be able to:

1. Explain the law relating to duress.

2. Identify the connection between consideration and duress.
3. Explain the law relating to undue influence.
4. Advise on the impact of undue influence upon creditors and lending institutions.

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1. Introduction

In English contract law when you enter into a contract you are freely entering into the
contract, you are not forced into it, however if a party has been forced into the contract
by threat or undue pressure, they are not necessarily bound by it.

There are two principals:

• Duress, and
• Undue influence

1.1 What Constitutes Duress in Contract Law?

Activity 1 Identifying possible duress.

Duress may take the form of violence or illegitimate threats or pressure which coerce
a party into entering a contract or varying a contract. Let’s consider some situations
and decide whether any of them involves duress:

Situation Duress?
Y/N
a) Mischa threatens to set fire to your house unless you sell her your car Yes
for £50. You go ahead with the sale.

b) Sam threatens to beat you up unless you sell him your state-of-the-art Yes
sound system for £10. You agree.

c) Designe Ltd tells Namco that if it does not enter into a contract with No
Designe Ltd, they will never deal with Namco again. Namco agrees as
Designe Ltd is an important customer for Namco’s business and it doesn’t
want the business going to a competitor company.

Duress =

Duress in contract law occurs when one party is forced into a contract through threats
or coercion by the other party, depriving them of free will. The pressured party must
show they faced illegitimate pressure (like threats of harm or economic loss) and had
no reasonable alternative but to agree. If proven, the contract may be voidable,
allowing the victim to affirm or void it.

1.2 Physical threats

If there is a threat of violence it is referred to as duress to the person, and if it's made
at the time the contract is being made, then it can amount to a duress, if it can be
proved that duress was one reason for the party to enter into the contract.

Barton v Armstrong (1975)

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 • Plaintiff executed (signed) a contract following threats of violence and to take
his life.
• Many of the threats were made over the phone and in the early hours of the
morning.
• Plaintiff was also allegedly being kept under surveillance by men hired by the
defendant.
• Plaintiff claimed the deed should be avoided based on duress.

Decision:
The appeal by Barton was allowed. The court held that any agreement that was a
result of duress and fraudulent misrepresentation did enable the agreement to be set
aside and considered voidable. Even if the agreement was signed firstly out of
commercial necessity, the fact that coercion had occurred made the agreement void.
It was for Armstrong to prove that there was no unlawful pressure or duress which
coerced Barton into signing the contract.

1.3 Economic duress

Legitimate commercial preside will not affect the contract.

Illegitimate pressure:
• Thread to commit a crime.
• Threat to commit a tort.
• Treat to break a contract.

Atlas Express v Kafco (1989)

Atlas Express was threatening to break its contract, when it said it would not deliver
goods to Woolworths’ stores, unless it was paid more money than the amount stated
in the original contract.

Decision:
Judgment was awarded in favour of Kafco. Kafco were found to have signed the
agreement under economic duress as they felt that in the circumstances, they had no
alternative but to sign the varied contract. Kafco had not approved the new terms of
the agreement (as they had previously rejected the proposed variation) and further,
there was no consideration for the new agreement as the variation placed Kafco in a
less favourable position financially. Thus, their non-payment of the money of account
resulted from the duress. This case is significant as it established that the threat to
breach an existing contract between the parties can amount to illegitimate pressure
and thus economic duress.

1.4 Duress: Ingredients

Carillion Construction Ltd v Felix (UK) Ltd (2001)

The ingredients of actionable duress are that there must be pressure:

(a) whose practical effect is that there is compulsion on, or a lack of practical
choice for, the victim,
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(b) which is illegitimate, and

(c) which is a significant cause inducing the claimant to enter into the
contract.

1.5 Additional Guidelines

• Actual or threatened breach of contract.

• Wether victim protected at the time.

• More than normal commercial bargaining.

Activity 2 Relevant factors for economic duress

Watch the Practitioner: Opel v Mitras media clip. The clip contains an interview with
a barrister, Donald McCue, of 11 Stone Buildings (a barristers’ chambers), who was
Opel’s counsel in the case of Adam Opel GmbH v Mitras Automotive Ltd [2007]
EWHC 3205. Note that Mr McCue refers to Opel at a number of points as GMR for
reasons which he states in the interview.

As you watch, answer the following questions:

1. How were the elements of duress established on the facts of the case?

Pressure: Mitras, the sole supplier of a particular automotive part, threatened to stop
supplies when Adam Opel GmbH decided to source the part from a new supplier.

Which is illegitimate: The pressure was considered illegitimate because Mitras

threatened to stop supplies, which would have caused significant financial and
logistical problems for Adam Opel GmbH.

Significant cause of inducement: The pressure from Mitras was a significant cause
that induced Adam Opel GmbH to pay the money so that Mitras would continue the
supplies of the goods.

Causing compulsion/lack of practical choice: Adam Opel GmbH had a lack of

practical choice because they were unable to find an alternative supplier as Mitras
was the sole supplier of the item.

2. What did Mr McCue consider to be the two most important factors to put
before the court, and what were his major concerns?

Mitras had no contractual rights to carry out the threats which they were making.
GMR had no other option but to pay up.

1.6 Link between economic duress and consideration

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Stilk v Myrick (1809)
Performance of an existing contractual duty is not good consideration for a further
promise. This principle is based on the idea that an enforceable contract requires
consideration.

Atlas Express v Kafco (1989)

The case established that a threat to breach an existing contract between the parties
can amount to illegitimate pressure, and thus constitute economic duress.

Williams v Roffey (1991)

Performance of an existing contractual duty will be good consideration for a promise
of extra payment if it confers a real practical benefit on the promisor; but if the promise
to pay extra was only made under economic duress the variation may be avoided.

2. Effect of Duress

Duress makes an original, or renegotiated, contract voidable. It is a similar outcome to

that which follows a proven misrepresentation.

When a contract is voidable, the party can either rescind or affirm the contract.

The effect of duress is rescission, neither party must perform further obligations.

Example:

2.1 Bars to rescission

(a) Affirmation.
(b) Undue delay.
(c) An innocent purchaser has already acquired an interest in the property.
(d) Impossible to restore goods or property

North Ocean Shipping v Hyundai Construction Co.(The Atlantic Baron) (1979)

• Construction of a ship called ‘The Atlantic Baron’.

• Building started, but the shipbuilders demanded more money and threatened to
stop work unless the claimants agreed to pay.
• Claimants agreed to pay the extra money; no practical choice but to agree to the
demand.
• Ship was delivered on time and the shipbuilders were then paid.

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• Eight months later the claimants asked for repayment of the extra money on the
grounds of duress.
Decision:
The Court found in favor of HC. HC’s increase of the letter of credit served as
consideration for NOS’s increased payments under the original contract. While HC’s
demand for a 10% price increase did amount to economic pressure and made the
original contract voidable, NOS’s payments without protest affirmed the contract.
NOS’s claim based on economic duress thus had to fail.

3. UNDUE INFLUENCE

3.1 Definition

No precise definition: influence which goes beyond what is regarded as

acceptable; or
where one party is in a position to influence another and takes unfair advantage
of that position.

Undue influence would presumed where there is a fiduciary relationship, which is a

relationship of trust and confidence between the parties, and a transaction occurs,
which calls for an explanation.

3.2 Actual Undue Influence

Daniel v Drew (2005)

• Elderly Mrs Drew intensely disliked confrontation and was afraid of her nephew
and the prospect of going to court.
• He told her to sign a contract resigning from a family trust which included a large
farm and land in Hampshire, under the threat of taking court action.
• Mrs Drew signed feeling unable to refuse.

Decision:
The Court disagreed with Mr Daniel and held that Ms Drew would clearly have wanted
to settle the identity of her successor before resigning and obviously wanted her son
to replace her. However, Ms Drew was vulnerable and wanted to avoid legal
confrontation at all costs. Mr Daniel, a forceful person, took advantage of this and
obtained her signature in an unacceptable way. The key question in undue influence
cases is whether the persuasion resulted in the invasion of the claimant’s free will.
Leading is acceptable but the claimant must not be driven. Here, Ms Drew clearly was
not acting at her own free will – as vulnerable as she was, she just wanted to avoid
confrontation.

3.3 Presumed Undue Influence

Royal Bank of Scotland v Etridge (No 2) (2001)

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a) Relationship of trust and confidence

O’Sullivan v Management Agency Ltd (1985)

b) The transaction must call for an explanation

c) Can the presumption be rebutted?

3.4 Undue Influence and the Position of Third Parties

EXAMPLE
Husband Undue Wife
(Debtor) influence (Surety)
Bank Loan Husband
(Creditor) agreement
Bank Security (guarantee) Wife
agreement

CIBC Mortgages plc v Pitt (1993) – notice of reason for surety.

• A wife was pressured by her husband into signing a mortgage of £150,000 to

fund his stocks and shares trading.
• The loan was said to be for the purchase of a holiday home
• Initially, the husband became a millionaire on paper, though he never cashed in
his shares, instead buying more.
• In 1987, with the stock market crash, the husband lost everything, and the bank
sought to repossess the house.
• Mrs Pitt claimed undue influence to try and stop the re-possession.

Decision:
Following in the footsteps of the lower courts, the House of Lords also decided against
the wife. It held that a transaction can be set aside even without proof of disadvantage
if the actual undue influence is shown (as it was shown here). However, this would only
affect CIBC if the husband was acting as its agent in procuring the wife’s agreement
or, if CIBC had actual or constructive knowledge of the undue influence. In the Court’s
view, the husband was not CIBC’s agent and there was no evidence that CIBC had
any knowledge that the agreement was not for the couple’s joint benefit. Consequently,
CIBC was entitled to enforce the order for possession and secure the payment of the
arrears.

Actual or Constructive Notice

Barclays Bank v O’Brien (1994)

The House of Lords found in favour of the wife as well – albeit not on the basis of a
special equitable protection. The Court held that the husband exercised undue
influence, misrepresented the deed – i.e. committed a legal wrong – and thus induced
her to sign the deed. As a result, the wife had equity against her husband to set the
deed aside. Such equity was enforceable against a third party who had constructive or

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actual notice of the situation that gave rise to the equity or for whom the husband was
an agent – Barclays in this case. The creditor would have constructive notice when the
transaction in question was not to the wife’s financial advantage and which carried a
significant risk of her husband committing a wrong in law or equity.

Constructive Notice

Royal Bank of Scotland v Etridge (No 2) (2001)

• Put on inquiry

• Failed to take reasonable steps to ensure the surety understands the

implications of the transaction

o Private meeting to explain.

o Obtain written confirmation from a solicitor that the risks have been
explained.

3.5 Cases not involving husbands and wives

Credit Lyonnais Bank Nederland NV v Burch (1997)

• Junior employee was asked to secure her employer company’s debts with her own
house and take responsibility for any further debt.
• The bank quickly tried to enforce the security by repossessing the employee’s
house.
• Employee claimed undue influence from her employer.

Decision:
The court held that the bank did in fact have constructive notice of the relationship
between the parties and had not done enough to allay concerns of undue influence.
The court affirmed the following:
• An employer/employee relationship was capable of developing into such a
relationship for undue influence.
• There was no benefit to Burch in the agreement, as such no evidence was
required of sexual or emotional tie between the parties to induce undue
influence. The lack of benefit to one party was evidence enough.
• The bank could not consider the information they had supplied Burch with as
sufficient to escape constructive notice, as the information was not full and
complete as such to allow her to understand the gravity of the company
borrowing.
• The bank had not made all reasonable steps to allay themselves of the concerns
regarding undue influence.
• The fact that, on advice from the bank, the defendant did not seek independent
advice should have been taken as confirmation of undue influence.

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