Vitiating elements - Duress and undue influence

Introduction

In contract law, the validity of an agreement depends on the genuine and voluntary consent of all parties involved. Duress and undue influence are vitiating elements that undermine this consent, rendering contracts voidable. These concepts challenge the enforceability of agreements and carry significant legal consequences.

Duress: Coercion in Contract Formation

Duress occurs when an individual is forced into a contract through unlawful pressure, violating the principle of voluntary consent. A contract formed under duress is voidable at the instance of the coerced party.

Elements of Duress

To establish duress, several critical elements must be demonstrated:

1. Coercion: The victim must have been compelled to enter into the contract due to pressure applied by the other party.
2. Illegitimacy: The threat or pressure must be improper or unlawful.
3. Causation: The coercion must have significantly contributed to the victim's decision to enter into the contract.

Types of Duress

Physical Duress

Physical duress involves threats of harm or actual violence, compelling an individual to agree to contractual terms. Although less common in modern times, it represents a clear violation of voluntary consent.

An example of physical duress is where an individual is forced to sign a contract under threat of violence against themselves or their family. Such circumstances are instances of physical duress, rendering the contract voidable due to the absence of genuine consent.

Economic Duress

Economic duress arises when financial pressure is used to coerce a party into accepting unfavorable contractual terms. It is more frequently encountered in commercial contexts.

In the landmark case of Pao On v Lau Yiu Long [1980] AC 614, the court laid down principles to identify economic duress, considering factors such as the absence of protest, the availability of alternative remedies, and whether the victim received independent legal advice.

For example, if a supplier threatens to withhold essential deliveries unless the buyer agrees to inflated prices, thereby jeopardizing the buyer's business continuity, this may constitute economic duress.

Legal Test for Duress

The legal test for duress, as refined in DSND Subsea Ltd v Petroleum Geo Services ASA [2000] BLR 530, focuses on the nature of the pressure and its legitimacy. Courts assess factors including:

• Whether there was an actual or threatened breach of contract.
• Whether the victim had any realistic practical alternative.
• Whether the victim protested at the time.
• Whether the victim affirmed and sought to rely on the contract.

Remedies for Duress

A contract entered into under duress is voidable, allowing the coerced party to rescind the agreement. However, certain limitations apply:

1. Affirmation: If the victim affirms the contract expressly or by conduct after the duress has ceased, the right to rescind may be lost.
2. Delay: Failure to act promptly upon the removal of duress may bar rescission.
3. Third-Party Rights: If rescission would adversely affect the rights of third parties, the remedy may not be available.

Undue Influence: Exploitation of Trust

Undue influence occurs when one party uses a position of trust to exert pressure on another, resulting in a transaction that is not the outcome of the influenced party's free will.

Categories of Undue Influence

Undue influence is categorized into two types:

1. Actual Undue Influence: Direct evidence shows that undue influence was exerted to procure the agreement.
2. Presumed Undue Influence: Certain relationships raise a presumption of undue influence, shifting the burden of proof to the alleged influencer.

Actual Undue Influence

To establish actual undue influence, it must be proven that the influencer exerted improper pressure on the victim to enter into the contract. This requires clear evidence of the undue influence exercised.

An example is where a solicitor persuades a client to enter into a transaction that benefits the solicitor without obtaining independent advice, exploiting the professional relationship.

Presumed Undue Influence

In certain relationships characterized by trust and confidence, undue influence is presumed. These relationships include, but are not limited to, parent and child, guardian and ward, religious advisor and devotee, and solicitor and client.

In Royal Bank of Scotland v Etridge (No 2) [2001] UKHL 44, the House of Lords provided guidance on presumed undue influence, emphasizing the need for the transaction to be one that calls for explanation, beyond what would be expected in the ordinary course.

For instance, if an elderly person transfers substantial assets to a caregiver without apparent reason and without independent advice, the court may presume undue influence.

Legal Test for Undue Influence

The legal test for presumed undue influence involves two elements:

1. Relationship of Trust and Confidence: Establishing that a relationship existed wherein the victim placed trust and confidence in the other party.
2. Transaction Calling for Explanation: Demonstrating that the transaction is manifestly disadvantageous or not readily explicable by the relationship.

Once these elements are established, the burden shifts to the influencer to rebut the presumption by showing that the victim entered into the transaction freely and with full understanding.

Remedies for Undue Influence

Contracts formed under undue influence are voidable, and the primary remedy is rescission. Limitations to rescission include:

1. Restitutio in Integrum: The parties can be restored to their original positions.
2. Affirmation: If the influenced party affirms the contract after the undue influence has ceased, rescission may not be available.
3. Delay: A significant lapse of time between entering the contract and seeking rescission can bar the remedy.

Distinctions Between Duress and Undue Influence

While both duress and undue influence render contracts voidable due to the absence of genuine consent, they differ in nature and elements:

Application: Analyzing Duress and Undue Influence

Hypothetical Scenario

Consider a situation where Mrs. Smith, an elderly widow, relies on her nephew, John, for daily care. John persuades her to transfer her property to him "for safekeeping," without advising her to seek independent legal advice.

Analysis:

• Relationship of Trust: A familial and dependent relationship exists, indicating trust and confidence.
• Transaction Calling for Explanation: Transferring significant property without apparent benefit or independent advice is unusual.
• Presumed Undue Influence: The presumption arises, shifting the burden to John to prove that Mrs. Smith acted freely and with full understanding.
• Potential Remedy: If undue influence is established, Mrs. Smith may seek rescission of the transaction, provided limitations such as affirmation or delay do not apply.

Conclusion

Duress and undue influence are critical vitiating elements in contract law that undermine the fundamental requirement of genuine consent. They interact with contractual principles by providing grounds upon which agreements may be deemed voidable. Understanding the distinctions and legal tests associated with each concept is essential for analyzing contractual validity.

Notably, landmark cases such as Pao On v Lau Yiu Long and Royal Bank of Scotland v Etridge have shaped the legal field, clarifying the requirements and applications of duress and undue influence. These principles highlight the importance of voluntariness in contractual agreements and the legal mechanisms available to address violations of this core tenet.