CAPACITY, DURESS, UNCONSCIONABILITY -and- UNFAIR TERMS

1. CAPACITY, DURESS, UNCONSCIONABILITY -and- UNFAIR TERMS Law of Contract LW1154 BCL 2005-2006

2. Reading • Textbook: Clark chapters 12-13 and 16, and pp194-196 • Reference: McDermottchapters 14 and 17, and pp 492-506

3. DURESS, UNDUE INFLUENCE -and- UNCONSCIONABILITY

4. 3 distinct doctrines • Duress • Undue influence • Unconsc-ionability • Similar factual situations • Same general complaint that the contracts are unfair • Slightly different focuses

5. The doctrines • Duress = contract was secured through unfair pressure • Undue influence = contract was secured through abuse of trust • Unconscionability = contract was secured by sharp dealing

6. How close are the doctrines? • In practice, the doctrines are quite similar to one another • Facts which bring in one doctrine also tend to bring in the others • The basic question seems to be the same in all 3 … • … viz, Was there genuine consent to the terms of the contract?

7. A unitary doctrine? • “Inequality of bargaining power” was proposed as a unifying notion … • … to cover these and other doctrines for correcting unfair or unbalanced contracts … • ... by Lord Denning in Lloyds Bank v. Bundy [1975] QB 326

8. A unitary doctrine? • But no jurisdiction has yet accepted Denning’s broad notion • To say that the various doctrines are similar does not mean that they are identical … • … and a broad doctrine loses sight of important distinctions … • ... as well as unsettling commercial contracts generally

9. DURESS andUNFAIR PRESSURE

10. Duress - elements • Where a contract is made as a result of unlawful pressure … • … which no individual of reasonable firmness could have withstood … • … then the party under pressure has a right to escape from the contract

11. Types of duress • Various types of duress are present in the cases • But today, they are all simply examples of the same principle … • … that a sufficiently serious threat can invalidate consent to the contract

12. Types of duress 1. Physical force or violence • If violence, or the threat of it, is used to force someone to contract ... • … then they have a right to escape from the contract • At one time, this was the only recognised ground of duress … • … but today is simply an extreme example

13. Example Lessee of Blackwood v. Gregg (1831) Hayes 277 • A 92-year-old was abducted and imprisoned by relatives • He later signed a deed in favour of one of his captors • It was held that fear of imprisonment could amount to duress … • … enabling him to avoid the deed

14. Types of duress 2. Threats to property A threat to someone’s property can amount to duress • eg a threat to damage it • eg a threat to set fire to it • eg a threat to take it away

15. ExampleSmelter Corp v. O’Driscoll [1977] IR 305 • P sought to buy an option over D’s land • P threatened that if D would not grant the option, the City authorities would compulsorily purchase the land from D • The Supreme Court thought this sufficient to amount to duress

16. Types of duress 3. Threats to sue or prosecute • A threat of legal proceedings can certainly constitute duress … • … provided it is sufficiently serious • The court will need to put itself in the place of the party threatened … • … to assess how serious the threat was

17. ExampleWilliams v. Bayley (1866) LR 1 HL 200 • A son forges his father’s signature on promissory notes • Bank threatens to prosecute the son unless the father honours the notes • A successful prosecution would have resulted in the son’s transportation • Father’s agreement to honour the notes was set aside

18. Types of duress • But the result might be different if the consequences of legal action are less severe … • … or if the party threatened has more time to think carefully about the matter … • … or has good legal advice

19. ExampleMcConville v. ESB (1997) 8 ELR 46 • P was suspected of fraud by his employers • He was told that a prosecution would be recommended • On legal advice, he agreed to resign to avoid prosecution • He later argued that there was duress

20. ExampleMcConville v. ESB (1997) 8 ELR 46 Buchanan J held that: • Dismissal was, at the time of P’s resignation, “a long way down the road” … • … and P’s decision was taken “for his own reasons” in the light of his legal advice • No sufficient duress was found

21. Types of duress 4. Economic duress • This is a threat of economic harm … • … usually by refusing to carry out a commercial contract • The doctrine has only recently arisen … • … but it seems to be accepted by the Irish courts (eg Hearn v. Collins High Court 3/2/98)

22. ExampleAtlas Expressv.Kafco [1989] 1 AER 641 • P agrees to carry D’s goods to purchasers • D’s survival depends on P’s carrying out the contract • P suddenly demands double the contract price, and D agrees • But when P sued for the extra, a defence of duress succeeded

23. The degree of pressure Various phrases are used to identify the necessary degree of pressure: - • “No free will” • “Vitiation of consent” • “Overborne will” There is no very precise test

24. The degree of pressure Relevant factors are:- • Whether the person threatened made any protest • Whether they had a reasonable alternative open to them • Whether they were independently advised • Whether they later took steps to avoid the contract

25. The degree of pressure • Economic pressure is much less serious than the other sorts … • … and so the courts are particularly hard to convince where economic duress is pleaded • Mere “commercial pressure” is not enough to constitute duress • The threat must be catastrophic

26. ExamplePao On v. Lau Yiu Long [1979] 3 AER 65 • Buyout agreement to exchange one parcel of shares for another • Subsequent refusal by one side to complete, unless there was a guarantee as to share values • This threatened the collapse of the entire deal

27. ExamplePao On v. Lau Yiu Long [1979] 3 AER 65 The Privy Council held that: • “There was commercial pressure, but no coercion” • Both companies were very large, well-advised concerns • No sufficient duress was found

28. “Unlawful” pressure? • It is often said that the pressure must be “unlawful” • But it is not clear what this means, if anything • It is certainly not always a defence that the threat was a perfectly lawful one to make … • … though this appears to be a relevant factor

29. ExampleCTN v. Gallaher [1994] 4 AER 714 • A consignment of cigarettes was lost by theft • Sellers demanded that buyers should pay for them • When buyers refused, sellers threatened to deny them credit in the future • Buyers paid, but later pleaded duress

30. ExampleCTN v. Gallaher [1994] 4 AER 714 The court of appeal held: • The sellers were quite entitled to refuse credit if they wished • While the pressure on the buyers was extreme, it did not constitute duress • But the court did not say that lawful threats could never constitute duress

31. Causation • Duress cannot be effective unless it supersedes all other motives for acting … • … so if it appears that the party threatened would have acted the same way anyway, duress is not established • But the case law is not entirely clear

32. ExampleBarton v. Armstrong [1976] AC 104 • Sale of a company on fair terms • But when the seller hesitated in accepting the contract … • … the buyer threatened to have him killed

33. ExampleBarton v. Armstrong [1976] AC 104 The Privy Council held: • Even though the “primary and pre-dominant motive” was commercial necessity … • … duress was established if the threat was one motive for agreeing But this is a controversial view

34. Remedy • The effect of duress is that the contract is set aside at the threatened party’s option … • … and cannot be enforced by the other party • The remedy is lost by delay in asserting it … • … or by affirming the contract after the threat has been lifted

35. UNDUE INFLUENCE

36. Undue influence Elements:- • A very close relationship between the contracting parties … • … which leads one side to place great trust in the other … • … and so to fail to exercise independent judgment in deciding whether to make a contract

37. Unfair pressure? • Sometimes one side put very strong pressure on the other, or bullied them • But this is just an example of the doctrine of undue influence … • … which asks whether the weaker party was able to exercise their own judgment

38. Fairness • In theory, the question is not whether the contract was fair … • … but whether it was entered into voluntarily • In practice, fairness is central … • … because lack of fairness is very strong evidence of lack of voluntariness

39. ExampleCarroll v. Carroll [1999] 4 IR 241 • An elderly man transferred his farm to his son for nothing • The man had no other assets • He had been misled, and thought his daughters would be entitled to stay • His lawyer advised, but also did not know the full facts • The Supreme Court found undue influence

40. Rebuttal • But if an informed and independent decision was taken … • … then undue influence is disproved … • … and the transaction cannot be set aside (Moyles v. Mahon [2000] IEHC 197, [2000] Ann Rev Ir L 108-111)

41. Relationships of trust Which relationships involve enough trust to bring in the doctrine? • Many professional relationships do • Many family relationships do • But any sufficiently close relationship will be sufficient There are many examples

42. Example – family relationshipGregg v. Kidd [1956] IR 183 • An ill man was staying with his sister • In effect, she told him to make a will in her children’s favour, or get out • He transferred his only property to the children • The transfer was later set aside for undue influence

43. Example – professional relationship Tolhurst v. Smith [1994] EMLR 508 • P and D were members of a pop group • Over time, D effectively took charge of the group … • … and P developed a drink problem • D persuaded P to agree to take a lower percentage of the group’s earnings • Undue influence was found

44. Example – other relationshipAllcard v. Skinner (1887) 36 Ch D 145 • Woman of 27 entering an enclosed religious sisterhood • Vows of poverty and obedience • She made a large gift of property to the order • No evidence of pressure or deception • Nonetheless, sufficient undue influence was found

45. Problems of proof • So while there is often good evidence of undue influence … • … it is usually very hard to show exactly what was said, or what effect it had … • … or whether, despite the influence, a free and independent judgment was exercised

46. Proof - types of case Category 1 • Actual undue influence is proved Category 2 • Undue influence is presumed, unless proof to the contrary is given

47. Category 1 Actual proof of undue influence • It is for the person alleging the influence to prove it • This type of case is not uncommon • But it is very dependent on the actual facts … • … and so rarely ends up in the law reports

48. ExampleO’Flanagan v. Ray-Ger High Court 3/2/98 • Agreement for a transfer of property • The transferee dominated the transferor, his business partner • The agreement left the transferor’s family unprovided for • Costello J found undue influence in fact

49. Category 2 • Presumption of undue influence • Influence must be disproved • The presumption may arise from: • Traditional case law (2A) • The actual relationship (2B) • Disproof will involve a showing that independent judgment was exercised despite any influence

50. Category 2A Traditional presumed influence: • eg Parent’s influence over child • eg Guardian’s influence over ward • eg Doctor’s influence over patient • eg Lawyer’s influence over client The categories are not closed: • egTolhurst v. Smith (pop group manager over member of the group)