Chapter 10 – Duress and Undue influence

Essay question

Critically discuss the case of Royal Bank of Scotland v Etridge (No.2) (2001).

Essay question answer guidance

Where one party to a contract has used undue influence to induce that contract, the contract is, subject to various bars, voidable.  What happens in the situation where a person is induced to enter into a contract as the result of undue influence by a third party (and not the other party to the contract)?  A common example from the case law is where a husband uses undue influence to persuade his wife to enter into a contract of guarantee with a bank (often with the matrimonial home as security) to secure a loan to the husband or husband’s business.  Here a court has to balance a desire to protect the wife with a desire not to affect the confidence of banks in this type of lending which is very important to small businesses.  Royal Bank of Scotland v Etridge (No.2) (2001) refined the key principle in this area which is that the wife will usually only be able to set aside the guarantee as against the bank if the bank had actual or constructive notice of the husband’s undue influence.  You should consider the key principles of notice, particularly situations where the bank will have constructive notice of the husband’s undue influence.  Has an appropriate balance been drawn or is the balance more in favour of banks, who have to take a number of simple procedural steps?  Royal Bank of Scotland v Etridge (No.2) (2001) also clarified some of the aspects of the doctrine of undue influence itself.

Problem question

For many years Ceri was a member of a religious cult. During her time as a member of the cult Ceri transferred all of her property, including a very large inheritance, to the leader of the cult, Dewi-Dog. Dewi-Dog wished to use the property transferred from all members of the cult to further ‘the love and appreciation of animals’. When Ceri left the cult, she quickly fell into debt and applied for a bank loan. The bank, Thomas Bank plc, would only lend to Ceri if she was able to provide security from a third party. Ceri persuaded her elderly, infirm parents to use their home as security for a loan from Thomas Bank plc to Ceri. Ceri did not repay the loan and Thomas Bank plc wishes to enforce the security against her parents’ home.

Advise (i) Ceri’s parents on whether they might be able to resist the bank’s claims on the basis of undue influence, and (ii) whether Ceri can regain property from Dewi-Dog so as to be able to pay Thomas Bank plc.

Problem question answer guidance

In relation to (i), it is not clear whether Ceri’s parents wish to claim undue influence directly against Thomas Bank plc or to claim that Ceri (a third party) placed undue influence on them to enter into a contract of guarantee with Thomas Bank plc. In either case, they will need either affirmatively to prove undue influence or raise a presumption of undue influence which is not rebutted (Royal Bank of Scotland v Etridge (No. 2) (2001)). Some relationships (formerly called 2A relationships) give rise to a presumption of influence although the scope of this category is a little hazy (compare Bainbrigge v Browne (1881) on the relationship between a parent and child). Other relationships have to be shown to be a relationship of influence (for example, the relationship between a bank and a customer – National Westminster Bank plc v Morgan (1985)). In either case, in order to raise a presumption of undue influence, the transaction also needs to call out for explanation. If Ceri’s parents can raise a presumption of undue influence which is not rebutted, this does not necessarily mean they can set aside the guarantee as against Thomas Bank plc. The bank needs to be infected by notice of Ceri’s undue influence (applying the principles in Royal Bank of Scotland v Etridge (No. 2) (2001)). In relation to (ii), Ceri may be able to raise a presumption of undue influence (Allcard v Skinner (1887)) although there may be a question of whether rescission is still possible at this time.