Undue influence is an equitable doctrine, which applies where one party uses their influence over the other to persuade them to make a contract. Where a court finds that a contract was made as a result of undue influence, it may set it aside, or modify its terms so as to mitigate the disadvantage. There are two types of influence;
Actual undue influence
This arises where the claimant can prove that they entered the transaction as a result of undue influence from the other party. In these cases, the influence tends to be of a kind which is similar to, but falls short of, duress.
The party claiming actual undue influence must prove that they were influenced, and that the contract resulted from that influence. It is not necessary in the case of actual undue influence to prove that the contract was manifestly disadvantageous to the party influenced. This was the position in CIBC Mortgages v Pitt (1993).
Presumed undue influence
Undue influence may be presumed where there is a pre-existing relationship of confidence between the two parties to a contract, as a result of which one places trust in the other, and the contract between them is manifestly disadvantageous to the party who places trust in the other.
Such a relationship of trust is called a fiduciary relationship, and it may arise in two ways;
- First, it may fall into several categories in which a relationship of trust is automatically presumed to exist. These categories are parent and child, religious adviser and disciple, guardian and ward, solicitor and client, trustee and beneficiary, doctor and patient.
- Second, where the relationship does not fall within any of the above categories, a relationship of trust may nevertheless be established on the facts and will be justified by the circumstances of each case. This was the position in the case of Lloyds Bank v Bundy (1974).
A manifestly disadvantageous transaction
The transaction must be manifestly disadvantageous to give rise to a presumption of undue influence. This will be found to be the case where it would have been ‘obvious as such to any independent and reasonable persons who considered the transaction at the time with knowledge of all the relevant facts’. This was the position held by the courts in Bank of Credit and Commerce International SA v Aboody (1989).
Determining whether there is a manifest disadvantage is a matter of weighing the advantages and disadvantages of the transaction in question. This position was however question by the House of Lords in the case of CIBC Mortgage Ltd v Pitt Morgan (1993).