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Undue Influence in the Context of Civil Fraud

Author: Nicola Sharp  3 June 2024
3 min read

What is undue influence?

Undue influence is manipulating the will of another to gain an advantage. It is more common to see allegations of undue influence in a domestic setting than in a commercial one.

For example, a wife who is coerced into executing a charge over the matrimonial home, or applying pressure on a vulnerable person to amend their will. 

It is a more difficult claim to make out in a commercial relationship, because the parties are deemed to have the knowledge and resources to make informed decisions. They are presumed to have equal bargaining power and the ability to thoroughly review and reject deals or offers. 

The key prerequisite in a commercial setting is that one party’s actions must give rise to a relationship of trust and confidence which would give rise to a duty of fairness and candour. 

With that in mind, it is possible to plead undue influence, and it often sits as a strand of a wider claim in civil fraud. It is a claim that lies in equity. The other arguments that often run in parallel with an undue influence claim are economic duress and unconscionable dealing.

Economic duress is conduct which falls outside what is considered to be legally acceptable. ‘Unconscionable dealing’ is where a vulnerable person has entered into a disadvantageous transaction. The disadvantage must be known and exploited by the other party. 

Why plead undue influence?

A commercial party may pursue a claim in undue influence in order to exit a financial transaction. The remedy for a successful claim is to set aside the contract.

An Example of Undue Influence Pleaded by a Commercial Party

One high profile example of an argument in undue influence is the case of The Libyan Investment Authority v Goldman Sachs International [2016] EWHC 2530 (Ch).

The Libyan Investment Authority (LIA) alleged that employees of Goldman Sachs had exerted undue influence over its members, in order to procure the LIA to enter into trading transactions. 

Ultimately, the High Court rejected the LIA’s arguments (and the Court of Appeal refused permission to appeal). It held that the LIA could not seek to set aside the bargain because there had been no protected relationship of trust and confidence between the parties. The transaction did not constitute an unconscionable bargain.

In delivering the leading judgment, Mrs Justice Rose did not exclude the possibility that an undue influence and / or an unconscionable bargain claim by a client against a bank could succeed. But she explained that it would only be possible in ‘exceptional circumstances.’ 

While the claim was unsuccessful, it is a good reminder to banks, and other commercial parties, to give proper risk warnings and ensure that transactions are properly understood by the client. Keeping good records of what was discussed and understood will help to evidence the defence against an undue influence claim. 

What is economic duress?

Economic duress is a situation in which a commercial party to contractual negotiations applies pressure to another. The other party is coerced into entering the contract, or parting with money.

An Example of Economic Duress

Atlas v Kafco [1989] QB 833 serves as an example of what a claim in economic duress might look like.

A carrier agreed to transport a supplier’s goods at a particular price. Later, the carrier refused to transport the goods unless an additional payment was made. The agreement to pay the additional sums was held to have been formed under duress. 

In reaching that decision, the judge found that it was obvious to the carrier that the supplier’s commercial survival depended on the goods being delivered. It was also very difficult for the supplier to find an alternative carrier. 

There was no genuine renegotiation of the contract. The supplier was “over a barrel”. 

There was found to be no consideration for the additional payment as the carrier did no more than it had originally been obliged to do.

When is a claim in economic duress made out?

A claim in economic duress will be fact specific. But as a general guide, economic duress is more likely to be established where: 

  • A party is able to perform the contract, but they are acting in bad faith by refusing to do so. They are taking advantage of the other party’s vulnerability.
  • The non-performing party is insisting on additional payment or other more favourable contractual terms.
  • The innocent party agrees to pay, or does pay under protest (although protest is not essential).
  • The innocent party has no realistic alternative to agreeing to pay.

Possible Alternatives to Undue Influence

Undue influence and economic duress present high barriers for the claimant to overcome. Another option could be to seek contractual estoppel, but that is also a difficult claim for a claimant to make out.

If the facts allow, a claimant may be on more robust ground by pursuing misrepresentation and deceit (fraudulent misrepresentation). 

If you would like advice on a potential claim in civil fraud, or defending a claim in civil fraud, please get in touch with our experts at Rahman Ravelli.

Nicola Sharp C 09983

Nicola Sharp

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nicola.sharp@rahmanravelli.co.uk
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Nicola is known for her fraud, civil recovery, arbitration and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.

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