Undue Influence

by Sebastian A E Martens

1. Object and goal

The principle of private autonomy which is fundamental for European private law requires that it must principally be possible for every individual to regulate his legal relations in a free, self-responsible and self-determined manner. The freedom of formation of the will is thus violated if someone else illegitimately interferes with it. Therefore, all European legal systems grant protection from undue interferences with the process of will formation by laws covering fraud and duress. But the freedom of self-determination can also be violated by other persons’ acts that do not reach the severity of these traditional vices of consent. A special problem is presented by transactions which are entered into by someone under the influence of a relationship of trust and emotion (eg a transaction in favour of a close relative). In these cases a rational balancing of the advantages or disadvantages of the transaction is often replaced by purely emotional decisions. Under usual market conditions both parties try to maximize their individual benefit in a negotiating process and this generally leads to a compromise of their contrary interests. If, however, there is an emotional relationship between the parties and one party regards the interests of the other as equally important to his own, this situation is open to abuse by the stronger party. In such a situation a transaction may be entered into that would not have been wanted under usual circumstances and is only concluded because of an undue influence on the dependent contracting party.

The European legal systems have developed different strategies to address the problems caused by such situations. They have all had difficulties in satisfactorily categorizing them within the general doctrinal system. This problem derives from their acceptance of a market model as a basic assumption according to which everyone is generally capable of rational judgments and is able to control his emotions at least insofar as he can take them into consideration as one factor (along with others, such as price, need, etc) in the process of balancing his interests. According to this model everyone is responsible for his own emotions, and emotions cannot cause a legally relevant vice of consent. Therefore, some legal systems do not analyse the problem in terms of impaired consent but turn to scrutinizing the content of the transaction, eg by regarding bargains contra bonos mores as unconscionable. However, in this analysis they also take into account the process leading to the conclusion of the contract.

Other legal systems, in contrast, refuse to inquire into the substantive fairness of a bargain and focus on procedural justice, ie the freedom of will-formation. These legal systems in turn face the question whether it is really possible completely to suppress all substantive evaluation of the contract in question. They are also faced with the practical difficulty of proving undue influence in a relationship of trust and emotion. Such a proof can be facilitated either by presumptions of undue influence in certain defined types of cases or by formulating the concept of undue influence in a rather abstract way, eg by using a concept of inequality of bargaining power.

Finally, a legal system can also refrain from the idea of a single comprehensive provision for all cases of undue influence, and can instead adopt a case-by-case strategy with specific provisions for every transaction that has proved to be problematic in relationships of trust and emotion.

2. The legal development on the European continent

a) Rise and fall of metus reverentialis

Roman law took account of the need for protection of socially or emotionally dependent persons in a casuistic manner by specific rules and exceptions for the protection of wives, minors and freedmen (liberti). For example, the SC Velleianum generally prohibited women from standing surety for the debts of other persons and accepted such transactions to be valid only if strict formalities had been complied with.

The general remedies because of metus (fear, duress) did not apply in cases of mere reverence, as was explicitly stated in the Digest. Nevertheless, lawyers developed the concept of metus reverentialis in the course of the reception of Roman law generalizing the fragment D. 44.5.1.6 which contained a specific rule for the protection of freedmen. It was argued that a judge, notwithstanding the limits of the statutory provisions as to metus, had a discretionary power to recognize reverence as an obstacle to the binding force of an agreement, eg the reverence of a wife towards her husband that had caused her to undertake a disposition in his favour. Mere reverence was, however, not sufficient. The transaction in question also had to be substantively unfair (laesio enormis), or the revered dominant person at least needed to have a violent character which justified the metus reverentialis. The lawyers developed a number of presumptions to determine the existence of such a relevant metus reverentialis in judicial practice.

The theory of metus reverentialis disappeared in the times of the secular natural law and the late usus modernus. Interferences with the free formation of the will in the contracting process were now seen to jeopardize the binding force of the contract only if such interferences could be qualified as delictual wrongdoings, as in the cases of fraud and duress. Thus, even today there remain provisions such as Art 1114 Code civil and Art 1437 Codice civile that explicitly declare mere metus reverentialis to be irrelevant. But not only the concept of metus reverentialis was abandoned in the course of the codification of private law. Additionally, lawyers increasingly regarded the traditional special provisions of protection, particularly those for wives (eg the SC Velleianum), to be in conflict with the general system of law. Thus, these provisions were slowly phased out.

b) The modern development, particularly with respect to suretyship contracts

However, it has become clear that it is often only with great difficulty, that the rules for standard business transactions can be applied to contracts which are concluded within a relationship of trust and confidence. In particular intercessions by spouses, most often suretyship contracts by wives vis-à-vis banks for their husband’s debts, have caused many problems to the European legal systems since the late 20th century.

In Germany, following a fundamental ruling of the Federal Constitutional Court (BVerfG 19 October 1993, BVerfGE 89, 214), the validity of such suretyship contracts is determined by the Federal Supreme Court in terms of § 138 Bürgerliches Gesetzbuch (BGB), which concerns contracts contra bonos mores (illegality of contracts), and the court takes account of both substantive and procedural aspects. While § 138 BGB usually requires a material imbalance between the corresponding contractual obligations, in the cases of suretyship contracts it is regarded as sufficient if the obligation under the suretyship contract is grossly out of proportion to the financial circumstances of the person standing surety. However, the conclusion of such a contract is only seen as being contra bonos mores if the creditor took advantage of some special weakness of the surety, eg her special emotional relationship to the principal debtor. Some German legal writers reject the approach of the Federal Supreme Court for systematic reasons. They propose to overcome the narrow limits of the two recognized forms of unlawful interference with the formation of the will (fraud and duress) by introducing a general concept of undue influence.

Austrian, Dutch and French laws have special provisions for suretyship contracts concluded by consumers. Of these, Art 341-4 Code de la consommation is particularly strict and forbids a creditor from accepting a consumer as surety, if the obligation undertaken by him would be out of proportion to his financial capacity. However, only Art 31 of the Nordic Contract Codes and Art 3:44(4) Burgerlijk Wetboek (BW) regard the abusive exploitation of some weakness, especially within a relationship of trust and confidence, as a wrongful interference with the formation of the will comparable to fraud and duress.

3. Undue influence in English law

In principle, English law refuses an evaluation of the substantive justice of contracts and focuses instead on a control of the procedural fairness of the negotiations. In doing so, the judges can, amongst other devices, make use of the equitable doctrine of ‘undue influence’. Since the 19th century the courts have granted protection to persons who have entered into transactions under such ‘undue influence’. It was, however, left unclear what exactly was meant by ‘undue influence’. Courts recognized undue influence if a legal disposition could not be regarded as a free and voluntary decision in a particular case. Over the course of time two types of cases were distinguished: On the one hand, there were cases of ‘actual undue influence’ where some wrongful interference with the formation of the will could actually be proven. On the other hand, undue influence was presumed in certain relationships of trust and confidence if the trusting party made a disadvantageous disposition in favour of the party trusted. Recently, attempts have been made, once again, to merge both lines of cases of undue influence by demanding that ‘presumed undue influence’ is to be restricted to cases where some real wrongdoing, as it has to be proven in cases of ‘actual undue influence’, can justifiably be presumed in fact. If this reasoning were to prevail, the special protection for dependent persons in relationships of trust and confidence would be significantly weakened.

Since the 1980s, the concept of undue influence has been used by the courts in particular to control intercessions on the part of relatives or other people who are emotionally close to the principal debtor. A non-commercial contract of suretyship can be avoided in case of undue influence if the creditor did not insist on independent advice being provided to the surety. The mixed legal systems of Scotland and South Africa have functionally adopted this solution to a large extent under the general umbrella of the principle of good faith.

4. The provisions concerning undue influence in PECL and UNIDROIT PICC

In view of the described disparate state of law it comes as no surprise that the relevant provisions of the international uniform model projects, ie Art 4:109 PECL (adopted verbatim in Art II-7:207 DCFR) and Art 3.10 UNIDROIT PICC, contain compromise solutions. Both provisions are systematically close to the traditional vices of consent mistake, fraud and duress. They grant a right of avoidance in case of gross disparity (Art 3.10 UNIDROIT PICC) or in case of an excessive benefit or unfair advantage (Art 4:109 PECL). This substantive injustice of the contract needs to be due to the fact that one party took unfair advantage of a weak position of the other party.

Both Art 3.10 UNIDROIT PICC and Art 4:109 PECL proceed from the concept of a contract with interconnected mutual obligations where the values of these obligations can be put into proportion with each other. Therefore, it is unclear how an excessive benefit or a gross disparity is to be determined in cases of unilaterally binding contracts such as suretyship contracts, gifts or testamentary dispositions. In case of suretyships, most European legal systems take the financial capacity of the person standing surety into consideration. Sometimes, as for example in England, no substantive unfairness is required in cases of unilateral acts, and substantive criteria such as a lack of personal interest are only used as factors indicating the presence of undue influence.

Art 3.10 UNIDROIT PICC and Art 4:109 PECL grant a right to avoid a substantively unjust contract only if it has been concluded in objectionable circumstances. The disadvantaged person has to have been in a weak bargaining position due to one of a number of specific, enumerated reasons. Article 4:109(1)(a) PECL explicitly mentions as one such reason the fact that a party was dependent on, or in a relationship of trust with, the other party. It does not, however, cover the situation in which the weakness of one contractual party is due to an emotional relationship with a third party. The European legal systems also have problems to analyse such three-party constellations within their usual doctrinal framework, as has particularly become clear in the cases of non-commercial suretyships. In the PECL this problem is meant to be solved by Art 4:111, which extends the consequences of vices of consent caused by a third party to the contractual partner under certain circumstances. Thus, Art 4:111 PECL also requires that the third party has fulfilled all elements of Art 4:109 PECL in his own person, ie the third party needs to have gained an excessive benefit by taking unfair advantage of the other party’s weak position; under certain circumstances this is then attributed to the contractual partner of the weak party. This rule may have the advantage of systematic logic, but it is not clear how it is supposed to work in practice. The PECL reflect the doctrinal uncertainty of many European legal systems as to whether in three-party constellations some personal wrongdoing by the contractual partner is required or whether it is the third party’s wrongdoing which is to be attributed to the contractual partner. In both cases it is uncertain just what constitutes the actual wrongdoing.

In the usual two-party cases, the other party must have known or must at least be reasonably supposed to have known about the weakness of the disadvantaged party. The other party also has to have taken advantage of this weakness (Art 4:109(1)(b) PECL).

Apart from establishing a right of avoidance, PECL and UNIDROIT PICC also grant the disadvantaged party a right to request the court to adapt the contract in order to bring it into accordance with good faith and fair dealing. The disadvantaged party may alternatively or cumulatively claim damages under Art 4:117 PECL or Art 3.18 UNIDROIT PICC. According to Art 4:118(1) PECL and Art 3.19 UNIDROIT PICC, these remedies cannot be excluded or restricted contractually.

5. Unitary law

The topic of vices of consent is usually excluded from the scope of international model laws or treaties and left to the national legal system to regulate. Until now, in European secondary legislation only Dir 85/577 concerning contracts negotiated away from business premises controls some negotiation practices. The new consumer credit directive (Dir 2008/48/EC) does not contain any provisions as to non-commercial sureties despite suggestions from legal writers to that effect; rather, the directive explicitly excludes from its scope even the topic of credit agreements secured by real estate.

Literature

John Cartwright, Unequal Bargaining (1991); Peter Birks and Nyuk Yin Chin, ‘On the Nature of Undue Influence’ in Jack Beatson and Daniel Friedman (eds), Good Faith and Fault in Contract Law (1995) 57; Stephan Lorenz, Der Schutz vor dem unerwünschten Vertrag (1997) 445; Jacques du Plessis and Reinhard Zimmermann, ‘The Relevance of Reverence: Undue Influence Civilian Style’ (2003) 10 MJ 345; Peter Birks, ‘Undue Influence as Wrongful Exploitation’ (2004) 120 LQR 120 34; Nelson Enonchong, Duress, Undue Influence and Unconscionable Dealing (2006); Stephan Wagner, ‘Undue Influence—mögliche Einflüsse des Civil law vom Ende des 16. bis Anfang des 19. Jahrhunderts’ (2006) 123 Zeitschrift der Savigny-Stiftung für Rechtsgeschichte (Romanistische Abteilung) 248; Nils Jansen, ‘Seriositätskontrollen existentiell belastender Versprechen: Rechtsvergleichung, Rechtsgeschichte und Rechtsdogmatik’ in Reinhard Zimmermann (ed), Störungen der Willensbildung bei Vertragsschluss (2007) 125; Sebastian Martens, Durch Dritte verursachte Willensmängel (2007).