Equity recognises a more subtle form of pressure:
undue influence. The relationship between the parties
may be such that one occupies a position of dominance
and influence over the other. There are several relation-
ships, such as doctor and patient, solicitor and client,
parent and child, where it is automatically assumed that
undue influence has been at work. The contract will be
set aside unless the dominant person can show that the
complainant had independent advice. Where there is no
special relationship between the parties, the claimant
must prove that pressure was applied.
A number of cases have raised the question whether
a presumption of undue influence is created by the
relationship between a banker and his customer.
The legal considerations involved in giving guarantees
to secure business loans, including the effect of the deci-
sion of the House of Lords in the Royal Bank of Scotland
vEtridge(No 2) (2001) case, are discussed in detail in
Chapter 4.Legality
The principle of freedom of contract is subject to a basic
rule that the courts will not uphold an agreement which
is illegal or contrary to public policy. Where the contract
involves some kind of moral wrongdoing, it will be ille-
gal. If, however, the conduct is neither immoral nor
blameworthy, but simply undesirable, the contract will
be void. A court may object to an agreement either
because of a rule of common law or because it is con-
trary to statute.Contracts illegal at common law
The following agreements come into this category:
1 Contracts to commit crimes or civil wrongs,e.g.
a contract to assassinate someone or to defraud HM
Revenue & Customs.
2 Contracts involving sexual immorality, e.g. an
agreement to pay an allowance to a mistress or any con-
tract with an immoral purpose.Part 3Business transactions
240
agreed to pay a minimum of £440 per load. Kafco was
anxious about maintaining a good relationship with
Woolworths but was unable easily to find another carrier.
Accordingly, Kafco agreed to the new terms but later
refused to pay. The High Court held that Kafco was not
liable as Kafco’s agreement to the new terms had been
obtained by economic duress.Lloyds Bank Ltdv Bundy(1974)An elderly farmer, inexperienced in business matters,
mortgaged his home and only asset to the bank to guar-
antee his son’s business overdraft. The Court of Appeal
set aside the guarantee and charge. The farmer had
placed himself in the hands of the bank and had looked
to the assistant bank manager for advice. It was clearly
in the bank’s interest that the farmer provided the
guarantee. The court held that the presumption of undue
influence applied. The bank had failed to rebut the pre-
sumption since the farmer had not been advised to seek
independent advice.The Bundy case is exceptional and normally the
presumption does not apply to the banker/customer
relationship.
respect of the house loan. Mrs Morgan appealed against
a possession order obtained by the bank, on the ground
that the mortgage transaction should be set aside because
of undue influence on the part of the bank. The House of
Lords held that Mrs Morgan’s action should fail. Although
Mrs Morgan had not had the benefit of independent
advice, the bank manager had not taken advantage of
her and the transaction was not to her disadvantage.National Westminster Bank plcv
Morgan(1985)
Mrs Morgan agreed to the family home being mortgaged
to secure an advance to her husband by the bank. She
signed the legal charge after receiving assurances from
the bank manager that the mortgage only covered the
house loan and not her husband’s business liability.
Mr Morgan died. His only liability to the bank was inPearcev Brooks(1866)Pearce let a coach out on hire to a prostitute (Brooks)
knowing that it would be used by her to ply her trade.
The coach was returned in a damaged state. Pearce was
unable to recover the hire charges or for the damage, as
the court refused to help him to enforce a contract for an
immoral purpose.