The equitable doctrine of undue influence covers cases in which the particular relationship of trust and confidence leads the court to presume that undue influence has been exerted without necessity for proof. There are those relationships that are based on trust and confidence where the assumption will be made , i.e. doctor/patient, or advocate/client.
The doctrine also extends to cases outside of such relationships in which the court will uphold the plea of undue influence if satisfied that such influence has been in fact exerted based on the evidence. These will be cases of actual undue influence and the basis of the doctrine is the principle that the court is justified in setting aside a transaction for undue influence a transaction that is based on the victimisation of one party by another.
In the case for presumed undue influence it has to be established that a relationship of influence exists between the parties and that a transaction has taken place between those parties which was wrongful in the sense that the party in the position of influence has obtained an unfair advantage from the party subject of the influence.
ACTUAL UNDUE INFLUENCE IS A QUESTION OF FACT
Under what circumstances will the Bank be hit with the notice of undue influence. When is the bank affected by undue influence.
Undue influence exerted by a third party over the giving of security will generally not have effect on the validity of the security given by a bank. There are circumstances however when the bank may be affected by such undue influence
1. Where the Bank has constituted the 3rd Party its agent for purposes of procuring the execution of the security; (Agency)
2. Where the Bank has actual or constructive notice at the time of execution that it has been procured by undue influence. (Notice)
Bank Credit & Commerce (1990) Vol 1 QB 923
Paget argues that before this decision, there was a tendency on the part of the courts to utilise and widen the concept of agency for this purpose. In a typical situation where a bank to which the husband was indebted sought security in the form of a guarantee from the wife or a legal charge in the joint names of husband and wife and the bank then left it to the husband to procure his wife to execute the security but did not take steps to communicate with the wife, it was then sufficient to constitute the husband the agent of the bank. This theory is artificial and the authority is the case of
Barclays Bank v. Obrien
When will the Bank be put on notice?
If at the time of execution of a security the Bank has actual notice or constructive notice that the security has been procured through undue influence and equity is raised that disentitles the bank to rely on that security, the circumstances constituting notice required to fix the bank with the liability for another person’s undue influence will depend on the nature of the undue influence that is alleged. Where actual undue influence is alleged, it must be shown that notice of the circumstances alleged to amount to the undue influence were known to the bank.