Making someone do something by threatening or coercing them is duress. But there is an ancient line of cases concerning more subtle means of dishonestly taking advantage. The doctrine of ‘undue influence’ prevents a person exploiting a position of power to make a weaker party act in accordance with the influencer’s wishes.

In modern New Zealand, undue influence is probably most often alleged in relation to wills. Everyone will be familiar with media stories about dying relatives who have inexplicably left their money to unrelated carers, cutting their children out. We sometimes assist clients who get dragged into the inevitable litigation.

However, when the undue influence has been claimed in a commercial relationship, rather than a personal one, it is always more difficult to prove. Whilst courts are comfortable that dying relatives are open to being influenced by their carers, they are more reluctant to find that businesspeople have been unduly influenced by their advisers.

A good case on undue influence came out of the UK Privy Council recently. It was an appeal from the Court of Appeal of Trinidad and Tobago.

Nature Resorts was a company which owned a beautiful block of land in Tobago. It wanted to develop an eco-resort. It sought money for the development, and sold shares to two investors. The investors borrowed money from a bank, which took a mortgage over the land as security for the loan. A lawyer did the legal paperwork on behalf of the bank. The investors defaulted on the mortgage and the bank moved to sell the land. Nature Resorts sought to stop the bank selling the land, and claimed that the lawyer had exercised undue influence over Nature Resorts when the paperwork was signed.

The landmark case setting out the English law is Etridge, which sets out two requirements to show that a person has unduly influenced another:

1. First, there must be a ‘relationship of influence’;
2. Second, the transaction must not be readily explicable on ordinary motives.

If those two requirements are met, there is a presumption that the transaction is the result of undue influence.

The Privy Council in Nature Resorts dealt quite quickly with the actual appeal – they agreed with the Court of Appeal that the director of Nature Resorts “entered into the mortgage transaction on his own free will knowing what he was doing and fully appreciating the risks involved” (at [19]). The Board of the Privy Council then spent much of the judgment elaborating on the presumption of undue influence in commercial transactions:

[26] The Board has concerns that the reasoning of the Court of Appeal may lead to the view that, in many situations where a solicitor (or attorney) is providing professional advice to a client, and the client then enters into a disadvantageous commercial transaction with a third party, the client would be able to invoke the law on undue influence (including the law of agency) to set aside the transaction.

[27] In the Board’s view, where the other party to the transaction is not the solicitor obtaining some benefit from the client but is rather a third party, an ordinary commercial transaction such as a mortgage, entered into by a person engaged in business, should rarely be regarded as one that is not readily explicable on ordinary motives, merely because it is, or turns out to be, disadvantageous. It is readily explicable that the client will enter into such a transaction without being under the undue influence of the solicitor”

In summary – in most cases you can’t lose money on a bad business transaction and then sue your lawyer saying they unduly influenced you. Lawyers are not responsible for their clients entering ‘standard’ business arrangements like mortgages – such things are not ‘inexplicable’, but just a normal part of business.

The Privy Council confirmed that the two questions set out in Etridge are still the right way of determining whether there has been undue influence. Etridge has been adopted by the courts in New Zealand as the law, so this new case will be very applicable here, too.