Oxford University Comparative Law Forum

ISSN 1743-8713

Home
:: Articles
:: Discussion
¤ Search
¤ Subscribe
¤ Editors
¤ Editorial
¤ Submit Article
¤ Oxford University
¤ About the OUCLF
¤ Our Sponsors
¤ Copyright
¤ Disclaimer


Last updated: 14/10/02

Valid HTML 4.0!

Oxford University Comparative Law Forum

Duress and Undue Influence in English and German Contract Law: a comparative study on vitiating factors in common and civil law

by Armin Hadjiani1

(2002) Oxford U Comparative L Forum 1 at ouclf.iuscomp.org | How to cite this article | Discuss this article

"The Law is not only the basis for all civilised intercourse; it forms part of our life as an important cultural phenomenon. The solutions developed in a particular system may serve as useful models for other systems. The problems are, after all, often identical. Though the ways in which they are solved may be different, the outcome is mostly the same or similar. Arguments derived from comparative law are thus nowadays increasingly accepted in construing and applying one's own law."2

Table of content

I. Introduction

The notion of freedom of contract is the acknowledged basis of contract law in both the common law system of England as well as in the civil law system of Germany.3 Freedom of contract can be understood as “having the ability at will, to make or abstain from making, a binding obligation enforced by sanctions at the law.”4 According to the Bundesverfassungsgericht (Federal Constitutional Court), if these requirements are not met, the use of a contract as a means to satisfy the contracting parties’ interests will fail.5 Similarly, it was held in 1875 in Printing and Numerical Co. v Sampson6 that “if there is one thing which is more than another public policy requires, it is, that a man of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntary shall be held sacred and shall be enforced by the courts of justice.”7 In relation to English contract law it has also been said that “it is reasonable to assume that if the parties freely agree…, they both regard the transaction as making them better off.”8 The notion of freedom of contract can be seen to be based both on the theory of the individual autonomy and the theory of economic utilitarianism, in the sense of social wealth maximisation.9

The protection which both English and German law afford to freedom of contract enjoys constitutional status in Germany. Art. 2 (1) of the German constitution10 states: “Everybody has the right to self-fulfilment in so far as they do not violate the rights of others or offend against the constitutional order or morality”.11 According to the Bundessverfassungsgericht, this constitutional right to ‘personal freedom’ includes the notion of ‘freedom of contract’.12

The interest of one contracting party to be bound only by an obligation entered into freely and voluntarily, however, might come in conflict with the other contractual party’s legitimate expectations, i.e. that the promised performance will be made. Such expectations are not created if the latter party has a reason to believe that the undertaking was not given freely. Thus, the allocation of the contractual parties’ interests results in the introduction of a legal requirement intended to control the scope of the ‘defect consent’ defence: the violation of the freedom of contract of one party will, in general,13 have consequences in both contract law systems only where a certain kind of responsibility of the other contractual party is found. If anagreement could be rescinded on the sole ground that one party did not decide freely, this would gravely affect the certainty of legal relationships.

Freedom of contract could be impaired, for instance, where the consent of a contracting party has been obtained by some form of pressure which the law regards as improper, and for this reason the victim of such pressure may be entitled to relief. Such pressure can be exercised through duress and undue influence, which are discussed in the present article through a comparison of English and German law.14

II. Duress and Undue Influence under English law

Historically the doctrine of duress has been developed within the common law, whereas the doctrine of undue influence is based on equity.15

Both doctrines are concerned with protecting freedom of contract. Traditionally it was said that the rules of duress and undue influence apply to cases where there is a lack of “consent” or “voluntariness” or where the promisor’s “will is overborne”.16 “This language is obscure in its meaning”17 and has consequently been much criticised.18 Indeed, these terms are not a sufficiently precise guide to the fine distinctions which the law has to draw. When a person under duress or undue influence agrees to contract, he does not do so involuntarily in the sense that his will has been overborne. Rather, he chooses the least unattractive of the alternatives before him. In considering this, the House of Lords in Lynch v D.P.P. of Northern Ireland19 explicitly rejected the notion that duress totally deprives a person of his free choice, or makes his acts non-voluntarily.

III. Duress under English law

It is generally accepted that “every contract we make is made under some form of pressure, every contractual offer is made backed by some sort of threat”,20 because “every offeror threatens that unless the offeree accepts the terms offered, he will not get the benefit of the offer.”21 This means that some method must be found in order to distinguish illegitimate pressures from other pressures which are permissible and which will not invalidate a contract because they are common pressures associated with any competitive society.

As will be shown below, the doctrine of duress applies if there is a combination of (a) a specified form of pressure (b) of an unacceptable kind, (c) an absence of a practical choice (d) which causes in some way the assent of one party to enter into a contract.

(a) Forms of pressure

(aa) Duress to the person

Duress to the person is the most obvious form of duress. It “involves a threat by one party to the life, health, liberty, or physical comfort of the other, to persuade him to enter into the contract.”22 This pressure “need not be directed at the claimant.”23

It is sometimes stated that “violence and threats of violence”24 lead to duress under certain circumstances. However, this language is somewhat inaccurate. The use of violence can rarely forces someone to enter into a contract which can be considered as having been concluded under duress. Either the use of violence will prevent the intention to contract (for instance, if one is physically forced to sign a contract with his arm being held and moved) and consequently there will be no contractual relationship, or the mere use of violence in the past will not be sufficient to make a person enter into a contract, in particular if there is no explicit or implicit threat to apply violence again in future. For this reason German contract law expressly mentions in its statutory provision concerning duress25 “threats” as an element within its doctrine of duress.

English courts refer to the Australian case of Barton v Armstrong26 as a leading modern case on duress. In this case, Barton sought to avoid a contract by which he had agreed to buy Armstrong’s shares in a company. The trial judge found that on many occasions Armstrong had threatened Barton with death.27 Thus, duress to a person was established as follows: “Barton wasin genuine fear that Armstrong was planning to have him killed if the agreement was not signed.”28

(bb) Duress to goods

Traditionally, it was held that the mere “fear that goods may be taken or injured does not deprive anyone of his free agency.”29

The doctrine of duress to goods is now, however, well established.30 The statement of Kerr J (as he then was) in the Occidental Worldwide Investment Corp. v Skibs A/S Avanti31 that “a plea of coercion or compulsion would be available in such cases” was confirmed by Lord Goff in Dimskal Shipping Co. SA v International Transport Workers’ Federation.32

A suggested requirement for cases of executed33 contracts, namely that duress can only be relied upon by someone who acted under protest34 was rejected35 several times. However, a more general limitation of the application of this doctrine should be accepted where the agreement is a mere submission to the execution of legal process such as distress or execution.36

(cc) Economic duress

“In modern times, commercial and economic pressures are of enormous importance, and they often reflect major conflicts of political power.”37 Apart from this common use of legitimate pressure there are a number of cases illustrating the abuse of economic power. In a number of recent cases the courts have began to recognise the concept of economic duress.38 Economic duress is defined as a “threat to harm not someone’s person nor even his property, but other interests such as rights someone has under a contract.”39

The application of this particular doctrine highlights the danger of invalidating common contracts, since “it must be remembered that the whole system of private property also rests on recognition of the monopoly right of the property owner. …The same goes for the human labour.”40 It is inevitable that a person who negotiates with another will threaten to harm this other person's economic interests. Hence the limits which must be placed on how the doctrine of duress in general is to be used have to be considered with exceptional care in relation to economic duress. As it will be shown these limits are mostly derived from cases of economic duress.

(b) Illegitimacy of the pressure

It was established in Universe Tankships Inc. of Monrovia v International Transport Workers’ Federation and Laughton41 that the threat must be “illegitimate”.42 The key difficulty is in identifying the circumstances in which these forms of pressure are illegitimate. The task of drawing the line between pressures which are legitimate and those which are illegitimate is of increasing importance because of the multitude of the pressures which are exerted in any competitive society. The only serious discussion of the issue of legitimacy of pressure is found in the same case which established this new requirement, i.e. Universe Tankships Inc of Monrovia v International Transport Workers' Federation.43   The case was concerned with economic pressure. The defendant trade union had ‘blacked’ the plaintiff’s ship import, and refused to release her except on payment of a large sum of money. Lord Scarman discussed44 the legitimacy requirement as follows: “In determining what is legitimate two matters may have to be considered. The first is as to the nature of the pressure... And so the second question may have to be considered, namely, the nature of the demand which the pressure is applied to support.” It therefore appears that pressure may be illegitimate either45

(aa)

Because the conduct which has been threatened is unlawful, for instance a threat to commit any crime or tort; or

(bb)

Because, even though the conduct which has been threatened is lawful, the way in which the pressure is exerted is illegitimate. This is e.g. the case if the advantage which is sought to be obtained by the threat is illegitimate. This is illustrated by Lord Scarman using the analogy of the crime of blackmail. He stated that “what he (the blackmailer) has to justify is not the threat, but the demand of money.”46   Furthermore, in CTN Cash and Carry Ltd. v Gallaher Ltd,47 a case which was also concerned with economic duress, the Court of Appeal accepted that there could be circumstances in which a threat to do something which one was actually entitled to do was improperly coercive and therefore amounted to duress. Therefore, it is clear that even a threat to commit what would otherwise be a perfectly lawful act may be improper if the threat is connected with unreasonable demands. For this reason a threat to prosecute, even when perfectly proper in itself, in the sense that a prosecution would be justified, may amount to an improper threat of duress.48 Furthermore an agreement obtained by threats to prosecute for a criminal offence may also be invalid on the ground that it involves the stifling of a prosecution for the offence.49 “These are matters of public concern and therefore not legally the subject of a compromise.”50 Thus, duress can overlap with public policy limitations on what parties can agree on in a contract.

And while one needs to be careful not to consider lawful threats in themselves as amounting to duress, it is also worth noting that in CTN Cash and Carry Ltd. v Gallaher Ltd51 Steyn LJ (as he then was) stressed that “it is a mistake for the law to set its sights too highly when the critical inquiry is not whether the conduct is lawful but whether it is morally or socially unacceptable.” It is interesting to note that what Steyn LJ proposed resembles the approach taken in German contract law in considering the question of whether a lawful act amounts to duress.

(cc)

It has been held by English courts that a person who is under no duty to enter into a contract with another is entitled to threaten not to enter into a contract unless the threatener’s terms are met.52 Conversely, a threat to breach a contract53 might be understood as a threat which satisfies the requirement of an illegitimate act and might therefore amount to duress because an act is threatened which is a breach of another’s rights. This view is, however, surrounded by controversy.

It has been suggested by legal writers54 that exceptions to this general rule that a threat to break a contract amounts to duress should be identified where the other party demanding has a genuine belief in the moral strength of this claim, would suffer considerable hardship if his demand is not met, is willing to correct an acknowledged imbalance in the existing contract or indeed where the party making the threat will be unable to perform. In my view, all of these exceptions are questionable. While acting in good faith might justify the conduct of the person who makes the threat, the same cannot also justify the effect of such conduct.55 As long as there is no frustration of contract, the mere imbalance of an agreement does not justify a variation of a contract without the proper consent of both of the contracting parties.56

The party who states, however, that, without the extra payment which he demands, he will be unable to perform, is not to be regarded as making a threat. A statement of the inevitable has to be treated as a mere warning which does not amount to duress.

In Williams v Roffey Bros Ltd57 the Court of Appeal held that there was no duress in a case where one contracting party was concerned that the other party would not complete the work on time and had taken the initiative for a re-negotiation. In these circumstances, the Court held that for a contracting party it is generally “open … to be in a deliberate breach of the contract in order to cut his losses commercially.”58 The same judgment also indicates that the examination of the motivation of the party in question might be relevant when deciding whether or not certain conduct is permissible.

(c) No other practical choice but to submit

As has been stated above (II) the doctrine of duress is not concerned with the absolute lack of will to enter into the contract, but rather with “the victim’s intentional submission arising from the realisation that there is no other practical choice open to him.”59 Therefore it is relevant whether or not the victim had a reasonable alternative. If there was such an alternative, “whether legal or practical”,60 to submitting to the other party’s demand, the victim will not obtain relief.61

The question as to whether there was a reasonable alternative, such as an adequate legal remedy as discussed by Lord Scarman in Pao On v. Lau Liu Long,62 is just one feature within the main question of whether the pressure was so great as to grant relief. Thus, Lord Scarman held that, in addition to the alternatives test, “it is material to inquire whether the person alleged to have been coerced did or did not protest; whether he was independently advised; and whether he later took steps to avoid the contract.”63

Thus, it must be established that there was pressure which was so great that it effectively gave the victim no choice but to act as he did. A finding of such a high degree of defectiveness of consent may depend on the physical and mental condition of the person threatened.64

It has been argued that a different approach is required in cases where a criminal offence has been threatened. The alternatives test is inappropriate in such a situation, as it is derived from cases where the threats have been of civil wrongs.65 There is no indication of any "no choice approach" in cases such as Barton v Armstrong66 where physical violence was threatened. The same conclusion may also be derived from the rationale for the alternatives test. “The limitation of a claim of duress by the alternative test is a balancing of the competing needs of protection of the original legal position of the person claiming duress and the enforceability of compromises.”67 To consider interests within this balancing act which are based on physical violence would clearly run counter to public policy. It could be said that in these circumstances even quite a low degree of defectiveness of consent is considered to be relevant in law.

(d) Causation

In all cases of duress, it is necessary that the threat caused the affected person to enter into the agreement. On the other hand, it now appears settled that the requirements for causation depend on the type of duress involved.

(aa) Duress to the person

In Barton v Armstrong 68 the Privy Council held that the doctrine of duress will apply provided that the pressure was at least “a reason” for the victim to enter into the contract. In this case, it was held that the threatener generally “must take the risk that the impact of his threats may be accentuated by extraneous circumstances for which he is not in fact responsible.”69 Therefore, it would be inadequate to consider whether the other party would have entered the contract but for the existence of pressure. Although Barton (the person threatened) “thought that the agreement with Armstrong was a satisfactory business arrangement”,70 Armstrong’s threats could not be understood as contributing nothing to Barton’s decision to sign the contract. A similar approach is taken under German law in the context of causation (V, d).

Once it is shown that a party committed a wrong in applying unlawful pressure, the presumption will arise that this pressure caused the defendant to enter into the contract.71 Consequently, the law favours the innocent party over the wrongdoer. The latter carries the burden of disproving the causal relationship between the pressure and the contract.

(bb) Duress to goods

In cases72 concerned with duress to goods it is generally considered that the pressure must have been a “significant cause”. This means that the pressure applied by the wrongdoer must have been a reason which influenced the decision to contract to a high degree. The extent of influence required increases according to the type of duress applied. Thus, the requirement of causation will offset the broad application of the doctrine of duress brought about by the development of new categories, such as duress to goods and in particular economic duress. Hence, in relation to economic duress it has been said that “economic interests are now protected, but with considerably more caution.”73

(cc) Economic Duress

It may be seen that the courts are now taking a more restrictive approach towards economic duress. More particularly, the pressure must be more than simply a reason to enter into the contract. In Dimskal Shipping Co. SA v I.T.W.I.74 Lord Goff said that there may be duress where “the economic pressure ... has constituted a significant cause.” Further in contrast to duress to person and duress to goods the courts have reasoned that, “it seems unlikely that the victim will have the benefit of the reversed burden of proof.”75 Thus, the causal test will be satisfied if the victim can show that he was significantly influenced by the threat. It must be stressed, however, that these causal requirements are still not entirely clear and that their future development by the courts remains open.

(e) Legal effect of duress

(aa) Void or voidable

In North Ocean Shipping Co. Ltd. v. Hyundai Construction Ltd.76 Mocatta J stated that a contract made under duress is undoubtedly “voidable and not void.” Consequently, a person who has entered into a contract under duress may either affirm this agreement, or render it void. On account of the delay between the date of submission and the date of the first protest,77 it was held that the claimants must be taken to have affirmed the contract so that the claim failed.78 In addition to this aspect of lapse of time, an action aimed at avoiding a contract may fail on the ground that it is impossible to put the parties back into the position in which they had been prior to the formation of contract, or because it is necessary to protect the interests of innocent third parties.

(bb) Effect of duress exercised by a third party

The pressure exerted on one party, however, will have consequences only if the other party to the contract “ knows (actually or constructively) that the plaintiff's consent has been wrongly induced”.79 Since this requirement will always be fulfilled if a contractual party himself is the threatener, it is relevant only where duress is exercised by a third party.

IV. Duress and Undue Influence under German law

(a) Section 123 BGB (duress) and section 138 BGB (undue influence)

The German doctrines of duress and undue influence are much broader than their corresponding English doctrines. Section 123 BGB80 states that any illegitimate “action intended to create fear of future evil”81 is sufficient in order to qualify for duress. Under English law, however, a threat by a wife to break the relationship with her husband if he remains reluctant to pay her bills would not fall within the scope of the doctrine of duress, because there is neither duress to a person, which is defined as a “threat by one party to the life, health, liberty, or physical comfort of the other”,82 nor duress to goods, nor economic duress. It is the function of theequitable doctrine of undue influence to close the gap which arises insuch cases in English law.

However, even the German doctrine of duress is too narrow to serve its original function in contract law, namely to protect the freedom of choice. In situations in which certain behaviour or circumstances can only be labelled as “immoral”, relief will be given on the grounds of the general rule of section 138 BGB. This statutory provision, which provides the main legal source of the rules of the German doctrine of undue influence, renders void an agreement “if it is contrary to good morals”.83 Hence, it is generally considered that section 138 BGB is “considerably wider than the corresponding English conception of immorality and public policy taken together.”84

(b) Introduction into German legal methods

Some brief remarks on German legal methods may be appropriate at this stage. Under German law only Gesetz (statute) and Gewohnheitsrecht (customary law, defined as “the regular and general public practice of law based on the opinion that a binding rule is being put into effect”85 ) are recognised as sources of law. Decisions of the Courts are in general86 binding only upon the parties of the litigation. Although no binding force of precedent is recognised, the courts tend to follow existing judicial decisions on the ground that “they have a highly persuasive authority”.87 Therefore, previous judgements are useful means to find an appropriate interpretation of a legal term in a given case. In addition to these judgements, academic writing carries significant weight in German law. Views which are widely shared between these persuasive authorities are called “dominating opinion” (herrschende Meinung) and will usually be adhered to by the courts.88

V. Duress under German law

Section 123 BGB protects the freedom of decision making in legal transactions.89 As has been mentioned above, freedom of choice enjoys protection under the German constitution, namely Art. 2 GG (I). As has been stated above for English law (III, a, aa), relief under duress in German contract law is available only in relation to psychological pressure (vis compulsiva) and not in relation to mere physical pressure (vis absoluta).90 Accordingly, section 123 (1) BGB states: „Whoever has been induced to make a declaration of intention by fraud or unlawfully by threats may rescind the declaration.” 91

(a) Definition of a “threat” under section 123 BGB

A threat(Drohung) under German law is “any action intended to create fear of future evil.”92 It is crucial that the person threatened believes “and is intended to believe”93 that the realisation of the evil depends on the will of the threatener.94 It is sufficient that the person threatened was intended to, and does take the threat seriously, whereas it is not necessary that the threatener actually intended to realise the threat.95

Any disadvantage concerning the person threatened or another person is sufficient to qualify as evil.96 It is irrelevant whether this evil is of a material or idealistic97 nature and whether the threat is made explicitly or implicitly.98 A threat not to act will satisfy the requirement if there is a legal duty to act.99 Hence the threat not to help someone in danger, as long as he does not pay a fee, does not amount to duress, if there is no duty to help.100 The use of an existing fear101 or a mere warning102 is not sufficient.

(b) Definition of the “unlawfulness” of the threat

There are three different ways in which the threat can be illegitimate or unlawful (widerrechtlich): the threatened evil may be unlawful (aa), the aim of the threat may be unlawful (bb), or the relationship between evil and aim may be unlawful (cc).

(aa) Illegitimacy resulting from the applied "means of the threat"

The threat is unlawful if the conduct which is threatened is in itself unlawful. This is the case e.g. if a person who is reluctant to pay existing debts is threatened with violence. It is worth noting, though, that acts which in itself are unlawful (physical violence) can be rendered lawful in particular situations under the grounds of justification contained in sections 227-230 BGB, which include self-defence (section 227 BGB), e.g. against a violent attack.

The threat to breach a contract is unlawful.103 An exception to this general rule was allowed for the case that the threatener reasonably, but mistakenly believed the threatened conduct to be lawful.104 It appears, though, that today the majority of writers and courts do not accept that it is relevant whether the threatener acts in good faith as concerns the lawfulness of the threat.105 This will be discussed below in the context of the mental state of the threatener (V, c).

(bb) Illegitimacy resulting from the "aspired outcome of the threat"

Unlawfulness of the intended result of the threat. The threat is also unlawful if the intended agreement violates a statutory provision, unless it appears from the statute that the latter is not intended to render contravening legal transactions void (voidness for illegality under section 134 BGB),106 or if the contract offends good morals (voidness for immorality under section 138 BGB).107 The courts have held that contracts are immoral if they are “contravening the sense of decency of every person who possesses understanding of what is just and equitable” (section 138 BGB).108 However, as such contracts are void under sections 134 or 138 BGB, there is strictly speaking no need to take recourse to the doctrine of duress.

(cc) Illegitimacy resulting from an unlawful combination of (aa) and (bb)

The threat is furthermore unlawful if the combination of the means of the threat (the threatened evil) and the intended result of the threat is unlawful.109 This is, in analogy to section 138 BGB, the case if the relationship between the threat and the intended outcome is contrary to a sense of decency of every person who possesses understanding of what is just and equitable.110 So in this case, it is the mere combination which is “immoral” rather than the intended assent or the legal transaction itself. (bb).

Thus, a threat is not simply lawful because both the means threatened (e.g. to take legal action) and the threatener's objective (e.g., payment of an existing debt) are justified. 111 Neither does the fact that the person making the threat does not have a right to the intended result make the threat illegal.112 Rather, the crucial issue is whether there is an appropriate relationship between the threatened means and the intended result.

It is now required that the person who is making the threat has a justifiable interest in the intended result of the threat and that, in analogy to section 138 BGB, the threat is, in accordance with ‘a sense of decency’, an appropriate means to reach the intended result.113 Another general rule employed by the courts in this context is derived from section 242 BGB,114 which states: “The debtor is bound to effect performance according to the requirements of good faith, common habits being duly taken into consideration.”115 The “dominating opinion” (herrschende Meinung: IV, b) on this issue combines both elements.116 Whether or not these requirements are met, will often have to be decided on a case to case basis.

The combination of means and intended result of the threat amounts to duress e.g. where a creditor, who wants immediate payment of a debt, threatens to expose the debtor for drunk driving.117 On the other hand, the relationship between threat made and intended result was not found to be unlawful e.g. where a dismissal is threatened in order to induce the employee to agree to a termination of his contract of employment, if a reasonable employer would have grounds to consider in similar circumstances a dismissal of this particular employee.118 The prevailing view amongst scholars, however, seems to reject the view that the ex ante-view of a reasonable employee is relevant.119 It has been stressed that, at least where the dismissal is not justified under the given circumstances, such a threat has to be considered unlawful.

The threat of a criminal prosecution is not unlawful if the threat is intended to induce the person who is threatened to compensate for the damage he caused by his criminal conduct.120 According to the Bundesgerichtshof121 (BGH, Federal Court of Justice) this rule also applies where the threat is intended to make a third party, rather than the criminal himself, to agree to a contract. In this case, the wife of a criminal was induced to stand surety for the person who threatened criminal prosecution of her husband. The court held that because the wife could be identified as a beneficiary of the criminal conduct of her husband, she was equally liable for compensation. Increasingly, and by what is now a majority of writers, it is no longer accepted that it is moral and legitimate to take advantage of a personal relationship between a criminal and his wife if she is neither a voluntary beneficiary nor involved in the crime.122

As with the English doctrine of duress, the main disputes in German law relate to economic pressure.123 In these cases the courts seem to be reluctant to treat certain behaviour as an immoral threat and therefore as illegitimate, particularly if the conduct in question is used solely to serve lawful economical interests.

One such case concerned the commission of an estate agent who had acted for both seller and buyer, which can be permissible under German law.124 In such a situation, courts will interpret section 652 BGB as creating an obligation on both seller and buyer to pay a fee to the estate agent once they have entered into a contract of sale. The seller threatened not to sign the contract for as long as the estate agent did not waive his right to charge the threatener. If realised, this threat would have entailed that neither seller nor buyer would have had to pay a fee. The court examined whether this waiver agreement was voidable on the ground of duress. In contrast to a previous judgement, the Court held that, despite the estate agent’s financial problems, it was not unlawful for the seller to serve merely his own financial interests, as long as no further circumstances made the agreement in question offensive. Therefore, the seller's conduct was not considered an unlawful threat in the meaning of section 123 (1) BGB.

In particular the latter case shows that German courts are struggling just as much as English courts when it comes to define what exactly makes a threat unlawful. In both jurisdictions this seems to be the most problematic requirement in relation to the doctrine of duress.

(c) Subjective requirements concerning the threatener

In addition to these predominantly objective tests, a further subjective test relates to the mental state of the threatener, namely that the threatener must have the intention to force the person threatened to enter into the contract.125 It is necessary that the threatener intended to cause the other party to make a declaration of intention which is similar to the one which is actually made.126

In a case which related to the issue of a threat being contrary to a sense of decency of every person who possesses understanding of what is just and equitable (b, cc), the Bundesgerichtshof held in 1957 that it was necessary that the threatener knew or ought to have known those facts which make the threat offensive.127 This subjective feature is required in similar circumstances under section 138 BGB in order establish  immorality (Sittenwidrigkeit).128 It has been followed from this judgement that it is generally necessary that the threatener knew or should have known that the threat was unlawful.129 The prevailing view amongst writers, supported by some courts, rejects the view that there is such a subjective requirement.130 That view mirrors what has been said for the English doctrine of duress, namely that “good faith…in the sense that he (the threatener) honestly believes that his demand is legally justified…does not preclude a finding of duress.”131 Similarly, German writers have argued that it is not the purpose of the doctrine of duress under section 123 BGB to reproach the threatener for his conduct but rather to protect the freedom of decision making of the person who is threatened.132 Therefore it could be said that “good faith” may be used as a means to justify the threatener, rather than to justify the effect of his conduct in contract law (III, b).

In summary, it remains disputed whether the above-mentioned 1957 judgment by the Bundesgerichtshof133 implies for German contract law today that, in addition to objective aspects of the immorality test, it is necessary that the threatener knew or ought to have known the facts which make the threat immoral or unlawful.134 As the latter subjective element is also required by section 138 BGB in analogous cases,135 it would seem logical to walk down the path taken by the Bundesgerichtshof and to make the mental state of the threatener similarly relevant for duress under section 123.

(d) Causation

In order for the contract to be voidable on the ground of duress, the person who has been threatened must have been caused by fear to give consent, and his fear must have been caused by the threat.136 This is the case if, without the threat, that person would not have entered into the contract at all, or into a contract with different content,137 or if the contract would have been made at a different time.138 Thus, in German law it is said that the threat usually needs to be a conditio sine qua non for entering into the contract.139 That is the same as requiring that the party would not have entered into the agreement but for the existence of the pressure. In practice, however, this is similar to what is required for duress to a person under English law (III, d), i.e. that the threat is “a reason” for the person threatened to enter into the contract.140

There is therefore no causal link if the consent is given free of any fear, since in this case the decision to enter into the contract by the person threatened is made on the basis of other considerations.141 Hence it is crucial to examine the mental state of the person threatened when considering the question of whether the formation of the contract is caused by the threat.142 Similar to the causal requirements of duress to a person and duress to goods under English law (III, d), the “dominating opinion”143 (herrschende Meinung: (IV, b) agrees that once an unlawful threat can be identified, the burden of disproving the causal relation is placed on the threatener, who must thus provide evidence to the contrary.

(e) Legal effect of duress under German law

(aa) Void or voidable

A contract made under duress is voidable, in the sense that the person threatened can avoid the contract with retroactive effect (sections 123, 142 BGB). The party whose freedom of choice has been affected is therefore required, in the interests of clarity, to impugn his assent. If he does so, he can return to the status quo ante. Section 124 (1) BGB states that the right to avoid the contract expires one year after the predicament resulting from duress ends, with a thirty year long-stop counted from the time the agreement was made.

(bb) Effect of duress exercised by a third party

In contrast to the German rules of undue influence (VIII, c) and the English concepts of duress (III, e, bb) and undue influence (IX, a, bb), it is not relevant in the German law of duress whether the person seeking to enforce the agreement knows or ought to know that the other party’s consent has been wrongly induced. This aspect becomes relevant in particular if duress is exercised by a third party.144

In relation to undue influence in England and Germany, this distinction may be explained by both the level of defectiveness of the party’s consent and the degree of the apparent violation of public policy principles.145 These factors are generally much more obvious in relation to ordinary threats than in relation to more subtle pressure which is frequently exercised in cases of undue influence. Consequently, German contract law takes a more restrictive approach to cases of duress than undue influence by attaching less value to transactional certainty and the other party’s reasonable expectations.

A practical explanation for this approach can be found in the official draft of the German Civil Code.146 In 1888 it was stated in this draft that, in particular during “flustered periods”, a single person might threaten another individual in the interests of many other persons. In this case, the individual threatened cannot reasonably be expected to prove that all the persons he contracted with under the influence of the threat knew or ought to have known of that threat. The same source also argues that, in relation to the concept of fraud,147 it is easier for a person to prevent himself from being defrauded than from being threatened. Thus, the exceptional character of duress gives rise to a special need of protection in favour of the person on whom pressure is exerted.

The reason for the difference between German and English law of duress will be explained below (VI, a).

VI. Comparison of duress under English and German law

The most relevant difference between English and German concepts can be found in the relationship between the notion of freedom of contract and the law of duress.

(a) Objective and subjective approach

Under the English law of duress, freedom of contract is of paramount importance. If the consent of the party who denies the validity of the contract was defective, this invalidates a contract only where the deficiency is known to the party who seeks to enforce the contract (III, e, bb). In contrast to this objective view, German law takes a more subjective approach in relation to duress, namely that if a promise is not made freely then it cannot create a contract (V, e, bb). Thus, the scope of the no consent defence is more limited in the English law of duress.

(b) Defectiveness of consent and a wrongful conduct

In both legal systems, there is duress where (1) freedom of choice is disturbed by (2) illegitimate threats. Hence, in Universe Sentinel148 the House of Lords defined two elements of duress: “(1) pressure amounting to compulsion of the will of the victim; and (2) the illegitimacy of the pressure exerted”. In relation to element 1, the law is concerned with the question whether the defendant exercised his free choice during the formation of the contract. In the context of element 2, it must be examined whether the claimant’s amounted to a wrong in the sense of the law. The question arises how these relate to each other.

(aa)

German law focuses on the threatened party's responsibility for entering into a contract rather than the threatener's responsibility for committing a wrong. Thus, the courts will examine first and foremost whether freedom of contract was interfered with. Element 2 is merely applied as a controlling feature (I; X, a). However, both elements carry equal weight and do have to be operative (V, d): Fear must have caused the threatened party to enter into the contract (element 1), and this fear must have been caused by the illegitimate threat element 2).

(bb)

In English contract law there seems to be an ongoing controversy on these questions.149 Firstly, it is true that the English courts do not clearly “distinguish wrongdoing and lack of consent as conceptually distinct”.150 At the same time, they refrain, in contrast to German law, from explicitly referring to the principle of freedom of contract as the underlying concept of duress, although the ratio decidendi will be mainly based on the defectiveness of consent (see, for instance, the ‘alternatives test’: III, c). The latter aspect is the result of the unwillingness in English law to accept general principles in this context (IX, a, cc, bbb; X, b). This situation has led to various interpretations, suggesting “that the courts’ concern for consent really is (and should be) the concern for something else.”151 According to this view, in typical cases of duress it is only the “wrongdoing principle” (element 2) which is operative.152 Consent is seen as neither a meaningful nor a useful concept. Thus, influential writers such as Atiyah have stated that “A victim of duress … does choose to submit, and does intend to do so”153 or “what men do voluntarily, they choose to do, and do freely”154 and the courts should not “divert attention into quite irrelevant inquiries into the psychological motivations of the party pleading duress”155 and attempt “to analyse the effect of the pressure on a man’s mind.”156 This view obviously rejects a broader meaning and value of consent (element 1) and is inconsistent with the “express words of the overwhelming majority”157 of the courts in relation to duress. Moreover, this approach cannot be explained on the basis of the more objective view taken in English law of duress (a), since it queries the general relevance of freedom of choice (I). Thus, it might even be labelled as a “logical fallacy”.158

(cc)

The broader approach of the German concept (IV, a) has been recognised by English writers, who have simply said that the German law of duress “throws the net more widely”159 than the English concept. Thus it may be concluded that the German law of duress pays more attention to individual autonomy (X, b). Cases not covered by the concept of duress need, however, to be considered in the context of the law of undue influence.

VII. Undue influence under English law

In Kaufman v Gerson160 the inadequacy of the doctrine of duress was highlighted when the Court of Appeal raised this question: “What does it matter what particular form of coercion is used, so long as the will is coerced? It seems to me impossible to say that it is not coercion to threaten a wife with dishonour of her husband and children.”161 Thus, in order to ensure appropriate freedom of choice of the party in question, it is necessary to supplement the rather narrow doctrine of English duress with the equitable doctrine of undue influence, which is said to be capable of covering “more subtle influences”.162 In contrast to duress in common law, the “equitable concept of pressure”163 can be exercised without making illegitimate threats or indeed any threats at all. In considering the crucial question of what sort of conduct qualifies for undue influence, it has been said that such influence arises “where influence is acquired and abused, where confidence is reposed and betrayed”164 and that aberrational conduct, which can be described as “wrongful, unfair, or unconscionable”165 is required.

Historically, the Courts of Equity, by looking primarily at the relationship between the contracting parties, developed a distinction between two categories of undue influence:166

Class 1: Actual undue influence can be identified, where the evidence demonstrated the exercise of undue influence (see below: b).

Class 2: Presumed undue influence can be identified, as summarised by Cartwright, “where the circumstances of the contract, in the context of the relationship between the parties, enabled a court to presume that influence had been exerted, although it could not be affirmatively proved on evidence (see below: c).”167

In addition, it appeard to be necessary to make a sub-division within presumed undue influence: “The presumption may arise automatically from the type of relationship (Class 2A) or it may be necessary to establish that the specific relationship between the particular parties is such as to give rise to the presumption (Class 2B).”168

The House of Lords, in Royal Bank of Scotland v Etridge169 (which includes the judgments on seven other appeal cases), has now indicated, however, that “the attempt to build up classes or categories may lead to confusion”. The House of Lords intends to counteract the tendency to over-complicate the legal concept of undue influence. For this reason, it formulates broad generalisations in order to merge the categories as far as possible into one concept of undue influence. Thus, this decision of the House of Lords minimises the differences in relation to German law in this context.

The analysis provided by this judgment will be discussed further below within the specific categories.

(a) Manifest disadvantage

(aa)When is it required?

In National Westminster Bank plc v Morgan170 Lord Scarman, after consideration of the judgement by Lindley LJ in Allcard v Skinner,171 stated that relief for undue influence rests “not on some vague public policy but specifically on the victimisation of one party by the other.”

In particular this part of his judgement was seen as indicating that manifest disadvantage of the transaction was required even in relation to actual undue influence, and consequently that was the line taken by the Court of Appeal in Bank of Credit and Commerce International SA v Aboody.172 It was the House of Lords in CIBS Mortgages plc v Pitt173 which made it clear that such an approach was wrong and that it is not necessary in cases of actual undue influence to prove that the transaction was manifestly disadvantageous in order to obtain relief, and that any requirement of manifest disadvantage was confined to cases of presumed undue influence. Lord Browne-Wilkinson went on to say that, if there is evidence that “the effect of… the conduct is to prevent… (the other) party from bringing a free will… to bear on the proposed transaction… (the contract) must be set aside… as a matter of justice”,174 without consideration of the eventual disadvantageous character of the transaction in question.

It has been argued that the words of Lord Brown-Wilkinson are equally applicable to all kinds of influence. His comment was, therefore, in effect an open invitation to debate the correctness of the manifest disadvantage requirement with regards to presumed undue influence. For this reason a number of legal writers175 have argued that, since such procedural unfairness is generally, in itself, sufficient for the law to intervene, there should be no additional requirement of substantive unfairness. Despite this criticism, the courts still tend to require a manifestly disadvantageous transaction in relation to presumed undue influence. Hence in Goldsworthy v Brickell176 Nourse L.J. stated that “the presumption is not perfected and remains inoperative until… the contract… is prima facie explicable only on the basis that the influence was exerted.”

The reason to introduce this requirement in relation to presumed undue influence seems to be based on the desire to find an equitable allocation of the parties’ interests, such that it would be fairer to shift the burden of proof only in such cases where the party who relies on undue influence is actually “victimised”.177

(bb) What constitutes manifest disadvantage?

In Bank of Credit and Commerce International SA v Aboody178 it was held that “a disadvantage would be manifest if it would be obvious as such to any independent and reasonable persons who considered the transactions at the time with knowledge of all the relevant facts.” In that case, the question was one of weighing the disadvantages, namely the risk of the contract, against the benefit gained by the person giving the guarantee or executing the charge. There were substantial potential liabilities. The fact however, that Mrs Aboody’s actions gave some hope of survival to the family business was regarded as of paramount importance and therefore resulted in a lack of a manifest disadvantage. It is argued that, aside from material interests, even predominant immaterial interests such as emotive family links could result in the manifestly disadvantageous character of a transaction.179

The crucial question is, therefore, whether this particular transaction is “one that a party in a similar situation would ordinarily be expected to have made…”.180 According to Royal Bank of Scotland v Etridge, manifest disadvantage is found where the transaction is "explicable only on the basis that undue influence had been exercised”.181 This terminology seems to me to be circular: Proof that ‘undue influence had been exercised’ makes a presumption of undue influence useless.

(b) Actual undue influence (Class 1)

(aa) Former cases

Since the doctrine of undue influence is used as a means to supplement the doctrine of duress,182 its scope depends upon the range of application of that doctrine. A number of recent judgements have rendered former cases largely irrelevant, which involved, for instance, a threat to prosecute,183 since such a threat was formerly (III, b, bb) thought to be incapable of giving rise to duress at common law and relief was, therefore, only given under the doctrine of undue influence.

(bb) Recent cases

More recently, actual undue influence was held to be present between husband and wife in the case of Bank of Credit and Commerce International SA v Aboody.184 Here the question arose as to whether the wife had been unduly influenced by her husband when executing guarantees and charges on the matrimonial home, relating to loans by the bank to the husband’s business. It was routine for Mrs Aboody to sign whatever her husband asked her to sign in relation to his company. Mrs Aboody stated that she trusted her husband to be acting for the good of the family business. The Court held that Mr Aboody had intentionally exploited her trust because he used his influence to ensure that she signed the documents without any discussion or consideration of the risks. Therefore Mrs Aboody’s mind could be described as “a mere channel through which the will of the influencing party operated.”185

In Bank of Montreal v Stuart186 undue influence could be identified, because “she had no will of her own… she was ready to sign and do anything he told her to do.” In particular the latter statement makes clear that the fact itself that the claimant was under pressure, for instance from family loyalty or from influences in the guise of religion187 or employment,188 will not result in undue influence, as long as the person is not deprived of his freedom of choice. Hence it is crucial to examine the mental state of the claimant when considering this aspect, not the question of whether a normal person would be influenced.189 In the context of parties who trust the other to the extent that they will sign a contract without question, it has even been said that it is not the wrongdoer’s importunity in itself that constitutes undue influence, but “the fact that… (the other party is) deprived of the opportunity to make an independent… judgement.”190 In Royal Bank of Scotland v Etridge Lord Nicholls stated that “the law will not permit the transaction to stand ... , whenever the consent hus procured ought not fairly to be treated as the expression of a person’s free will.” In his view “it is impossible to be more precise or definitive.”191

These statements highlight the fact that English courts have concentrated clearly on the question of whether one party’s consent is defective, in the sense of not having a free choice. At the same time however, and similar to the law of duress (VI, b, bb), they have refrained from stating explicitly their concern that the notion offreedom of contract may be undermined in cases of undue influence. The final consequence of this negligence by English courts is a lack of orientation as concerns the rules to be applied (X, b).

The above mentioned examples make clear that actual undue influence, like undue influence in English law in general, is usually192 based on “relationships of trust and confidence” (c, bb). In this context it is right to state that the term ‘actual’ does not indicate any qualitative difference of the influence exerted. It is “simply a matter of evidence and proof.”193

If clear terminology is used, former cases (see above: aa) should be distinguished from recent cases (see above: bb). The latter group of cases is always concerned with some form of personal relationship. Within this group of cases it might be distinguished between relationships of “trust and confidence” and such of “dominance or control”.194 In relation to the latter distinction Stuart-Smith LJ in Royal Bank of Scotland v Etridge (No. 2) stated:195 “The expression ‘actual undue influence’ and ‘presumed undue influence’ might be taken to indicate that the difference between them lies merely in the means by which the exercise of undue influence is proved. But this is not the case.”

In contrast, Lord Clyde held in Royal Bank of Scotland v Etridge196 that “on the face of it a division into cases of ‘actual’ and ‘presumed’ undue influence appears illogical”, as “ the names used to identify the classes do not bear their actual meaning.”197

(c) Presumed undue influence (Class 2)

In a number of situations the relationship between the parties will be such as to give rise to a presumption of undue influence. The burden lies on the person who is presumed to have exerted the influence to show that he did not abuse his position, in the sense that the transaction was not brought about by any undue influence on his part.198 A position capable of being abused might result from “a relationship of trust and confidence”.199 The House of Lords in Royal Bank of Scotland v Etridge, however, made clear that if such a relationship of trust and confidence is found, the presumption of undue influence does not, in contrast to the former concept of presumed undue influence (see below: class 2B), arise automatically. Before that judgement, it was required to appear, either on a presumption in law (Class 2A) or on the facts proven by the claimant (Class 2B), that one party was in a position to exert influence on the other party entering into the contract. This will be explained below.

(aa) Certain relationships (Class 2A)

In Goldsworthy v Brickell200 Nourse LJ held that in certain “relationships it would seem that you only have to look at the relative status of the parties in order to presume that the requisite degree of trust and confidence is there.” This first presumption is, in contrast to the presumption of undue influence, irrefutable.201

The special relationships that will give rise to a presumption in favour of undue influence include those of solicitor and client,202 doctor and patient,203 religious adviser and decipe,204 guardian and ward,205 trustee and beneficiary206 and parent and child.207 The presumption neither applies to a relationship between a customer and a banker (defined as a person “having a pre-existing and conflicting interest”208) nor to that between husband and wife.209 These findings are adopted by the House of Lords in Royal Bank of Scotland v Etridge: “There are some relationships, generally of a fiduciary character, where, as a matter of policy, the law requires the dominant party to justify the righteousness of the transaction.”210 “Class 2 A is useful in identifying particular relationships were the presumption arises.”211

(bb) No special relationship between the contracting parties (so-called Class 2B)

Before the judgement in Royal Bank of Scotland v Etridge, 212 the House of Lords had held in Barclays Bank plc v O’ Brien that “if the complainant proves the de facto existence of a relationship under which the complainant generally reposed trust and confidence in the wrongdoer, the existence of such a relationship raises the presumption of undue influence.”213 In the latter case the Court of Appeal had held that although the relationship between husband and wife was not within the first group of presumed influence, a wife is more likely than others to be able to show that the relationship was in fact one of confidence.214

However, in Royal Bank of Scotland v Etridge215 the House of Lords took a different viewpoint on these issues. Lord Clyde disputed the utility of subdividing ‘presumed undue influence’ into further categories: “All these classifications to my mind add mystery rather than illumination.”216 Lord Hobhouse added quite generally that “the point of categorisation has been the source of much of the confusion which has ensued... in this difficult corner of the law”.217 Finally, Lord Scott explicitly questioned the utility of the Class 2 B classification. It is simply not clear “why the mere ‘existence of such a relationship raises the presumption of undue influence’.”218 Consequently it is held that “the so-called class 2 B presumption should not be adopted.”219 Lord Scott furthermore explains that the application of this concept in particular in relation to surety wife cases “has set the law on a wrong track”:220“In the surety wife cases it should, in my opinion, be recognised that undue influence, though a possible explanation for the wife’s agreement to become a surety, is a relatively unlikely one.”221 “I would regard her support as a natural and admirable consequence of the relationship of a mutually loyal married couple.”222 Consequently, a “relationship of trust and confidence that is part of every healthy marriage”223 is not a “legal relationship of trust and confidence”224: “If at the end of the trial the wife succeeds on the issue of undue influence, it will be because that is the right conclusion of fact on the state of evidence ...not because of some artificial legal presumption”.225

Therefore, the transaction cannot be set aside without proof that it was actually induced by undue influence. In the context of surety wife cases it is held that “although the general burden of proof is, and remains, upon her, she can discharge that burden of proof by establishing a sufficient rima facie case to justify a decision in her favour on the balance of probabilities.”226 Consequently, I would argue, that cases not relevant to the so-called class 2 A (presumed undue influence) need to be discussed under the category of ‘actual undue influence’. Thus, the House of Lords stated that, “presumed undue influence ... necessarily involves some legally recognised relationship.”227 Legally recognised are merely the relationships within category 2 A.

Even if an unspecific ‘relationship of trust and confidence’ does not, in accordance with the House of Lords in Royal Bank of Scotland v. Etridge, raise any presumption, it still remains the main228 source of ‘undue influence’. In Lloyds Bank v Bundy229 the court considered the crucial question of whether a relationship of trust and confidence could be identified between an assistant bank manager and his client. In this case, Mr Bundy had charged his home to guarantee his son’s business debts to the bank which was also used by his son. Although the father’s relationship with the bank was longstanding, and had obviously relied upon it for advice, the “assistant manager had not perceived any conflict of interest and had not advised Mr. Bundy to obtain independent advice.”230 It was inferred from the judgement of Sir Eric Sachs that the required relationship tends to arise where one party relies upon the other party, that is to say, the latter is expected “to act in the interests of the other party, and not his own.”231

In addition to what has been termed this “vital element” of “confidentiality”,232 it is required that the alleged wrongdoer is “aware”233 of the reliance upon him. In relation to the latter element it will be sufficient, however, if the party, for instance a banker, “should have known”234 that his customer relies upon him, namely that the customer was in need of advice and was looking to him to give it. It may be said, therefore, that a relationship of recognisable confidentiality is required. This is the position adopted by the House of Lords in Royal Bank of Scotland v Etridge.235

(cc) Rebutting the presumption

In order to rebut the presumption of undue influence, the burden of proof rests on the person seeking the enforcement of the contract to show that the relationship in question did not result in undue influence. If the presumption is rebutted, it may be seen that the “duty of confidence”236 has been fulfilled.

(aaa)

As explained (a, aa), the presumption will not arise unless manifest disadvantage can be identified. Therefore this requirement is not a part of the presumption itself, but rather a mere prerequisite of the presumption. Accordingly it was held in National Westminster Bank v Morgan237 that the burden of proof in considering whether the contract was to the manifest disadvantage of the complaining party lies on the party seeking to set the agreement aside. As the disadvantage of the transaction is a mere condition for the presumption to arise, it is inaccurate to state that the presumption will be rebutted by showing “that the contract was not to the manifest disadvantage of the complaining party”.238

(bbb)

A finding of undue influence will not be held unless the freedom of contract of one party is interfered with (VII, b, bb; IX, a, aa).

Hence, showing that the party concerned acted “under circumstances which enabled him to exercise an independent will”, will rebut the presumption.239 For the party seeking the enforcement of the contract it is in general only required to show that he himself did not exert undue influence, since it would gravely affect the certainty of legal relationships to require him to prove that no undue influence at all was exerted, if a third party in another relationship to the person denying the contracts validity exerted undue influence and if the other party to the contract had “nothing to do with him”240 (e, bb : ‘doctrine of notice’).

(ccc)

The courts have held that the question whether the claimant had “competent and independent advice”241 must be examined in order to ensure that the party concerned acted “with the full appreciation of what he was doing.”242 The advice must be given “with a knowledge of all relevant circumstances and must be such as a competent and honest adviser would give if acting solely in the interests”243 of the person to whom advice is given.

It is sufficient, however, if the advice given led the party make an “informed choice”.244 The fact that the party did not follow the independent and competent advice will not prevent a rebuttal of the presumption. Moreover, the presumption may be rebutted, by the simple act of advising the other party to obtain independent advice.245 It has even been held that it is generally not required that one takes steps to ensure that such advice is actually taken.246

It must be stressed, however, that an “informed consent” is not inevitably a “free consent”. This may explain why the decisions of some English courts have been heavily criticised, a matter which I shall return to later when discussing the category of ‘undue influence and third parties’ (e, cc). The effect of the provision of information is handled differently in German law (e, cc, ccc).

(d) Causation

It has been suggested,247 by analogy with economic duress, that the undue influence must be a “significant cause” for the complainant entering into the contract. Hence, in the case of presumed undue influence, the defendant has to prove that undue influence was less than a “significant cause” in order to prove a lack of causation, thus providing him with a means to rebut the presumption of undue influence.

(e) Undue influence by a third party

In some cases there are different kinds of relationships involving three different parties. The first of them is the contractual relationship between the defendant and the claimant. The second is the relationship in which trust and confidence is abused between one contracting party and a third party.

The key question in such cases is which conduct by the party who seeks to enforce of the contract can justify that he should be saddled with the wrongful conduct of the third party.

(aa) Agency

In Kings North Trust Ltd. v Bell248 Dillon LJ said that a defendant “who instructs an agent to achieve a particular end (the entering into the contract) is liable… (for undue influence) made by the agent in achieving this end.” Hence in Turnball & Co. v Duval249 it was said that a creditor cannot enforce a guarantee or security against a wife who has secured her husband’s indebtedness, if the creditor himself entrusts to the husband the task of obtaining the execution of the relevant documents by the wife and further if it is established that the execution of the document by the wife was procured by undue influence of the husband. The conclusive phrase used in this case was “they left every thing to the husband…, and must abide the consequences.”250

The same approach was taken in a number of subsequent cases.251 The extensive use of the law of agency in relation to undue influence was, however, criticised by the House of Lords in Barclays Bank v O’ Brien.252 The court stressed that it would be wholly artificial to inquire whether the husband was the agent of the bank. Hence it was held253 that there may still be cases in which, “without artificiality”, agency could be established, but “such cases will be of very rare occurrence.” This accords with the view of the House of Lords in Royal Bank of Scotland v Etridge.254

It is a common feature of cases in which the defendant has been held to be affected, that they “all involved conscious acts”255 by the defendant, in the sense that he intentionally involved a third party in inducing the plaintiff to enter into the contract. For this reason the House of Lords in Barclays Bank v O’ Brien256 considered an alternative way in which a third party’s acts could affect the contract.

(bb) The doctrine of notice

In Barclays Bank v O’ Brien257 the husband, who was a shareholder in a manufacturing company, wanted to increase the overdraft which the company had with the plaintiff bank. He offered a surety, charged on the matrimonial home, which was jointly owned by himself and his wife. Although the manager gave instructions for the bank’s staff to explain the necessary documents to both husband and wife and to explain the need for independent advice, the bank’s staff did not follow these instructions. Both the husband and the wife signed the documents without reading them. She claimed that she had executed it whilst acting under the undue influence of her husband and also that her husband had misrepresented to her the effect of the legal charge. The impact upon the bank, however, was “the same whether the wife acted under undue influence or misrepresentation.”258 Lord Browne-Wilkinson held that, apart from the possibility that the husband acted as the bank’s agent, it would be sufficient if the bank had actual or constructive notice of the facts giving rise to the wife’s claim.259 Constructive notice occurs if the party had “any reason to suspect”260 undue influence or if the defendant “knows facts which put him on inquiry as to the possible existence of undue influence.”261 Lord Brown-Wilkinson explained that the bank will be put on inquiry if there is a combination of two factors:

“(a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in a transaction of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction.”262

In Royal Bank of Scotland v Etridge,263 Lord Nicholls explained, that “this passage, read in context, is to be taken to mean, quite simply, that a bank is put on inquiry whenever a wife offers to stand surety for her husband’s debts. ... I do not read (a) and (b) as factual conditions which must be proven in each case before a bank is put on inquiry.” Lord Hobhouse accepted this “affirmation of the low threshold.”264

In CIBS Mortgages plc v Pitt,265 the bank was not put on inquiry, since for a husband and a wife jointly to borrow money on the home for a joint purpose such as buying a holiday home was not held to be a transaction which in itself aroused suspicion in any way. The actual purpose of this transaction, however, was to allow the husband to speculate on the stock exchange.

It must be stressed that the House of Lords expressly rejected the notion developed of the Court of Appeal in Barclays Bank v O’Brien266 that wives enjoyed a particularly strong protection in equity. Thus it was held by the House of Lords that these rules are “not based on the marriage ceremony but reflect the underlying risk of one… exploiting the emotional involvement and trust of the other.”267 They are thus applicable as a general rule in other relationships, where a party, for instance the surety, reposes trust and confidence in the other, for instance the debtor, in relation to financial affairs. Furthermore, this approach is not clearly confined to surety transactions.

This rule, as established in Barclays Bank v O’ Brien,268 was therefore applied to other “emotional relationships”269 and even to the relationship of employer and junior employee which was seen as “easily capable of developing into” one of “trust and confidence”.270 These views have been confirmed by the House of Lords in Royal Bank of Scotland v Etridge.271

(cc) Reasonable steps in order to avoid constructive notice

What can the third party do to avoid constructive knowledge in order to ensure that the agreement “has been properly obtained?”272 In Royal Bank of Scotland v Etridge273 Lord Nicholls explained that “the steps are not concerned to discover whether the wife has been wronged by her husband... . The steps are concerned to minimise the risk that such a wrong may be committed.” In Credit Lyonnais v Burch274 Millet LJ held that a third party could not avoid being fixed with constructive notice unless he took “reasonable steps to allay any suspicion” of undue influence. This statement of the Court of Appeal, however, does not accord with the present view of the House of Lords in Royal Bank of Scotland v Etridge: the bank “must take steps to satisfy itself that the wife understands the nature and effect of the transaction”.275 But Lord Nicholls also stated: “This does not wholly eliminate the risk of undue influence.”276

In relation to past transactions “a bank can reasonably be expected to take steps to bring home to the wife the risk she is running by standing as surety and to advise her to take independent advice. ... For the future a bank satisfies these requirements if it insists that the wife attend a private meeting with a representative of the bank at which she is told of the extent of her liability as surety, warned of the risk she is running and urged to take independent legal advice.”277 This approach was put in rather more concrete terms by Lord Scott.278 However, it mainly accords with the approach in Barclays Bank v O’ Brien.279

(aaa) Criticism

Thus, the criticism expressed by commentators such as  Collins still applies: “The courts have accepted rather unsatisfactorily that, provided a solicitor explains the transaction, the requirement of reasonableness will be satisfied.”280 Such “adequate and independent advice” (c, cc, ccc) must however not involve any advice to the contracting party on whether he should sign.281 These requirements have proved very easy for the creditors to satisfy. Hence this current approach is seen as resulting in “creditor-sympathetic outcomes”.282 Reforms unfavourable to the creditor however might arguably “damage the interests of sureties by increasing transaction costs.”283 It was been said that such an outcome is neither in the interest of individuals involved in the transaction nor in the interest of society,284 as it would undermine the function of suretyship as a social good.285 “The reality remains, …that even if changes were implemented, …many surety wives would continue to provide security out of emotional commitment and… dependence.”286 This therefore means, “that the answer for surety wives in longer term requires more than merely improving the information and advice.”287

(bbb) Alternative views in England

A contractual party might be considered rationally independent only if sufficient information is provided making that party capable of giving an informed consent.288 Some English judgements recognise this aspect. Quite recently, in Banco Exterior Internacional v Mann289 Hobson LJ stated that “the problem in cases of undue influence is not that the wife does not understand the transaction but that she has no independence.” This was confirmed by Lord Bingham in Royal Bank of Scotland v Etridge:290 “A person may understand fully the implications of a proposed transaction ... and yet still be acting under the undue influence of another.”

In 1944, the Court of Appeal held in Bowater v Rowley Regis Corp: “A man cannot be said to be truly willing unless he is in a position to choose freely, and freedom of choice predicates, not only full knowledge of the circumstances in which the exercise of the choice conditioned, so that he may be able to choose wisely, but the absence from his mind of any feeling of constraint so that nothing shall interfere with the freedom of his will.”291

(ccc) Approach in Germany

According to German courts there is no legal obligation for creditors to provide any information or advice.292 Thus, they cannot avoid 'constructive knowledge' by any steps.

The creditor, however, may have a natural interest in providing information in order to prevent the consent of the other party from being defective. In contrast to English law, the provision of information is not relevant when examining the enforceability of an agreement which is motivated not by rationality, but rather by emotionality.293 On the other hand, information is generally held to be relevant in cases where one party is, for instance, inexperienced in business matters (rational defect).294 Hence, the crucial question in German contract law is whether the provision of information is capable to prevent the consent of the party denying the contract’s validity from being defective. This approach follows from the function of the doctrine of undue influence as protecting the principle of freedom of contract. Although the last aspect applies to both legal systems under consideration (X), for the English courts “reasonable steps” are not directly relevant to the consent element, but rather to the additional responsibility element (I): English courts examine the question of whether the provision of information prevents the party who relies on the validity of the contract from being fixed with responsibility. Strictly speaking, the objective capacity of “reasonable steps” to avoid defectiveness of consent is in English law not relevant at all.

As explained above (I), in both countries the responsibility element is applied to limit the defence of defective consent: a contractual party who cannot be blamed for the exertion or exploitation of undue influence could thus rely on the validity of the agreement. However, to limit the defence of defective consent by a requirement which can be fulfilled so easily (“reasonable steps”: e, cc ) indicates that this part of English law undervalues the notion of freedom of contract (X, b) . Thus, in relation to English law it has been criticised by writers that “in practical terms, the current judicial approach reflects a strong preference for form over substance and does nothing to ensure that sureties will be in a position to protect their own interests.”295

(f) Legal effect of undue influence under English law

As stated in Allcard v Skinner,296undue influence makes a contract not void, but voidable. Analogous to the restrictions in relation to the doctrine of duress, restrictions on the right to avoid a contract for undue influence can arise from affirmation of the contract, the intervention of third party rights and the impossibility of restitution (III, e).

VIII. Undue influence under German law

It is recognised that the German doctrine of duress is too narrow to serve its original function in contract law, i.e. to protect the freedom of choice (IV, a). However, in German law there is neither a specific legal provision nor even any particular legal term for undue influence which is analogous to English law.

In cases which do not fall within the scope of section 123 BGB (IV, a) relief for those situations which in English law fall under undue influence will be granted in German law under section 138 (1) BGB (lex specialis derogat legi generali).297 That provision states: “A legal transaction is void if it is contrary to good morals”.298 Here the legislator uses the general canons of ethical conduct in order to fix the limits within which contractual freedom is vouchsafed. It was left to the courts to clarify the ambit of this comprehensive provision in section 138 BGB. The Reichsgericht299has defined the term “immoral” (“contrary to good morals”) as “contravening the sense of decency of every person who possesses understanding of what is just and equitable”.300 The Bundesgerichtshof has adopted this definition.301It is the average sensibility that is in issue here, not the unduly lax or demanding ethics of any particular group or judge. Within this framework the adequacy of the contractual obligation is, in principle, not subject to control by the judiciary. It has been said that “the conception (of section 138 BGB) is considerably wider than the corresponding English conception of immorality and public policy taken together.”302

The immorality (in the sense of undue influence in German law) can arise either from the content303 of the agreement itself or from certain circumstances in which the formation of the contract took place.304 Usually the immorality will result from the combination of several negative factors. In particular, one must examine the content of the agreement, the motivation of the parties involved and the objective of this agreement.305 Even the combination of elements, which, on their own are morally acceptable, may result in immorality.306 It is necessary, therefore, to examine the overall impression of the agreement in question.307

As there is no specific doctrine of undue influence in German law, it is crucial to identify the relevant group of cases of undue influence within section 138 BGB. The main concern of this section is the protection of fundamental constitutional and social values308 as well as the protection of individual rights. Art. 2 GG contains the basic individual right to personal freedom and therefore implicitly, the principle of freedom of contract (I). As explained above, undue influence arises where the freedom of choice is interfered with. The legal transaction may result in,309 or from, the interference of freedom of choice. In relation to undue influence, however, only the latter group of cases is relevant.

Cases of this nature are combined in a subgroup of cases falling under section 138 (1) BGB which is concerned with the abuse of a predominant position (“Ausnützung von Übermacht”).310 Under English law such words as “the abuse of the inequality of bargaining power” (IX, a, cc, bbb) are used to describe the same situation, which seems to be the underlying basis of undue influence in both the English common law system and the civil law system of Germany. Although inequality of bargaining power may result in the defectiveness of consent, it is in both legal systems not in itself considered to be sufficient for the contract to be avoided (I; X, a; IX, a, cc, bbb).

It is generally said311 that undue influence usually arises where (a) the entering into an unfair contract (or any other legal transaction) results from the abuse of (b) a predominant position. Moreover, an abuse in the sense of section 138 BGB will only be identified where (c) one party consciously takes advantage of a predominant position.312 It must be stressed that it is the combination of these elements in each particular case which guides the decision as to whether or not the legal transaction contravenes the sense of decency of every person who possesses understanding of what is just and equitable.313

(a) An apparent unfairness of the legal transaction

Similar to cases of presumed undue influence in English law, relief will only be granted in cases where a disadvantageous character of the legal transaction can be identified. The disadvantage has to arise from the imbalance of the contractual obligations of the parties, in the sense that the terms of the agreement appear (from an objective314 point of view) to be unfair.315 In relation to unilateral legal obligations, such as guarantees, disproportion has to be apparent between the financial scope of the liability on the one hand and the actual financial abilities of the potential debtor on the other hand.316 It is necessary to examine the overall impression of the legal transaction in order to answer the crucial question of whether the particular transaction is “one that a party in a similar situation would ordinarily be expected to have made…”.317 If that is not the case the transaction will usually be deemed to be unbalanced. To be “apparent”, however, the disadvantage has to be of a certain quantity. It could be said, in accordance to English law, that the imbalance of the legal transaction is apparent if it results in a “manifest disadvantage” (VII, a, bb).

(b) Predominant position

The German courts have recognised circumstances in which the undue influence can occur without a “relationship of trust and confidence”.318 There are several types of dominant positions which have been recognised as being capable of giving rise to undue influence.319

The first case which concerned undue influence under German law involved the abuse of a monopoly position.320 Public authorities,321 landlords,322 employers323 and bankers324 were identified as occupying positions of dominance which, similar to those who had a position of trust,325 were capable of interfering with the freedom of choice of one party. Although the exertion of undue influence in these cases is possible, its existence seems, in contrast to English law, never to be presumed.326 Nevertheless, there are some individual judgements which have, with some restrictions, recognised circumstances under which a presumption can arise: it has been suggested that the exertion of undue influence is to be presumed in cases of disadvantageous transactions between parents and their children327or, more rarely, in cases of exorbitant unfair legal transactions.328

In most of the judgments, however, the claimant is, similar to the rules of ‘actual undue influence’ (VII, b, bb) in English law, in general required to show a relationship which interfered with his freedom of contract. In this context, prima facie evidence might be accepted by the courts. Only if there is evidence that the freedom of contract was interfered with, the position in question can be labelled as “predominant” in the sense of section 138 BGB.It is necessary, in contrast to English law, to find such a position of dominance within the relationship of claimant and defendant (IX, b, bb).

The provision of information may prevent the consent of the other party from being defective (VII, e, cc, ccc).

(c) Knowledge of the facts giving rise to the claim

An abuse, in the sense of an immoral act falling within the scope of section 138 BGB will generally only occur where one party consciously takes advantage of a predominant position.329 That advantage accrues from the fact that the weaker party entered into the unbalanced legal transaction. According to the majority of courts and legal writers,330 it is necessary that the defendant actually knew, or ought to have known, of the facts which give rise to the immoral character of the transaction see also: V, c).331 The Bundesgerichtshof explicitly rejected both the view that the subjective element will be irrefutably presumed in cases where the required objective elements (a and b) are apparent332 and the suggestion of a number of legal writers to abolish the entire subjective requirement altogether.333

On the other hand, it is sufficient for this purpose that the defendant ought to have known of the relevant facts. There is no equivalent in German law to the English notion of avoiding constructive knowledge by taking particular steps (VII, e, cc, ccc).

(d) Causation

As for duress, (V, d) it is necessary for undue influence that the weaker party was caused to enter into the contract by the interference with his freedom of choice, and what has been said above in that context also applies to undue influence.

(e) Legal effect of undue influence under German Law

It is the main purpose of section 138 BGB to prevent the validity of legal agreements which are seen as being contrary to the sense of justice of the general public.334

(aa)

For this reason, the aggrieved party is not given an opportunity to affirm an immoral transaction. The legal transaction will be void with retroactive effect, not just voidable. Delay of the claimant or lapse of time in general is not relevant. It might also be noted that it is the notions of “decency” during the time in which the formation of the contract took place that are decisive for the validity of that transaction.335

(bb)

Section 138 BGB is designed to protect the interests of the society. Therefore it is not relevant whether any individual relies on the invalidity of the transaction.336 At least theoretically, the courts may intervene if they become aware of the immoral character of the legal transaction even if neither party has pleaded that the transaction is immoral, even if this is unlikely to occur in practise.

(cc)

Thus, the question arises why contracts made under threats are voidable (V, e, aaa), whereas agreements formed under much more subtle influence should be void. In English law it is stated that, “it would be strange if conduct less than duress could render a contract void, whereas duress does no more than render a contract voidable.”337 German law provides no specific justification for the different treatment. Rather, this inconsistency in German contract law results from the lack of a specific section in relation to undue influence (VIII), which is present in relation to the concept of duress (section 123 BGB).

(f) Application of the doctrine: Cases involving children as guarantors under German law

The most influential cases on the development of a German equivalent to the doctrine of undue influence law concern guarantees which young and inexperienced adults of little means may provide for large loans granted to their parents by banks. This is illustrated by a decision of the Bundesgerichtshof in 1994:338

In this case, the guarantor’s father worked as an estate agent. He was requested by his bank to provide a guarantee from his daughter in order to increase the borrowing limit for his bank account. Although his daughter was 21 years, earned some DM 1,150 net per month as a blue collar worker and did not dispose of any assets, she signed an absolute guarantee for the amount of up to DM 100,000 in order to secure all present and future claims which the bank had against her father. When his assets deteriorated, the bank called in all credits and claimed for the payment of DM 100,000.

(aa)

Such contracts were held by the court to be disadvantage since “if the risk materializes, the children will have to make substantive payments to the creditor over an unforeseeable period or perhaps for the rest of their lives”.339 Since this disadvantage would not be compensated by any direct own economic interests of the daughter, the contract in question was held to be of material unfairness.340

(bb)

The daughter was found to be in an unequal bargaining position in relation to the bank on two grounds: First, she was evidently inexperienced in business matters.341 Instead of providing sufficient information to the daughter, the bank grotesquely trivialized the significance of the liability.342 Second, she was held to be in a ‘mental predicament’ resulting from her emotional relationship with her father.343 The court held that “freedom of contract, which enjoys protection as a basic right, can justify the conclusion of risky and at the same time unilaterally burdensome contracts only if both parties are in a position to decide freely in favour of or against being bound by a contract.”344

(cc)

The defectiveness of consent, it was held, needs somehow to be attributed to the bank’s responsibility. In this context it is generally sufficient if the bank consciously takes advantage of a predominant position (c). However, in this particular case the court concluded that “it can be left open whether the father’s conduct sufficed for this (defectiveness of consent and responsibility of the bank), or whether the trivializing representations made by the saving bank’s employee were an additional cause, as the defendant must account for either conduct within the framework of § 138 (1) BGB̶