LETTER OF THE LAW

Law guards against coercion when making contracts

Parties must understand legal and practical implications and be free to make up own minds

PUBLISHED : Tuesday, 29 October, 2013, 4:08am
UPDATED : Tuesday, 29 October, 2013, 4:08am

Contracts are an expression of the free will of the parties to them. This is obviously not the case where the signatory has an actual or metaphorical gun to their head. Contracts that have been induced by coercion can be set aside. The law goes further and offers protection in any case where entry into the contract is not a reflection of the informed consent of either of the parties.

There may be no gun and both parties might be gentle, honest people, but if there is no informed consent, the contract can still be set aside. This is the result of an area of the law known as undue influence. The word "consent" conveys the idea that the parties must not be subject to some overbearing influence that significantly takes away from their practical freedom to make up their own mind. The consent must be informed. The parties must be able to understand the legal and practical implications for them if they enter into the proposed contract.

Nowadays, the law of undue influence is to the fore when someone agrees to provide a guarantee (with a bank) in respect of the liabilities of some third party. Many cases involve wives who agree to guarantee a loan given to their husband or their husband's business.

If the wife's consent is not informed consent, then she might not be bound by the guarantee and any charge that has been given to support the guarantee. This risk arises if the husband has actually misled or pressurised his wife. It can also arise if the wife has reposed trust in her husband to such an extent that she relies on his judgment rather than her own.

In this latter situation, there is an undue influence problem if the transaction is such that the wife seems to be incurring real risk without obtaining any proportionate advantage.

Although the problem lies in the dealings between the husband and the wife, the bank can still lose out. It will do so if the facts known to it suggest the relationship and the transaction are such that there is a risk that the transaction might be tainted by some undue influence.

Banks can, however, protect themselves by ensuring that the wife is given, and is in a position to understand, the documents that she has been asked to sign and the practical implications of those documents for her. If this is done, then the bank will be able to rely on the documents signed by the wife even if it should prove that there has been some undue influence.

This problem and the legal principles surrounding it are not confined to husbands and wives. The principles are equally applicable in many types of relationship. The banks don't have to go looking for trouble. They don't need to ask about the nature of the relationship nor to seek assurance that there has been no undue influence. The law consciously seeks to strike a balance between protection of the vulnerable and ensuring that the wheels of commerce do not grind to a halt.

Professor Michael Lower of the Faculty of Law at Chinese University teaches and researches land law