Understanding Undue Influence in Commercial Law

This article provides an in-depth analysis of undue influence in commercial law, including its definition, types, and application in various scenarios. It also offers expert advice on how to deal with undue influence in commercial transactions. The article covers the legal principles of actual and presumed undue influence, and how they apply in cases of disadvantageous transactions. It also discusses the fiduciary relationships that can lead to undue influence, and how to prove actual undue influence in court. The article is relevant to students of commercial law, legal practitioners, and anyone interested in understanding the legal principles of undue influence.

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Introduction
Issue
The main issue in this scenario regards the authority of an agent. Linda was the agent of
John (principal). This scenario brings the issues such as did Linda had apparent authority to order
the goods on behalf of John? Can John assert that Linda had no authority to order the goods?
Rule
The three main features of an agency relationship are the consent given by both the
principal and its agent, the authority, and the principal’s control (Thampapillai et al., 2015,
p.140). The creation of this relationship was explained by Diplock LJ in (Freeman & Lockyer v.
Buckhurst Park Properties (Mangal) Ltd, [1964]) that the principal/agent relationship is a legal
relationship originating from an agreement between an agent and its principal. In (South Sydney
District Rugby League Football Club Ltd v. News Ltd, [2000]), Finn LJ stated that this
agreement can be ascertained through the application of principles of a contract, express words,
trade practices, or the course dealings.
In this agency relationship, if an agent enters into contracts with third parties, the
contract is deemed to have been created between the principal and those third parties. The work
of (Stoljar, 1961, p.264) explains this rationale with the case of (Hubbard v. Tenbrook, [1889]).
The judge stated that it would be a fraud to the public if the principal who absorbs the profit is
allowed to escape when the pinch comes.
An agent cannot act without the legal authority of the principal, and the principal places
all the trust and reliance on the agent (fiduciary relationship). Legal authority in an agency
relationship can be express or implied. Actual authority was explained in (Poulet Frais Pty Ltd v.
The Silver Company Pty Ltd, [2005]) where the Full Federal Court explained that actual

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authority is a matter of consent between the parties. Express actual authority comes in situations
where the principal expressly, grants an agent the permission to execute all operations but
restricts that authority to specific tasks (Schneeman, 2009, p.10). A landmark case for this
rationale was (Ireland v Livingstone, [1872]) where the principal was prevented from denying
the authority after instructing the agent to send tons of sugar with general instructions for the
measurements. Livingstone could not be allowed to deny the authority when Ireland sent sugar in
measures of 400 tons.
Implied authority is an extension of the express actual authority where the agent moves
beyond the powers given expressly (Bouchoux, 2009, p.6). In most cases, agents on a particular
position in an office have implied authority to exercise powers and authority which naturally
flows from their positions. A classic case for this rationale is (Hely-Hutchinson v. Brayhead Ltd,
[1968]) where the court denied a claim by Brayhead that their Chairman had no authority to
execute the duties of a managing director since he was not officially appointed to the position.
Usual authority is simply an implied authority that grants the agent the authority to do
what he/she has been employed to do (Roach, 2016, p.194). For example, a manager has
authority in managerial operations. A classic case of this nature is (Watteau v. Fenwick, [1893])
where the court ruled that as far as the agent had previous experience as a public house manager,
he could have usual authority to bind the company when working as a pub manager.
Apparent or ostensible authority arises from the principal’s representation to the third
party (Miller and Jentz, 2010, p.499). As far as the principal made the third party believe that the
agent had the authority, the law will not allow the principal to deny the authority in question.
This rationale was used in (Racing UK Ltd v. Doncaster Racecourse Ltd and Doncaster Borough

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Council, [2005]) where the court concluded that the previous manifestation of the Council to
Racing UK Ltd that their agent had authority could not be denied.
Application
Applying these rules to the case of Linda and John, an analysis to certify the requirements
for an agency relationship must be made. In certifying the existence of the relationship, the judge
in (Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd, [1964]) explained that
existence of contracts, the course of dealings or trade practices can demonstrate are sources of
authority. Therefore, as far as Linda was working as a manager, there is already an
employer/employee contract.
The next step would be a test for authority, a manifested consent as explained in (Poulet
Frais Pty Ltd v. The Silver Company Pty Ltd, [2005]) creates a fiduciary relationship, and
instructions to carry out some particular tasks as in (Ireland v Livingstone, [1872]) proves that
there was express authority. In the case of Linda, there was no express authority to sign for the
orders. Her authority was only to dispatch them after they have been signed. On the other hand,
applying the test for implied actual authority as in (Hely-Hutchinson v. Brayhead Ltd, [1968])
will show that Linda had implied actual authority because she already had express actual
authority for dispatching orders. Also, a test for the usual authority which was applied in
(Watteau v. Fenwick, [1893]) can allow us to conclude that Linda was executing the duties of the
managerial position. Thus, she had the usual authority.
Lastly, a test of apparent authority would look at what John had manifested to Caty a
third party. Since Cathy and Linda were the ones exchanging tasks through the dispatched orders,
it can be concluded that Linda had apparent authority by applying the rationale upheld in
(Racing UK Ltd v. Doncaster Racecourse Ltd and Doncaster Borough Council, [2005]).

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Conclusion
Linda had usual authority, implied actual authority, and apparent authority to bind John to
Cathy.
Question 1: Advice to AFC Grocery Ltd.
Following the establishment that Linda had the authority of binding John to Cathy,
recovery of $45,000 would require electing an action. However, a specific performance which
would have recovered $45, 000 directly would not apply to this case. Specific Performance is
only available under the court’s discretion and it is awarded to the innocent party and it is not an
award for damages (Mann and Roberts, 2018, p.319). Therefore, in the case of breached
contracts, specific performance is not granted since damages are the adequate remedy (Mann and
Roberts, 2018, p.319). With this, specific performance is mostly not available in cases of breach
of agreements for the sale of goods since the goods can be sold or bought from somewhere else.
Under the Australian Sale of Goods Act, section 53 provides for the seller's action when
the buyer is in breach (Sale of Goods Act, 1954). Section 53 (1) provides that if a buyer
wrongfully objects to pay or accept the goods, the select can take actions against that buyer for
the damages for non-acceptance. Subsection 2 provides that the actual measures for the damages
would be the loss that the seller has incurred which arise directly from the non-acceptance of the
buyer. Section (3) states that in cases where the market is available for those goods, damages
would be measured prima facie by ascertaining the difference between the current price or the
market price and the contract price.
Question 2: Linda expressly prohibited from making orders.
It could be true that Linda had no express authority to make orders. This can be inferred
from the fact that it was John who was coming to discuss and sign them. In addition, there is

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nothing mentioned that John had orally or in writing told Linda to make order hence the reason
why Linda tried to reach out to him. For instance, in the case above (Ireland v Livingstone,
[1872]), the defendant had orally instructed the plaintiff to execute the procurement. However,
John is still liable since there is evidence of other forms of authority such as implied actual
authority, usual authority and apparent authority
Scenario 2: Sylbo and Bruno
Issue
Whether the transaction between Sylbo and Bruno resulted from undue influence.
Whether transactions resulting in undue influence can be nullified.
Rule
Undue influence is a principle within the doctrine of equity which provides for rescission
of transactions, contracts or gifts that are a product of relationship where influence was used on
one of the parties. The English court in (R v. Attorney-General for England and Wales, [2003])
explained undue influence on the face of the common law. Lord Hoffmann, in paragraph 21
stated that like duress, undue influence happens into situations where a completed transaction
was obtained through corrupted consent and such transaction should be nullified. The Australian
Court also holds the same meaning by focusing more on the consent of the weaker party in the
case of (Commercial Bank of Australia Ltd v. Amadio and Another, [1983])
Undue influence is thus, based upon unfair exploitation where one party uses its power in
the relationship to influence the decision of the other. The principle of equity in undue influence
takes two approaches. The first one looks at ‘actual undue influence.’ This happens where one
party uses its position to influence the transaction which is similar to duress where no threats or
coercion is used. Therefore, in establishing actual undue influence, the claimant needs to show

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that the main reason he entered into the contract was not that he was willing to form it, but the
genuine intimidation from the defendant. Thus in actual undue influence, the defendant, the
dominant party pressures the plaintiff to an extent that he could no longer use his independent
judgment. Actual undue influence requires the court to employ a subjective test as opposed to an
objective test. The subjective test looks at how the dominant party confined to the reasoning of
the victim leaving him with only one choice of accepting the contract. Thus, the test looks at
what the claimant genuinely believes.
One of the earliest authorities of actual undue influence was the case of (Williams v.
Bayley) where the bank told the father that if he refused to repay back the bank’s money that was
taken by the son, the bank would prosecute the son. Another authority was the case of (Johnson
v. Buttress, [1936]). At paragraph 134, the judge stated that there must be a fact showing that the
contract resulted from an actual influence to the mind of the alienator in a way the court
considered that it was not his free act. This case concerned a transaction where the Plaintiff's
father, Mr. Buttress, old and illiterate, relied on the defendant in general assistance. This reliance
relationship followed with Mr.Buttress writing a will that gave everything to the defendant
leaving the family with nothing. The court nullified the transaction. In this case, Dixon J that
Actual undue influence is present in a situation where the defendant is shown to have the
capacity to exert influence on the claimant. Secondly, the influence exercised must be undue.
Thirdly, the influence ended up with the claimant consenting to the transaction. Since these facts
were proven, the court nullified the transaction.
In addition, in cases of actual undue influence, the claimant does not need to show that
there was a disadvantageous transaction. The only thing required is to demonstrate that there was
an actual undue influence, and the defendant was aware that he was using it to pressure the

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claimant. For instance, in (CIBC v. Pitt, [1994]), the court stated that where there is enough
proof of actual undue influence, there is no more need for the claimant to prove that the influence
was followed by the disadvantaged transaction. This case involved a situation where the husband
induced the defendant to their matrimonial home and so the court nullified the transaction.
The second approach is the ‘presumed undue influence.’ In such situations, the court
looks for two elements to conclude that the transaction did not rely on the free will of both
parties but the unconscionable use of influence on one of the parties. The first element is finding
whether the parties had a satisfactorily strong relationship which creates a fiduciary relationship
between the parties. In (Royal Bank of Scot. PLC v. Etridge (No. 2), [2002]), Lord Nicholls
explained this rationale by stating that undue influence requires the existence of relationships
where the law will presume that one party exerted pressure on the other. This case also divided
these forms or relationships into two classes. One group being of cases where one party will
automatically take dominion of the other. Examples of these relationships are parent/child,
guardian/ward, doctor/patient, solicitor/client, trustee/beneficiary e.tc. The second class of these
relationships consists of situations where the weaker party proves that it had trust and confidence
in the other party.
The second element looks for an existence of disadvantageous transactions. In a situation
where there is a proof that the weaker party lost something of value to the stronger party, the
court will be likely to presume that there was undue influence. Earlier cases for this rule include
(Allcard v. Skinner, [1887]) where the court found that claimant was subjected to undue
influence after she joined a convent. This was followed by a transaction where she gave the
£7,000 property to the sisterhood. However, courts have always been cautious with this element.
Judges in (Royal Bank of Scot. PLC v. Etridge (No. 2), [2002]) advised that this element would

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not be considered in the situation where the stronger party used the trust or confidence given by
the weaker party to ensure that the weaker party received independent legal advice regarding the
transaction. The same reasoning was given in the case of (National Westminster Bank Plc v.
Morgan, [1983]) at para 709. Also, the stronger party can demonstrate that it did not take any
advantage of the weaker party in executing the transaction. In the case of (Union Fidelity
Trustee Co of Australia Ltd v. Gibson, [1971]), the court advised that as far as the defendant can
demonstrate that the claimant well-understood the repercussions of the transaction in a
reasonable man’s position, and the claimant used his free judgment, the transaction will stand.
Application
Applying the rules to the case of law to the case of Sylbo and Bruno, this would require
looking for the elements stated in the authorities mentioned above. For a test for actual influence
would require looking for direct influence where the claimant is left with no choice as in the case
of (Williams v. Bayley), or in the case (CIBC v. Pitt, [1994]). However, as the case of Sylbo and
Bruno does not show instances where Sylbo was forcing a choice of selling to Bruno, a test for
actual undue influence would fail, and so we can move to test the presumed undue influence.
A test for presumed undue influence involves identifying the existence of the two
elements which are the fiduciary relationship, and a disadvantageous transaction. A threefold test
for finding a fiduciary relationship was defined in (Frame v. Smith, [1987]). The characteristics
were said to involve; (1) exercise of power or discretion. (2) The power affects the beneficiary's
legal interests. (3) The vulnerability of the beneficiary at the expense of the of a fiduciary who is
using power. As for the case of Sylbo and Bruno, the Australian courts have expanded these
characteristics in cases involving advisers. In (Daly v Sydney Stock Exchange Ltd, [1986]),
Gibbs CJ stated that a fiduciary relationship in a transaction can arise even when there is no

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anterior relationship as far as one claimant showed reliance on the guidance provided by the
defendant and the defendant end ups initiating a transaction of which he is a beneficially or an
agent of a beneficially. In (Aequitas v AEFC, [2001]), the court said at 287 that fiduciary
obligations do arise in situations where one party has a responsibility to consider the interests of
the other. Again, as per Gummow J, the weaker party’s vulnerability is another characteristic of
finding a fiduciary relationship. So going back to Sylbo and Bruno, the facts that show Bruno
relied on Sybo advice are evident where Bruno was advising him to sell land to be with his wife.
Also, the fact that Bruno mentioned severally about his personal matters with his wife shows
Bruno’s reliance on Sylbo advice. Also, Bruno’s vulnerability proves that there was a fiduciary
relationship.
Lastly, a disadvantageous transaction needs to be proven as the second element of
presumed undue influence as ruled in (Allcard v. Skinner, [1887]) which was also held in (Royal
Bank of Scot. PLC v. Etridge (No. 2), [2002]). On weighing this principle to Sylbo and Bruno
case, Bruno bought the land $220, 000 in 2010. Therefore, selling this land at $160, 000 in 2012
calls for what the judges in (Royal Bank of Scot. PLC v. Etridge (No. 2), [2002]) as ‘an
explanation.” In other words, this transaction was disadvantageous to Bruno, as the selling price
was way lower than how he had bought it considering that assets like Land appreciate in value.
Conclusion
The court will nullify the transaction based on presumed undue influence on Bruno by
Sylbo.

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References
Aequitas v AEFC [2001] NSWSC 14.
Allcard v. Skinner [1887] Ch D 36.
Bouchoux, D.E., 2009. Fundamentals of Business Organizations for Paralegals. Aspen
Publishers Online.
CIBC v. Pitt [1994] AC 1 1994.
Commercial Bank of Australia Ltd v. Amadio and Another [1983] ALR 46 1983.
Daly v Sydney Stock Exchange Ltd [1986] 160 CLR 371.
Frame v. Smith [1987] SCR 2 1987.
Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd [1964] QB 2 1964.
Hely-Hutchinson v. Brayhead Ltd [1968] QB 1 1968.
Hubbard v. Tenbrook [1889] Pa. 124.
Ireland v Livingstone [1872] LR 5 HL 395.
Johnson v. Buttress [1936] CLR 56.
Mann, R.A. and Roberts, B.S., 2018. Essentials of Business Law and the Legal Environment.
12th ed. Mason, OH: Cengage Learning.
Miller, R.L. and Jentz, G.A., 2010. Cengage Advantage Books: Business Law Today: The
Essentials. 9th ed. Mason, OH: Cengage Learning.
National Westminster Bank Plc v. Morgan [1983] All ER 3 1983.
Poulet Frais Pty Ltd v. The Silver Company Pty Ltd [2005] FCAFC 2005.
R v. Attorney-General for England and Wales [2003] UKPC 2003.
Racing UK Ltd v. Doncaster Racecourse Ltd and Doncaster Borough Council [2005] EWCA Civ
2005.
Roach, L., 2016. Card and James’ Business Law. 4th ed. UK: Oxford University Press.
Royal Bank of Scot. PLC v. Etridge (No. 2) [2002] UKHL 2002.
Sale of Goods Act, 1954.

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Schneeman, A., 2009. Law of Corporations and Other Business Organization. Cengage
Learning.
South Sydney District Rugby League Football Club Ltd v. News Ltd [2000] ALR 177.
Stoljar, S.J., 1961. The Law of Agency: Its History and Present Principles. Sweet & Maxwell.
Thampapillai, D., Tan, V., Bozzi, C. and Matthew, A., 2015. Australian Commercial Law.
Cambridge University Press.
Union Fidelity Trustee Co of Australia Ltd v. Gibson [1971] VR 1971.
Watteau v. Fenwick [1893] QB 1 1893.
Williams v. Bayley LT Rep. NS 14.