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(i) Restitution

Once undue influence has been established, and any transaction been set aside, the claimant will recover any benefit which has been transferred to the defendant as a result of the undue influence, but counter-restitution must be made to the defendant as well. In Smith v Cooper,[1] where the parties had cohabited in a property which had been purchased in their joint names, it was held that Cooper had contributed to the purchase price of the property as a result of undue influence by Smith. As a consequence, the value of the property was to be divided between the parties proportionate to their contribution to its purchase, with credit being given to Smith for his payments to the cost of renovation of the property and mortgage payments he had made.

(ii) Rescission is Absolute

Where a transaction is rescinded for undue influence it can only be set aside in its entirety and not so that part of the transaction remains valid.[2] Also, the transaction cannot be set aside on terms, for example by setting aside the whole transaction and substituting a new one for it. In Zamet v Hyman[3] it was held that the relief for undue influence is confined to setting aside the particular transaction and that the court could not substitute some other, fairer, transaction for it. This approach was endorsed by the Court of Appeal in TSB Bankplc v Camfield,[4] where it was held that a mortgage would be set aside completely as a result of a husband’s misrepresentation and it would not be treated as valid to the extent of the maximum liability which the wife had accepted.134 135 This general principle against partial rescission and rescission on terms is, however, subject to an apparent exception where rescission is conditional on the defendant making restitution to the claimant and the claimant making counter-restitution to the defendant of any benefits received under the transaction.1 5 But this is consistent with rescission operating to set the transaction aside completely and so restore both parties to the position they occupied before entering into the transaction, by ensuring that they return any benefits received, or the value of any benefits received, to the other party.

The apparent reason for the courts’ refusal to allow partial rescission or rescission on terms stems from the nature of rescission itself. Rescission is traditionally considered to be a form of self-help. The claimant rescinds the transaction and the only role for the courts is to determine whether the claimant has actually rescinded it or is entitled to do so.[5] [6] [7] [8] [9] [10] There is consequently no scope for any halfway house; either the claimant is or is not entitled to rescind the transaction in question. But this is highly dubious reasoning. The better view is that rescission in Equity does indeed depend on the intervention of the court,137 138 139 and it is the equitable jurisdiction which is engaged where rescission is sought on the ground of undue influence. In the exercise of that jurisdiction the court may be required to value a benefit received so as to secure restitution or counterrestitution, or otherwise rescission will be barred, so why should it not be possible for the court to intervene in other ways through the imposition of terms?1

In fact some cases show that rescission on terms is available.1 9 The most important of these is Cheese v Thomas,[11] where the Court of Appeal set aside a transaction on terms where the transaction had been entered into through the exercise of undue influence. In that case the defendant, who was the claimant’s great-nephew, was presumed to have unduly influenced the claimant into entering into a transaction to buy a house, whereby the claimant had contributed all of his capital, amounting to ?43,000. The parties had agreed that the claimant would occupy the house for the rest of his life and it would then pass to the defendant, in whose name the house was registered. The balance of the purchase price and expenses, amounting to ?40,000 in total, was funded by a building society loan made to the defendant and secured by a mortgage over the property. The defendant was to pay off this loan but he failed to keep up with the mortgage payments and the claimant then sought to set the transaction aside. It was conceded that there was a relationship of trust and confidence between the parties and the court held that the transaction was manifestly disadvantageous to the claimant, so it was presumed that the claimant had entered into the transaction as a result of the defendant’s undue influence. The court then needed to consider what remedy was appropriate. Since the value of the house had fallen by over ?27,500, the real issue for the court was which party should bear this loss. If the orthodox approach to rescission was adopted, the transaction would be set aside in its entirety, so the claimant would recover his contribution to the purchase price plus interest and the defendant would suffer the loss. But the court imposed a condition on rescission, namely that the loss should be apportioned between the parties in proportion to their respective contributions to the purchase price. In reaching this conclusion the court emphasized the importance of characterizing the transaction involved.[12] [13] In this case the transaction did not simply involve a payment by the claimant for the right to occupy the house. Rather, it was a joint venture between the claimant and the defendant, since the parties had agreed to contribute money to buy a house in which they would both have an interest. Since it is a feature of a joint venture that both parties participate equally in the transaction, it was held that the loss arising from the transaction would be apportioned between both of them.

But this identification of a joint venture is difficult to defend. The court emphasized that the parties should be treated as equal participants in the venture, particularly because the defendant was exonerated of any reprehensible behaviour in inducing the claimant to participate. But such a conclusion was not open to the court, simply because it had been presumed that the defendant had unduly influenced the claimant to enter into the transaction and this presumption had not been rebutted. Consequently, the parties should have been treated as unequal participants in the transaction, with the result that the transaction should have been set aside in its entirety. The Court did acknowledge that, had there not been a joint venture, the transaction would have been set aside completely, so that the claimant would have recovered what he had contributed and the defendant would have suffered the loss in value of the property.

A further difficulty with the analysis of rescission in this case arises from the principle that rescission is barred where the claimant has received benefits under a transaction which he or she is unable to restore to the defendant.[14] This was in fact the situation in Cheese v Thomas since the claimant had received benefits under the transaction, namely rent-free occupation of the house. This benefit was received at the defendant’s expense, since the defendant was the registered owner of the house and the claimant was merely a contractual licensee. Nevertheless, the fact that the claimant received this benefit should not have barred rescission, since courts are prepared to award the defendant an allowance which is assessed by reference to the reasonable value of the benefit received by the claimant, especially in Equity.[15] Since this benefit was the use of the house, it could have been valued and a sum of money equivalent to rent been paid to the defendant. In fact, the Court of Appeal procured this counter-restitution by simply offsetting the rent which the claimant should have paid for occupation against the interest which the defendant should have paid to the claimant on the money which he had received once the house had been sold. This is a highly inaccurate method of securing counter-restitution. The court should simply have valued the rent which the claimant owed and deducted this from the ?43,000 plus interest which the defendant owed to the claimant.

In most cases of rescission for undue influence the only term which it is appropriate to impose as a condition for rescission is that the claimant must make counter-restitution to the defendant for any benefits obtained under the transaction. One exceptional circumstance has, however, been recognized where rescission on other terms is possible. This is where part of a complex transaction which was formed in stages was obtained by undue influence, then this part can be severed from the rest, which was not obtained by undue influence, without adding to or modifying the rights and obligations in that remaining part.[16] In most other cases the undue influence will generally taint the whole transaction so there is little scope for imposing terms as a condition for rescinding the transaction, save where this is necessary to achieve counter-restitution.[17]

  • [1] [2010] EWCA Civ 722, [2010] 2 FLR 1521.
  • [2] National Commercial Bank (Jamaica) Ltd v Huw [2003] UKPC 51. 132 [1961] 1 WLR 1442.
  • [3] 133 [1995] 1 WLR 430. See also Bank Melli Iran v Samadi-Rad [1995] 2 FLR 367; De Molestina v Ponton
  • [4] [2002] 1 All ER (Comm) 587. In Australia partial rescission is accepted: Vadasz v Pioneer Concrete (SA) Pty Ltd(1995) 184 CLR 102 (rescission of guarantee relating to past but not future indebtedness). See L Proksch,‘Rescission on Terms’ [1996] RLR 71; J Poole and A Keyser, ‘Justifying Partial Rescission in English Law’(2005) 121 LQR273.
  • [5] In Yorkshire Bank pic v Tinsley [2004] EWCA Civ 816, [2004] 1 WLR 2380, where a replacementmortgage was taken out as a condition of discharging an earlier mortgage which was voidable for undueinfluence, the replacement mortgage was also voidable, at least where the two mortgages were taken out withthe same lender.
  • [6] See TSB Bank pic v Camfield [1995] 1 WLR 430, 434-5 (Nourse LJ). For an example of such conditionalrescission see Midland Bank plc v Greene [1994] 2 FLR 82 and Smith v Cooper [2010] EWCA Civ 722, [2010]2 FLR 1521.
  • [7] See TSB Bank plc v Camfield [1995] 1 WLR 430, 438 (Roch LJ).
  • [8] J O’Sullivan, ‘Rescission as a Self-Help Remedy: A Critical Analysis’. See p 23, above.
  • [9] See J Poole and A Keyser, ‘Justifying Partial Rescission in English Law’, who argue that partial rescissionis distinct from the equitablejurisdiction to secure restitution and counter-restitution, since partial rescission isconcerned with fulfilling the parties’ expectations, where those expectations were not affected by the vitiatingfactor for which rescission is sought.
  • [10] In some of the old cases on rescission for mistake the claimant was permitted to rescind the transactionbut onlyon condition that a newcontractwas offered: SollevButcher [1950] 1 KB 671 and GristvBailey [1967]Ch 532. Today, rescission in Equity would not be allowed for mistake in such cases: Great Peace Shipping Ltd vTsalviris Salvage (International) Ltd [2002] EWCA Civ 1407, [2003] AC 679. See p 193, above.
  • [11] [1994] 1 WLR 129.
  • [12] Ibid, 136 (Sir Donald Nichols V-C).
  • [13] For an alternative analysis of the case as involving an implicit application of the defence of change ofposition, see M Chen-Wishart, ‘Loss-Sharing, Undue Influence and Manifest Disadvantage’ (1994) 110 LQR173. See p 685, below.
  • [14] See further p 25, above.
  • [15] See, for example, O’Sullivan v Management Agency and Music Ltd [1985] QB 428.
  • [16] Barclays Bank plc v Caplan [1998] 1 FLR 532.
  • [17] Cf where the claimant entered into a transaction as a result of misrepresentation, where the claimantthought, for example, that he or she had entered into a surety transaction for ?5,000 but in fact the transactionwas for ?50,000. In such circumstances the actual surety transaction should be rescinded but terms could beimposed that a ?5,000 surety transaction should be substituted since this is the amount which the claimantactually consented to guarantee. See p 28, above. See further GJ Virgo, ‘Undue Influence and Misrepresentationafter O’Brien: Making Security Secure: A Commentary’ in F Rose (ed), Restitution and Banking Law (Oxford:Mansfield Press, 1998), 77.
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