(iii) Monetary Remedies in Lieu of Rescission

Even though rescission of a contract is the usual remedy following undue influence, and this remedy may often involve payment of money to effect or to complement rescission, it has sometimes been suggested that it is possible to award monetary remedies in lieu of rescission.^[1] The key authority which appears to support such an approach is the difficult decision in Mahoney v Purnell.^{[2] [3]} In this case a transaction involving the sale of shares by a father-in-law to his son-in-law was liable to be set aside by reason of undue influence, but it was not possible to restore the parties to their original position because the relevant transaction had involved the sale of shares in a company which had subsequently been wound up. It was held that rescission was barred, but the court had a power to award the claimant ‘equitable compensation’. Whilst the result of the case is defensible, the reasoning and the terms used are open to criticism. The case has been analysed as one where the court awarded the monetary equivalent of rescission simply because precise restitution was not possible.¹ Whether this is the correct interpretation depends on careful analysis of the underlying cause of action. There are two possibilities.

(1) Abuse of a Fiduciary Relationship

Although the judge focused on the defendant’s presumed undue influence ofthe claimant, it appears that he was treating undue influence as a form of wrongdoing which justified the award of a compensatory remedy. The better view, however, is that undue influence can be established without any need to prove the commission of a wrong.^{[4] [5]} In fact, even though the case was treated as involving undue influence, the judge characterized the relationship of the parties as a fiduciary relationship^{1 1} creating fiduciary duties which had been breached. If the claim was founded on the commission of such an equitable wrong, the award of an equitable compensatory remedy is justifiable since the defendant fiduciary is liable to account to the principal for the value of property which he or she no longer holds but which he or she is obliged to return to the claimant. On this reading of the case there was no need to rescind the transaction at all; the case was only concerned with compensation for loss suffered.

(2) Restitution for Undue Influence

Alternatively, the remedy of so-called ‘equitable compensation’ can be analysed as a restitutionary response to the defendant’s unjust enrichment, where the ground of restitution is the undue influence itself. Consequently, the monetary award is not damages at all, since it is not giving effect to rights which arise from the commission of a wrong, but is simply operating to deprive the defendant of a benefit obtained from the undue influence. What the judge was in fact authorizing was restitutionary relief, since the ‘equitable compensation’ took the form of the claimant recovering from the defendant the value of the shares he had surrendered minus what he had received from the defendant.^[6] But on this interpretation there is nothing peculiar about Mahoney v Purnell at all. As has been seen, where specific restitution is not possible, Equity will value the benefit received by the defendant and then effect restitution by means of transfer of the value. In other words, the monetary award was not made in lieu of rescission but was a condition of rescission to ensure that the parties were returned to the position they occupied before entering into the transaction.

• [1] In the same way that damages can be awarded in lieu of rescission for misrepresentation by theMisrepresentation Act 1967, s 2(2) where a contract was induced by innocent or negligent misrepresentation.Although the basis for the assessment of these damages remains unclear (William Sindall plc v Cambs CC[1994] 1 WLR 1016), the better view is that these ‘damages’ are not restitutionary (cf PBH Birks, ‘UnjustFactors and Wrongs: Pecuniary Rescission for Undue Influence’ [1997] RLR 72, 75), but are a special measuredesigned to compensate the representee for the loss resulting from his or her inability to obtain rescission: HBeale (ed), Chitty on Contracts (31st edn, London: Sweet and Maxwell, 2012), para 6-104. It follows that theeffect of s 2(2) is to create a limited statutory wrong of innocent misrepresentation which may be available ifthe justice of the case so requires.
• [2] [1996] 3 All ER 61.
• [3] O’Sullivan, ‘Rescission as a Self-help Remedy: A Critical Analysis’, 510.
• [4] See p 257, above.
• [5] This is doubtful because the requisite element of dependence was lacking. See p 276, below.
• [6] The judge apparently assumed that compensation was the only remedy where the defendant no longer