Contract Law/Case study

The next issue which must be addressed is that of their intention to create legal relations in order to establish if this agreement would be legally binding.  As far as intent to be legally bound is concerned, contracts can be divided into domestic and social agreements on the one hand and commercial transactions on the other.  As neither party seems to be acting in a business capacity and have had a close relationship for at least three years, this agreement, if established, would fall into the category of either a social or domestic agreement.  Although Posh and Becks are not married, they have been living together and sharing domestic finances for three years which would represent the domestic nature of any agreement.  The law presumes that in the case of domestic agreements that there is no intention to create legal relations.  In the case of Balfour v Balfour, which involved an agreement between a husband and his wife, the Court of Appeal held that the agreement was not legally binding.  This was due to the fact that there was no intention to create legal relations at the time when the agreement was made and that the courts had no place to interfere in agreements of a domestic nature.  On this basis Posh may rely on the fact that she had no intention to create legal relations unless any agreement states to the contrary.

If it is established that a valid contract does indeed exist, then there may be present some vitiating factor that would render the contract voidable which in turn may then be rescinded.  Posh states that she only agreed to the sale of her shares as she was afraid, that if she did not comply, that Becks would leave her.  This may be shown to have unduly influenced her in reaching the decision to sell her shares at such a discounted price.  Undue influence may be present in a contract in one of two forms: actual and presumed undue influence.  Actual undue influence requires that one party would exercise actual influence over the other which would induce them to enter into the transaction as clearly shown in the case of CIBC Mortgages plc v Pitt.  This would not be the case in Posh’s decision to sell her shares to Becks and so may not be relied upon.  Presumed undue influence exists where there is a pre-existing relationship of confidence between two parties to a contract, as a result of which one places trust in the other, and the contract between them is manifestly disadvantageous to the party who places trust in the other.  It has now been accepted that such relationships of trust and confidence may exist between husband and wife and indeed cohabitees as recognized in the case of Barclays Bank plc v O’Brien.  There is manifest disadvantage where a transaction looks suspiciously unfavourable to one party and requires explanation.  This seems to be the case concerning the transaction between Posh and Becks due to their emotional involvement and the price for which the shares were sold and so may therefore be relied upon to have the contract made voidable and set aside.

Turning to Posh’s legal position concerning the signing of a guarantee for a loan for Rooney, we must look closely as to haw this was obtained.  It is stated that Rooney threatened to tell his brother about his affair with Posh unless she signed the guarantee for the loan which Rooney was borrowing.  This would suggest that Posh had felt under pressure to carry out the agreement.  Since a contract will only be binding if the parties voluntarily consent to it, it is obvious that where one party is forced to consent by threats or undue persuasion by the other, that consent should be invalid.  This coercion may be brought about either by duress or by undue influence which, if established, would make any contract voidable.  In order for there to be a finding of duress there is a requirement to satisfy each of the following conditions:

• Pressure was extended on the contracting party.
• This pressure was illegitimate.
• The pressure induced the claimant to enter the contract.
• The claimant had no real choice but to enter the contract.
• The claimant protested at the time or shortly after the contract was made.

In the case of posh it is clear that there was pressure exerted on her and that this pressure induced her to enter into the contract.  She may also state that she did not have any real choice as she did not want Becks to gain knowledge of her affair with his brother.  Posh must now be protesting against there being any contract as she is seeking legal advice and so must clearly satisfy four of these conditions.  The condition which Posh may have difficulty in satisfying is that the pressure was illegitimate and so may wish to state that there was undue influence alternatively.  As previously stated actual undue influence requires that one party would exercise actual influence over the other which would induce them to enter into the transaction.  The influence tends to be of a kind which is similar to, but falls short of, duress.  Slade LJ  in Bank of Credit and Commerce International SA v Aboody stated that “…a person relying on a plea of actual undue influence must show that (a) the other party to the transaction had the capacity to influence the complainant; (b) the influence was exercised; (c) its exercise was undue; (d) its exercise brought about the transaction…”  in the case of Posh it would seem that she would satisfy each of these requirements and so may therefore rely upon the doctrine of actual undue influence to have any contract made voidable.

If Becks had left Posh threatening to publish intimate photographs which he had taken when they were living together, then Posh would be advised to do everything within her powers to refrain him from carrying out this threat.  In order to achieve this she would need to seek an injunction which is a court order restraining the defendant from a specified activity, namely the publication of the photographs.  The type of injunction which she would be seeking would be a prohibitory injunction which serves to prevent any future breach of contract.  This can be shown in the case of Theakston v MGN Ltd.  The case involved a famous television presenter who successfully acquired an injunction against a national newspaper.  The newspaper was planning on publishing photographs of him entering a brothel and stating that he had engaged in sexual activity with three prostitutes.  His main claim was that the publication of the material would constitute a breach of confidentiality and a breach of his right to privacy as provided under The Human Rights Act 1998 Sch. 1 Part I Art.8.  On the same basis, Posh may seek a prohibitory injunction so as to prevent Becks from publishing the photographs without her consent.

If Rooney had become insolvent and the bank was seeking to enforce the guarantee then the legal position of Posh would be as follows.  Posh signed the guarantee for the loan for Rooney which was secured by a charge on the flat which she owned.  The bank would now be seeking the sale of the flat in order to honour the loan.  It has already been established that the guarantee was signed under undue influence.  It will therefore be important to establish as to whether or not the bank had any knowledge of the undue influence.  Where a contracting party is placed on inquiry as to the existence of undue influence, they will only be able to enforce the contract if they can avoid being fixed with constructive notice of the undue influence.  They will only avoid having constructive notice by taking reasonable steps to be satisfied that the other party’s agreement had been freely given.  The leading authority on this subject is Royal Bank of Scotland v Eltridge (No.2).  If the bank was aware as to the existence of any relationship between Posh and Rooney, then they would have been placed on inquiry and should have taken reasonable steps, such as insisting upon independent legal advice, in order to avoid being fixed with constructive notice.  If the bank was totally unaware as to any relationship or the presence of undue influence, as seems to be the case here, then they may indeed enforce the guarantee and Posh may be forced to sell her flat in order to honour the loan.

Based on the alternative assumption that when Posh had agreed to the sale and guarantee she was only seventeen years of age then her capacity to contract must be examined.  Due to the fact that she is only seventeen, she would be classed as a minor as stated by The Minors’ Contracts Act 1987.  The basic common law rule is that contracts do not bind minors.  There are, however, some types of contracts which are binding on minors or which are merely voidable.  The only contracts binding on a minor are contracts for necessaries and contracts of service for the minor’s benefit.  This is not applicable in the case of Posh as neither the sale of the shares or being guarantor fall within either of these categories.  Apart from these types of contract the general rule is that a minor’s contracts are voidable.  Relying on this, Posh will be under no obligation as to the sale of the shares to Becks or to the guarantee for the loan to Rooney.  

     

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