Part A Introduction The facts present various problems. The first issue is undue influence. This is the most obvious issue.
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Rachel took a mortgage out with Ernest for debts that her husband owed for his business and for this reason, it was a transaction not for her advantage. The second issue that must be discussed is sales at undervalue – a friend of the mortgagee advised his sister to purchase the property at a much reduced price. The final issue is the second charge, and the rights that the second mortgagee may have in regard to the sale and any proceeds from it. Undue influence The basic idea behind the doctrine of undue influence is that a person should not be held to a transaction if induced to enter into that transaction due to the exercise of power over him by someone with whom he had a relationship of confidence or trust. Undue influence arrives when two key elements exist. Firstly, there must be a relationship of trust and secondly, there must be some evidence of abuse of trust. In the case of Barclays Bank plc v O’Brien  the husband needed to raise money for his business, and owned the matrimonial home jointly with his wife. They used the house as security for the overdraft, and his wife signed the paperwork and attended the bank to secure the funding. When the bank wished to foreclose, she claimed the mortgage was not enforceable against her, because she was a victim of undue influence by her husband and misrepresentation by the bank. Although the case was decided on misrepresentation, Lord Browne-Wilkinson set our two categories of undue influence. Class 1 was where the claimant had to prove that there was actual undue influence over her and this was the reason for entering into the transaction. Class 2 constitutes presumed undue influence, where all the claimant needed to prove is that a relationship of trust and confidence between her and the wrongdoer and was induced to enter into the transaction to her manifest disadvantage. The classification above was not entirely discounted in the case of Royal Bank of Scotland v Etridge  but changed in that the presumption in the second category was changed. It is now necessary for the person alleging undue influence to prove it. In Etridge, the court confirmed that manifest disadvantage was still needed, as it acts as a necessary limitation on the relationship of trust. If undue influence is proven, then the complainant will have the right to have the transaction set aside against the wrongdoer. In regard to the mortgagee, the undue influence gives rise to an equity in favour of the complainant – a right of remedy against the wrongdoer.
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