Undue Influence in Contract Law
Aim and objective of the project
- To discuss (in detail) the concept of Undue Influence in Contract Law.
- To analyze the circumstances and relationships where Undue Influence is present.
Introduction
Section 13 of the Indian Contract Act, 1872 defines Consent as:
“Two or more persons are said to consent when they agree upon the same thing in the same sense.”
Which is also known as consensus ad idem (meeting of minds).
Section 14 of the Indian Contract Act, 1872 further defines the criterion of free consent to form a valid binding contract (as has been mentioned in section 10 of the Indian Contract Act, 1872) as:
“Consent is said to be free when it is not caused by–
- Coercion, as defined in section 15, or
- Undue influence, as defined in section 16, or
- Fraud, as defined in section 17, or
- Misrepresentation, as defined in section 18, or
- Mistake, subject to the provisions of sections 20, 21 and 22.
Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake.”
Where consent to an agreement is caused by undue influence (defined in section 16), the agreement becomes a contract voidable at the option of the party whose consent was so caused, under section 19A of the Indian Contract Act, 1872.
Undue Influence In Contract Law
‘Influence’ can be described as the ascendancy acquired by one person over another. ‘Undue Influence’ is improper use of such ascendancy by the ascendant person, for the benefit of himself or someone else so that the act of the person who get influenced are not in the fullest sense, his free or voluntary act. In simple words we can say that undue influence involves one person taking advantage of the position of dominant power over another person. This difference in power between the contracting parties can vitiate the consent of the party who is not powerful and because of this inequity in power the other party is unable to exercise his free or independent will which further makes the contract voidable at his option
Section 16(1) of the Indian Contract Act, 1872
Undue Influence as defined under section 16(1) of the Indian Contract Act, 1872 as:
“A contract is said to be induced by ‘undue influence’ where the relations subsisting between the parties are such that one of the parties is in the position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.”
The principle of undue influence is a doctrine of equity which involves one person taking advantage of his dominant position over another. Section 16 comes into play when:
- There lies existing relationship between the contracting parties.
- One party dominates the will of other party.
- The person dominating the will obtains unfair advantage of the other person.
These are the basic elements that needs to be present so as to render a contract induced by undue influence as laid down by the honorable Supreme Court in the case of Ladli Parshad Jaiswal v. Karnal Distillery Co. Ltd. [1].
Indian Contract, (Amendment) Act, 1899, (6 of 1899). With the amendment in 1899,[2] a new sub section was inserted namely Section 19-A, which states that “When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused. Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the Court may seem just.”
1. Existing Relationship between the parties:
Relationship of blood, marriage or adoption not ‘sine qua non’. It means that it is not essentially required that the parties of the contract need to be connected by blood, marriage or adoption, but the relationship should be such a nature that a party is in a superior position over the other person. “Mere relationship is not sufficient for a court to assume that one relation was in a position to dominate the will of the other.”[3] It applies to all types of relations where there is a possibility of exercising undue influence on the basis of confidence created or established or in cases of exercising dominance and is not restricted to cases where fiduciary relationship is established. Some relationships where dominating position exists are a guardian and ward, father and son, patient and his medical advisor, preacher and his disciple etc. All these relationships are ones in which a person can dominate the will of the weaker person.
The possibility of existence of undue influence even arises as the result of the circumstances under which a contract was being entered into. In the case of Ranee Annapurni Nachiar v. Swaminatha Chettiar[4], a money lender charged unreasonable rate of interest from a widow because she was poor and in dire need of money. The court held that the plaintiff was in a position to dominate the will of the defendant and dismissed the claim of the money lender and revised the rate of interest that seemed reasonable.
2. Domination of will
The second essential element to prove the existence of undue influence is domination of will. “The court is of the opinion that the there must not only be dominant position but the person so having the dominant position must use it[5].” The Privy Council observed in Poosathurai v. Kappanna Chettiar[6] that it would be wrong to treat all the cases where influence is present as a case of undue influence. In the situation where one party is naturally relied upon other for advice and the person giving advice was in a position to dominate the will of the first person, we can say that the person having the dominant position have influence over the other person but there needs to be something more than mere influence so as to render an influence ‘undue’. The exercise of the dominant position over the weaker person is an essence in a contract so as to render a contract within the purview of undue influence.
For reference, In the case of threat to file a criminal proceeding, it was held that the plaintiff must show that the complainant took advantage of his powerful position and the state of the accused to apply pressure upon the plaintiff to obtain his consent[7].
3. Obtains Unfair Advantage
The basic and the most essential element to constitute undue influence is obtaining unfair advantage. The person dominating the will must take unfair advantage of the weaker person. Unfair advantage here means advantage obtained by unrighteous means. It would exist where the bargain is in favour of the influencer and unfair to the other party. It is not only that we need to prove the unfair advantage has been obtained to establish undue influence, it also has to be shown that this unfair advantage was obtained by the party when he was in a position to dominate the will of the other person.
An instructive illustration is the decision of the Privy Council in Wajid Khan v Raja Ewaz Ali Khan:[8] An old and illiterate woman who was incapable of doing any business, conferred on her confidential managing agent, without any valuable consideration, an important pecuniary benefit under the guise of a trust.
Section 16(2) of the Indian Contract Act, 1872
Different circumstances and relationships under which the will of one party to contract is said to dominate the will of the other party is defined under Section 16(2) as:
“In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of another-
(a) where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or
(b) where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress.”
A person can dominate the will of a person over whom he can exercise some authority. Such authority can be grouped in three categories as mentioned in sub-section 2:
- Real or Apparent Authority
- Fiduciary Authority
- Person not mentally fit
1. Real or Apparent Authority
Under real authority, specific powers, expressly conferred by a principal to an agent to act on the principal’s behalf. This power may be broad, general power or it may be limited, specific power. It is also known as express authority. This authority exists between employer and employee, an officer and his subordinate, a police officer and an accused, etc. Apparent Authority is when real authority does not exist, but the person is able to approach the other with a show or colour of authority.
Under real or apparent authority, the person so exercising the power is in the position to dominate the will of the other party to the contract and it appears that he is clearly in the position to take unfair advantage of the position of the weaker party and gain from this unfair advantage.
2. Fiduciary Authority or fiduciary relationship
A fiduciary relationship arises between parties where one of them stands in a position of trust with the other, or in such a position that the latter naturally reposes confidence in him, a confidence such that an influence grows out of confidence. “Fiduciary relationships are of several kinds. Indeed every relationship of trust and confidence is a fiduciary relation.”[9] Such relationship exists between parent and child, solicitor and client, doctor and patient, etc. “Such relationship also exists between a brother and his unmarried and uneducated sister living under his care[10]” and even between “a teacher and a student[11].” “There also lies a special relationship of trust and confidentiality between the bank and the employee.”[12]
In order to establish fiduciary relationship, it is necessary to prove that one party relies on the other to such an extent that complete trust and confidence is placed in the other enabling him to influence the former. Where such fiduciary relationship subsists, the probability of one person dominating the will of the other arises from the nature of the relationship. Mere existence of fiduciary relationship raises the “presumption of undue influence”.
The effect of presumption is that once it is shown that the defendant was in the position to dominate the will of the plaintiff it will be presumed that he must have used his position to obtain an unfair advantage. It will be then for the defendant to show that the plaintiff freely consented.[13]
3. Person not mentally fit
When a person’s mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress, there lies an existence of undue influence. Only existence of distressed mind does not raise the presumption of undue influence, unless the other party has taken undue or unfair advantage to himself[14]. In the case of Hart v O’Connor,[15] Jack O’Connor who was a person of 83 year old with unsound mind, sold his farm to Hart. After Hart occupied the land one of the Jack’s brother, Mr. Joseph O’Connor took over as trustee of the estate and he sought to set aside the contract. O’Connor was successful at the trial as Jack’s mental capacity was to enter into a contract was affected as he was of unsound mind while contracting and this inequity makes the other person in a position to dominate his will.
The contract that is influenced by undue influence is voidable at the option of the party whose consent was dominated. The person being not able to express his free consent can set the contract aside.
Section 16(3) of the Indian Contract Act, 1872
Section 16(3) of the Indian Contract Act, 1872 says that:
“Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall be upon the person in a position to dominate the will of the other. Nothing in the sub-section shall affect the provisions of section 111 of the Indian Evidence Act, 1872 (1 of 1872).”
This section says about the burden of proof that a contract is not induced by undue influence lies upon the person, who being in the dominant position makes a bargain so as to his own advantage that it ‘shocks the conscience’. This section comes in operation when it is proved that a person was in a position to dominate the will of another and the transaction appears on the face of it or on the evidence adduced to be unconscionable. If these are not proved, the presumption of undue influence will not arise and burden will not shift; and proof of the actual use of dominating position will be required.
In Poosathurai v. Kannappa Chettiar[16], it was observed that “the person in a position to use his dominating power has the burden thrown upon him, and it is a heavy burden of establishing affirmatively that no domination was practiced so as to bring about the transaction, but that the grantor of the deed was scrupulously kept separately advised in the independence of a free agent.”
Power to set aside contract induced by undue influence
With the amendment in 1899,[17] a new sub section was inserted namely Section 19-A, which states that “When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused. Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the Court may seem just.”
To understand this sub section we can refer to the given illustration, A a moneylender advances Rs 100 to B, an agriculturist and by exercising undue influence induces B to execute a bond for Rs 200 with interest at 6 per cent per month. The Court may set the bond aside, ordering B to repay Rs 100 with such interest as may seem just.
In the case of Mannu Singh v Umadat Pande,[18] where a spiritual guru influenced his disciple to take his property in gift by promising to secure benefits to him in the next world. The court set the gift aside as it was not formed with free consent.
Conclusion
Undue Influence is therefore a constructive fraud. When a person uses his dominant position to dominate the will of another contracting party to obtain unfair advantage over him, he comes under the ambit of undue influence. The contract induced by undue influence is voidable at the option of the party whose free consent was not present. The person who is in the dominating position in the contract has to prove that he did not exercise any domination for the transaction. Undue influence can be distinguished from other influences on the basis that the person takes unfair advantage of another in undue influence.
Author: Ankita Sharma,
1st year,
National University of Study and Research in Law, Ranchi (NUSRL).