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Undue influence
15/11/2005 The Star Articles of
Law with Bhag Singh
The existence of undue influence in the formation of a contract can lead to
its being flouted by the party who claims to have been influenced to agree
to it.
This is because all contracts depend on “free consent” and consent is said
to be free only if it is not caused by undue influence. This makes it
necessary to understand what “undue influence” means.
A starting point would be Section 16 of the Contracts Act 1950 which states
the general principle and the emphasis where such influence is deemed to
exist and lays down rules for establishing on whom the burden of proof is in
certain situations. It states: “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 a position to dominate the will of the other and
uses that position to obtain an unfair advantage over the other.”
The word “undue influence” has the tendency to make people feel that it
would include situations where one party is about to persuade the other
through some kind of influence in a general sense. But this may not be
enough.
However if the section is looked at carefully it is obvious that there are
essential elements namely a relationship in which one party is dominant and
the use of such dominance to obtain an unfair advantage.
Thus in Bank of China vs Maria Chia Sook Lan, the respondent who had charged
her property for facilities given to her husband for his business contended
that the bank had procured the execution of the guarantee by her by undue
influence.
It was alleged that the bank acting through its servant had threatened her.
The facts that were relied upon were the statements made by the bank officer
(a) pressing her in her husband’s absence to give a further guarantee of his
account; (b) threatening that, if she did not give the guarantee, the bank
would sell her shares held as security for her overdraft and (c) threatening
that, if she did not give the guarantee, the bank would make her husband
bankrupt.
It was conceded for the guarantor that although the bank was entitled to
make him bankrupt, the threat to do so constituted undue influence.
The court took the view that considering the facts relating to the
guarantee, Madam Chia had failed to establish undue influence.
Of course this is not to say that a threat can never amount to undue
influence. Williams vs Bayle involved a case where a son sent to bankers
promissory notes with his father’s name on them as endorser. The bankers
insisted, without any direct threat of a prosecution, on a settlement to
which the father was to be a party.
He consented and executed an agreement to make an equitable mortgage of his
property. It was held where a father takes upon himself a civil liability
with the knowledge that unless he does so, his son will be exposed to a
criminal prosecution, is not a free and voluntary agent and the agreement he
makes under such circumstances is not enforceable in equity.
Apart from the general provisions and principles relating to undue influence
the Contracts Act 1950 specifically sets out situations where a person is
deemed to be in a position to dominate the will of another. These are:
(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.
The effect of these stipulations is that where it can be established to
support this presumption then it is not necessary to go any further to
establish that such a person is in a position to dominate the will of the
other.
However the fact that a person who is alleged to exercise undue influence is
in a “deemed position” to dominate the will of the other is by itself not
enough to prove that there has been undue influence. There must be a further
element present.
The transaction must be unconscionable. Once this further element is
established then it will be presumed that the transaction was entered into
under undue influence. This is reflected in Section 16 (3) of the Contracts
Act 1950 which reads: “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 the contract was not induced by undue influence
shall lie upon the person in a position to dominate the will of the other.”
A consideration of all these is required to establish that undue influence
exists. The existence of undue influence affects the consent which is a
prerequisite to the existence of a valid agreement. Hence Section 20 reads:
“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 there under, upon such
terms and conditions as to the court may seem just.”
Where there is no undue influence, aspects such as misrepresentation, fraud
or coercion may vitiate an otherwise valid agreement. |
