Contract Law: Free Consent: Undue Influence

 

UNDUE INFLUENCE

If the consent of a party of the contract has been obtained by undue influence, the consent is not the free consent which is needed for the validity of a contract and contract is voidable at the option of the party whose consent has been so obtained.

Section 16 defines undue influence as under:

(1) 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.

(2) 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

(3) 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 lie upon the person in a position to dominate the will of the other Nothing in this sub-Section shall affect the provision of Section 111 of the Indian Evidence Act, 1872"

Essentials of undue influence

(1) In order to constitute undue influence, it is necessary to prove that 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

(2) such a person uses his dominant position to obtain an unfair advantage over the other.

It is manifest that both the conditions have ordinarily to be established by the person seeking to avoid the transaction: he has to prove that the other party to the transaction was in a position to dominate his will and that the other party had obtained an unfair advantage by using that position.

Person in dominant position and obtaining of unfair advantage to dominate the will of another-

(1) where he holds a real or apparent authority over the other, or,

(2) where he stands in a fiduciary relation to the other, or,

(3) 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.

 

(1) Real or apparent authority

If a person has an authority over the other contracting party, it is expected that he would not abuse that authority to gain an undue advantage from the other. An employer may be deemed to be having authority over his employee, an income-tax authority over the assessee, a police or a judicial officer over the accused, licensing authority over the licensee.

(2) Fiduciary relation

Any relationship in which one party enjoys the "active confidence of another party who is to lean on him and is inclined to repose implicit confidence in him is enough to approximate to the kind of relationship." For example, A, having advanced money to his son B, during his minority, upon B's coming of age obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence. Fiduciary relation means a relationship of confidence and trust When a person reposes confidence in the other, it is expected that he will not be betrayed. If a person betrays the confidence and trust reposed in him and gains an unfair advantage over the other party in any contract, the suffering party has an option to avoid the contract. The principle of undue influence applies to every case, where influence is acquired and abused, where confidence is reposed and betrayed.

Examples of fiduciary relationship are solicitor and client trustee and cestui que trust (beneficiary), spiritual adviser and devotee, medical attendant and patient, parent and child," "husband and wife, master and servant, creditor and debtor principal and agent, landlord and tenant, lover and beloved, and guardian and ward.

 

In cases of fiduciary relationship, if the person in a dominant position has gained undue advantage in any transaction, the burden of proof lies on such a person to show that the transaction was without undue influence, and in the absence of such a proof the transaction is liable to be cancelled.

The rule regarding the burden of proof in such cases is contained in Section 111, Indian Evidence Act 1872 which reads as under:

“Where there is a question as to the good faith of a transaction between parties, one of whom stands to the other in a position of active confidence, the burden of proving the good faith of the transaction is on the party who is in a position of active confidence."

In Mannu Singh v. Umadat Pande, (1890) ILR 12 All 523 where a 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.

(3) Person in mental or bodily distress

A person is deemed to be in a position to dominate the will of another also in a situation, 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's mental capacity may have been affected on account of his old age, illness, or mental or bodily distress, and there is every possibility that such a person's position may be exploited and unfair advantage taken in such a situation. The law tries to afford protection to such persons also. If a contract is made to the prejudice of such a person, there is deemed to be undue influence in such a case. For example, A, a man enfeebled by disease or age, is induced, by B's influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services. B employs undue influence. Merci Celine D'Souza v. Renie Fernandez, AIR 1998 Kerala 280

Presumption of undue influence in Unconscionable Bargains

When-

1. One of the parties who has obtained the benefits of a transaction is in a position to dominate the will of the other, and

2. The transaction between the parties appears to be unconscionable, the law raises a presumption of undue influence. An unconscionable bargain is one as no sane man not setting under a delusion would make, and no honest man would take advantage of. In such a case, it is for the dominant party to rebut the presumption of undue influence.

 For example, A being in debt to B, a money-lender of the village, contracts a fresh loan on terms which appear to be unconscionable, it lies on A to prove that the contract was not induced by undue influence (Illustration (c) to Section 16).

In Niko Devi v. Kirpa, AIR. 1989 H.P. 51, orphan girl transferred as gift deed to her cousin (loco perentis) all her property the plaintiff

Other cases: Diala Ram v. Sarga, ALR. 1927 Lah. 536(2).  

Takri Devi v. Rama Dogra AIR 1984, HP. 11

Effect of undue influence

Section 19-A of the Indian Contract Act, 1872, declares 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. For example, A's son has forged B's name to a promissory note. B, under threat of prosecuting A's son, obtains a bond from A, for the amount of the forged note. If B sues on this bond, the Court may set the bond aside.

Because of undue influence one party to the contract may have taken an undue advantage under the contract, or the party entitled because to avoid the contract may have already received some benefit under the contract. The court in such cases has been empowered to set aside the contract either absolutely or upon such terms and conditions as the Court may deem just. Second para to Section 19-A incorporates the following provisions in this regard: "Any such contract may be set aside absolutely, or if the party who was entitled to avoid it has received any benefit there under, upon such terms and conditions as the court seem just.

For example, A, a money-lender, advances Rs. 100 to B, an agriculturist, and, by 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.' The object of the above stated provision is that a party who seeks rescission of the contract must also do equity and, if he has received any benefit under the contract, he should compensate the other party.

A provision to that effect is also contained in Section 30, the Specific Relief Act, 1963, which runs as under:

 

"On adjudging the rescission of a contract, the court may require the party to whom such relief is granted to restore, so far as may be, any benefit which he may have received from the other party and to make any compensation to him which justice may require."