Undue Affect beneath the Indian Contract Act, 1872 – LexForti Authorized

This article explains the concept of Undue Influence under the Indian Contract Act, 1872. It has written by Anirudha Sapre associated with National Law University, Jodhpur

Introduction

An unfair influence arises when a person is able to convince the decisions of another on the basis of the relationship between the two parties. Sometimes, due to elevated status, higher education, or emotional relations, one of the parties is in a position of dominance over the other.

The more influential person uses this leverage to coerce the other person into making choices that may not be in their best interest in the long term. In the exercise of undue power, the influencer is always able to take advantage of the weaker group.

A party claiming to be the object of unfair interference may in contract law, be entitled to revoke the terms of the agreement. It is the duty of the individual with power in this form of relationship to show that he did not use his role to take advantage of the other party. In other cases, one party could be suspected, on the basis of prior encounters, of exploiting the confidence of the other party to its advantage.

Classes of influence

Two classes of influence were recognized in the case of Bank of Credit & Commerce International v Aboody[1]: –

Actual undue influence:

Actual undue influence, as the name implies, requires proof that the contract has been entered into as a result of actual influence. The complainant would plead and show that the actions they claimed amounted to excessive control. This can include acts such as threats to terminate a relationship, continuing to plaster the group where they have denied consent before they finally give in. There is no simple concept of excessive control.

Presumed undue influence:

In this case, due to the nature of the relationship between the two parties, the law assumes that there was undue influence, and the burden of proof falls on the accused. The relationship could be one of the following- Parent-Child, Lawyer-Client, Religious Advisor-Disciple, Doctor-Patient, Trustee-Beneficiary.

Presumption of Undue Influence may also arise when the transaction is clearly not for the good of the weaker party but offers the party in a fiduciary role a great advantage, the law would create a presumption that the transaction was entered as a consequence of some form of relationship violence. This criterion has been expressed in terms of a visible disadvantage.

In the case of Royal Bank of Scotland v. Etridge, the House of Lords found that the word could no longer be used and replaced with the criterion that the transaction must be one that cannot be easily clarified by the relationship of the parties, considering the difficulties in relation to the manifest disadvantage.

This is intended to exclude insignificant gifts, but to put significant advantages within its realm, even where a gain is also earned by the vulnerable group.

Undue Influence under the Indian Contract Act, 1872

Indian Contract Act (ICA) describes consent as a meeting of the parties’ minds, i.e. consensus ad idem (when they are in agreement on the same thing in the same sense), in Section 13. Section 14 further defines consent as an essential component of a legal binding contract by stating that’ Consent is voluntary unless induced by Coercion (Section 15), Undue Control (Section 16), Fraud (Section 17), Misrepresentation (s 18) or Mistake (s 18) (s 20-22) (s 20-22). A contract entered into under the defendant’s control is enforceable at the plaintiff’s discretion (the party whose consent was given) and voidable under ICA Section 19A.[2]

Section 16[3] of the ICA notes that a contract is said to be caused by undue interference where, due to the nature of the relationship between them, the will of the consenting party may be controlled by the other. Although the contract is formed to get an unfair advantage over the other, one party controls the other. It also means that a person is able to influence the will of the other person if he:

  • Has a real or evident power resulting through or from fiduciary relationships (trust relationships) between them.
  • Forms a contract with a party whose mental ability is temporarily or permanently impacted due to disease or age or due to mental distress.

The burden of proof that the contract was not affected by unfair interference rests with the accused, i.e. the person who was able to overpower the other’s will.

The plea of undue interference, as held in M Venkatasubbaiah v. M Subbamma[4], must be from the party or its legal members who under the influence of the other party, executed the document or created the contract. Even if he thinks so, any third party is not permitted to assert adversity or lack of agreement in any way.

However, a contract is qualified to be set aside if some other (third party) party other than that in the contract has exerted excessive control. Similarly, a contracting party could forfeit its rights under the contract if, through collusion with a third party, the contracting party was an agent or a third party’s principle by which it was able to exert its control over the contract.[5]

Section 19A

Section 19A[6] talks about the consequences of a contract entered by undue influence: –

“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.”

At the choice of the party whose consent is thus established, a contract caused by undue influence is voidable. This is the same provision as in the case of other factors vitiating consent. The second paragraph is an additional provision giving powers to a court to impose conditions while adjudging setting aside the contract.

This provision was enacted by the Indian Contract Act (Amendment Act) 1899 and it was intended to expressly authorize the Indian and English courts’ practice of relieving the debtor from the coercive terms of his contract in cases of unconscionable money lending, but conditional to the return to the lender of the money actually advanced with reasonable interest.

Where consent to an agreement has been caused by undue influence, the contract is voidable at the option of the party whose consent is so caused. Since the contract is voidable, it gives the person under undue influence, a right of choice or election. Such a right, once exercised, is exhausted.

If such a person, by express notice or by conduct, elects to affirm, he cannot later seek to avoid the contract; and if he has elected to avoid, he cannot later be allowed to affirm. There is no locus penitentiae in either case.

Where a contract is voidable, it can be rescinded by communicating rescission under Section 66 of the Contract Act, or by filing a suit for setting aside the contract. The plea of undue influence can also be raised as a defence in a suit filed by the other party for enforcing the contract, but a document vitiated by undue influence is voidable and not void ab initio and will have to be set aside; a mere suit for declaration that the instrument is void and ineffective, will not lie.[7]

Popular categories

Relationship

In order to fall into this category, it is not required for the parties to be connected to each other by a blood relationship, marriage or adoption, but what is inherently important is for one party to be in a superior position and to be able to dominate the will of the other.

It is not limited to strict fiduciary relationships but is applicable to all forms of relationships. The presence of such relationships alone, however, is not capable of proving undue power, but there must be an exercise of supremacy.

Dominating position

The conditions in which the contract was concluded are taken into account in this category of unfair control, along with their relationships. The presence and use of the dominating position are compulsory for an action to be invoked. If, unless any contrary object occurs, once supremacy is created, it is assumed that there was the usage in the specific case.

Unfair Advantage 

In the case of Ganesh Narayan Nagarkar v. Vishnu Ramchandra Saraf[8], the court declared that the benefit or enrichment obtained by unjust or unjust means is an unfair advantage.  When the bargain favours the one who enjoys the power and proves unjust to others it comes into being.

True and Obvious Authority

There is a real authority in this sort of power, such as a police officer or an employer who uses his dominance for his enrichment. Apparent power pretends to have true power without its reality.

Fiduciary Partnership

This kind of relationship is based solely on the presence of mutual trust between the parties. It is one that one of the parties inevitably recovers its confidence in the other and one party begins to control the other with an increase in that trust gradually.

There is typically this form of relationship between patients and doctors, attorney and client, biological parents, mentor and pupil and trust recipient (cestui que trust), etc.

In Mannu Singh v. Umadat Pande[9], an instance of such an event, a guru influenced his disciple to take his property as a gift by promising to obtain benefits for him in the next world. Since it was not produced with free consent, the court set the gift aside.

Parent and Kid

As parents satisfy their children’s every need and expect them to act under their supervision, there is an intrinsic effect from their upbringing on children and that follows in their lives. Therefore, when some gain is transferred at the detriment of the child to the parent or any third party, the courts of equity view it as envy on the part of a parent.

Therefore, in any situation, the age of children is often taken into consideration to assess the level of parental control. In Lancashire Loans Ltd v. Black[10], when a girl entered a money loan transaction as protection for her mother just before her marriage, it was held to be entered under undue influence.

Affecting Mental Capacity

It is an existing rule of Inder Singh v. Dayal Singh[11] that “undue influence arises when a party executes a contract taking advantage of the temporary or permanent benefit of the mental condition of another.”

But once the defendant has used this chance to his benefit, a mere disturbed state of mind does not amount to undue control. Similarly, because of a lack of experience of the complainant, instigating a person to enter into a contract who has just achieved his majority amounts to unfair control under this category.

Difference between Undue Influence and Coercion.

“Under Section 15 of the Indian Contract Act, “Coercion is to commit, or threaten to commit, any act prohibited by the Indian Penal Code, or to unlawfully detain, or to threaten to detain, any property, to the detriment of any person whatsoever with the intention of causing any person to enter into an agreement.” There are several differences, however, as well: –

  • Under Section 15 of the Act, coercion is specified, while under Section 16 of the Act, unreasonable control is defined.
  • The parties may or may not be linked to each other in Coercion. It is not compulsory for any kind of interaction to occur between the parties. In the case of unfair interference, however, the parties are linked to one another. 
  • Coercion is committed when by committing or threatening to commit any act punishable under the Indian Penal Code, 1860, a party obtains the consent of the other party to make him enter into an agreement. Undue Control refers to the undue usage by one party over the other of authority or power to make him enter into an agreement.
  • There is physical aggression in the use of violence. Mental or moral coercion is used to exert excessive control.
  •  In Coercion, the benefit earned must be returned or reimbursed to the injured portion if the deal is avoided. The injured party must therefore be positioned in its original location. In the event of undue interference, if the contract is avoided, it is the court’s discretion whether to order the aggrieved party to recover or repay the profit obtained.[12]

Conclusion

The theory of excessive control is equity doctrine. Undue influence is a descriptive term that encompasses instances of undue influence in specific circumstances, as well as instances of superiority or pressure beyond those particular relationships. It can be argued that undue control is one of the ways in which, as described under Section 13 of the Act, there is inadequate consent. Moreover, by misusing one’s authority, the establishment of a contract violates the concept of equity.

Therefore, it must be decided in fiduciary and other partnerships where one party enjoys real obvious authority or power that the arrangement he/she has made is free of any external manifestation. By specifying the exact limits of its exercise, the courts have always been careful not to fetter this useful authority. But the examples of undue influence have been laid down quite extensively.

The Indian Contract Act is not the only statute that provides protection from undue influence. Section 27-30 of the Specific Relief Act, 1963 also takes into account undue influence. The law has generally always considered consensus ad idem to be an essential part of contracts, and the protection of undue influence under Section 16 and 19A of the ICA are just examples of that.

FAQs

What is undue influence in contract law?

Undue influence occurs when an individual is able to persuade another’s decisions due to the relationship between the two parties. In contract law, a party claiming to be the victim of undue influence may be able to void the terms of the agreement.

What is presumption of undue influence?

Where one of the parties to a contract is in a position to dominate the will of the other and contract is prima facie unconscionable i.e., unfair, the court presumes the existence of undue influence in such cases.

[1] Bank of Credit & Commerce International v Aboody, [1990] 1 QB 923.

[2] Krishnendra Joshi, Undue Influence in Contract, available at: – https://blog.ipleaders.in/undue-influence-contract/.

[3] Indian Contract Act, Section 16.

[4] M Venkatasubbaiah v. M Subbamma, AIR 1956 AP 195.

[5] Supra Note 2.

[6] Indian Contract Act, 1872, Section 19A.

[7] Mulla, Indian Contract Act.

[8] Ganesh Narayan Nagarkar v. Vishnu Ramchandra Saraf, (1907) ILR Bom 439.

[9] Mannu Singh v. Umadat Pande, (1890) ILR 12 All 523.

[10] Lancashire Loans Ltd v. Black, [1933] All ER Rep 201.

[11] Inder Singh v. Dayal Singh, AIR 1924 Lah 601. Indian Contract Act, 1872, Section 15.

[12] Mayank Burman, Coercion, Undue Influence and the Difference between Coercion and the Undue Influence. Available at:-http://lawtimesjournal.in/coercion-undue-influence-difference-between-coercion-and-undue-influence/.

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