Undue Influence

 


In the last post, we discussed on the topic of coercion. Do you still remember what coercion is? That's great! Today, I'm going to explain on another topic which is also an agreement made without free consent just like coercion. I guess that you already know what it is! 

What is Undue Influence (UI)?

It is an improper pressure on a person resulting in his being at a manifest disadvantage in relation to some transaction. In other words, UI happens when a person manipulatively influence others to enter into a contract and obtain unfair advantage over the other.

In Malaysia, UI is provided under Section 16(1) of Contracts Act 1950 as follows:-

"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 unfair advantage over the other."

From the provision, there are two elements in order to prove UI which are:

  1. Dominant position
  2. Obtain unfair advantage

Section 16(2) of Contracts Act 1950 provides two limbs where a party have a dominant position:-


(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 first limb provides that a person is deemed to have a dominant person over the other when he holds a real/apparent authority OR where he stands in a fiduciary relation. How to determine which relations it falls? The court usually refer to the common law principle which are Class 2A for real/apparent authority and Class 2B for fiduciary relation. It can be understood as follows:

Real/Apparent authority (Class 2A)
  • Exhaustive
  • Special relationship
  • Eg: solicitor and client/ doctor and patient

Cases:
  • Public Finance Bhd v Lee Bee Rubber Factory Sdn Bhd - Supreme Court gave examples of certain classes of relationship which puts the person in a position to dominate the other
  • Rosli Darus v Mansor Hj Saad - The defendant was in loco parentis. Plaintiff was unemployed, without parents and was totally dependent on the defendant for his daily subsistence.
  • Ong Ban Chai v Seah Siang Mong - Advocate and client


Fiduciary Relationship (Class 2B)
  • Subjective
  • Trust and confidence
  • Eg: husband and wife/siblings/friends

Cases:
  • Southern Bank Bhd v Abdul Raof bin Rakinan - Husband  and wife
  • Tate v Williamson - Uncle and nephew
  • Polygram Records Sdn Bhd v The Search - trust and confidence 

The second limb of Section 16(2) usually known as a shortcut to prove the existence of dominant position because it only needs to prove on the mental incapacity of the party entering the contract.

Cases:
  • Inche Noriah v Shaikh Allie bin Omar - Appellant was a feeble old woman, unable to leave the house, relying entirely upon the respondent for everything, even for her food, clothes and management of her affairs.
  • Lim Kim Hua v Ho  Chui Lan - The plaintiff was very much dependent on the first defendant in both her physical and financial needs as she was getting old in age, had a poor memory and was illiterate. 

As all the requirements were satisfied, a person is deemed to have a dominant position over the other in a contract. Thus, making the first element of UI was established.


The second element to prove UI is the party obtain an unfair advantage over the other. The court also refer to the common law principle which is the rule of unconscionable bargain. It must be a disadvantage which is so obvious to any independent and reasonable person.

Cases:
  • Tate v Williamson - A nephew sold a property to his uncle at an undervalue price
  • Polygram Records Sdn Bhd v The Search - Fail to prove suffered determent

When it is satisfied that a person fulfilled both of these requirements which are dominant position and obtain unfair advantage, it is justified that the contract is made under Undue Influence.

However, in gifts cases,  there is no need to prove unfair advantage as it is obvious that one party will have unfair advantage over the other. In the case of Inche Noriah v Shaikh Allie bin Omar, the court observed that when the appellant executed the deed(gift), her relationship with the respondent was sufficient to raise the presumption of undue influence of respondent over the appellant.

Can we rebut the presumption of UI?

Yes. Section 16(3) provides that the burden of proof  will shift to the defendant where the court will give the defendant to rebut the presumption. Generally, the dominant party can rebut the presumption of UI by showing :-
  1. The transaction was the result of the free exercise  of the victim’s independent will even without showing that the victim received independent legal advice.
  2. The victim understood what he was doing and that was his mental act. ie the donor was acting independently of any influence from the done with full appreciation of what he was doing.

What are the effects and remedies for a contract entered by UI?

Section 20(6) provides that an agreement caused by undue influence is voidable at the option of plaintiff where the plaintiff may rescind or affirm the contract. If the plaintiff rescind the contract, all the benefit he received from the contract should be restore back by virtue of Section 65 of Contract Act 1950.

By setting aside undue influence contract, we can prevent victimization of one party by the other and not because of one’s folly, imprudence or want of foresight.













 

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