Examine the concept of ‘undue influence’ as per the Indian Contract Act. How does undue influence affect the validity of a contract? Provide relevant examples and case laws

The concept of “undue influence” as per the Indian Contract Act, 1872, is an essential part of contract law that helps to ensure fairness and voluntariness in contractual dealings. Under Section 16 of the Indian Contract Act, undue influence is defined as a situation where one party, due to their position or relationship, is able to dominate the will of another and uses that position to obtain an unfair advantage. When undue influence is proven, the contract can be rendered voidable at the option of the influenced party.

Understanding Undue Influence

Section 16 of the Indian Contract Act, 1872, defines undue influence as:

• When a party to a contract is in a position to dominate the will of the other and uses that position to gain an unfair advantage.
• This domination can occur due to relationships such as guardian-ward, lawyer-client, doctor-patient, trustee-beneficiary, or other such relations where there is an inherent power imbalance.

The Act also specifies factors that indicate undue influence, particularly when:

1. One party holds real or apparent authority over the other.
2. One party stands in a fiduciary relation to the other.
3. The party whose will is dominated has a mental or physical infirmity or is under distress, which makes them susceptible to influence.

Types of Relationships Presumed to Involve Undue Influence

There are certain relationships in which the court presumes the existence of undue influence. In such cases, the burden of proof shifts to the dominant party to show that no undue influence was exerted. Some examples include:

1. Parent and child – For instance, a parent could influence a child to transfer property.
2. Guardian and ward – Where a guardian may exert pressure over a minor.
3. Trustee and beneficiary – A trustee could manipulate a beneficiary to act in a certain way.
4. Doctor and patient – The trust a patient places in a doctor could be used unethically.
5. Religious advisor and follower – A spiritual or religious leader might use their influence over a disciple or follower.

Conditions Necessary to Prove Undue Influence

To establish undue influence, the following conditions must generally be satisfied:

1. Existence of a Dominant Position: The party must be in a dominant position, having real or apparent authority over the other.
2. Unfair Advantage Gained: The dominant party must have gained an unfair advantage from the contract due to their influence.

Legal Consequences of Undue Influence on a Contract

When undue influence is proven, the contract becomes voidable at the option of the influenced party. This means the affected party has the right to either:

• Rescind the contract, restoring both parties to their pre-contractual position, or
• Seek revision of the terms of the contract to ensure fairness.

Case Laws Illustrating Undue Influence

1. Raghunath Prasad v. Sarju Prasad (1924)

• In this landmark case, the court held that a party who holds a position of power and authority over another must be cautious not to take an unfair advantage. The court recognized that undue influence had been exercised due to the relationship of trust, and therefore, the contract was voidable.

2. Ladli Prasad Jaiswal v. Karnal Distillery Co. Ltd. (1963)

• In this case, the Supreme Court emphasized that the presumption of undue influence applies if the transaction appears unconscionable and one party holds a dominant position over the other. Here, a director of a company, due to his authoritative position, was alleged to have induced other directors to enter into an agreement. The contract was set aside as the court found undue influence.

3. Man Kaur v. Hartar Singh Sangha (2010)

• This case dealt with undue influence within a family context. Here, the court scrutinized a transaction between family members, examining whether one relative used their position to influence the other unfairly. Since no independent advice was taken, the court was inclined to assume undue influence due to the family relationship and the lack of clarity in the transaction.

4. Allcard v. Skinner (1887)

• Although not an Indian case, this English case is often cited in Indian courts regarding undue influence. In this case, a woman gifted her entire property to a religious organization under the influence of her religious adviser. The court found that undue influence was exercised, considering the religious dependency, and declared the contract voidable.

5. Subhas Chandra Das Mushib v. Ganga Prosad Das Mushib (1967)

• In this case, the defendant, who was in a dominant position over the plaintiff, obtained an agreement through undue influence. The plaintiff challenged the agreement, claiming that it was entered under undue influence, and the court ruled in favour of the plaintiff. The court held that the plaintiff’s circumstances, including limited mental capacity, supported the claim of undue influence.

Examples of Situations Where Undue Influence May Arise

1. Medical Treatment Agreements: If a patient, in a vulnerable state, signs a financially disadvantageous agreement with a doctor, claiming undue influence can render the agreement voidable.
2. Elderly Parent’s Property Transfer: If an elderly parent transfers their property to a caretaker or child without independent legal advice, it may be presumed to be under undue influence.
3. Loans Taken Under Pressure: If an individual takes a loan from a family member due to undue pressure in a time of financial crisis, they may later contest the validity of the agreement on grounds of undue influence.

Burden of Proof in Undue Influence

Generally, the burden of proof lies on the influenced party to show that:

1. The other party had a dominant position.
2. They used that position to obtain an unfair advantage.

However, once undue influence is presumed (e.g., in cases of fiduciary or special relationships), the burden shifts to the dominant party to prove that the contract was entered into fairly and voluntarily.

Section 16(3): Reversing the Burden of Proof

The Indian Contract Act, 1872, under Section 16(3), establishes that if a contract appears to be unconscionable (unfairly one-sided), the courts may presume undue influence, reversing the burden of proof. This effectively protects weaker parties from exploitation by dominant parties.

Remedies for Contracts Affected by Undue Influence

The affected party may seek one of the following remedies:

1. Rescission: The influenced party may have the contract cancelled, and the parties are returned to their original positions.
2. Revision or Modification: The court may adjust the contract terms to ensure fairness.

The Role of Independent Advice

Courts often look for evidence of independent advice in cases alleging undue influence. If the influenced party had access to independent legal counsel, it reduces the likelihood of proving undue influence, as it suggests that the party entered into the agreement voluntarily and with full knowledge.

Conclusion

The doctrine of undue influence under the Indian Contract Act serves as an essential check against exploitation in contractual relationships. It ensures that contracts are based on free will rather than manipulation or coercion due to a position of power or trust. This doctrine upholds the sanctity of contract law by preventing abuse of dominant positions and securing fairness in contractual dealings. The courts use both subjective and objective factors, such as the nature of the relationship, the circumstances under which the contract was made, and whether independent advice was available, to assess undue influence claims.

This legal provision thus ensures a balanced approach by validating contracts that are made freely and voiding those obtained unfairly, as illustrated through case laws like Raghunath Prasad v. Sarju Prasad, Ladli Prasad Jaiswal v. Karnal Distillery Co. Ltd., and others. In essence, the doctrine of undue influence preserves the integrity and fairness of contractual relations, making it a cornerstone of contract law in India.