Undue Influence
INTRODUCTION
The element of free consent is vital and a contract which bears any of the
vitiating factors of coercion, undue influence, fraud and
misrepresentation may be rescinded by the party whose consent was not
freely obtained.
REQUIREMENT OF FREE CONSENT
Section 10(1) of the Contracts Act emphasises the need for free consent to
a contract.
It provides that:
All agreements are contracts if they are made by the free consent of parties competent to contract,
for a lawful consideration and with a lawful object, and are not hereby expressly declared to be
void. (Emphasis added).
Consent is said to be so caused when it would not have been given but for
the existence of such coercion, undue influence, fraud,
misrepresentation, or mistake.
MEANING OF "VOIDABLE CONTRACT"
an agreement which is enforceable by law at the option of one or more of the parties
thereto, but not at the option of the other or others, is a voidable contract.
Section 14(a)
Section 15
The law on coercion in Malaysia is provided in s 15 of
the Contracts Act. Section 15 defines coercion as follows:
• In Occidental Worldwide- Investment Corp v Skibs a/l Avanti & Ors (the "Siboen" and
the "Sibotre") [1976] 1 Lloyd's Rep 293, in response to counsel's submission that a
contract could only be set aside for duress to the person but not in any other case of
duress, Kerr J stated:
Offences outside the Penal Code or which are merely civil wrongs are
not covered. Thus, the scope of coercion is obsolete and it also does not
address the chief objection to the use of illegitimate pressure.
Economic duress
“First, I do not take the view that the recovery of money paid under
duress other than to the person is necessarily limited to duress to
goods Secondly, from this it follows that the compulsion may take
the form of "economic duress" if the necessary facts are proved. A
threat to break a contract may amount to such 'economic duress'.
Thirdly, if there has been such a form of duress leading to a contract
for consideration, I think that contract is a voidable one which can be
avoided and the excess money paid under it recovered.
In Malaysia, arguments based on economic duress had come before the
courts.
In Teck Guan Trading Sdn Bhd v Hydrotek Engineering (S) Sdn Bhd & Ors
[1996] 4MLJ 331, the plaintiffs agreed to sell round iron bars to the first
defendant. The dispute concerned the price of the bars.
The defendants contended that the price was RM1,180 as stated in a
document drawn out as a result of a discussion between the parties. The
plaintiffs contended that this was a typing error and that the actual price
was RM1,244.
They refused to supply the bars unless the defendants agreed to pay
RM1,244. The first defendant initially resisted the demand but eventually
acceded to it as: (a) the plaintiffs persistently refused to supply; (b) the first
defendant had committed itself to supplying and producing concrete
requiring the bar; and (c) there was no time to look for another source of
supply.
The defence contended that the first defendant was subjected to "economic
blackmail" which constituted another category of coercion. This argument
was rejected by the High Court.
In Mohd Fariq Subraman jam v Naza Motor Trading Sdn Bhd [1998] 6
MLJ 193 the defendants held 50 permits for the operation of taxis and,
by an agreement, appointed the plaintiff as one of their taxi drivers.
The plaintiff was to pay the defendants, inter alia, a daily rental of
RM43 per day, presumably for the use of the taxi and the licence
that went with it. Subsequently, the defendants repossessed the
taxi on the ground that the plaintiff had failed to pay an
outstanding amount of daily rentals.
This repossessionwas permitted by a variation to the agreement
between the parties which was entered into about two months
after the main agreement. The plaintiff contended, inter alia, that
he had signed this variation under economic duress, in that the
defendants would not have released the taxi to him if he had not
signed it and that would lead to a deprivation of his livelihood.
On the facts, the High Court found that there was no coercion. The
plaintiff made no protest either before or after the agreement was
executed. He admitted that the contents in the agreement were
read to him (as he did not know how to read) and no force was
applied to make him sign the agreement. There was also no
evidence that he had taken any steps subsequently to repudiate
the agreement.
While the above cases appear to recognise the doctrine of economic duress,
in Perlis Plantations Berhad v Mohammad Abdullah Ang[1988] 1 CQ 670 the
High Court after referring to the submission of economic duress held that
the "Contract Act does not provide for any form of coercion other than as
defined by section 15". VC George J stated:
“The remedy to which economic duress gives rise is not an action for
damages but an action for restitution of property or money exacted
under such duress and the avoidance of any contract that has been
induced by it; but where the particular form taken by the economic
duress used is itself a tort, the restitutional remedy for money had
and received by the defendant to the plaintiff's use is one which the
plaintiff is entitled to pursue as an alternative remedy to an action
for damages in tort.” Ibid. at 814.
Coercion under section 73 Contracts Act
Chin Nam Bee Development Sdn Bhd v Tai Kim Choo (1988) 2
MLJ 117, the High Court upheld the respondents’ claim and held
that the definition of ‘coercion’ in section 15 should only apply
for the purpose contained in section 14 as section 14 of the Act
specifically says so. It does not apply to section 73. The word
coercion in the context of section 733 of the Act should be given
in its ordinary and general meaning since there is nothing under
section 15 that says that the meaning of the word ‘coercion’ under
section 15 should apply throughout the Act.
In Kanhaya Lal v National Batik of India Ltd ILR (1913) 40 Cal 598, PC
(Appeal fron India) the plaintiff was the proprietor of Delhi Cotton Mills
while the defendant was a bank which obtained judgment against another
company, Delhi Cotton Mills Co. Due to the similarity between that
company's name and the plaintiff's, the plaintiff's property was wrongly
attached. The plaintiff was compelled to pay the sum due under the
judgment by Delhi Cotton Mills Co in order to prevent attachment of its
property. Subsequently, the plaintiff sued for the return of the money. The
defendant contended that the plaintiff's action did not show that there was
coercion within the meaning of s 15 of the Indian Contract Act (in pari
materia with s 15 of the Contracts Act), in that there was unlawful
detaining of property with the intention of causing the plaintiff to enter
into the agreement.
The Privy Council held that the plaintiff was entitled to the return of the
money. It was held that the definition of "coercion" under s 15 only
applies to the question whether there was free consent to an agreement
so as to render it a contract under s 10, and in that case the definition of
coercion would be limited to unlawful acts done with intention of causing a
person or persons to enter into an agreement
Further, the definition of coercion in s 15 does not restrict the meaning
of the word when used in its general and ordinary sense, as to construe it
otherwise would be inconsistent with s 72 of the Indian Contract Act (in
pari ma teria with s 73 of the Contracts Act).
Kanhaya Lal's decision was followed in the Malaysian case of Chin Nam
Bee Development Sdn Bhd v Tai Kim Choo & 4 Ors [1988] 2 MLJ 11 .
In this case, the defendant, a housing developer, told the purchasers to pay
an additional $4,000 and threatened to cancel their bookings if they did not
do so. The purchasers paid the said sum and later claimed for its return on
the ground that it was paid under coercion within s 73 whilst the defendant
contended that this did not fall within coercion as defined in s 15 of the
Contracts Act.
The High Court referred to the Privy Council decision of Kanhatja Lal and
held that the meaning of coercion under s 73 is wider and should be given
its ordinary and general meaning. It is not confined to situations falling
within s 15 of the Contracts Act.
Eusoff Chin J stated:
“It would be difficult to give effect to section 73 illustration (b) if the word
"coercion" is to be given the meaning as defined in section 15 of the Act. They
appear to be in conflict with each other. Therefore the word "coercion" in the
context of section 73 of the Act should be given its ordinary and general
meaning since there is nothing under section 15 which says that the word
"coercion" should apply throughout the Act. The definition of "coercion" in
section 15 should only apply for the purpose contained in section 14, as section 14
of the Act specifically says so.” Ibid. at 119.
Restitution
Section 65
Section 66
UNDUE INFLUENCE
Undue influence under section 16 Contracts Act
Under s 16(1), both elements must be satisfied: (i) the relation subsisting
between the parties are such that one person is in a position to dominate the will
of another; and (ii) the dominant person uses that position to obtain an unfair
advantage over the other.
This was made clear in Poosathurai v Kannappa Chettiar & 0rs (1919) LR 47 IA 1,
Pc (Appeal from India) where the Privy Council held that it is not sufficient to
have mere influence, the influence must be "undue" in that the dominant person
has used his position to obtain an unfair advantage.
“It is a mistake ... to treat undue influence as having been established by a proof
of the relations of the parties having been such that the one naturally relied upon
the other for advice, and the other was in a position to dominate the will of the
first in giving it. Up to that point 'influence' alone has been made out. Such
influence may be used wisely, judiciously and helpfully.
Under s 16(1), both elements must be satisfied: (i) the relation
subsisting between the parties are such that one person is in a position
to dominate the will of another; and (ii) the dominant person uses that
position to obtain an unfair advantage over the other.
This was made clear in Poosathurai v Kannappa Chettiar & 0rs (1919) LR
47 IA 1, Pc (Appeal from India) where the Privy Council held that it is
not sufficient to have mere influence, the influence must be "undue" in
that the dominant person has used his position to obtain an unfair
advantage.
Lord Shaw stated:
“It is a mistake ... to treat undue influence as having been established by a proof
of the relations of the parties having been such that the one naturally relied
upon the other for advice, and the other was in a position to dominate the
will of the first in giving it. Up to that point 'influence' alone has been made
out. Such influence may be used wisely, judiciously and helpfully.
In this case, the appellant alleged that his maternal uncles influenced him
to execute a deed of sale and he sought to cancel the deed. On the facts,
the Privy Council held that it was not proved that the sale was
unconscionable or constituted an advantage unfair to the plaintiff, that is, it
was not a sale for undervalue.
The above principles were applied in the Malaysian case of Saw Gaik Beow v
Cheong Yew Weng & Ors [198913 MLJ 3O1, where the High Court
emphasised the requirement that an unfair advantage was obtained and in
this case, referred to it as "manifest advantage".
.
In Hongkong & Shanghai Banking Corp v Syarikat United Leong
Enterprise Sdn Bhd & A nor [1993] 2 MLJ 449; [1993] 2 AMR Supp Rep
524, the second defendant failed to establish that the first requirement
"a position to dominate" was established. In this case, the second
defendant had signed a guarantee in favour of the plaintiffs for loans
given to the company in which he was a director. His allegation that he
signed under undue influence was rejected by the High Court.
The Court held that PW1 (an advocate of the law firm acting as solicitors for
the bank) was not in a position to dominate the will of the second defendant
as alleged by the second defendant.
On the contrary, the forcefulness of the second defendant's character was
demonstrated when the second defendant got PW1 to meet him at a coffee
house instead of going to PW1's office himself.
Further, the lack of independent legal advice did not necessarily point to
undue influence, as the second defendant, being a man wise of the world,
had not said that he wanted legal advice or had asked for it.
Deemed to be in position to dominate: s 16(2)
The parties were on intimate terms: Abdullah and Daud were frequently
in their brother Arshad's house and had access to the women's quarters.
Arshad's sons went to school in Abdullah's house and frequently went
there to play with their relatives. Abdullah was trustee of a house for one
of the sons. After some negotiations over a family dispute, the plaintiff
signed a conveyance of some properties to the defendants. She sought to
set aside the conveyance and the issue of undue influence was raised.
The Court stated the principles as follows:
“It is a well recognised doctrine of equity that when a
confidential relationship has existed between two
persons and one of them has obtained from the other a
conveyance of property or other advantage for which he
has given no consideration, then it is for such party, if
he claims the benefit of the transaction, to prove that it
was a righteous and proper transaction. And accordingly
such party must show that the deed he sets up as
embodying the transaction was fully understood by the
person who executed it, and that such person executed
it freely and without being subject to undue influence”.
Ibid, at 73-74.
On the facts, the Court held that there was a confidential relationship
between the plaintiff and the defendants:
“The Defendants are the brothers-in-law of the Plaintiff. When her husband,
Arshad, was absent from the Colony... Abdullah managed his business,
collected his rents, paid his expenses, supplied her with money for her wants,
in fact acted as her husband's representative
Eat the time the agreement and conveyance were executed] Arshad was
lying on his bed dangerously ill and unable to attend to business
the Plaintiff, Saiwath, the other wife, Zainab, and the children must have
looked upon Abdullah as the representative of their husband and father, as
the head of the family from whom they could expect advice and protection.
Under such circumstances, his influence over them must have been
necessarily great...” Ibid,at74.
However, the defendants failed to prove that the plaintiff had acted of her
own volition in executing the agreement and the conveyance:
A confidential relationship was also held to have arisen in Rosli bin
Darus v Mansor @ Harun bin Hj Saad & Anor.90 90 [2001] 4 MLJ 206.
In this case, the defendants who were the uncles of the plaintiff failed to
rebut the presumption that undue influence was exercised in the
conveyance of the plaintiff's land to them. The plaintiff had inherited land
from his adoptive mother after her death and had subsequently transferred
it to his uncles, the defendants, in equal shares. He later applied for a
declaration that the transfer was null and void on the ground that it was
induced by the undue influence of the defendants. The High Court agreed
and set aside the conveyance.
Jeffrey Tan J stated the applicable principles:
The principle on which the court acts in relieving against transactions on the
ground of inequality of footing between the parties is not confined to cases where
a fiduciary relation can be shown to exist, but extends to all the varieties of
relations in which dominion may be exercised by one man over another, and
applies to every case where influence is acquired and abused, or where confidence
is reposed and betrayed ... Ibid, at 216.
A type of relationship where one party may be deemed to hold authority and
exercise undue influence over another is the solicitor- client relationship.
A case in point which went on to the Federal Court is Tara Rajaratnam v Datuk
Jagindar Singh & Ors [1983] 2 MLJ 127, HC; [1983] 2 MLJ 196, FC In this case, the
plaintiff agreed to transfer her land as security for an advance of $220,000 to the
plaintiff. The money was to be used to pay off a charge as well as to the first
defendant an amount payable by the plaintiff's brother-in-law for whom the first
defendant stood as surety for a loan obtained. The first and second defendants
were advocates and solicitors who prepared the necessary documents. The
plaintiff's land was transferred to the second defendant who bought the land on
behalf of the first defendant. The second defendant had assured the plaintiff that
although it was in the form of a sale, it would remain a security and will be
transferred back to her after one year. Through the collusion of the defendants,
the land was eventually transferred to the third defendant, who was also an
advocate and solicitor. In the third defendant's action for possession of the land,
the plaintiff pleaded, inter alia, undue influence.
Abdul Razak J referred to the presumption under s 16(2) of the Contracts
Act in relation to solicitors and applied it to the facts of this case as
follows:
“But once a person acts as a solicitor then the presumption of undue influence
arises, and unless they can rebut it the property they acquired from their client
cannot be allowed to remain in their hands. Acting as a solicitor intrinsically
creates a fiduciary relationship between a solicitor and his client which the
solicitor cannot take advantage of since it imposes an obligation on its part to act
with strict-fairness and openness towards them (Haisbury's, Vol. 26 Para. 131).
But a person need not be having fiduciary relationship with another for undue
influence to arise if the relation between the parties are such that one of the
parties is in a position to dominate the will of the other (s 16(2) Contracts Act).
The evidence led showed that the plaintiff had been asked to sign [the
agreement] in circumstances, if not in terms clearly unfavourable to her when
between her, a lay person and the defendants, very senior lawyers and State
Dato', position of respect and dignity in the State, they were clearly in a position
to dominate her will to their advantage.
As earlier stated, the burden of proving that the contract was not induced by
undue influence was on the person in a position to dominate the will of the
other that is the first and second defendants. It is clear from what has been
said they had not discharged that burden.” Ibid, at 138.
The High Court's decision was upheld on appeal to the Federal Court.
In Seah Siang Mong v Ong Ban Chai & Another Case [1998] 1 CLJ Supp 295,
the High Court held that the solicitor-client relationship came within a
fiduciary relationship under s 16(2)(a) of the Contracts Act. The Court held
that the defendant (OBC) who was an advocate and solicitor had failed to
discharge the burden of showing that no undue influence had been
exercised by him.
Mohd Ghazali J stated:
“ … the solicitor-client relationship that existed between the plaintiff makes their
relationship a fiduciary relationship and pursuant to s. 16(3)(a) of the Contracts Act
1950, the burden of proving that the 1980 agreement/PA was not induced by undue
influence was on OBC. I find that OBC had not discharged that burden and his
admission that he failed to advise the plaintiff to obtain independent legal advice is
an admission of his failure to discharge the burden. The evidence had also shown
that a confidential relationship existed between the plaintiff and OBC.” [1998] 1 CLJ
Supp 295 at 327.
Continue…
Fiduciary relationship
In this case, the first and second appellants, together with the Ayala Group of
Companies from the Philippines, planned to incorporate..a. proprietary club in
Malaysia. They acquired all the shares in a company called Raintree Development
Sdn Bhd (RDB) which owned a piece of land that was identified as the proposed
site of the clubhouse. Allied Capital Sdn Bhd was incorporated to build the club's
premises. The preponderance of the shares in RDB and Allied were held by the
first and second appellants. Later, the shareholders of RDB sold their shares to
Allied.
A protem committee of the club was elected and passed a resolution
which authorised the first and second appellants to enter into a share
acquisition agreement on behalf of the club under which the entire
capital of RDB was to be purchased by the club from Allied for RM47
million. The purpose was to acquire the building and the facilities for the
club. The club members were subsequently informed that the total cost
of acquiring the club's premises from Allied would cost much more than
RM47 million due to additional costs. The club members (the
respondents) brought a representative action against the appellants, the
promoters of the club. Meanwhile, Allied brought a separate action
against the club (the respondents) to recover what was due to it under
the share acquisition agreement. The action was resisted on the ground
that the agreement had been procured by undue influence.
Gopal Sri Ram JCA adopted a broad approach to the equitable doctrine of
undue influence as applied to s 16 of the Contracts Act and stated:
After applying the law to the facts of the instant case, the Court concluded
that the share acquisition agreement was procured by undue influence and
considered the appropriate remedies. Gopal Sri Ram JCA stated:
‘… there is a specific finding by the learned judge (which we have upheld) that
the first and second appellants (among others) were fiduciaries and that they
abused the confidence placed in them because they did not seek independent
advice in respect of a transaction under which they stood to reap huge
profits. Additionally, there is the fact that Allied was involved in the whole
transaction through these two appellants as its de facto controllers. Their
abuse of the confidence reposed in them, in the circumstances of this case, is
to be equated to an abuse of confidence by Allied. The learned judge's
conclusions against Allied are therefore sufficiently borne out by the law as
applied to the emerging fact pattern.” Ibid, at 318.
The consequence of undue influence upon a contract is prescribed
by s 19(1) of the Contracts Act 1950 ... The usual remedy by which
an innocent party may relieve himself Of all his obligations under a
contract procured by undue influence is rescission.” Ibid, at 323.
The Court granted the plaintiff a remedy allowed restitutionary relief and
directed that Allied return to the club, the difference between RM47m
and the fair price of the shares, as ordered by the trial judge. The Court
also upheld the award of damages given by the trial judge.
Husband and wife
Following English cases, the Malaysian courts have held that a husband
and wife relationship does not give rise to a presumption of undue
influence. The facts situation in which such arguments are raised are
similar: a wife has given a guarantee for a loan granted to her husband by
a finance company and upon the finance company enforcing the
guarantee, the wife raises as a defence that she had signed the
guarantee under the undue influence of her husband.
In Public Finance Bhd v Lee Bee Rubber Factory Sdn Bhd & Ors [1994] 1
MLJ 495, the High Court held that no presumption of undue influence
arose by reason of the husband and wife relationship alone.
Edgar Joseph Jr SCJ stated:
Most people would think that a conspicuous omission from the list aforesaid is
that of husband and wife. However, the case of Yerkey v Jones (1939) 63 CLR 649
per Dixon J at p 675, shows that the approach of the courts is that there is nothing
unusual in a wife showing her affection for her husband in a tangible way, as for
example, by guaranteeing repayment of his debts. And, so, it is said, that the
affection and confidence inherent in the marital state does not, ipso facto, amount
to undue influence in the eyes of the law. (See Colonial Bank of A/asia v Kerr.
(1889) 15 VLR 74)
I could not therefore hold, having regard to the authorities cited above, that
simply by reason of the relationship of husband and wife existing between
the second and third defendants, a presumption of undue influence arose.”
Ibid,at 505.
This decision was followed in Mayban Finance Bhd v Liew Ek Chiu & Ors
[1998] 1 CLJ 56, where Steve Shim J stated:
“ …the onus of proof generally lies on the party alleging undue influence.
There are however certain relationships which can give rise to a presumption
of undue influence but the case authorities appear to establish that the
relationship of husband and wife is not one of them: see Public Finance Bhd v
Lee Bee Rubber Factory Sdn Bhd & Ors [1994] 1 MLJ 495 on p 505. That being
the position, in the instant case, the 2nd defendant, having alleged undue
influence on the part of the plaintiff and the 1st defendant, the onus would
be on her to prove it.” Ibid,at 6l.
However, it should be noted that in both Mayban Finance Bhd's case above
and in Southern Bank Bhd v Abdul Raof bin Rakinan & Anor [200014 MLJ
719 the courts also referred to the House of Lords decision in Barclays Bank
plc v O'Brien and another [199314 All ER 417; 119931 3 WLR 786 where
Lord Browne-Wilkinson held that a wife who has been induced to stand
surety for her husband's debt by his undue influence, has an equity as
against him and in some circumstances, also as against the creditor, to set
aside the transaction.
In the Southern Bank Bhd case [2000] 4 MLJ 719, KC Vohrah J quoted
Lord Browne-Wilkinson's judgment in Barclays Bank pie v O'Brien [1993]
4 All ER 417; [1993] 3 WLR 786, HL. "' as follows:
“…A wife who has been induced to stand as a surety for her husband's
debts by his undue influence, misrepresentation or some other legal
wrong has an equity against him to set aside that transaction. Under the
ordinary principles of equity, her right to set aside the transaction will be
enforceable against third parties (e.g. against a creditor) if either the
husband was acting as the third party's agent or the third party had
actual or constructive notice of the facts giving rise to her equity.
The doctrine of notice lies at the heart of equity ... Therefore where a wife
has agreed to stand surety for her husband's debts as a result of undue
influence or misrepresentation the creditor will take subject to the wife's
equity to set aside the transaction if the circumstances are such as to put
the creditor on inquiry as to the circumstances in which she agreed to
stand surety.” [2000] 4 MLJ 719 at 724-725.
However, as set out earlier, the position adopted by Lord Browne-
Wilkinson has not been affirmed by later English decisions. The latest
statement of the law on this issue is Royal Bank of Scotland v Etridge (No
2) and other appeals [2002] 6 MLJ 273; [2001] 6 CLJ 79.
where the House of Lords held that in the ordinary course, a wife's
guarantee of her husband's business debts is not to be regarded as a
transaction which, failing proof to the contrary, is explicable only on the
basis that it has been procured by the exercise of undue influence of the
husband.
In Chemsource (M) Sdn Bhd v Udanis bin Mohammad Nor, 121 the High
Court applied the doctrine of undue influence to a case of a defendant
afflicted with Parkinson's disease.
In this case, the defendant took a loan from the plaintiff upon the security of
a mortgage. The interest rate for the loan was very high, namely 2% per
mensem (or 24% annually). The defendant contended that the mortgage was
entered into under undue influence, in view of the high interest rate and the
fact that he was desperately in need of money at the time.
The Privy Council held that the defendant had not brought himself within s 16
of the Indian Contract Act (in pari matenia with s 16 of the Contracts Act).
Lord Shaw stated though the bargain had been unconscionable (and it has the
appearance of being so) a remedy does not arise until the initial fact of a
position to dominate the will has been established. After that fact is
established, then the unconscionable nature of the bargain and the burden of
proof on the issue of undue influence comes into operation. In this case, the
Privy Council held that the relation between the parties was simply that of
lender and borrower.
In an early case, Chait Singh v Budin bin Abdullah (1918) FMSLR 348
of the transaction was also consideredthe unconscionable nature . In
this case, a moneylender sued a borrower upon a promissory note
which provided for interest at the rate of 36%. The borrower had
furnished good collateral security for the loan. The Court held that
these circumstances raised a presumption that the transaction was an
unconscionable one, especially since the rate of interest was
extravagant, within the meaning of s 16(iii) of the Contract Enactment
and liable to be set aside under s 19A of that Enactment. It was also
pointed out that a presumption of the same strength would not arise in
the case of a man of better education and having the advantage of
some business experience (here the borrower was illiterate).
Rebutting the presumption of undue influence
The High Court, while holding that a person not a party to the contract
can commit undue influence, found on the facts that the mere
allegations of the third and fourth defendants were not sufficient to
raise the issue of undue influence.
Zakaria Yatim J stated that:
“In order to establish undue influence, the third and fourth defendants
have to prove that the other party to the contract, that is the plaintiff,
was in a position to dominate their will and that the other party had
obtained an unfair advantage by using that position. A plea of undue
influence can only be raised by a party to the contract and not by a third
party. “ Ibid, at 477.
From the Bank of Montreal case [1911] AC 120, it appears that when a
party enters into a contract with another and that party was induced by
undue influence by a person who is not a party to the contract, the
contract is not enforceable. In my view this conclusion is not inconsistent
with s 16 of the Contracts Act 1950. It is based on the common law and
should be considered as a principle of law in addition to what is provided
in s 16 especially in cases of bank guarantees.”Ibid,at 478.
Unconscionability and inequality of bargaining power
Both are equitable doctrines and there are differing views whether they are so
similar that the doctrine of unconscionability can be developed within s
16(3)(a)'35 or are they distinct doctrines that merit unconscionability a separate
development.
In Malaysia, the Court of Appeal in Saad Marwi v Chan Hwan Hua & Anor
[2001] 2 AMR 2010; [2001] 3 CLJ 98, CA. has recognised the doctrine of
unconscionability and at the same time referred to the doctrine of inequality of
bargaining power.
There have, however, been differing judicial views on this matter in light of, inter
alia, the provision on undue influence in s 16 of the Contracts Act.
Effect of, and relief for undue influence
Thus, the innocent party has the option to rescind or affirm the contract. If
the party chooses to rescind, the effects of rescission as provided in ss 65,66
and 76 of the Contracts Act apply.
Section 20 also provides that the contract may be set aside either absolutely
or upon such terms and conditions as the court may deem just. This
provision giving the court power to set aside a voidable contract on terms as
the court deems just appears only in s 20 (and not in s 19 applicable for
voidable contracts due to coercion, fraud and misrepresentation). This is due
to the equitable nature of the doctrine of undue influence.
In this respect, the Court of Appeal's decision in Tengku Abdullah ibni
Sultan Abu Bakar & Ors v Mohd Latiff bin Shah Mohd & Ors and other
appeals [1991] 2 MLJ 265 CA is relevant.
“Does the case fall within the principles laid down by the decisions of
the Court of Chancery in setting aside voluntary gifts executed by parties
who at the time were under such influence as, in the opinion of the
Court, enabled the donor afterwards to set the gift aside? These
decisions may be divided into two classes - First, where the Court has
been satisfied that the gift was the result of influence expressly used by
the donee for the purpose; second, where the relations between the
donor and donee have at or shortly before the execution of the gift been
such as to raise a presumption that the donee had influence over the
donor... The first class of cases may be considered as depending on the
principle that no one shall be allowed to retain any benefit arising from
his own fraud or wrongful act. In the second class of cases the Court
interferes, not on the ground that any wrongful act has in fact been
committed by the donee, but on the ground of public policy, and to
prevent the relations which existed between the parties and the
influence arising therefrom being abused.” Ibid. at 171.
.
In the same case, Lindley LJ stated:
“First, there are the cases in which there has been some unfair and improper
conduct, some coercion from outside, some overreaching, some form of cheating,
and generally, though not always, some personal advantage obtained by a donee
placed in some close and confidential relation to the donor
The second group consists of cases in which the position of the donor to the donee
has been such that it has been the duty of the donee to advise the donor, or even
to manage his property for him. In such cases the Court throws upon the donee
the burden of proving that he has not abused his position, and of proving that the
gift made to him has not been brought about by any undue influence on his part.
In this class of cases it has been considered necessary to shew that the donor had
independent advice, and was removed from the influence of the donee when the
gift to him was made.”Ibid. at 181.
Lindley LJ also stated that the basis of the doctrine of undue influence is not to
"save persons from the consequences of their own folly" but to "save them
from being victimised by other people.”
In Barclays Bank plc v O'Brien [1993] 4 All ER 417; [1993] 3 WLR 786, HL.
the House of Lords adopted the classification applied by the Court of Appeal
in Bank of Credit and Commerce International SA v Aboody [1992] 4 All ER
955; [1990] 1 QB 923, CA which further subdivided "presumed undue
influence" into two further sub-classes.
“A person who has been induced to enter into a transaction by the undue
influence of another (the wrongdoer) is entitled to set that transaction
aside as against the wrongdoer. Such undue influence is either actual or
presumed.
Class 2A
Certain relationships (for example solicitor and client, medical advisor and patient)
as a matter of law raise the presumption that undue influence has been exercised.
Class 2A
Certain relationships (for example solicitor and client, medical
advisor and patient) as a matter of law raise the presumption that
undue influence has been exercised.
Class 2B
Even if there is no relationship falling within class 2A, if the
complainant proves the de facto existence of a relationship under
which the complainant generally reposed trust and confidence in the
wrongdoer, the existence of such relationship raises the presumption
of undue influence.
In Etridge's case, the House of Lords held that there are two
prerequisites to the evidential shift in the burden of proof from the
complainant to the other party as follows:
“First, that the complainant reposed trust and confidence in the other
party, or the other party acquired ascendancy over the complainant.
Second, that the transaction is not readily explicable by the relationship
of the parties .” Ibid. at 460.
Which held that relief for undue influence rests, not upon some vague "public
policy", but specifically upon the victimisation of one party by the other. Thus, the
presumption that undue influence was exercised would only arise if the transaction
was "manifestly disadvantageous" to the person influenced.
CIBC Mortgages plc v Pitt & Anor [1993] 4 All ER 433 (see also the more
recent Court of Appeal decision in Cheese v Thomas [1994] 1 All ER 35).
Lord Browne-Wilkinson, in overruling Aboody's case, explained that the
requirement of establishing manifest disadvantage was not applicable to
cases of actual undue influence, but applied (if at all), only to cases of
presumed undue influence…
As the present case is one dealing with presumed undue influence, falling
under the class 2B category, and not one of actual undue influence, I need
to consider, following the Privy Council decision in Poosathurai, but bearing
in mind the reservations expressed by Lord Browne-Wilkinsoin Pitt's case,
whether the defendants have also succeeded in establishing that the
contract entered into by the defendants was 'unconscionable' or one of
manifest disadvantage to them .” Ibid, at 156-157
The High Court considered whether the second recording contract was
manifestly disadvantageous as alleged by the defendants and held that it
was not.
Visu Sinnadurai J stated:
“As for the duration of the contract, it is true that the period of the contract was
being extended under the second contract. But this change in the duration of the
contract by itself cannot render the entire contract to be manifestly
disadvantageous to the defendants, though it be said that it appears to be
unreasonable…
Though a period of six years may appear to be unreasonable, but considering the
nature of the recording contract, under which both the recording company and
the artistes themselves may need a reasonable time to achieve their respective
objectives; the recording company to recoup its investments in promoting
relatively unknown artistes; and the artistes'-ambition to achieve recognition as a
successful group, I am inclined to take the view that the duration of the second
contract in the present case is not of such a duration so as to render the entire
contract to be manifestly disadvantageous to the defendants. Manifest
disadvantage, it is generally said, for purposes of the doctrine of undue influence,
has to be a disadvantage which was so obvious to any independent and
reasonable person who considered the transaction as a whole at the time it was
entered into, with full knowledge of all the relevant facts. The mere overbearing
of a person's will is not in itself a disadvantage in the relevant sense. Surely, in the
present case, at the date when the second contract was entered into, no
reasonable person, considering the commercial practice of the recording industry
at that time would say thatthe second contract whereby the defendants
undertook to record for the plaintiffs was clearly disadvantageous to the
defendants .” Ibid, at 158.
As the defendants had failed to establish manifest disadvantage, their attempt
to set aside the contract failed.
His Lordship added that that even if manifest disadvantage no longer needed
to be established as a separate requirement, it was still doubtful if the
defendants would be allowed to set the contract aside as they appeared to
have affirmed it. This was because the group had taken no steps to set aside
the contract but had continued to fulfill their obligations under the second
contract by recording for the plaintiffs.
Guarantee by wives
Cases prior to Barclays Bank plc v O'Brien [1993] 4 All ER 417; [1993] 3 WLR
786, HL. had applied the agency theory, holding the husband to be acting as the
agent of the creditor bank when he asked his wife to execute the guarantee or
charge over his debts. Therefore, if the husband was guilty of undue influence in
procuring the wife's agreement, the bank as his principal would be party to the
same wrongdoing and would be unable to enforce the guarantee or charge.
His Lordship, in restating the law, applied the doctrine of constructive notice,
holding that the bank would have constructive notice of the husband's
wrongdoing unless it had taken reasonable steps to satisfy itself that the wife
had undertaken her obligations freely and with knowledge of all relevant facts.
“In my judgment, if the doctrine of notice is properly applied, there is no
need for the introduction of a special equity in these types of cases. A wife
who has been induced to stand as a surety for her husband's debts by his
undue influence, misrepresentation or some other legal wrong has an
equity as against him to set aside that transaction. Under the ordinary
principles of equity, her right to set aside that transaction will be
enforceable against third parties (e.g. against a creditor) if either the
husband was acting as the third party's agent or the third party had
actual or constructive notice of the facts giving rise to her equity.” [1993]
4 All ER 417 at 428.
Lord Nicholls made it clear that the court should not be too ready to find
undue influence in every case where a wife stands as surety for her
husband's business debts:
“Statements or conduct by a husband which do not pass beyond the bounds of
what may be expected of a reasonable husband in the circumstances should not,
without more, be castigated as undue influence. Similarly, when a husband is
forecasting the future of his business, and expressing his hopes and fears, a degree
of hyperbole may be only natural. Courts should not too readily treat such
exaggerations as misstatements.”Ibid, at 462-463.
Independent legal advice
In Etridge's case, Lord Nicholls considered at length the steps and the
content of legal advice that banks should adopt in cases of guarantees given
by wives for their husbands' debts. Lord Nicholls stated:
“The furthest a bank can be expected to go is to take reasonable steps to satisfy
itself that the wife has had brought home to her, in a meaningful way, the
practical implications of the proposed transaction. This does not wholly eliminate
the risk of undue influence or misrepresentation. But it does mean that a wife
enters into a transaction with her eyes open so far as the basic elements of the
transaction are concerned.” Ibid. at 467.
His Lordship pointed out that the practice of banks, even after the decision
in O'Brien which raised the issue of-constructive notice, was not to have a
private meeting with the wife. His Lordship noted that it was
understandable for banks to be reluctant to hold such meetings, as there
was the risk that assurances allegedly given by the bank's representatives at
such meetings might be used against the bank in subsequent litigation,
whether such allegations were well-founded or not. In the circumstances,
ordinarily it would be reasonable for a bank to rely upon confirmation from
a solicitor, acting for the wife, that he had advised the wife appropriately.
Lord Nicholls set out the scope of the responsibilities of such solicitor as
follows:
“As a first step the solicitor will need to explain to the wife the purpose for
which he has become involved at all. He should explain that, should it ever
become necessary, the bank will rely upon his involvement to counter any
suggestion that the wife was overborne by her husband or that she did not
properly understand the implications of the transaction. The solicitor will
need to obtain confirmation from the wife that she wishes him to act for
her in the matter and to advise her on the legal and practical implications
of the proposed transaction .” Ibid, at 470.
Lord Nicholls also set out the legal content which was considered the
core minimum as follows:
“Typically, the advice a solicitor can be expected to give should cover the
following matters as the core minimum. (1) He will need to explain the nature
of the documents and the practical consequences these will have for the wife if
she signs them. ... (2) He will need to point out the seriousness of the risks
involved. ... (3) The solicitor will need to state clearly that the wife has a choice.
The decision is hers and hers alone …(4) The solicitor should check whether
the wife wishes to proceed …
The solicitor's discussion with the wife should take place at a face-to- face
meeting, in the absence of the husband. It goes without saying that the
solicitor's explanations should be couched in suitably non-technical language. It
also goes without saying that the solicitor's task is an important one. It's not a
formality.
The solicitor should obtain from the bank any information he needs. If the bank
fails for any reason to provide information requested by the solicitor, the
solicitor should decline to provide the confirmation sought by the bank.”Ibid,
at 470.