Contracts/Undue influence: Difference between revisions

Template:Multiple issues Template:Contract law Template:Equitable doctrines In jurisprudence, undue influence is an equitable doctrine that involves one person taking advantage of a position of power over another person. This inequity in power between the parties can vitiate one party's consent as they are unable to freely exercise their independent will.^[1]

In contract law

Where it is established that a plaintiff was induced to enter into a contract or transaction by the undue influence of the defendant, the contract may be rendered voidable. If undue influence is proved in a contract, the innocent party is entitled to set aside the contract against the defendant, and the remedy is rescission. ^[2]

As the law of undue influence was applied and developed by the Court of Chancery, it developed into two distinct classes: ‘actual’ undue influence and ‘presumed’ undue influence. ^[3]

In Australia

In Australia, the leading case on undue influence is Johnson v Buttress [1936] HCA 41 ^[4] in which the approach to 'actual' and 'presumed' undue influence was at issue.

• Actual undue influence,^[5] where it is proven that the defendant exerted influence over the complainant to have them enter into a contract^[6]
• Presumed undue influence, made up of:

1. deemed relationship of influence, relationships that raise the premise, as a matter of law, that influence has been utilised^[7]
2. relationship of influence in fact, where the complainant ensconces that trust and confidence was bestowed in the wrongdoer and therefore a presumption of influence should be recognised^[8]

Presumed undue influence

First subgroup

In the first subgroup, the relationship falls in a class of relationships that as a matter of law will raise a presumption of undue influence. Such classes include:

• Government/citizen (note this is not confirmed)^[9]
• Parent/child^[10]
• Guardian/ward^[11][12]
• Religious adviser/member of the flock^[13]
• Solicitor (attorney)/client^[14][15]
• Doctor/patient^[16] (note this excludes dentist and patient^[17])

In such cases, the burden of proof lies on the first of said parties (e.g. the government, parent, or doctor) to disprove undue influence on the second party. This requires the dominant party to establish that the second party "knew and understood what he or she was doing, and that he or she was acting independently of the influence of the dominant party".^[18][19] One influential factor in deciding whether the second party was acting independently is whether he or she was given an independent advice, while such an advice is not indispensable for rebutting the presumption.^[20]

Second subgroup

The second subgroup covers relationships that do not fall into the first subgroup, but on the facts of case, there was an antecedent relationship between the parties that led to undue influence. The test is one of whether "one party occupies or assumes towards another a position naturally involving an ascendancy or influence over that other, or a dependence or trust on his part".^[21] If the plaintiff satisfies this a presumption of undue influence will arise, to which the onus of proof transfers to the defendant, who thereon, must rebut that "in all the circumstances", the relationship between the parties involved "dealings were at arm's length and that the other’s will was in no way overborne by the relationship of confidence" that existed.^[22]

Actual undue influence

An innocent party may also seek to have a contract set aside for actual undue influence, where there is no presumption of undue influence, but there is evidence that the power was unbalanced at the time of the signing of the contract.,^[23][24] Factors such as age, mental capacity and literacy of the donee, among other considerations such as the nature of the transaction (fair or unfair) will help determine actual undue influence.^[25] There is no requirement of manifest disadvantage.^[26]

In Farmers' Co-Op Executors & Trustees v Perks,^[5] a wife transferred her interest as tenant in common on a farming property to her husband; the property was owned jointly be the husband and herself. There was evidential proof that there was a long history of brutal domestic violence inflicted by the husband on the wife, whereby he ended up murdering her. There was a presumption that the wife only transferred her interest to the husband because of undue influence and evidence proved that the transfer resulted from actual undue influence. It was because of the history of violence that resulted in the judge setting aside the transfer.^[27]

A contrasting case is Lee v Chai, in which Mr Lee purchased an apartment and a Porche for Ms Chai, with whom he was having an affair.^[28] Mr Lee argued that the gifts were given as a result of undue influence, and as such should be set aside. It was held that Mr Lee and Ms Chai were not in a relationship of influence that would attract the operation of the equitable doctrine. Mr Lee was a well-educated man with substantial experience in business affairs, while Ms Chai had a 'less forceful personality' and less business experience. This case highlights an approach taken in Australia, which is to focus on the impaired consent of the plaintiff.^[29] Deane J in Commercial Bank of Australia v Amadio said 'Undue influence, like common law duress, looks to the quality of the consent or assent of the weaker party'.^[30]

A special principle

In Garcia v National Australia Bank (1998) 194 CLR 395, the High Court of Australia approved the principle in Yerkey v Jones [1939] HCA 3 by distinguishing between cases of actual undue influence and situations where the transaction is set aside because the guarantor does not understand the nature of the transaction.^[31] Although there is no presumption of undue influence, a "lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet ... did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her."^[32]

In probate law

"Undue influence" is the most common ground for will contests and are often accompanied by a capacity challenge. That is, someone in possession of full mental capacity is not likely to be swayed by undue influence, manipulation, or coercion. In litigation most jurisdictions place the burden of proving undue influence on the party challenging the will. Undue influence can be very difficult to prove, and the mere appearance of undue influence is inadequate to challenge the validity of a will.^[33]

In probate law, undue influence is generally defined as a testator's loss of free agency regarding property disposition through contemporaneous psychological domination by an advisor, resulting in an excessive benefit to the advisor. It is important to note that "undue influence" is an issue only when the advisor is benefiting, not when advisor is getting a benefit for someone else; in that case it would be considered fraud.^[34]

In Germany, to avoid undue influence it is illegal for a testator who is or has been a resident of a nursing home to bequeath any property to any employee of the nursing home.^[35]

See also

• Compare with duress
• Undue influence in English law

References