Law of Contract: Undue Influence

Johnny is an old man. He has two children, Joe and Victoria. Johnny has informed everyone that when he dies, the property is to be shared equally among Joe and Victoria. He stays with Victoria and is totally dependent on her to look after him. Johnny loves his daughter and does whatever she tells him to do. Two months ago, Johnny transferred all his property to Victoria. He passed away a few days ago. Joe claims that the contract is voidable. Discuss.


The issues that arise in this case are:

  1. Whether there is a relationship between Johnny and Victoria?
  2. Whether Victoria used her dominant position to transfer all of Johnny’s property to her?
  3. Whether Joe has the right to set aside/ rescind the contract?
  4. Whether this presumption can be rebutted?

Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contacting by any law to which he is subject according to section 11 of Contracts Act 1950. Section 10 (1) of Contracts Act 1950 states 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. Consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation and mistakes according to Section 14 of Contracts Act 1950.

A voidable contract is one where one party has a choice of either continuing with the contact or rescinding the contract: section 2 (j). Rescission ab initio means termination of contract on the original date of the contract. Section 20 provides that 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 the conditions as the court may seem just. Undue influence is where the consent has been obtained by some form of pressure applied improperly on the victim, the contract becomes voidable. The contract is said to be vitiated for lack of consent. The burden of proving that such undue influence has been exercised normally lies on the person seeking to rescind the contract. In this case, the burden of proving undue influence falls upon Joe.

Section 16(1) provides that a contract is said to be induced by “undue influence” where a. There is a relationship between the parties and one of the parties is in a position to dominate the will of the other b. The dominant party uses that position to obtain an unfair advantage over the other Based on Section 16(1) Joe must show that at the time:

a. At the time of the contract, there was already a close relationship between Johnny and Victoria and that in the relationship Victoria was in a dominant position. Rosli Darus V. Mansor Hj.Saad Rosli lost his adoptive father when he was 11. Since then, the Mansor Hj. Saad i.e. brother of Rosli’s adoptive mother has been living together with him in the same house, providing food, clothing and expenses to the Rosli. Rosli’s adoptive mother died when Mansor was 22. Since then, Mansor has continued his role as guardian to the Rosli.

Mansor testified that Rosli always listened to his advice and instructions. Rosli transferred his land to the Mansor. The court held that, the defendant was in loco parentis(refers to an individual who assumes parental status and responsibilities for another individual, usually a young person, without formally adopting that person) .Rosli was unemployed,without parents and was totally dependent on the defendant for his daily subsistence. Mansor could dominate the will of the plaintiff if he wanted to.

b. Victoria made use of her dominant position to obtain the gift or the contract from Johnny. Southern Bank Bhd V Abdul Raof B. Rakinah The plaintiff granted an overdraft facility to the first defendant. The second defendant who was the wife of the first defendant stood as guarantor. The plaintiff sued the defendant. The second defendants defended plaintiff claim and alleged undue influence on the part of the first defendant on her at the time she executed the guarantee agreement. The court held that, section 16 of the Contracts Act 1950 as well as decided cases makes it clear that there is no presumption of undue influence between husband and wives. However, where a wife has been induced to stand surety for her husband debt by his undue influence, she has equity as against him to set aside the transaction.

c. The making of the gift to Victoria, or the contract entered into with Victoria was unfair to the Joe. In the case of Tate v Wiliamson, Tate is a student who intends to sell some property to settle his tuition fees. He found the defendant who is a lawyer for advice on the sale. The defendant bought Tate’s property at 7,000 without informing Tate that the actual value of the property is 20,000.The Court held, the contract must be set aside because there is trust between the defendant's relationships with Tate.

This is because Tate has referred to the defendant to obtain counsel and by the defendant was not entitled to buy the property without making the disclosure.Such a relationship was described as; wherever 2 persons stand in such a relation that while it continues, confidence is necessarily reposed by one, and the influence which necessarily grows out of that confidence is passed by the other, and this confidence is abused, or the influence is exerted to obtain an advantage at the expense of the confiding party, the person so availing himself of his position will not be permitted to retain the advantage, although that transaction could not have impeached if no such confidential relation had existed.

In this case, Johnny is Victoria and Joe’s father. However he is an old man and needs someone to care for him therefore his mental capacity is questionable. Johnny loves and adores his daughter, Victoria a lot. Johnny is also totally dependent on her. Victoria is in a dominant position because Johnny does whatever Victoria asks him to do. Two months ago, Johnny transferred all his property to Victoria even though previously he said he will divide his property equally between Joe and Victoria. The transfer of property to Victoria is clearly unfair to Joe.

Natural love and affection is a valid consideration. According to Section 26(a) of the Contracts Act 1950, an agreement made on account of natural love and affection would be held to be binding in Malaysia id these requirements are present: * It is expresses in writing

  • It is registered(if applicable)
  • The parties stand in a near relation to each other In this case, Victoria,Joe and Johnny stand in close relation to each other. The contract is binding however there is evidence of the presence of undue influence therefore the contract is considered to be voidable.

Coomber v Coomber A father had been assisted in his business by his second son. After the father's death, the mother transferred the business assets to that second son. After her death, the elder son sought the transfer of those assets back into her estate, saying that in the absence of her having taken independent advice, the younger son's position brought an implication of undue influence. Held:

The mother's actions were adequately explained by her wish to do what she thought her husband would have wanted. Fletcher Moulton LJ summarised the general rules applicable to cases of persons who are competent to form an opinion of their own: 'All that is necessary is that some independent person, free from any taint of the relationship, or of the consideration of interest which would affect the act, should put clearly before the person what are the nature and the consequences of the act. It is for adult persons of competent mind to decide whether they will do an act, and I do not think that independent and competent advice means independent and competent approval.

It simply means that the advice shall be removed entirely from the suspected atmosphere; and that from the clear language of an independent mind, they should know precisely what they are doing.' Dominant position is essential that the person relying on the plea of presumed undue influence must first prove that the other party was in a position to dominate his will. No further question arises until this is proved. Section 16(2)-In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of another- a. Where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or

  • Illustration: A’s son has forged B’s name to a promissory note. B, under threat of prosecuting A’s son, obtain bond from A for the amount of the forged note. If B sues on this bond, the court man set the bond aside.

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 stress.

  • Illustration: A, a moneylender, advances RM 100 to B, an agriculturist, and, by undue influence , induces B to execute a bond for Rm 200 with interest at 6% per month. The court may set the bond aside, ordering B to repay the RM 100 with such interest as may seem just. Che Som bte Yip & Ors v Maha Pte Ltd & Ors

The first and second plaintiffs are the committee of the estate of the third plaintiff, having been appointed by orders of court under the Mental Disorders and Treatment Act (Cap 178). The present action is taken by the first and second plaintiffs, for and on behalf of the third plaintiff, for a declaration that a mortgage deed of the property at 344 Onan Road (the said property) dated 17 December 1974, allegedly executed by the third plaintiff in favour of the third defendant, be declared null and void and of no legal effect.

They also asked for a declaration that all consequential entries made at the Registry of Titles and Deeds be declared null and void.The mortgage deed was executed between Maha Pte Ltd (the first defendant) of the first part, Abdul Hamid Bilal (the second defendant) and Alias Bilal (third plaintiff) of the second part and Habib Bank Ltd (the third defendant) of the third part.

The third defendant was and is a bank incorporated in Pakistan and was at the relevant time having a branch and carrying on banking business in Singapore (the bank). The said mortgage was executed as part security for banking facilities granted by the third defendant to the first defendant, tenants in common in equal shares of the said property.The mortgage ded was set aside insofar as it affected the plaintiff over whom undue influence was exercised.In this case the relationship was that of brothers.This relationship on the face of it does not give rise to a presumption of undue influence. However, the court found as a fact that undue influence was indeed exercised by the brothers because the third defendant’s mental capacity was questionable.

Barclays Bank plc and O’Brien & Anor 151 Farnham Lane, Slough, was in Mr and Mrs O’Brien’s names jointly. They had a £25,000 mortgage to a building society. Mr Tucker, who worked for Barclays Bank plc, when the mortgage was increased to £60,000 in 1981 made a note that Mrs O’Brien might be a problem. In 1987 Mr O’Brien’s company, Heathrow Fabrications Ltd, was not doing well and he agreed with the Barclays Woolwich branch to raise the company’s overdraft to £135,000, reducing to £120,000 after three weeks, guaranteed by Mr O’Brien and secured on his matrimonial home with a second charge.

The Woolwich branch sent a message to the Burnham branch where Mrs O’Brien was meant to sign saying to tell her of the full effects, but they did not follow instructions. Mrs O’Brien saw a document and did not read it. It said ‘obtain independent legal advice before signing this letter’ but she just signed it and was not given a copy. By November 1987 the company was doing badly. The demands for the repayments were not met and possession was sought. Mrs O’Brien argued she was unduly influenced into the contract and that she was not bound. In this case, the House of Lords approved of the following classification and the effect of actual and presumed undue influence

a. Class 1 –actual undue influence – here it is necessary for the claimant to prove affirmatively that the wrongdoer exerted undue influence on the complainant to enter thw particular transactions which is impugned.

b. Class 2- presumed undue influence- here the complainant only has to show, in the first instance, that the wrongdoer of such a nature that it is fair to presume that the wrongdoer abused that relationship in procuring the complainant to enter into the impugned transaction. In class 2 cases, there is no need to produce evidence that actual undue influence was exerted in relation to the particular transactions impugned: once a confidential relationship has been proved, the burden than shifts to the wrongdoer to prove that the complainant has independent advice.

This case can be classified under presumed undue influence. Joe must show that Victoria was in a dominant position in her relationship of trust and confidence with Johnny and the disputed transaction was unfair to Joe.

Whether this presumption can be rebutted?

Section 16(3) a. Where a person who is in the position to dominate the will of another, enters into a contact with him and the transaction appears on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that the contract was not induced by undue influence shall lie upon the person in a position to dominate the will of another. In Raghunath Prasad v Sarju Prasad [Father and son are equal owners of a vast joint family property .Both have quarrelled over it.Father instituted criminal proceedings against the son. In order to defend himself, the son borrowed money from the father at 24% compound interest and mortgaged his properties . In eleven years, the amount payable magnified more than eleven fold.

The son contended that the father/lender taking unconscionable advantage of his mental distress and exercised undue influence.The son failed to prove that the father/lender was in a position to dominate his will.The son/borrower got no relief.] it was held that three matters are to be dealt under Section16(3) of the Act, i.e: i. The relations between the parties or each other must be such that one is in a position to dominate the will of the other ii. The issue whether the contract has been induced by undue influence iii.

The burden of proof that the contract was not induced by undue influence lies upon the person who was in a position to dominate the will of the other In situations where it is apparent that a confidential relationship exists between the parties, the law raises a presumption that undue influence has been exercised and the onus of proof is upon the donee to show the transactions is ‘righteous and proper’ Based on Salwath Haneem versus Hadjee Abdullah (1894),the plaintiff’s husband executed a conveyance of property belonging to himself and the plaintiff to B and C, his brothers. The plaintiff agreed to the conveyance but after her husband’s death, she brought an action seeking to set aside the agreement and the conveyance.

The Straits Settlements Court of Appeal held that a confidentialrelationship existed between the plaintiff B and C. The burden of proof therefore lay on B and C to show that the plaintiff fully understood the transaction and executedconveyance freely and without being subject to undue influence. Since both B and C failed to discharge the burden, the transaction was set aside. Datuk Jaginder Singh and Ors v Tara Rajaratnam

The respondent, who was the registered proprietor of land, claimed that she was induced by the fraud and under influence of the 1st and 2nd appellant to transfer her land to the 2nd appellant. The court held that the appellants and respondent were in a solicitor-client relationship, the transaction was unconscionable, the burden was on the appellants to rebut the presumption of undue influence. Since they had not discharged that burden, the transaction was set aside.

Under section 16(3), it is for Victoria to prove the act that Johnny entered into the contract freely without any undue influence. Victoria must shows that Johnny understood the nature of the transfer and its full significance and effect. In case Lim Kim Hua V Ho Chui Lan, the plaintiff was the registered proprietress of a piece of land on which stood a shophouse. She executed a will devising and bequeathing the shophouse to four of her grandchildren including the second defendant.

The plaintiff later executed a memorandum of transfer transferring her one-half share of the shophouse to the second defendant and shortly afterwards she executed another memorandum of transfer transferring her remaining half-share of the shophouse to the first defendant (the mother of the second defendant). The plaintiff sought a declaration that the two memoranda of transfer are null and void and relied on the ground of fraud or dishonesty and undue influence on the part of the defendants.

There was sufficient evidence to show the existence of a special relationship between the plaintiff and the first defendant. The plaintiff was living with the first defendant who provided her with food and accommodation and the first defendant was entrusted by the plaintiff to manage the affairs of the shop house. There can be no question that 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. From these factors undue influence can reasonably be inferred and the first defendant’s allegation that the plaintiff wanted to affect the transfer in hurry and the contents were read and explained to her werenot sufficient to rebut the inference of undue influence.

In order to rebut the presumption of undue influence, the court must be satisfied upon the evidence that the donor was acting independently of any influence from the donee and with the full appreciation of what he was doing. One way of establishing this is to prove that independent legal advice had been given to the owner.

In the case of Inche Noriah v Shaik Allie bin Omar, An old and illiterate Malay woman executed a deed of gift of a landed property in Singapore in favour of her nephew who had been managing her affairs. Before executing the deed the donor had independent legal advice from a lawyer who acted in good faith. However, he was unaware that the gift constituted of practically the whole of her property and did not impress upon her that she could prudently and equally effectively, have benefited the donee by bestowing the property upon him by a will. The court held that the gift should be set aside as the presumption of undue influence, which is raised by the relationship proved to have been in existence between the parties, was not rebutted. Bruce Barkwill v. The Cornelia H. Barkwill Revocable Trust.

The appellate judges had to decide whether Cornelia Barkwill revised her trust under undue influence from her son Jeffrey Barkwill. Jeffrey lived near Cornelia, assisted her in getting a line of credit on her homes, and issued checks drawn on that line of credit to her when needed. He also advanced around $230,000 of his own money to her throughout the years. Bruce lived in Florida and only saw his mother twice between 1998 and when she died in 2007.

After taking Valium without a prescription, Cornelia became disoriented and confused, leaving her house in disarray. She told Bruce she thought Jeffrey and his family was stealing from her. After she stopped taking the Valium, Cornelia returned to her normal self and worked with an attorney to revise her trust to remove Bruce as a beneficiary. She named Jeffrey as sole beneficiary. The trial court found the 2006 trust to be valid. On appeal, Bruce claimed the trial court failed to apply the necessary presumption of undue influence by Jeffrey on Cornelia.

He believed the financial arrangements between Jeffery and their mother points to his obvious dominant position. Jeffrey argued that no presumption of undue influence attached to his relationship with his mother and Bruce had misinterpreted the trial court's finding on the issue.The appellate court found Cornelia's arrangements with Jeffery weren't her only means of income, she didn't depend on him on a daily basis, and he wasn't in a dominant role in the relationship with his mother at the time she changed the trust. Also, unlike the circumstances in Meyer or Allender, Jeffery wasn't involved in the revision to the trust, wrote Judge Michael Barnes.

Victoria will have to prove that Johnny’s mental capacity was not questionable and that he had received legal advice before the transfer of property to her. She also have to clarify her presence during the revision of Johnny’s will. Therefore the effect of undue influence is that the agreement is a voidable contract under Section 20 of Contract Act 1950, the contract may be set aside.