Undue Influence

Undue influence is defined in Section 16 of the Indian Contract Act, 1872. A contract is said to be induced by undue influence when: (1) one of the parties is in a position to dominate the will of the other; and (2) that party uses such position to obtain an unfair advantage over the other. Section 16(2) specifies when a person is deemed to be in a position to dominate another's will: (a) where they hold a real or apparent authority over the other (employer-employee, parent-child); (b) where they stand in a fiduciary relation to the other (guardian-ward, solicitor-client, spiritual advisor-disciple); or (c) where they contract with a person whose mental capacity is temporarily or permanently affected by age, illness, or mental distress.

On establishing undue influence, Section 16(3) shifts the burden of proof: where a person who is in a position to dominate the will of another enters into a contract with that person, and the transaction appears unconscionable — the burden of proving that the contract was not induced by undue influence shall lie upon the person who is in a position to dominate the will. This reverse burden is significant — in relationships of dominance and vulnerability (such as a moneylender-borrower relationship, or a spiritual advisor-devotee relationship), the burden to prove the absence of undue influence falls on the dominant party.

The relationship between undue influence and constructive fraud is important. Undue influence is sometimes called 'constructive fraud' because it involves taking advantage of a weaker party — though no fraud in the strict sense (intentional deception) is required. What undue influence requires is: (1) a relationship of dominance; (2) use of that dominance to obtain a contract; and (3) an unfair bargain — the transaction must be unconscionable, not merely one-sided. All three elements must be established; mere proof of a relationship of dominance is not sufficient without evidence of an unfair advantage obtained.

Spiritual advisor and religious teacher relationships are particularly susceptible to undue influence challenges. Courts have set aside gifts, wills, and contracts entered into by devotees or disciples with their spiritual advisors where the transaction disproportionately benefited the advisor and the circumstances suggested the devotee's independent judgment was overborne. Similarly, medical professionals entering into transactions with patients, and lawyers entering into transactions with clients, face a presumption of undue influence that must be rebutted.

For advocates, undue influence defences are most commonly raised in: (1) disputes involving elderly or mentally vulnerable persons who made large gifts or signed unfavourable contracts; (2) family arrangements where a dominant family member benefited disproportionately from a weaker member's contract; and (3) commercial transactions between parties in unequal bargaining positions where the terms are oppressive. The remedy is rescission of the contract and restoration of benefits — with the court having discretion to impose compensatory terms where full rescission would be unjust.