Section 16 of Indian Contract Act, 1872 defines undue influence as a situation where one party has the power to dominate the will of another thereby influencing their decision to enter into a contract. This provision is designed to protect vulnerable individuals who may be exploited due to factors like dependency, disability, authority, or mental health challenges
The core idea behind the section is to ensure that consent in contract is genuine and free from coercion or manipulation. By addressing undue influence, the law seeks to promote fairness and justice in contractual relationships, ensuring that both parties derive equal benefit from the agreement.
Section 16 of Indian Contract Act, 1872 specifically applies to relationships where trust, authority or dominance is inherent such as between an employer and employee, a guardian ward or a doctor and a patient. It requires judicial scrutiny in such cases to prevent exploitation and uphold the principles of equity and the rule of law.
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Understanding Undue Influence under Section 16 of Indian Contract Act, 1872
According to Section 16 of the Indian Contract Act, 1872, undue influence happens when one party to a contract has significant influence or control over the other party’s decisions and uses this part to unfairly benefit themselves. It undermines the free will of the influence party leading to an agreement that may not be genuinely voluntary.
This provision protects persons from being compelled or influenced into making deals that, by the use of their freewill, they wouldn’t want to make.
The law appreciates that relations may be characterised by power relations, be it business, friendship or even a fiduciary relationship.
Section 16 prevents absolute dominance of one party where such dominance creates unfair contractual provisions.
Essential Elements of Section 16 of Indian Contract Act, 1872
The following essential ingredients must be present to prove the inclusion of undue influence as per Section 16 of Indian Contract Act, 1872:
Ability to dominate the will of another
This is the very foundation of undue influence. It occurs when one individual or group gains so much control or influence over the other that moves made by the other will be easily regulated. The law agrees with the fact that contracts must be entered freely and where the will of one party is dominated that is legal wrongdoing.
Relationships Involving Domination
Section 16(2)(a) talks about such authorities where it becomes easier for a person to induce or dominate someone to enter into a contract by his authority, these are:
Real or,
Apparent Authority
This means where one party has actual or potential power over the other.
Real Authority: When a person has authority over, or the capacity to make decisions directly affecting, another person.
Example: An employer pressuring an employee to agree to terrible terms of employment treaties demanding the employee to be fired if they do not agree to them.
Apparent Authority: It is when one person appears to control another, even if they have no legal right to do so.
Example: there is a loan scheme where a senior student influences a junior to sign an agreement by pretending to have compatriots in the college’s administration.
What is Fiduciary Relation?
Section 16(2)(a) of Indian Contract Act, 1872 says that a fiduciary relationship is a principal-agent type relationship in which one individual owes a duty on behalf of another. There is honour, candour, and the requirement to work for the principal’s benefit and not for the agent's benefit.
Few examples of Fiduciary Relationships:
Trustee and beneficiary
Advocate and his client
Doctor and his patient
Guardian and ward
Company directors and their shareholders
Mental Distress
Section 16(2)(b) says that mental incapacitation occurring on a permanent or a temporary basis makes a person more susceptible to undue influence. This can include situations involving:
Age: Old people making a decision to sign deeds in property transfer under undue influence from the young people.
Illness: For example, a bedridden patient forced to sign an unjust contract with regard to the treatment they need to receive.
Bodily or Emotional Distress: Forcing a person who has just lost their loved one into agreeing to an unfair deal or a man who has been sacked from his job develops anxiety and convinces himself that he cannot get a better offer, that is why he agreed to part with his house at a lower price.
Burden of Proof
This is such a key point to make that if undue influence is suspected, together with other factors such as a contract that seems unfair or one-sided, then the burden of proof lies with the person in the position of dominant influence.
They need to provide evidence to the court that the parties to the contract did so willingly without undue influence or pressure.
This is quite different from the traditional rule in law where the person who lays a complaint comes with proof.
For Example: If a patient says that their doctor forced them to change the property in exchange for treatment then the doctor needs to prove that a patient agreed willingly to change property.
Read essential elements of a valid contract in Indian Contract Act, 1872
Judicial Interpretations
Indian courts have interpreted section 16 with precision to ensure justice and fairness and cases involving undue influence. Through careful analysis, the judiciary has consistently applied this provision to protect vulnerable parties and maintain the integrity of contractual relationship relationships. The following are some key judgements that highlight this approach::
Raghunath Prasad v. Sarju Prasad (1923): This case brought out specifics that in undue influence it is the misuse of power by the dominant party to gain an unfair bargaining power.
Subhas Chandra Das Mushib v. Ganga Prosad Das Mushib (1967): The case allowed that domination or influence for no exploitation to be unlawful unless it is used for gain.
Ladli Prasad Jaiswal v. Karnal Distillery Co. (1963): The Supreme Court pointed out that it is always for the dominant party or the defendant party to discharge the burden of proving the free consent
Remedies under Section 16 of Indian Contract Act, 1872
If undue influence is established, the affected party can:
Void the Contract: The influenced party may opt to reject the contract making it invalid
Seek Compensation: In some cases, restitution or compensation for all the losses incurred as a result of an unfair agreement may be awarded by the courts.
Modify the Terms: In some aspects, courts may be in a position to change part or the entire contract since it is unfair and not set it aside completely.
Learn about future contracts, its features and types under Indian Contract Act, 1872.
Summary
Indian Contract Act, 1872 outline Section 16 which relates to undue influence where free consent is required. If one party controls the other’s decisions then that is called undue influence where there is advantage occasioned by control. Factors include power where one person or party has more control over another like a position of trust, where one of the individuals has a right to trust and reliance, similar to that of an employer-employee relationship, and dependency where the two people are chained through age, sickness, or duress. They cause vulnerability in persons and make them easy to influence by others. In fact, it is usually the duty of the dominant party to demonstrate that the contract was made voluntarily. The Act also provides measures of rescission for undue influence, where the contract can be voided, the guilty party can be made to compensate for all the damages, or terms of contract are changed to make it more balanced.
Read how Contracts in restraint of trade are void.
Undue Influence: Section 16 of Indian Contract Act, 1872: FAQs
Q1. What does Section 16 of the Indian Contract Act, 1872 deal with?
Section 16 deals with "Contracts by undue influence." It declares contracts made under undue influence to be voidable at the option of the party influenced.
Q2. What is "undue influence" in a contract?
Undue influence occurs when one party uses their position of power over the other to dominate their will and get them to agree to a contract against their free will.
Q3. How is "undue influence" established?
Undue influence is presumed when one party holds a position of authority or trust over the other and uses this to obtain consent for a contract.
Q4. Can a contract made under undue influence be enforced?
No, the contract is voidable. The party influenced can choose to either affirm or rescind the contract.
Q5. Who has the burden of proof in undue influence cases?
The burden of proof lies on the party alleging undue influence to show that it occurred.
