Not every forced contract is signed after an obvious threat.
Sometimes the pressure that forces someone to entr a contract without free consent is much more subtle.
An elderly parent transfers property to a child whom they depend on. A person signs a guarantee after placing complete trust in someone managing their affairs. A client enters into a transaction heavily favouring a person whose advice they have always relied upon.
In situations like these, the question may be whether the person truly exercised their own independent judgment or whether their decision was affected by undue influence.
Under Malaysian contract law, undue influence can affect whether consent to a contract was genuinely free. Where it is established, the contract may be set aside as voidable.
What Does Undue Influence Mean in Malaysia?
The starting point is section 16(1) of the Contracts Act 1950.
In substance, a contract is induced by undue influence where the relationship between the parties places one party in a position to dominate the will of the other, and that position is used to obtain an unfair advantage.
The Malaysian courts ultimately apply section 16 when deciding whether undue influence exists. The Court of Appeal in Tengku Abdullah ibni Sultan Abu Bakar v Mohd Latiff bin Shah Mohd [1996] 2 MLJ 265 also recognised that undue influence is a flexible equitable concept and that section 16 should be approached broadly and liberally according to the particular facts.
Put more simply:
The law is concerned with situations where one person’s influence over another becomes so significant that it is improperly used to obtain the transaction.
When Is Someone in a Position to Dominate Another Person’s Will?
Having influence over another person is not automatically unlawful.
Parents influence children. Spouses influence each other. Business partners influence business decisions. Lawyers advise their clients.
The issue is whether the relationship places one person in a position where they can dominate the other’s decision-making, and whether that position has been abused.
Section 16 recognises circumstances where a person may be in such a position, including where that person:
- holds real or apparent authority over another;
- stands in a fiduciary relationship with another; or
- deals with someone whose ability to make decisions is affected by matters such as age, illness or mental or physical distress.
Undue influence commonly arises where there is already a relationship of trust and confidence between the parties.
If you need help understanding your contractual rights or interpreting a contract under Malaysian law, feel free to get in touch. You can also explore Contract Law in Malaysia: A Practical Guide to Contracts, Agreements and Legal Rights for practical articles covering everything from contract formation to breach of contract and legal remedies.
Does a Special Relationship Automatically Mean Undue Influence?
No.
This distinction is important.
Simply showing that two people have a close relationship does not necessarily mean that every transaction between them was obtained through undue influence.
For example, a child helping an elderly parent with financial matters does not automatically make every gift from the parent invalid.
Likewise, a solicitor-client relationship does not mean every transaction involving them must have resulted from undue influence.
The court looks at the actual relationship, the transaction and the surrounding circumstances.
In Tengku Abdullah, the Court of Appeal explained that the doctrine may apply where the evidence demonstrates a relationship of confidence and an abuse of that confidence.
Actual Undue Influence vs Presumed Undue Influence
One useful way of understanding the law is to distinguish between actual undue influence and presumed undue influence.
Actual Undue Influence
Actual undue influence arises where there is evidence showing that the dominant party actually used their influence to procure the transaction.
In Polygram Records Sdn Bhd v The Search [1994] 3 MLJ 127, the High Court recognised that where the actual exercise of undue influence is proven, it is not necessary for the victim to separately establish that the transaction caused an unfair disadvantage.
The important issue is that the transaction itself was obtained through the improper exercise of influence.
Presumed Undue Influence
Proving what happened privately between two people is not always easy.
Malaysian law therefore recognises circumstances where undue influence may be presumed.
Generally, the person challenging the transaction must first establish:
- that the other party occupied a dominant position in the relationship; and
- that the transaction was sufficiently unfair, unconscionable or disadvantageous.
Once those circumstances are established, the burden may shift to the other party to show that the transaction resulted from the person’s free and independent consent rather than undue influence.
There are additional nuances, particularly in relation to gifts, where the authorities recognise that proof of the relevant relationship itself may be sufficient in certain circumstances to raise the presumption.
A Simple Example of Undue Influence
Imagine an elderly father who has become heavily dependent on one of his children.
That child:
- manages his finances;
- takes him to medical appointments;
- controls access to his bank accounts; and
- advises him on virtually every financial decision.
The father then transfers his only property to that child for substantially less than its true value.
That does not automatically prove undue influence.
But the combination of dependency, influence and a transaction heavily favouring the child may justify closer examination by the court and, depending on the evidence, may give rise to a presumption of undue influence.
This is very different from an ordinary commercial negotiation where two experienced businesspeople simply negotiate aggressively for the best possible deal.
Is a Bad Deal Enough to Prove Undue Influence?
No.
This is another important distinction.
A contract does not become voidable simply because one party made a poor bargain.
If you sell something below market value, accept unfavourable payment terms or later regret signing an agreement, that alone does not prove undue influence.
As the Malaysian authorities demonstrate, unconscionability alone does not necessarily create a presumption of undue influence. The relevant relationship between the parties must also be established.
Contract law generally allows people to make good deals and bad deals. The court becomes concerned where the bargain resulted from the improper exploitation of influence.
Can Independent Legal Advice Prevent an Undue Influence Claim?
Independent advice can be extremely important.
Where one person occupies a position of significant influence over another, obtaining advice from an independent lawyer who is not acting for the benefiting party can help demonstrate that the person understood:
- what they were signing;
- the legal consequences of the transaction;
- the risks involved; and
- that they were free to refuse.
However, independent legal advice should not be treated as a magic formula that automatically defeats an allegation of undue influence. Ultimately, the court examines whether the transaction was genuinely the product of the person’s free and independent decision.
What Happens If a Contract Was Signed Under Undue Influence?
A contract induced by undue influence is generally voidable rather than automatically void.
Section 20 of the Contracts Act 1950 allows the affected party to have the contract set aside, subject to the court’s power to impose appropriate terms where benefits have already been received.
Depending on the circumstances, the affected party may therefore be able to:
- refuse to proceed with the transaction;
- resist an action for specific performance;
- seek rescission of the contract; and
- seek restitution to restore the parties, as far as possible, to their previous positions.
There can also be limits on rescission for example, where the transaction has been affirmed, there has been undue delay, third-party rights have intervened, or restoration of the original position is no longer possible.
Undue Influence vs Coercion: What’s the Difference?
The two concepts are related because both concern free consent, but they are not the same.
Coercion under section 15 of the Contracts Act 1950 generally involves prohibited acts or threats, including unlawful detention or threatened detention of property.
Undue influence, on the other hand, is usually more subtle. It focuses on the relationship between the parties and whether one party improperly exploited a position of dominance or trust.
A person therefore does not necessarily have to be physically threatened before the law will recognise that their consent was improperly obtained.
Can I Cancel a Contract Because of Undue Influence?
Potentially, yes but acting quickly matters.
If you believe you signed a contract, guarantee, transfer or other transaction because another person improperly used their influence over you, it is worth obtaining legal advice before taking further steps under the agreement.
Continuing to perform the agreement after discovering the problem may potentially be relied upon as evidence that you have affirmed the transaction. Delay can also affect the equitable remedy of rescission.
Evidence is particularly important. Documents, correspondence, medical evidence where relevant, the history of the relationship, financial records and evidence showing how the transaction came about may all become significant.
Frequently Asked Questions About Undue Influence in Malaysia
1. Is undue influence only relevant to contracts?
No. The doctrine can also arise in transactions such as gifts and transfers of property. The Malaysian courts have recognised its equitable character beyond strictly contractual transactions.
2. Does a family relationship automatically create undue influence?
No. The existence of a family relationship alone does not automatically invalidate a transaction. The court considers the nature of the relationship, the degree of trust or dependence and the circumstances surrounding the transaction.
3. Is undue influence the same as being pressured into signing?
Not necessarily. Ordinary commercial pressure or persuasion does not automatically amount to undue influence. The doctrine generally requires a relationship in which one party is capable of dominating the other’s will or where there has been an abuse of trust and confidence.
4. Is a contract affected by undue influence void?
Generally, no. Under section 20 of the Contracts Act 1950, a contract induced by undue influence is voidable at the option of the affected party, rather than automatically void.
Final Thoughts
Undue influence is ultimately about free consent.
Malaysian contract law does not prevent people from persuading each other, giving advice or entering into transactions that turn out to be financially unwise. But the position changes when someone uses a relationship of dominance, dependence or trust to procure a transaction that was not truly the product of the other person’s independent decision.
These cases are highly fact-sensitive. The question is rarely just “Was there pressure?” It is usually who had influence, what was the nature of the relationship, how was that influence used, and how did the transaction come about?
