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The law assumes that people who enter a contract have the same bargaining power. However, this is not always the case. For example, parties may have different revenue levels, influence or business experience, affecting how they understand the contract. The concept of undue influence recognises this imbalance. This article will outline what undue influence is and the effect it can have on contracts.
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What is Undue Influence?
Undue influence is a contract law principle that looks at the quality of consent and considers whether each party provides their consent to a contract freely and voluntarily. In particular, it looks at whether the relationship between the parties forced one party to sign when they otherwise might not want to. At its core, the principle states that a party cannot give proper consent if they have been:
- forced;
- pressured; or
- coerced.
In this sense, undue influence can look like many things, including:
- consistently bothering someone to do something;
- strongly pushing for someone to do something;
- excessively flattering someone to influence them;
- deceiving or misleading someone;
- insinuating and suggesting outcomes, either positive or negative; and
- tricking and lying to someone.
Types of Undue Influence
Legally, there are two types of undue influence. The main difference between the two is whether there is a special relationship between the parties.
Actual Undue Influence
This occurs when there is no special relationship between the parties. In this case, one party must influence the other so much that consent is not free or voluntary.
Presumed Undue Influence
This occurs when there is a special relationship between the parties. The unique relationships that the law recognises include:
- parent and child;
- guardian and ward;
- solicitor and client;
- doctor and patient;
- religious leader and follower; and
- trustee and beneficiary.
In these relationships, the court presumes that the party with less power has been influenced.
If the relationship does not fit into one of these categories, it may still be considered presumed undue influence. This will happen when one party naturally occupies a position of dominance or influence over the other. The other party may also depend on or trust the influencing party. To prove this relationship, you must show that you relied upon the guidance and advice of the other party, which:
- received a benefit from that reliance; and
- knew they influenced you.
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What is the Effect of Undue Influence on a Contract?
A contract is voidable if undue influence is found. This means that a party can choose to exit the contract by rescinding it. Moreover, rescission will make the contract void. It will then be unenforceable, and neither party can exercise their rights or perform the contract’s obligations. In this case, it is as if the contract never existed.
Who Has a Right to Rescind?
The party who has been unduly influenced may have a right to rescind. Rescission puts the parties back to where they were before the contract’s formation. For example, if you invest money into the contract, you will receive a repayment of that money. To rescind, you must communicate this decision to the other party.
The primary consideration is whether you can return to your previous position. This may be impossible in cases of third-party involvement or where goods have changed hands.
If rescission is impossible, there are other remedies available. For example, under Australian Consumer Law, unfair terms can be made void, and compensation may be available. You may even choose to continue the contract regardless to protect your business interests or avoid losses.
Key Takeaways
Entering a contract for your business can be an exciting and confusing time. Unfortunately, when you are eager to get going on business, you can be easily influenced by the people you are contracting with. Undue influence affects the quality of your consent and means the contract is voidable.
If you want to have your contract reviewed or discuss your options for ending a contract, our experienced contract lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1800 534 315 or visit our membership page.
Frequently Asked Questions
No. Although the two are closely related, the courts view them differently. Undue influence will look at the quality of the consent given to the contract. However, unconscionable conduct is when one party is under a unique disadvantage that the other side exploits in contract negotiations. This includes their age, sex, drunkenness or illiteracy.
When a contract is void, it is treated as though it was never created. On the other hand, a voidable contract can become void due to the circumstances under which it was made, such as misrepresentation or undue influence.
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