Undue Influence (Malaysia)

COERCION

Coercion, as an element of duress, is grounds for seeking the cancellation of a contract or deed. When one party to an instrument is forced against his or her will to agree to its terms the document can be declared void by a court.

In order words, a contract only be binding if both of the parties voluntarily consent to it. The consent should be invalid of one party is forced to consent by threats or under persuasion by the other. As defined in section 15 of the Contracts Act, one form of such threats is ‘coercion’ and for the purposes of section 14 (as discussed in para 2.1) which, among others, require ‘free consent’ of contracting parties. The section goes on to provide that consent is free when it is not caused by ‘coercion’ as defined by section 15, or others such as ‘undue influence, fraud, misrepresentation and mistake’.

Section related to coercion
The relevant part of section 15 reads as follows: –

‘Coercion’ is the committing, or threatening to commit any act forbidden by the Penal Code, or the unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, with the intention of
causing any person to enter into an agreement.

Illustration

The illustration of coercion as per following:
A, on board an English ship on the high seas, causes B to enter into an agreement by an act amounting to criminal intimidation under the Penal Code. A afterwards sues B for breach of contract at Taiping.

A has employed coercion, although his act is not an offence by the law of England, and although section 506 of the Penal Code was not in force at the time when or place where the act was done.

Sample Cases for coercion
Case 1

Lord Moulton in Kanhaya Lal v. National Bank of India Ltd, an appeal to the Privy Council from India on a provision in pari materia with the local Act, opined that the definition of ‘coercion’ was solely a definition which applied ‘to the consideration whether there has been ‘free consent’ to an agreement so as to render it a contract’. This means that the definition of ‘coercion’ under section 15 applies solely to the consideration whether there has been free consent to an agreement so as to render it a contract under section 10 of the Contracts Act.

The definition of ‘coercion’ covered duress at common law which has traditionally meant actual violence or threats of violence to the person of the contracting party or someone close to that person. The common law of duress relates to the unlawful threat to detain goods is a little unclear although it has been held that money paid to release goods unlawfully detained is recoverable.

In any case, its importance is greatly diminished light of the wide definition of coercion under the Contracts Act which includes ‘the unlawful detaining or threatening to detain any property, to the prejudice of any person whatever. In Kanhaya Lal case, the Privy Council ruled that the plaintiff was entitled to recover money paid as a consequence of coercion caused by the wrongful interference of the defendant bank with property.

Case 2

“Duress” was applied in Kesarmal s/o Letchman Das v Valiappa Chettiar, where the court held invalid as it is a transfer executed under the orders of sultan, issued in ominous presence of two Japanese officers during the Japanese Occupation of Malaya was invalid. In this case, was not given freely and the agreement was voidable at the will or option of the party whose consent was so caused.

Case 3

In Chin Nam Bee Development Sdn. Bhd. v. Tai Kim Choo & 4 Ors, the respondents purchased homes off the plan to be constructed by the appellants. Each of the respondents had signed a sale and purchase agreement to purchase a house at $29,500. Subsequently, the respondent was made to pay additional of $4,000. The court was asked to determine if the additional payment was made voluntarily or under threat by the plaintiffs to cancel the respondents’ booking for their houses.

The lower court had found that payment was not voluntary but had been made under threat. The appeal was dismissed by the High Court which ruled that there was coercion as defined in section 15 of the Contracts Act. It further added that the definition in section 15 should only apply for the purpose contained in section 14, and not for the entire Act. Given this interpretation, the word ‘coercion’ in section 73 is not restricted to the meaning in section 15, and should be given its ordinary and general meaning.

UNDUE INFLUENCE

The doctrine of ‘undue influence’ is a development of equity to cover cases of particular relations and is sometimes used as a comprehensive phrase to include cases of coercion, domination or pressure within or without those special relations. This doctrine as embodied in Section 16 of the Contract Act 1950 is in substance based on English principles. Section 16 (1) reads:

“A contract is said to be induced by ‘undue influence’ where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.” Section 16 (2) reads:

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 (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 distress. Section 16 (3) reads:

(a) Where a person who is in a position to dominate the will of another, enters into a contract 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 the other. (b) Nothing in this subsection shall affect section 111 of the Evidence Act 1950 [Act 56].

ILLUSTRATIONS

(a) A having advanced money to his son, B, during his minority, upon B’s coming of age, obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence. (b) A, a man enfeebled by disease or age, is induced, by B’s influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services.

B employs undue influence. (c) A, being in debt to B, the moneylender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on B to prove that the contract was not induced by undue influence. (d) A applies to a banker for a loan at a time when there is stringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence.

Bank of China v Maria Chia Sook Lan

In Bank of China v Maria Chia Sook Lan, the respondent who had charged her property for facilities given to her husband for his business contended that the bank had procured the execution of the guarantee by her by undue influence.

It was alleged that the bank acting through its servant had threatened her. The facts that were relied upon were the statements made by the bank officer :

(a) Pressing her in her husband’s absence to give a further guarantee of his account;
(b) Threatening that, if she did not give the guarantee, the bank would sell her shares held as security for her overdraft
(c) Threatening that, if she did not give the guarantee, the bank would make her husband bankrupt.

It was conceded for the guarantor that although the bank was entitled to make him bankrupt, the threat to do so constituted undue influence. The court took the view that considering the facts relating to the guarantee, Madam Chia had failed to establish undue influence. Of course this is not to say that a threat can never amount to undue influence.

Williams vs Bayle involved a case where a son sent to bankers promissory notes with his father’s name on them as endorser. The bankers insisted, without any direct threat of a prosecution, on a settlement to which the father was to be a party. He consented and executed an agreement to make an equitable mortgage of his property. It was held where a father takes upon himself a civil liability with the knowledge that unless he does so, his son will be exposed to a criminal prosecution, is not a free and voluntary agent and the agreement he makes under such circumstances is not enforceable in equity.

Apart from the general provisions and principles relating to undue influence the Contracts Act 1950 specifically sets out situations where a person is deemed to be in a position to dominate the will of another. These are:

(a) where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other

(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 distress.

The effect of these stipulations is that where it can be established to support this presumption then it is not necessary to go any further to establish that such a person is in a position to dominate the will of the other.

However the fact that a person who is alleged to exercise undue influence is in a “deemed position” to dominate the will of the other is by itself not enough to prove that there has been undue influence. There must be a further element present.

The transaction must be unconscionable. Once this further element is established then it will be presumed that the transaction was entered into under undue influence. This is reflected in Section 16 (3) of the Contracts Act 1950 which reads:

“Where a person who is in a position to dominate the will of another, enters into a contract 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 the other.”

A consideration of all these is required to establish that undue influence exists. The existence of undue influence affects the consent which is a prerequisite to the existence of a valid agreement. Hence Section 20 reads: “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 there under, upon such terms and conditions as to the court may seem just.”

Where there is no undue influence, aspects such as misrepresentation, fraud or coercion may vitiate an otherwise valid agreement.

Inche Noriah v Shaik Allie Bin Omar (1929) AC 127; 1 MC 79
Facts :

* An old lady (illiterate) executed a deed of gift of a landed property in S’pore in favour of her nephew who had been managing her affairs. * Before executing the deed, the donor had independent advice from a lawyer who acted in good faith. * However, he was unaware that the gift constituted practically the whole of her property and did not impress upon her that she could prudently and equally have benefited the donee by bestowing the property upon him by a will. Held :

* 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 The effect of undue influence is to render the contract voidable at the option of the innocent party. He can recover his losses under section 66 of the Contract Act 1950 which requires a person who has received any advantage under the contract, before it becomes void, to restore it to the party whom it was received

FRAUD

According to Section 17 of the Contracts Act 1950, fraud is defined as certain acts which are committed with the intent to induce another party to enter into a contract. In other words, it means an act which is done with the intention to deceive another party. As a general rule, when a person causes another person to act on a false representation which the maker himself does not believe to be true, he is said to have committed a fraud. Section 17 reads:

a. the suggestion, as to a fact, of that which is not true by one who does not believe it to be true. b. the active concealment of a fact by one having knowledge or belief of the fact. c. a promise made without any intention of performing it. d. any other act fitted to deceive ande. any such act or omission as the law specially declares tobe fraudulent.

An agreement made on the basis of fraud is a voidable contract. Section 19 (1) of the Contracts Act 1950 provides that when consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.

Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.

Illustration

(a) A sells by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse’s unsoundness. This is not fraud in A. (b) B is A’s daughter and has just come of age. Here, the relation between the parties would make it A’s duty to tell B if the horse is unsound. (c) B says to A, “If you do not deny it, I shall assume that the horse is sound.” A says nothing. Here, A’s silence is equivalent to speech. (d) A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B’s willingness to proceed with the contract. A is not bound to inform B.

Cases

Weber v. Brown:

The respondent sued the appellant for damages in respect of an alleged false and fraudulent misrepresentation relating to the number of rubber trees on an estate.

Held: The appellant’s statement that he counted the trees taken in conjunction with the written enumerated of trees amounted to fraud. The court also agreed that the representation made by the defendant had clearly induced the plaintiff to exercise the right to purchase.

MISREPRESENTATION

Misrepresentation is defined in the Section 18 of the Contract Act 1950 as: (a) The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true. (b) Any breach of duty which, without an intent to deceive, gives an advantage to the person committing it, or anyone claiming under him by misleading another to his prejudice, or to the prejudice of anyone claiming under him, and (c) Causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement.

A misrepresentation is a false statement of fact or law which induces the representee to enter a contract. Where a statement made during the course of negotiations is classed as a representation rather than a term an action for misrepresentation may be available where the statement turns out to be untrue. There are three types of misrepresentation: innocent misrepresentation, negligent misrepresentation and fraudulent misrepresentation. The effect of a finding of misrepresentation is the contract is voidable, or the contract exists but may be set aside by the representee.

The remedy available depends on the type of misrepresentation, but generally consists of rescission and or damages. The right to rescind the contract may be lost in some circumstances. The basic difference between misrepresentation and fraud is that the person making the representation may believe in its truth whereas, in cases of fraud, the person who making the presentation does not believe in its truth at all. As the case of fraud, silence in certain situation where there is a duty imposed to disclose, may amount to a misrepresentation as stated in section 18 (b).

Principal related

There are 2 main principles. One of it is the principal of the right of contracting party to remain silent, even knowing that the decision of other party may be affected. The principal related is the first part of Section 17 which stated ‘mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud…’ Illustration (a) and (d) will explain this: (a) A sells, by auction, to B, a cow which A knows to be unsound. A says nothing to B about the cow’s unsoundness. This is not fraud in A.

(b) A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B’s willingness to proceed to the contract. A is not bound to B. For the other principal is the extreme, certain circumstances that need a party to disclose information to each other, else the contract is voidable at the option of the innocent party. This principal is from the Section 17 which reads ‘…unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech’. This rule can be further explain in details by illustrations (b) and (c) based on the sale of a horse in various circumstances.

(a) B is A’s daughter and has just come of age. Here, the relation between the parties would like it A’s duty to tell B if the horse is sound.

(b) B says to A, ‘If you do not deny it, I shall assume that the horse is sound.’ A says nothing. Here, A’s silence is equivalent to speech. In addition, Section 18 (b) state that in particular that misrepresentation occurs if there is any breach of duty.

Cases related
1.Weber v. Brown supra

The plaintiff-respondent sued the defendant-appellant for damages in respect of an alleged false and fraudulent misrepresentation relating to the number of rubber trees on an estate over which the latter had the right of purchase, which right he transferred for the valuable consideration to the former. Held: The appellant’s statement that he counted the trees taken in conjunction with the written enumerated of trees amounted to fraud. The court also agreed that the representation made by the defendant had clearly induced the plaintiff to exercise the right to purchase.

2.ChooiLeng v. Public Life Co. Ltd

The defendant company in consideration of premiums paid and to be paid by the assured, since deceased, agreed to insure his life for $10,000. Upon proof of his death, they agreed to pay the said sum. The assured died and the plaintiff, to whom the policy was assigned filed an action for non-payment. The defendant’s case was that the contract was voidable and that they were not liable because the declaration by the assured, on the faith of which the policy was issued, contained false statements, misrepresentations and concealment and suppression of the truth.

There was medical evidence that the assured had been treated for pulmonary tuberculosis. But in his declaration, when applying for the insurance, in answer to the question:’have you ever had advice about your heart or lung or for cough?’ he said ‘No’ Held: The answer was a deliberate lie and the contract was therefore voidable. Gill J (ask he then was) said, ‘it is trite law that a contract of insurance is a contract uberrimaefidei which can be avoided for non-disclosure of material facts.