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Chapter 1 Undue Influence
Chapter 1 Undue Influence
Chapter 1 Undue Influence
Undue Influence
UNDUE INFLUENCE
•The law on undue influence in Malaysia is provided in s 16 of the Contracts Act which
has embodied English law on this subject.
(iii) the effect of, and relief for contracts entered into under undue influence.
•In this part, the following matters will be discussed: (i) classification of undue influence;
(ii) requirement of manifest disadvantage; (iii) undue influence in husband and wife
relationships; and (iv) the role of independent advice in undue influence.
•As a quick highlight, the House of Lords decision of Royal Bank of Scotland plc v
Etridge (No 2) 37 [2001] 4 All ER 449, HL has reviewed the law on undue influence and
on some issues, has adopted a different approach from previous decisions.
Classification of undue influence
A starting point of the English doctrine of undue influence is the case of
Allcard v Skinner (1887) 36 Ch D 145 where the Court considered the basis for
judicial intervention of undue influence cases and classified them into two
main categories of actual and presumed undue influence.
In Bank of Credit and Commerce International SA v Aboody (1988) [1992] 4
All ER 955; [1990] 1 QB 923, CA, the Court of Appeal retained the two
traditional classes of "actual undue influence" and "presumed undue
influence" but went on to subdivide "presumed undue influence" into two
further sub-classes, known as Class 2A and Class 2B cases.
This was adopted by the House of Lords in Barclays Bank plc v O'Brien [1993]
4 All ER 417; [1993] 3 WLR 786, HL. However, there have been differing views
on this approach.
The later House of Lords decision of Royal Bank of Scotland Plc v Etridge (No
2) [2001] 4 All ER 449, HL. is of the view that this sub-classification would
give rise to confusion.
In Allcard v Skinner (1887) 36 Ch D 145 the plaintiff became a member of a
religious sisterhood and bound herself to observe the rules of poverty, chastity
and obedience. Within a few days after becoming a member, she made a will
bequeathing all her property to the defendant, the lady superior of the
sisterhood. Subsequently, she left the sisterhood and, some six years later,
commenced an action claiming the return of her property on the ground that it
was made over by her while acting under the undue influence of the defendant.
In Barclays Bank plc v O'Brien [1993] 4 All ER 417; [1993] 3 WLR 786, HL. the
House of Lords adopted the classification applied by the Court of Appeal in
Bank of Credit and Commerce International SA v Aboody [1992] 4 All ER
955; [1990] 1 QB 923, CA which further subdivided "presumed undue
influence" into two further sub-classes.
Class 2A
Certain relationships (for example solicitor and client, medical advisor and
patient) as a matter of law raise the presumption that undue influence has
been exercised.
Class 2B
Even if there is no relationship falling within class 2A, if the complainant proves the de
facto existence of a relationship under which the complainant generally reposed
trust and confidence in the wrongdoer, the existence of such relationship raises the
presumption of undue influence.
In a class 2B case therefore, in the absence of evidence disproving undue influence,
the complainant will succeed in setting aside the impugned transaction merely by
proof that the complainant reposed trust and confidence in the wrongdoer without
having to prove that the wrongdoer exerted actual undue influence or otherwise
abused such trust and confidence in relation to the particular transaction impugned.
“ [1993] 3 WLR 186 at 791-792.
However, the subsequent House of Lords decision, Royal Bank of Scotland Plc v
Etridge (No 2) [2001] 4 All ER 449, HL disagreed with this approach. Lord Nicholls
and Lord Clyde stated that distinguishing between actual and presumed undue
influence can give rise to confusion, and Lord Clyde questioned the utility of
further subdividing "presumed undue influence" into Classes 2A and 2B.
Manifest disadvantage
The presumption that undue influence was exercised would only arise if the
transaction was "manifestly disadvantageous" to the person influenced. The
principle justifying the court in setting aside a transaction for undue
influence can now be seen to have been established by Lindley LJ in Allcard
v Skinner. It is not a vague 'public policy' but specifically the victimisation of
one party by the other.” Ibid, at 827-828.
This requirement was applied by the Court of Appeal in Bank of Credit and
Commerce International SA v Aboody (1988). However, it was overruled by
the House of Lords in CIBC Mortgages plc v Pitt & Anor [1993] 4 All ER 433,
HL, where
The position in Pitt is supported by the judgment of Lord Nicholls in Royal Bank of
Scotland plc v Etridge (No 2),5656 [2001] 4 All ER 449, HL. which had discussed the
requirement of manifest disadvantage in relation to the evidential shift in the burden
of proof in cases where a presumption has been drawn.
Cases prior to Barclays Bank plc v O'Brien [1993] 4 All ER 417; [1993] 3 WLR
786, HL. had applied the agency theory, holding the husband to be acting as the
agent of the creditor bank when he asked his wife to execute the guarantee or
charge over his debts. Therefore, if the husband was guilty of undue influence in
procuring the wife's agreement, the bank as his principal would be party to the
same wrongdoing and would be unable to enforce the guarantee or charge.
In Etridge's case, Lord Nicholls considered at length the steps and the
content of legal advice that banks should adopt in cases of guarantees given
by wives for their husbands' debts. Lord Nicholls stated:
“The furthest a bank can be expected to go is to take reasonable steps to satisfy
itself that the wife has had brought home to her, in a meaningful way, the
practical implications of the proposed transaction. This does not wholly eliminate
the risk of undue influence or misrepresentation. But it does mean that a wife
enters into a transaction with her eyes open so far as the basic elements of the
transaction are concerned.” Ibid. at 467.
Lord Nicholls also set out the legal content which was considered the
core minimum as follows:
“Typically, the advice a solicitor can be expected to give should cover the
following matters as the core minimum. (1) He will need to explain the nature
of the documents and the practical consequences these will have for the wife if
she signs them. ... (2) He will need to point out the seriousness of the risks
involved. ... (3) The solicitor will need to state clearly that the wife has a choice.
The decision is hers and hers alone …(4) The solicitor should check whether
the wife wishes to proceed …
The solicitor's discussion with the wife should take place at a face-to- face
meeting, in the absence of the husband. It goes without saying that the
solicitor's explanations should be couched in suitably non-technical language. It
also goes without saying that the solicitor's task is an important one. It's not a
formality.
The solicitor should obtain from the bank any information he needs. If the bank
fails for any reason to provide information requested by the solicitor, the
solicitor should decline to provide the confirmation sought by the bank.”Ibid, at
470.
Undue influence under section 16 Contracts Act
Under s 16(1), both elements must be satisfied: (i) the relation subsisting
between the parties are such that one person is in a position to dominate
the will of another; and (ii) the dominant person uses that position to
obtain an unfair advantage over the other.
This was made clear in Poosathurai v Kannappa Chettiar & 0rs (1919) LR 47
IA 1, Pc (Appeal from India) where the Privy Council held that it is not
sufficient to have mere influence, the influence must be "undue" in that the
dominant person has used his position to obtain an unfair advantage.
Lord Shaw stated:
“It is a mistake ... to treat undue influence as having been established by a proof
of the relations of the parties having been such that the one naturally relied
upon the other for advice, and the other was in a position to dominate the
will of the first in giving it. Up to that point 'influence' alone has been made
out. Such influence may be used wisely, judiciously and helpfully.
In this case, the appellant alleged that his maternal uncles influenced him
to execute a deed of sale and he sought to cancel the deed. On the facts,
the Privy Council held that it was not proved that the sale was
unconscionable or constituted an advantage unfair to the plaintiff, that is,
it was not a sale for undervalue.
The above principles were applied in the Malaysian case of Saw Gaik Beow v
Cheong Yew Weng & Ors [198913 MLJ 3O1, where the High Court
emphasised the requirement that an unfair advantage was obtained and in
this case, referred to it as "manifest advantage".
.
In Hongkong & Shanghai Banking Corp v Syarikat United Leong Enterprise Sdn
Bhd & A nor [1993] 2 MLJ 449; [1993] 2 AMR Supp Rep 524, the second
defendant failed to establish that the first requirement "a position to
dominate" was established. In this case, the second defendant had signed a
guarantee in favour of the plaintiffs for loans given to the company in which he
was a director. His allegation that he signed under undue influence was rejected
by the High Court. The Court held that PW1 (an advocate of the law firm acting as
solicitors for the bank) was not in a position to dominate the will of the second
defendant as alleged by the second defendant. On the contrary, the forcefulness
of the second defendant's character was demonstrated when the second
defendant got PW1 to meet him at a coffee house instead of going to PW1's office
himself. Further, the lack of independent legal advice did not necessarily point to
undue influence, as the second defendant, being a man wise of the world, had
not said that he wanted legal advice or had asked for it.
Deemed to be in position to dominate: s 16(2)
In an early case, Saiwath Haneem v Hadjee Abdullah(1894) 2 SSLR 57, the parties
involved were family members. The plaintiff was the sister in law of the two
defendants, Abdullah and Daud, who were the younger brothers of Arshad, the
plaintiff's husband. During Arshad's absence from Singapore from 1878 to 1889, his
property was managed by Abdullah, who collected his rents, paid for his expenses,
and supplied the plaintiff with money.
The parties were on intimate terms: Abdullah and Daud were frequently in
their brother Arshad's house and had access to the women's quarters.
Arshad's sons went to school in Abdullah's house and frequently went there
to play with their relatives. Abdullah was trustee of a house for one of the
sons. After some negotiations over a family dispute, the plaintiff signed a
conveyance of some properties to the defendants. She sought to set aside
the conveyance and the issue of undue influence was raised.
There are a number of cases where the courts have considered whether a
presumption of undue influence arises where some special relationships falling
within s 16(2)(a) are involved, that is: (i) father and son; (ii) solicitor and client;
(iii) fiduciary relationships; and (iv) husband and wife. The courts have also-
considered whether the presumption arises under s 16(2)(b) where a person's
mental capacity has been affected by illness.
Continue…
Father and son
The presumption has been applied to a father and son relationship in
Khaw Cheng Bok & Ors v Khaw Cheng Poon & Ors [1998]3 MLJ 457.
In this case, the deceased was a man of great wealth and the plaintiffs and
defendants were his children and grandchildren, respectively. An issue arose
whether the deceased had been unduly influenced by his third son, Cheng
Poon, into making certain gifts. Cheng Poon was the only son who lived with
the deceased and was the deceased's favourite son.
Jeffrey Tan J held that a presumption of undue influence was raised and
that it had not been discharged.
“Furthermore, and it was not the father and son relationship per se, undue
influence could be presumed. The deceased, at death's door, was totally
dependent, and in that sense beholden, to Cheng Poon and his family. From
the evidence adduced, there existed that close confidential relationship
where Cheng Poon and his family were persons with great influence and pull
over the life of the deceased and in a commanding person to exert undue
influence or 'dominion' over the deceased; the deceased and Cheng Poon,
with regard to the gifts, were not persons dealing on a footing of equality.
Continue..
Solicitor and client
A type of relationship where one party may be deemed to hold authority and
exercise undue influence over another is the solicitor- client relationship.
A case in point which went on to the Federal Court is Tara Rajaratnam v Datuk
Jagindar Singh & Ors [1983] 2 MLJ 127, HC; [1983] 2 MLJ 196, FC In this case, the
plaintiff agreed to transfer her land as security for an advance of $220,000 to the
plaintiff. The money was to be used to pay off a charge as well as to the first
defendant an amount payable by the plaintiff's brother-in-law for whom the first
defendant stood as surety for a loan obtained. The first and second defendants
were advocates and solicitors who prepared the necessary documents. The
plaintiff's land was transferred to the second defendant who bought the land on
behalf of the first defendant. The second defendant had assured the plaintiff that
although it was in the form of a sale, it would remain a security and will be
transferred back to her after one year. Through the collusion of the defendants,
the land was eventually transferred to the third defendant, who was also an
advocate and solicitor. In the third defendant's action for possession of the land,
the plaintiff pleaded, inter alia, undue influence.
Abdul Razak J referred to the presumption under s 16(2) of the Contracts
Act in relation to solicitors and applied it to the facts of this case as
follows:
“But once a person acts as a solicitor then the presumption of undue influence
arises, and unless they can rebut it the property they acquired from their client
cannot be allowed to remain in their hands. Acting as a solicitor intrinsically
creates a fiduciary relationship between a solicitor and his client which the
solicitor cannot take advantage of since it imposes an obligation on its part to act
with strict-fairness and openness towards them (Haisbury's, Vol. 26 Para. 131).
But a person need not be having fiduciary relationship with another for undue
influence to arise if the relation between the parties are such that one of the
parties is in a position to dominate the will of the other (s 16(2) Contracts Act).
The evidence led showed that the plaintiff had been asked to sign [the
agreement] in circumstances, if not in terms clearly unfavourable to her when
between her, a lay person and the defendants, very senior lawyers and State
Dato', position of respect and dignity in the State, they were clearly in a position
to dominate her will to their advantage.
As earlier stated, the burden of proving that the contract was not induced
by undue influence was on the person in a position to dominate the will of
the other that is the first and second defendants. It is clear from what has
been said they had not discharged that burden.” Ibid, at 138.
The High Court's decision was upheld on appeal to the Federal Court.
In Seah Siang Mong v Ong Ban Chai & Another Case [1998] 1 CLJ Supp 295,
the High Court held that the solicitor-client relationship came within a
fiduciary relationship under s 16(2)(a) of the Contracts Act. The Court held
that the defendant (OBC) who was an advocate and solicitor had failed to
discharge the burden of showing that no undue influence had been
exercised by him.
Mohd Ghazali J stated:
“ … the solicitor-client relationship that existed between the plaintiff makes their
relationship a fiduciary relationship and pursuant to s. 16(3)(a) of the Contracts Act
1950, the burden of proving that the 1980 agreement/PA was not induced by undue
influence was on OBC. I find that OBC had not discharged that burden and his
admission that he failed to advise the plaintiff to obtain independent legal advice is
an admission of his failure to discharge the burden. The evidence had also shown
that a confidential relationship existed between the plaintiff and OBC.” [1998] 1 CLJ
Supp 295 at 327.
Continue…
Fiduciary relationship
Appeals [1996] 2 MLJ 265, CA. In this case, the Court of Appeal stated that
"the categories of fiduciary relations are never closed" and held that the
fiduciary doctrine applied to promoters of a club.
In this case, the first and second appellants, together with the Ayala Group of
Companies from the Philippines, planned to incorporate..a. proprietary club in
Malaysia. They acquired all the shares in a company called Raintree Development
Sdn Bhd (RDB) which owned a piece of land that was identified as the proposed
site of the clubhouse. Allied Capital Sdn Bhd was incorporated to build the club's
premises. The preponderance of the shares in RDB and Allied were held by the
first and second appellants. Later, the shareholders of RDB sold their shares to
Allied.
Gopal Sri Ram JCA adopted a broad approach to the equitable doctrine of
undue influence as applied to s 16 of the Contracts Act and stated:
Most people would think that a conspicuous omission from the list aforesaid is
that of husband and wife. However, the case of Yerkey v Jones (1939) 63 CLR 649
per Dixon J at p 675, shows that the approach of the courts is that there is nothing
unusual in a wife showing her affection for her husband in a tangible way, as for
example, by guaranteeing repayment of his debts. And, so, it is said, that the
affection and confidence inherent in the marital state does not, ipso facto, amount
to undue influence in the eyes of the law. (See Colonial Bank of A/asia v Kerr.
(1889) 15 VLR 74)
I could not therefore hold, having regard to the authorities cited above, that
simply by reason of the relationship of husband and wife existing between
the second and third defendants, a presumption of undue influence arose.”
Ibid,at 505.
This decision was followed in Mayban Finance Bhd v Liew Ek Chiu & Ors
[1998] 1 CLJ 56, where Steve Shim J stated:
“ …the onus of proof generally lies on the party alleging undue influence.
There are however certain relationships which can give rise to a presumption
of undue influence but the case authorities appear to establish that the
relationship of husband and wife is not one of them: see Public Finance Bhd v
Lee Bee Rubber Factory Sdn Bhd & Ors [1994] 1 MLJ 495 on p 505. That being
the position, in the instant case, the 2nd defendant, having alleged undue
influence on the part of the plaintiff and the 1st defendant, the onus would
be on her to prove it.” Ibid,at 6l.
However, it should be noted that in both Mayban Finance Bhd's case above
and in Southern Bank Bhd v Abdul Raof bin Rakinan & Anor [200014 MLJ
719 the courts also referred to the House of Lords decision in Barclays Bank
plc v O'Brien and another [199314 All ER 417; 119931 3 WLR 786 where
Lord Browne-Wilkinson held that a wife who has been induced to stand
surety for her husband's debt by his undue influence, has an equity as
against him and in some circumstances, also as against the creditor, to set
aside the transaction.
In the Southern Bank Bhd case [2000] 4 MLJ 719, KC Vohrah J quoted
Lord Browne-Wilkinson's judgment in Barclays Bank pie v O'Brien [1993]
4 All ER 417; [1993] 3 WLR 786, HL. "' as follows:
“…A wife who has been induced to stand as a surety for her husband's
debts by his undue influence, misrepresentation or some other legal
wrong has an equity against him to set aside that transaction. Under the
ordinary principles of equity, her right to set aside the transaction will be
enforceable against third parties (e.g. against a creditor) if either the
husband was acting as the third party's agent or the third party had
actual or constructive notice of the facts giving rise to her equity.
However, as set out earlier, the position adopted by Lord Browne-
Wilkinson has not been affirmed by later English decisions. The latest
statement of the law on this issue is Royal Bank of Scotland v Etridge
(No 2) and other appeals [2002] 6 MLJ 273; [2001] 6 CLJ 79.
where the House of Lords held that in the ordinary course, a wife's
guarantee of her husband's business debts is not to be regarded as a
transaction which, failing proof to the contrary, is explicable only on the
basis that it has been procured by the exercise of undue influence of the
husband.
In Chemsource (M) Sdn Bhd v Udanis bin Mohammad Nor, 121 the High Court
applied the doctrine of undue influence to a case of a defendant afflicted with
Parkinson's disease.
In this case, the appellant was an elderly woman who was wholly
illiterate. The respondent was her nephew by marriage. The appellant's
husband had died, leaving her with considerable landed property. The
respondent, who was of Arab birth, had arrived in Singapore when he was
about 23 years of age. He and his wife lived together at the appellant's
house, and after his divorce and re-marriage, he lived in the
communicating house next door, which he rented from the appellant's
daughter. The respondent saw the appellant daily. The respondent was
entirely without means when he reached Singapore, and it was the
appellant who started him in business. After the death of the appellant's
daughter, the appellant executed a deed of gift whereby she gave to the
respondent absolutely the whole of her landed property, leaving herself
with a total gross income of about $30 a year. At the time when the deed
was executed, the appellant was so old and infirm that she was
to leave the house. She seldom saw any of her relatives and friends, and the
respondent managed all her affairs, including her domestic affairs, and
bought her food and clothing. The issue which arose was whether the deed
could be set aside on the ground of undue influence exerted by the
respondent.
The Privy Council upheld the trial judge's finding that the relations between
the appellant and the respondent were such as to give rise to a presumption
of undue influence. The respondent brought evidence that the appellant had
received independent legal advice from a solicitor. However, this fact was not
sufficient to rebut the presumption. In this case, although the solicitor, Mr
Aitken, had acted in good faith, he had received most of his information from
the respondent and had not brought home to the appellant's mind the
consequences of what she was doing, or the fact that she could more
prudently and effectively have benefited the respondent without undue risk
to herself by retaining the property in her own possession during her life and
bestowing it upon him by her will.
Undue influence from third parties
The High Court, while holding that a person not a party to the contract
can commit undue influence, found on the facts that the mere allegations
of the third and fourth defendants were not sufficient to raise the issue of
undue influence.
Zakaria Yatim J stated that:
“In order to establish undue influence, the third and fourth defendants
have to prove that the other party to the contract, that is the plaintiff,
was in a position to dominate their will and that the other party had
obtained an unfair advantage by using that position. A plea of undue
influence can only be raised by a party to the contract and not by a third
party. “ Ibid, at 477.
From the Bank of Montreal case [1911] AC 120, it appears that when a
party enters into a contract with another and that party was induced by
undue influence by a person who is not a party to the contract, the
contract is not enforceable. In my view this conclusion is not inconsistent
with s 16 of the Contracts Act 1950. It is based on the common law and
should be considered as a principle of law in addition to what is provided
in s 16 especially in cases of bank guarantees.”Ibid,at 478.
Unconscionability and inequality of bargaining power
Both are equitable doctrines and there are differing views whether they are so
similar that the doctrine of unconscionability can be developed within s 16(3)
(a)'35 or are they distinct doctrines that merit unconscionability a separate
development.
In Malaysia, the Court of Appeal in Saad Marwi v Chan Hwan Hua & Anor
[2001] 2 AMR 2010; [2001] 3 CLJ 98, CA. has recognised the doctrine of
unconscionability and at the same time referred to the doctrine of inequality of
bargaining power.
There have, however, been differing judicial views on this matter in light of, inter
alia, the provision on undue influence in s 16 of the Contracts Act.
Effect of, and relief for undue influence
Thus, the innocent party has the option to rescind or affirm the contract. If the
party chooses to rescind, the effects of rescission as provided in ss 65,66 and 76
of the Contracts Act apply.
Section 20 also provides that the contract may be set aside either absolutely
or upon such terms and conditions as the court may deem just. This provision
giving the court power to set aside a voidable contract on terms as the court
deems just appears only in s 20 (and not in s 19 applicable for voidable contracts
due to coercion, fraud and misrepresentation). This is due to the equitable nature
of the doctrine of undue influence.
In this respect, the Court of Appeal's decision in Tengku Abdullah ibni
Sultan Abu Bakar & Ors v Mohd Latiff bin Shah Mohd & Ors and other
appeals [1991] 2 MLJ 265 CA is relevant.