Setting Aside a Contract Induced by Undue Influence

Second limb: the terms

The court's choice is between two courses.

Set aside absolutely. Appropriate where the influenced party has received nothing, or nothing of value, under the contract.

Set aside on terms. Where the influenced party has received a benefit, the court may require them to give it back, or to account for it, as the price of relief. Typical terms are repayment of the principal actually advanced while striking down an extortionate rate of interest, or a direction to account for sums already received.

The principle behind it, in a sentence a student can use: the party who asks the court to undo a transaction must be prepared to restore what the transaction gave them, and section 19A lets the court measure how much of that is fair.

How section 19A works with section 64

Section 64 already provides that when a person at whose option a contract is voidable rescinds it, the other party need not perform, and the party rescinding must restore any benefit received to the extent he has received it. Section 19A goes further in two ways: it is a power of the court rather than an automatic consequence, and the terms are whatever seems just, which allows a partial restoration where section 64 alone would require full restoration.

A worked example

Bhavna, an elderly widow, borrows five lakh rupees from Chetan, the moneylender who has managed her late husband's affairs for twenty years and on whom she relies completely. The bond provides for interest at sixty per cent a year compounded monthly, and charges her house as security. Three years later Chetan sues on the bond. Bhavna pleads undue influence.

• Is the position to dominate made out? Chetan holds a real authority over her affairs and stands in a relation of trust, so section 16(2)(a) is engaged.
• Is the transaction unconscionable on its face? Sixty per cent compounded monthly, secured on her home, is. Section 16(3) therefore shifts the burden to Chetan to prove the contract was not induced by undue influence.
• Suppose he cannot discharge it. The contract is voidable at Bhavna's option under section 19A.
• Will the court set it aside absolutely? Almost certainly not, because she received five lakh rupees. The second limb applies.
• What terms would be just? The usual course is to set the bond aside on terms that she repay the principal actually advanced, with interest at a reasonable rate, and to strike down the extortionate rate and the charge on the house so far as it secures it. The court is not confined to an all or nothing answer.
• What if Bhavna had already repaid twelve lakh rupees? The court would take that into account in fixing the terms, and could hold the debt discharged and order nothing further.

Now change the facts. Bhavna, free of Chetan's influence and fully advised, writes to him two years later confirming the bond and continuing to pay under it. She has affirmed the contract, and the option to avoid is gone.

What it does NOT mean

"Undue influence makes the agreement void." It makes the contract voidable under section 19A. The distinction decides whether third party rights can arise and whether the contract binds in the meantime.

"The influenced party keeps what they received and escapes the contract." Where a benefit was received, section 19A lets the court impose terms, and section 64 requires restoration on rescission.

"Either party may avoid." Only the party whose consent was caused by the undue influence.

"The court must set the whole contract aside." It may set it aside absolutely or on terms, and in a lending case the usual course is to preserve the repayment of principal and strike down the extortionate parts.

"There is no time limit." The right to avoid is lost by affirmation and by delay once the influence has ceased, and a suit is in any event subject to the Limitation Act 1963.

Quick revision

• s.19A, first limb: consent caused by undue influence makes the agreement a contract voidable at the option of the party whose consent was so caused.
• Second limb: the court may set it aside absolutely, or, where that party received a benefit, upon such terms and conditions as to the Court may seem just.
• Undue influence was taken out of s.19 and given its own section precisely to carry that discretion.
• Works with s.64: on rescission, restore the benefit received. s.19A allows a partial and tailored restoration.
• Typical terms in a moneylending case: repay the principal, strike down the extortionate interest.
• The option is lost by affirmation with knowledge and free of the influence, and by delay.
• Until avoided the contract is valid, so a third party taking for value beforehand is protected.

Test yourself

1. State section 19A in full. 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; and any such contract may be set aside either absolutely or, if the party entitled to avoid it has received any benefit under it, upon such terms and conditions as to the court may seem just.

2. Why is undue influence dealt with separately from coercion and fraud? Because undue influence usually arises inside a continuing relationship in which the influenced party has already received something substantial that cannot simply be returned. Section 19 makes contracts induced by coercion, fraud or misrepresentation voidable and leaves restoration to section 64, whereas section 19A adds a judicial discretion to set the contract aside on such terms as are just, which allows the court to preserve what is fair and strike down what is not.

3. A widow avoids an extortionate bond after receiving the principal. What order would you expect? Not an absolute setting aside. Because she has received a benefit, the second limb of section 19A applies, and the court would ordinarily set the bond aside on terms that she repay the principal actually advanced with interest at a reasonable rate, striking down the extortionate rate and, so far as it secures it, the charge on her property.

4. Can the dominant party avoid the contract? No. The option belongs only to the party whose consent was caused by the undue influence. The dominant party remains bound.

5. How may the right to avoid be lost? By affirmation, where the influenced party, with knowledge of the facts and no longer under the influence, confirms the contract expressly or by continuing to take its benefits; by delay once the influence has ceased; and by the intervention of third party rights acquired for value before avoidance. A suit is also subject to the Limitation Act 1963.