Before you sign the dotted line of your contract, there are a myriad of considerations you should first be making and questions you should be asking yourself. While it might seem like a straightforward agreement or an amazing deal you cannot miss out on, contracts can often hold obligations that are not always clear at first glance. The first hurdle you must overcome is understanding who you are committing to in signing the agreement. It is essential to understand that you are entering a legal relationship, and binding yourself to the other party. If you do not understand this relationship, you may unintentionally cause undue influence or be the victim of it.
What is Undue Influence?
Put simply, undue influence occurs where there is an unequal power dynamic between the two parties entering into a contract. Here, the dominant party takes advantage of the other party, which results in the contract’s acceptance. In other words, the dominant party of a contract unduly influences the other party to agree.
If undue influence occurs between the parties of a contract, the unduly influenced party will have access to various remedies, which we will detail below.
Determining Undue Influence
There are two elements that the court looks to when determining whether there has been undue influence:
- there must be a special relationship between the parties, and this special relationship can be actual or presumed; and
- the dominant party needs to take advantage of the relationship.
Where Undue Influence is Presumed
There are various relationships where there is a presumption that one party holds more power. These relationships include:
- parents and their children;
- solicitors and their clients;
- trustees and the beneficiaries of the trust;
- doctors and patients; and
- spiritual leaders and their followers.
As is apparent, each of these specific relationships has a power dynamic where one party may unfairly control the other. They are all relationships with an existing or expected element of trust between the parties.
Where There is Actual Undue Influence
Actual undue influence occurs if one of the parties to a contract expressly uses their influence as the dominant party and that influence is such that the actions and judgments of the disadvantaged party are not free, independent or voluntary.
Unconscionable Conduct vs. Undue Influence
While often used interchangeably, there are some key differences between unconscionable conduct and undue influence. The main distinction is that unconscionable conduct requires the dominant party to exploit a special disadvantage of the innocent party. A special disadvantage is one that seriously impacts the innocent party’s ability to make a judgement for themselves or even to properly consent. It is coined unconscionable conduct because the dominant party conducts itself poorly in taking advantage of the other party. Cases regarding actual undue influence and unconscionable conduct often overlap in principle.
Consequences
The only way to confirm whether there has been an undue influence or unconscionable conduct in a contract is through Court. Alternatively, if the innocent party is a consumer, they may go through the ACCC.
The most common remedy for the victim of undue influence or unconscionable conduct is rescission. Rescission refers to voiding or setting aside the contract. Additional remedies may include compensation or awarding damages to the innocent party if they suffer a quantifiable loss as a result of the actions of the dominant party. Finally, the Court may award what is called an account of profits. This is awarded when the dominant party benefits or profits from their exercise of undue influence.
Avoiding Undue Influence and Unconscionable Conduct
The easiest way to avoid either undue influence or unconscionable conduct is to ensure that both parties to the agreement obtain legal advice before signing the agreement. This means giving the other side adequate time to review the agreement and negotiate any unreasonable or unfair terms.
Contracts should be clear and easy to understand. Furthermore, you should highlight any unusual or particularly onerous terms. Avoiding undue influence may also come down to how your team sells contracts for your business. Do not encourage any pressure-based sales; this is not just bad business, it may also mean that the agreement is later found to be void.
Before buying a business, it is important to undertake due diligence, to verify the information supplied by the seller. This guide will walk you through the due diligence process.
Key Takeaways
When negotiating and signing a contract, it is integral that there is no undue influence by one party on the other party to enter the agreement. Ultimately, you must understand who you are entering the contract with. Upon determining whether a power imbalance exists, you can determine if there was pressure to enter an unfair agreement. If the contract is unduly influenced, the contract may be void or set aside. It is crucial to consider the context and power dynamic of the legal relationship you enter to ensure that the contract you sign is binding on both parties.
If you suspect your contract may be unduly influenced, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Undue influence is determined by a two-stage test. Firstly, is there a special relationship between the parties, and if so, did the dominant party take advantage of their position of power to influence the other party to enter into the agreement?
The easiest way to avoid causing or being a victim of undue influence when entering into any contract is to receive legal advice.
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