About the article
Rapid Contract Enforcement is an essential requirement for the growth and prosperity of India. It will enable more investment, entrepreneurship, and trust for all stakeholders in business and commerce. The community of lawyers in India does not have access to a practical and scholarly manual that gives them a path to deliver rapid contract enforcement to their clients. Such a manual will also help lawyers to draft contracts that enable timely enforcement. Quick enforcement requires the effective use of the Arbitration Act, the institutional framework, and technology-enabled dispute resolution infrastructure. This article belongs to a series where the author analyses each of the Illustrations available in the Contract Act and recommends practical approaches to rapid enforcement.
This article is an illustrated rapid resolution example intended for lawyers. Useful when lawyers draft contracts where their client benefits from changed market conditions, but the agreement may be challenged later as an exercise of undue influence, placing the other party at a disadvantage.
Keywords: Undue Influence, Purchase agreements, Free Consent
Reference: The Contract Act: Section 16: Illustration (d)
Contract Act: Section 16
Section 16 of the Indian Contract Act, 1872 provides that if the consent of a party to the contract has been obtained by undue influence, it cannot be said to be free consent (as per Section 14 of the Indian Contract Act, 1872), which is needed for the validity of a contract. According to Section 19A of the Contract Act, the agreement between the parties is voidable at the instance of the party whose consent has been obtained by exercising undue influence.
According to Section 16(1), two essential ingredients have to be established to prove undue influence was exercised to obtain the other party’s consent. They are:
1. the relationship between the parties puts one of them in a position to dominate the will of the other; and,
2. such a party uses his/ her dominant position to obtain an unfair advantage over the other.
Clause (2) of Section 16 provides that a person is deemed to be able to dominate the will of others:
(i) where he holds real or apparent authority over the other; or,
(ii) where he stands in a fiduciary relation to the other; or,
(iii) where he makes a contract with a person whose mental capacity is permanently or temporarily affected by:
- Reason of age
- Mental distress, or
- Bodily distress
Illustration (d)- Indian Contract Act: Section 16
The fourth illustration of Section 16 is as follows:
“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.”
Illustration 1 — A modern-day example
Let us examine a modern-day example of this type of agreement:
Y, who is in desperate need of a new house, offers to buy Z’s apartment. As there was a boom in the real estate market at the time, Z quotes a much higher price than usual. Y accepts the terms, pays for the apartment, and the agreement is signed and registered. However, shortly after moving in, the market prices decrease significantly, and Y sues Z to void the contract on the ground that Z exercised undue influence over him and to recover the excess price paid for the apartment.
Interpretation and scenarios
An analysis of the above example would indicate that Y and Z’s agreement is not voidable at Y’s instance. Every transaction, where, due to prevailing market conditions, the terms are to the disadvantage of one party, the consent of that party need not necessarily have been obtained by exercising undue influence.
In the above example, real estate prices were higher than usual, so it is natural for property owners to demand higher prices for their properties than they would otherwise have demanded
In a suit or arbitration against Y, Z is likely to contend in his defense the following:
- Due to the prevailing circumstances, the price that he quoted was the market price then.
- He did not exercise undue influence to get Y to agree to the quoted price.
On the other hand, Y is likely to contend that Z was in a position to exercise undue influence because he was in desperate need of a new house.
Making This Situation Rapid Resolution Friendly — Strategy
A dispute arising out of the above example would be friendly to rapid resolution, only if the contract acknowledges prevailing market conditions. In the absence of such language in the agreement, both parties would need to lead substantial evidence to prove undue influence and vice-versa.
However, simple drafting solutions exist to ensure that disputes arising out of an agreement like the one in the above example can be made rapid resolution friendly. These solutions involve combining online dispute resolution efficiencies with pre-decided steps of the arbitration process.
Three of those solutions are examined here.
The Drafting Solutions
Solution 1- Recognising the abnormal market situation
In a contract like the one in the example, the parties need to incorporate a clause recognizing and accepting that, due to the prevailing market conditions, the unusually high price is the fair market value of whatever is sought to be purchased under the agreement in question.
Adding such a clause to the contract would, in the event there is a dispute over the price later, eliminate the parties’ need to prove or disprove the market price at the relevant time. It will further help to provide some objective evidence of the prevailing high market price.
Solution 2 — Making it difficult to make a plea of undue influence
In a contract where, due to prevailing external factors, one party could take the plea of undue influence in the event of a dispute, it is essential for the agreement to have language stating that the relevant party agrees freely and without any undue influence.
While this clause by itself is not enough to make it sufficiently difficult for a party to raise the plea of undue influence, when reading with the clauses recognizing the abnormal external factors (like the real estate boom in our example), it will be tough for the plea of undue influence to be raised.
Solution 3 — accelerates dispute resolution for both parties (Pre-decides contentious elements of the Arbitration process)
The agreement gives the claimant the right to ask for the arbitrator’s appointment by a named institution or ODR platform; and for such appointment to be made within 35 days of receipt of the defendant receiving notice.
In these cases, it will better serve the parties if the institution or ODR platform promises a process that binds the arbitrator to rapid resolution. Platforms often do this by minimizing oral hearings, not accepting documentation delays, and not allowing adjournments unless in emergencies.
In conclusion, it is fair to say that contracts entered into during abnormal market conditions favoring one party over another can be made rapid resolution friendly by ensuring that the abnormal market conditions are recorded in the contract.
Simple Explainer For The Layman
Sumit Bajaj was a 59-year-old government accountant on the verge of retirement. Like everyone else, Sumit dreamt of leading a happy post-retirement life, for which he decided to sell his current house and shift with his son, an engineer by profession.
Capitalizing upon the booming real estate market opportunity, Sumit quickly approached Anil Sharma, a house broker, to find the right buyer for his house.
Anil found Mr. Govind Seth interested in buying Sumit’s house. A meeting was arranged between the parties. Sunil proposed an amount more than the house’s usual price, given real estate properties’ rising price. Govind, who was in desperate need of a new house, agreed to the quoted price.
However, a few weeks after the agreement was executed and Govind was handed possession, Sumit received a letter from Govind voiding the contract on the grounds of undue influence and demanding that Sumit refund a part of the money.
Govind and Sumit ended up fighting protracted and expensive litigation, wherein the court eventually held that Govind had freely consented to the agreement, and dismissed the case.
The entire dispute could have been either avoided altogether or resolved avidly through Online Dispute Resolution, had three things been incorporated into the agreement.
Firstly, the agreement should have had a clause recognizing that the house’s higher than the usual price was based on the prevailing market conditions and was the fair price. An example or evidence from a market barometer publication or a recent transaction could support this assertion.
Secondly, the contract ought to have had a clause whereby Govind agreed that he had freely consented to pay the contract price, and Sumit had not exercised any undue influence over him.
Finally, the contract should have included an ODR friendly arbitration clause that pre-decided contentious aspects of the dispute resolution process, such as the arbitrator or arbitral institution’s choice and the arbitration procedure.
About the Authors
Dushyant Krishnan is a Mumbai based lawyer and the co-founder of House Court, an online dispute resolution platform.
Devansh Garg is a third year law student at the Vivekananda Institute of Professional Studies, and an associate editor of Indian Law Portal, an online legal news publication