Raghunath prasad V Sarju Prasad( 1923) 51 IA 101 Case Analysis

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LORD SHAW OF DUNFERMLINE: This is an appeal from a decree, dated November 9, 1920, of the High Court of Judicature at Patna, which varied a decree, dated September 25, 1917, of the Subordinate Judge of Arrah. The suit is for recovery of the amount of principal and interest due by the appellant to the respondents (the plaintifis) under a mortgage of date May 27, 1910. The Subordinate Judge gave decree in the mortgage suit, but only allowed simple interest. The High Court allowed compound interest. The substantial question raised on the appeal is whether the appellant, in the circumstances proved in the case, fell within the protective provisions of s. 2 of the Indian Contract (Amendment) Act, 1899. It may be convenient to set out that section in full:
“2. Section 16 of the Indian Contract Act, 1872, is hereby repealed, and the following is substituted therefore, namely:-
“16. – (1.) 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.

(2) 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;
(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.

(3) 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 such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other.Nothing in this sub-section shall affect the provisions of s. 111 of the Indian Evidence Act, 1872.” The mortgage is dated May 27, 1910. It is for the sum of Rs. 9999 borrowed from the plaintiffs. The rate of interest is covered by the following provision: “I, the declarant, do promise that I shall pay interest on the said debt at the rate of 2 per cent per mensem on the 30th Jeth of each year. In case of non-payment of the annual interest, the interest will be taken as principal and interest will run thereon at the rate of 2 per cent per mensem, that is, interest will be calculated on the principle of compound interest.”

There can be no question that these terms were high : if payment was not made the sum due on the mortgage would speedily mount up. By the decree of the High Court which was pronounced on November 9, 1920, it is seen that the original debt of Rs. 10,000 had reached, with interest and costs calculated up to May 8, 1921, more than a lac of rupees—namely, Rs.112,885. In eleven years the stipulation for interest at 24 per cent compound had magnified the sum covered by the mortgage more than elevenfold. It is upon these facts, coupled with one other about to be mentioned, that the appellant takes his stand.

The statement in the defence admits that at the time of the execution of the mortgage the defendant was owner of one half of a valuable joint family property. The owner of the other half was his father. Father and son had quarrelled. Serious allegations are made by the son against the father; whereas it appears that the father had instituted criminal proceedings against the son. Shortly before the date of the mortgage the defendant had borrowed Rs. 1000 from the plaintiffs, so as to enable him to defend himself in these criminal proceedings. It is alleged that they caused him great mental distress, and that he required more money to conduct his litigations. That is the story.

Evidence was taken in the case. It is sufficient to say that the defendant gave no evidence at all. It is quite plain that no Court can accept a story thus unproved by its author as establishing a case either of mental distress or of undue influence under the Indian Contract Act. The only case which the appellant has in the case derived from the contents of the mortgage itself.

Their Lordships think it desirable to make clear their views upon, in particular, s. 16, sub- s. 3, of the Contract Act as amended. By that section three matters are dealt with. In the first place the relations between the parties to each other must be such that one is in a position to dominate the will of the other. Once that position is substantiated the second stage has been reached – namely, the issue whether the contract has been induced by undue influence. Upon the determination of this issue a third point emerges, which is that of the onus probandi. If the transaction appears to be unconscionable, then the burden of proving that the contract was not induced by undue influence is to lie upon the person who was in a position to dominate the will of the other.

Error is almost sure to arise if the order of these propositions be changed. The unconscionableness of the bargain is not the first thing to be considered. The first thing to be considered is the relations of these parties? Were they such as to put one in a position to dominate the will of the other. Having this distinction and order in view the authorities appear to their Lordships to be easily properly interpreted.

In the judgment of this Board in Dhanipal Das v. Maneshar Bakhsh Singh [(1906) L.R. 33 I.A. 118] the outstanding effect was that the borrower who mortgaged the estate was actually, at the date of the transaction, under the control of the Court of Wards. He was treated, to use the language of Lord Davey, as “under a peculiar disability” and placed in a position of helplessness, and the lender was proved to have been aware of that and, therefore, in a position to dominate the borrower’s will. Lord Davey thus expressed the Board’s view (ibid. 126): “Their Lordships are of opinion that although the respondent was left free to contract debt, yet he was under a peculiar disability and placed in a position of helplessness by the fact of his estate being under the control of the Court of Wards, and they must assume that Auseri Lal, who had known the respondnt for some fifty years, was aware of it. They are therefore of opinion that the position of the parties was such that Auseri Lal was ‘in a position to dominate the will’ of the respondent within the meaning of the amended s. 16 of the Indian Contract Act. It remains to be seen whether Auseri Lal used that position to obtain an unfair advantage over the respondent.”

It is sufficient to say that the borrower in the present case was sui juris; had the full power of the bargaining and of burdening his estate, that his estate was not under the Court of Wards, and that he lay under no disability. With regard to his helplessness nothing whatsoever is proved in the case except the bare fact that he, being a man of wealth as owner of one-half of certain joint family property, wished to obtain and did obtain certain moneys on loan. The only relation between the parties that was proved was simply that they were lender and borrower.

In Sundar Koer v. Sham Krishen {L.R. 34 I.A. 9, 16} the exact point was referred to by Lord Davey in the course of the judgment read by him: “There is no evidence of any actual exercise of undue influence by the mortgagees or of any special circumstances from which an inference of undue influence could be legitimately drawn, except that the mortgagor was in urgent need of money. The learned counsel for the appellant argued that the mortgagees were thereby placed in a position ‘to dominate the will’ of the mortgagor. Their Lordships are not prepared to hold that urgent need of money on the part of the borrower will itself place the parties in that position.”

This precisely fits the situation of these parties. It has not been proved – it might be said that it has not even been attempted to be proved – that the lender was in a position to dominate the will of the borrower. In these circumstances, even though the bargain had been unconscionable (and it has the appearance of being so), a remedy under the Indian Contract Act does not come into view until the initial fact of a position to dominate the will has been established. Once that fact is established, then the unconscionable nature of the bargain and the burden of proof on the issue of undue influence come into operation. In the present case, for the reasons stated, these stages are not reached.

Their Lordships are of opinion that the decree of the High Court should be varied by allowing compound interest on the principal at the rate of 2 per cent per mensem from the date of the execution of the bond until September 25, 1917, and thereafter simple interest at the rate of 6 per cent per annum up to the date of realization, and that in other respects the decree of the High Court should be affirmed, as they will humbly advise His Majesty accordingly.