Undue influence in business contracts and when a signed deal can be set aside

A supplier emails a revised agreement at 4pm on a Friday with a note that the price only holds if it is signed by Monday. A director's mother is asked to guarantee the company's new overdraft and told it is "just a formality". A franchisee is walked through a sixty-page document set an hour before opening day. Each of those deals might have been entered freely, or might not. If the law later decides that the "yes" was not genuinely the signatory's own, the contract can be unwound, and the security and revenue you built your plans around can disappear with it. The doctrine that does that is undue influence, and it is one of the few things that can unravel an otherwise valid commercial agreement years after signing.

What "undue influence" actually is

Undue influence is an equitable doctrine. A court can set aside a contract, deed or gift where one party's will was overborne, meaning they agreed because of pressure or because of a relationship of influence, rather than as the result of their own free and independent decision.

The leading Australian authority is Johnson v Buttress (1936) 56 CLR 113. The High Court held that wherever one party is "in a position to exercise dominion over" the other "by reason of the trust and confidence reposed in" them, a presumption of undue influence is raised. To rebut it, the stronger party must affirmatively show that the transaction was "the pure, voluntary, well-understood act of the mind" of the weaker party.

The law recognises two routes to relief:

Actual undue influence: the weaker party proves, from the evidence of this particular transaction, that unfair pressure or manipulation was applied to them. There is no presumption to help them; the facts must carry the case.
Presumed undue influence: the relationship between the parties, or the surrounding facts, raises a presumption that influence existed. The burden then shifts to the stronger party to prove the deal was the free exercise of the weaker party's will.

One precision point matters here. A contract affected by undue influence is voidable, not void. In Thorne v Kennedy (2017) 263 CLR 85, the High Court described the agreements in question as "voidable". That means the contract stands unless and until the victim elects to set it aside. Acting as though the deal is valid, or delaying too long, can amount to affirming it and can bar relief.

The relationships that raise the presumption

The classic starting points are relationships in which influence is presumed as a matter of course: parent and child, guardian and ward, solicitor and client, doctor and patient, and religious adviser and follower. But the categories are not closed. What matters is whether one party reposed trust and confidence in the other and was in a position of dependence.

Johnson v Buttress itself involved no formal category. The donor was a 67-year-old man who was wholly illiterate, of low intelligence, without business experience and habitually dependent on others for advice and assistance. After his wife's death he transferred the land on which his home stood, substantially his only asset, to a relative of his wife. The transfer was executed at the donee's own solicitor's office, expressed to be for natural love and affection, and he had no independent advice. The High Court set the transfer aside: the relationship of trust and confidence was enough to raise the presumption, and nothing the donee showed rebutted it.

For a business, the lesson is that a relationship of influence does not need a label. It can arise between family members in a family company, between a long-standing adviser and a client, or between a dominant business partner and a passive one. The risk is highest where the weaker party gets no obvious benefit and no independent advice.

Where small businesses most often trip over it

The risk surfaces most often in four recurring situations:

Personal guarantees and security: following Garcia v National Australia Bank (1998) 194 CLR 395, a lender may be unable to enforce a guarantee against a guarantor who received no benefit from the transaction and placed trust and confidence in the borrower, where the lender did not take reasonable steps to make sure the guarantor understood what they were signing. Spouses, parents and other volunteers are the classic cases. If you are the one taking a guarantee, how you obtained it can matter as much as the document itself.
Family business transfers: a less experienced family member transferring shares, assets or a mortgage over the family home for someone else's benefit, without explanation of the downside and without independent advice, is a pattern courts set aside.
Settlement deeds and releases: a party under stress, unrepresented, and facing a "sign today or the offer dies" ultimatum at the end of a dispute is fertile ground for a later challenge. The same applies to variations forced through at the last minute.
Franchise and long-term supply deals: where one party holds all the information and the leverage, rushed sign-ups with material changes unhighlighted can create the appearance of overborne will, even if the deal itself was commercial.

Where a hard bargain stops being legal

Tough negotiation is not undue influence. The doctrine is about the decision-making process, not the outcome. A deal that is aggressive but transparent, with time to review and advice available, will almost always survive. The line is crossed when the process itself means the "yes" was not free.

Adjacent doctrines are often pleaded alongside undue influence, and it is worth knowing where each one bites:

Duress: illegitimate pressure that leaves the victim no realistic choice, commonly threats of unlawful action. In Thorne v Kennedy, the trial judge set the agreements aside for duress, but the High Court said undue influence was the better characterisation of her findings.
Misrepresentation: the problem is what was said, not how the decision was reached. A false statement that induces entry into a contract is a misrepresentation, and in trade or commerce it is also caught by s 18 of the Australian Consumer Law (ACL), which is Schedule 2 of the Competition and Consumer Act 2010 (Cth). Section 18 prohibits conduct that is misleading or deceptive or likely to mislead or deceive.
Unconscionable conduct: exploitation of a special disadvantage, such as the weaker party's lack of assets, dependence, or inability to understand the transaction, in a way that is against conscience. It exists in equity and is also prohibited by ss 20 and 21 of the ACL for conduct in trade or commerce. In Thorne v Kennedy, the agreements were voidable for undue influence and unconscionable conduct together.

The distinction matters for remedies. Undue influence, duress and unconscionable conduct are grounds for setting a transaction aside. Misleading or deceptive conduct under the ACL can also support compensation orders. In practice, parties plead several grounds at once and let the court decide which is made out.

What a court weighs: the Thorne v Kennedy example

The facts of Thorne v Kennedy [2017] HCA 49 show how the doctrine operates at the edges of a commercial relationship. Ms Thorne was 36 years old with no substantial assets. Mr Kennedy was a 67-year-old property developer with assets of between $18 million and $24 million. She moved to Australia to marry him, leaving behind her job, her community and her visa security. The wedding was set for 30 September 2007. The pre-nuptial agreement was prepared on 8 August. On 19 September, Mr Kennedy told her that if she did not sign it, the wedding would not go ahead. The next day he took her to an independent solicitor and waited in the car outside, and she saw the contents of the agreement for the first time. The solicitor gave written advice that the agreement was "entirely inappropriate" and that she should not sign it. She signed anyway, days before the wedding, and a substantially identical post-nuptial agreement followed.

The High Court held the agreements were voidable due to both undue influence and unconscionable conduct. The decisive point for business readers: she had emphatic independent legal advice from a specialist, and it did not save the agreements. Independent advice is powerful evidence, but it is not a silver bullet. The question is always whether the transaction was the product of the signatory's free will. Here the ultimatum, the timing, her dependence on Mr Kennedy for everything, and the fact that her parents and sister had already flown to Australia for the wedding meant her "yes" was not free.

The lesson is uncomfortable. Even if you can point to advice the other side received, a court may still set the deal aside if the circumstances overbore their will. And conversely, the absence of advice is not fatal if the process was otherwise fair. It is the whole picture that counts.

What happens if undue influence is proved

If a court finds undue influence, the usual remedy is to set the transaction aside, which is called rescission. The parties are restored, as far as practicable, to their positions before the deal. In Johnson v Buttress, the transfer was set aside and the land effectively returned to the estate.

But relief is discretionary, and it is not always all or nothing:

The court may set the transaction aside on terms, for example requiring the party seeking relief to account for benefits they received.
The court may refuse to enforce a particular term rather than unwind the whole deal, such as declining to enforce a guarantee while leaving the rest of the arrangement intact.
Where statutory claims are also made out, such as unconscionable conduct or misleading or deceptive conduct under the ACL, compensation orders may be available in addition to or instead of setting aside.
Third parties complicate things. If the beneficiary has on-sold the asset, or a bank has taken security, unwinding the transaction can affect people who were not parties to the original deal, and the court will balance those interests.

How to build a process that survives a challenge

The best defence to an undue influence allegation is a documented process that shows the other party had time, information and the opportunity for advice, and chose to proceed anyway. The steps are practical:

Disclose early and plainly: Provide draft contracts and key terms as early as possible, with a plain-English summary of the major risks: payment obligations, default consequences, guarantee exposure, and renewal or termination mechanics. Point to the clauses that matter most instead of dumping the whole document.
Allow realistic time: Avoid artificial deadlines, end-of-day pressure, and "price expires today" scripts for complex deals. For high-stakes documents, use version control and a genuine review window.
Encourage independent advice, and document it: Recommend that the other party obtain their own legal advice. Never send them to your lawyer. For guarantees, deeds and settlements, consider an independent advice certificate signed by the adviser and the signatory.
Execute cleanly: Make sure documents are signed by the right people in the right way. A company executes a document without a seal under s 127 of the Corporations Act 2001 (Cth) when it is signed by two directors, or by a director and a company secretary, or, for a proprietary company with a sole director, by that director if they are also the sole secretary or the company has no secretary. Execution can be electronic. Deeds must be expressed to be executed as a deed and executed in the same way.
Record how the deal was made: Keep meeting notes, email threads and annotated term sheets that show what was provided, when, and what was said about risks. If agreement was reached by email, remember that an email chain can form a binding contract.
Train your team: Coach staff to explain risks and costs as well as benefits, to prohibit high-pressure scripts, and to escalate to management when a customer is vulnerable, inexperienced, or does not seem to understand the key terms.
Keep the paper trail: Store a version-controlled document pack with a dated timeline: when the draft was provided, when questions were answered, when the document was signed, and who advised whom.

A contemporaneous record is often the difference between "their word against yours" and a convincing picture of a fair process.

If you are facing an allegation, or think you were pressured

Whether you are accused of exerting undue influence or believe you were on the receiving end of it, the first moves are the same:

Assemble the evidence now: Drafts, emails, text messages, meeting notes, advice certificates, and any record of what was explained and when. Build a timeline before memories fade.
Identify the red flags honestly: Was there a relationship of influence? Extreme time pressure? No access to advice? A transaction that gave one side everything and the other nothing, without explanation?
Do not quietly keep performing: If the contract is voidable, continuing to act as though it is valid can affirm it and destroy the right to set it aside. If you think the deal may be affected, get advice before you take the next step under it.
Consider commercial fixes early: A short variation, a cooling-off extension, or pausing performance can defuse a dispute before positions harden, and it costs far less than litigation.
If you settle, settle properly: A deed of release, executed correctly, can close off future claims. Unlike an ordinary contract, a deed does not depend on an exchange of consideration, which is why it is the standard instrument for finalising disputes.

Getting legal help with an undue influence problem

Whether you are seeking to set a deal aside or defending one, the judgement calls here are ones an article cannot make for you. Was the relationship one of influence? Does the burden shift to the stronger party to prove the transaction was freely entered? Has enough time passed, or has conduct since signing affirmed the deal? Those questions decide whether you have a case or a defence, and they turn on evidence you may not yet have assembled.

A lawyer can help you map the facts against the legal tests, gather and preserve the evidence that matters, and advise on the realistic options: rescission, renegotiation, a release, or litigation. For businesses taking guarantees or entering high-stakes deals, a lawyer can also design the process in advance, including advice certificates and execution procedures, so the file tells the right story before a dispute ever starts. Artificer Legal advises small and medium businesses on contract disputes and on building the documentation that keeps deals enforceable. If you are facing an allegation, or worried a deal you signed can be unwound, an early conversation is the cheapest step in the process.

The line between influence and undue influence

The most misunderstood element of this doctrine is that undue influence is about how the decision was made, not what the deal looks like. A transaction can be perfectly commercial on its face and still be set aside because the "yes" was extracted by pressure or dependence. Conversely, an aggressive but transparent negotiation, with time, disclosure and advice, is defensible no matter how hard the bargain. The question a court asks is whether the weaker party's will was overborne. If someone challenged one of your deals tomorrow, what would your file show about how their decision was made? That is the question worth answering before you need to.

The key points: undue influence lets a court set aside a contract, deed or gift where one party's will was overborne, either proved directly or presumed from a relationship of trust and confidence. Affected contracts are voidable, not void. The classic risk areas for small business are personal guarantees, family transfers, settlement deeds and rushed franchise or supply deals. The strongest protection is a documented fair process: early disclosure, realistic timeframes, independent advice, clean execution under s 127 of the Corporations Act, and a full paper trail. If a dispute arises, act early, preserve evidence, avoid affirming the deal, and take advice before the positions harden.