Vitiating Factors: From Malaysian Undue Influence to Chinese Rules on Exploitation

A contract represents the free will of the parties. If that will is compromised by external pressure or unfair advantage, the law allows the agreement to be set aside through vitiating factors. Both Malaysia and China recognise that contracts formed under improper pressure should not stand, but they apply different legal tests to determine unconscionability. The key distinction is whether the court examines the parties’ relationship or the fairness of the deal itself.

The Malaysian Doctrine: Section 16 and the Domination of Will

In Malaysia, the main safeguard against non-physical pressure is the doctrine of undue influence, set out in Section 16 of the Contracts Act 1950. A contract is considered induced by undue influence when one party is in a position to dominate the will of the other and uses that position to gain an unfair advantage.

The Malaysian test has two elements. First, there must be a “position to dominate.” Section 16(2) states that this exists where one party holds real or apparent authority over the other, such as a parent over a child, or stands in a fiduciary relationship, such as solicitor and client. It also applies when a contract is made with someone whose mental capacity is affected by age, illness, or distress.

Second, the dominant party must have used their position to gain an “unfair advantage.” Malaysian law, as established in Inche Noriah v Shaik Allie Bin Omar, emphasises the shifting burden of proof. If a dominant party enters into a transaction that appears unconscionable, it must prove the contract was not induced by undue influence. Typically, this requires showing that the weaker party received independent legal advice and understood the consequences.

Malaysian law does not always require the “victim” to prove a clear disadvantage. The main concern is the integrity of the decision-making process. If the stronger party overbore the will of the weaker party, the contract is voidable at the latter’s option. This protects vulnerable individuals but requires commercial parties to exercise caution when dealing with those in distress or dependence.

The Chinese Civil Code: Article 151 and the Rule on Exploitation

The 2020 Chinese Civil Code addresses similar issues through the concept of “Exploitation” in Article 151. If one party takes advantage of another’s distress or lack of judgment, resulting in a contract that is “manifestly unfair” at the time of signing, the injured party may request the court or an arbitration institution to revoke the contract.

The Chinese approach differs from Malaysia’s focus on “domination.” While Malaysian law examines the relationship and power dynamics, Chinese Article 151 considers the party’s vulnerability and the fairness of the outcome.

“Distressed state” and “lack of judgment” are key triggers under Chinese law. These include situations where a party faces financial hardship or lacks the professional experience to understand a complex deal. Unlike Malaysia’s presumption of influence in certain relationships, Chinese courts assess whether the stronger party actively exploited these vulnerabilities during negotiations.

The Chinese Code directly ties contract validity to the fairness of its terms. A contract resulting from a mere “bad bargain” will not be set aside, but if the terms are “manifestly unfair,” the court may intervene. This reflects the civil law principle of equity in exchange, aiming to balance the parties’ interests. For practitioners, even without a fiduciary relationship, a highly one-sided deal signed during a counterparty’s financial crisis could be revoked.

Evidentiary Thresholds and the Right to Revoke

The procedural differences in these jurisdictions create distinct risks for contract enforceability. In Malaysia, a claim of undue influence often leads to rescission of the entire contract. Under Section 19 of the Contracts Act, the court may set aside the contract absolutely or on terms it deems just if benefits have been received. Evidence typically focuses on whether one party overbore the other’s will, often considering the relationship history and independent advice.

In China, the right to revoke under Article 151 is subject to strict time limits. Article 152 states that this right expires if not exercised within one year from when the party knew or should have known the grounds for revocation. If not acted upon within this period, the contract becomes fully valid and cannot be challenged.

Chinese courts focus on whether the contract terms were “manifestly unfair” at the time of signing. Parties should be ready to present market data, price comparisons, and expert testimony to show that the deal was outside normal trade practices. This is a more objective, outcome-based inquiry than the subjective, process-based approach in Malaysian law.

Strategic Implications for Cross-Border Negotiations

For practitioners handling deals between Malaysia and China, these differences shape the defensive drafting needed during negotiations.

For transactions under Malaysian law, the best defence against undue influence claims is ensuring the counterparty has independent legal representation. If dealing with an individual or smaller entity in a position of dependence, insist on a “certificate of independent advice” from their solicitor. This confirms their will was not dominated and they understood the transaction, neutralising the presumption under Section 16.

For transactions under Chinese law, focus on documenting the fairness of the deal. If you secure favourable terms due to the counterparty’s urgency or distress, ensure the contract states the commercial justifications. Demonstrating that terms were negotiated at arm’s length and reflect a legitimate trade-off is the best defence against claims of “obvious unfairness” under Article 151.

Conclusion: Process vs Outcome

Malaysian law, through undue influence, aims to protect the integrity of relationships. It treats abuse of trust or domination of will as the main concern. If contract formation is tainted by a power imbalance, the law intervenes to protect the weaker party, regardless of the fairness of the final price.

The Chinese Civil Code, through Article 151, protects the integrity of the exchange. It treats manifest unfairness and exploitation of distress as the main triggers for intervention. The law prioritises substantive fairness, offering a broader but time-limited right to revoke objectively lopsided deals.

Understanding these boundaries is essential for international trade lawyers. Success requires more than agreement; it demands that consent is obtained through a process and on terms that will withstand court scrutiny. Whether navigating Malaysia’s fiduciary duties or China’s fairness standards, the goal remains a contract that is both signed and secure.

The article was first published on LinkedIn.