Raghunath Prasad v. Sarju Prasad

Facts

A borrower mortgaged property and took a loan carrying compound interest at 24 per cent per annum, with unpaid annual interest added to the principal. Over about eleven years the amount owed escalated roughly elevenfold. The borrower sought to have the contract set aside or rectified as unconscionable and induced by undue influence.

Issues

• Whether an exorbitant rate of interest, by itself, establishes undue influence under Section 16.
• The correct order in which the requirements of Section 16(3) must be established before the burden of proof shifts.

Arguments

The borrower contended that the grossly excessive interest rendered the bargain unconscionable, so it should be set aside or rectified for undue influence. The lender contended that mere harshness of terms does not prove that the parties stood in a relationship enabling one to dominate the will of the other, which is the foundational requirement.

Held

The Privy Council laid down a three-stage sequence under Section 16(3). First, it must be shown that the relations between the parties were such that one was in a position to dominate the will of the other; only then does the second question arise — whether the contract was induced by undue influence; and only after that does the third question of onus probandi arise, shifting the burden to the dominant party. The Court stressed that the unconscionableness of the bargain is not the first thing to be considered; error is almost certain if the order is reversed. As the lower courts had decided the case solely on the harsh terms of the mortgage without establishing any position of domination, the necessary stages had not been reached and relief could not be granted.

Ratio decidendi

The benefit of Section 16(3) and the shifting of the burden of proof arise only after it is first established that one party was in a position to dominate the will of the other; an unconscionable bargain alone does not raise a presumption of undue influence.

Significance

The foundational authority on the structured, stage-by-stage operation of Section 16. Its sequencing was expressly approved and applied by the Supreme Court in Ladli Prasad Jaiswal v. Karnal Distillery and Subhas Chandra Das Mushib v. Ganga Prosad Das Mushib, and it remains the standard analytical framework for undue influence claims.

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