Define Undue Influence: What Small Businesses Need To Know About Commercial Agreements

When you’re running or growing a small business in Australia, contracts are everywhere - from supplier terms and distribution deals to leases, joint ventures and investor agreements.

But what happens if someone later says they didn’t sign freely? Or you feel you were pushed into a contract that just didn’t feel like a real choice?

That’s where “undue influence” comes in. Understanding it can help you avoid messy disputes, keep your agreements enforceable, and negotiate with confidence.

In this guide, we’ll explain what undue influence means under Australian law, how courts assess it, how it differs from hard bargaining and other doctrines like unconscionable conduct, and practical steps you can take to reduce risk before you sign. We’ll also flag the key contracts and processes that help show real, informed consent.

If you’re unsure about a document on your desk right now, it’s smart to get a quick contract review before you commit.

What Is Undue Influence In Australian Contract Law?

Undue influence is about free will. It describes situations where one person uses their position, relationship or influence to overpower the other party’s independent judgment when entering a contract.

To put it simply: the deal looks like consent on paper, but the decision wasn’t truly free because of improper pressure or influence.

Why it matters: contracts require genuine consent to be enforceable. If undue influence is proven, the agreement is usually “voidable” - the disadvantaged party can ask a court to set it aside.

Key ideas to keep in mind:

• It’s more than firm negotiation - it’s influence that overbears free choice.
• It can arise from conduct (actual undue influence) or from certain relationships and circumstances (where a presumption can apply).
• If established, a contract can be unwound, and the parties returned (so far as possible) to their pre-contract position.

If anything about a negotiation makes you pause - very tight timeframes, one-sided terms, or a relationship dynamic that doesn’t feel balanced - step back and get advice before you sign. A short call with a contract lawyer can save a long dispute later.

How Do Courts Assess It (And When Is It Presumed)?

Courts look for whether the stronger party’s influence overbore the weaker party’s will at the time of contracting. There are two broad pathways:

1) Actual Undue Influence

This is proven by evidence of improper pressure or manipulation in the specific case. Examples include threats, persistent pressure in sensitive moments, or leveraging a dependency in a way that removes meaningful choice.

Evidence can be emails, texts, meeting notes, timing (e.g. late-night signings), or statements from witnesses. If the facts show real pressure that overbore free will, the court may set aside the contract.

2) Presumed Undue Influence

Sometimes the law recognises that certain relationships naturally involve trust and influence. Traditionally, categories such as parent–child, doctor–patient and solicitor–client can give rise to a presumption of undue influence when the stronger party benefits from a transaction.

Outside those established categories, a presumption can also arise on the facts if there is a proven relationship of trust and confidence that was exploited. Importantly, many commercial relationships - like franchisor/franchisee, employer/employee or majority/minority shareholders - are not automatic categories. Whether a presumption applies depends on the specific evidence of trust, dependence and how the deal was done.

If a presumption does arise, the burden shifts to the benefiting party to show the transaction was the result of the other party’s free and informed decision - for example, because they had time, understood the terms, and received independent legal advice.

Practical takeaway: where there’s a power imbalance or a relationship of trust, create a paper trail that shows the other party had time, information and independent advice. That record is often decisive.

Undue Influence Vs Hard Bargaining And Unconscionable Conduct

It’s easy to confuse these concepts. Here’s how to tell them apart and why it matters.

Hard Bargaining

Firm negotiation - even aggressive “take it or leave it” positions - is not unlawful by itself. Businesses are free to drive a hard bargain. Undue influence requires more than commercial pressure; it involves influence that overbears free will.

Unconscionable Conduct (ACL)

Separately, Australian Consumer Law (ACL) prohibits businesses from engaging in unconscionable conduct. For business-to-business dealings, section 21 of the ACL targets behaviour that takes advantage of a special disadvantage or is against conscience in the circumstances. You can read more in our overview of section 21 ACL.

Misleading or deceptive conduct is covered by section 18 ACL - that’s about false or misleading representations during negotiations or advertising. Our guide to section 18 ACL explains the basics.

Unfair Contract Terms (UCT)

If you’re using standard form contracts, separate rules deal with unfair terms for consumers and many small businesses. These are the unfair contract terms provisions in the ACL (ss 23–28). A term can be declared void if it’s unfair and in a standard form contract. If you rely on templates, consider a UCT review and redraft to reduce risk.

Why the distinction matters: you might have multiple arguments available in a dispute (e.g. undue influence and ACL claims). But the evidence and legal tests differ. Understanding the differences helps you gather the right proof and fix the right issues in your contracting process.

Practical Ways To Reduce The Risk Before You Sign

You can’t remove all risk, but you can take simple, practical steps that make an undue influence claim much less likely - and much less persuasive if it’s raised later.

1) Encourage Independent Advice

• Invite the other party to obtain independent legal and financial advice, especially for high-stakes agreements.
• Consider a short clause confirming they had an opportunity to obtain that advice, and don’t rush them.
• For directors signing for companies, make sure execution follows the Corporations Act - our note on signing under section 127 is a good refresher.

2) Allow Real Time To Consider

• Avoid late-night signings or “must-sign-today” deadlines unless truly necessary.
• Share drafts early, avoid last-minute material changes, and keep a timeline of versions sent and time allowed.

3) Be Transparent And Explain Key Terms

• Flag the clauses that matter most (price, termination, exclusivity, guarantees, restraints, variations, exit rights).
• Use plain English summaries or a term sheet to confirm the commercial understanding before sending the full agreement.

4) Keep A Clean Paper Trail

• Confirm negotiations in writing (emails or meeting notes).
• Record who attended meetings, what was explained, and any questions asked.
• If a party is vulnerable (language barrier, inexperience, stress), take extra care and note the steps you took to ensure understanding.

5) Avoid Overly One-Sided Terms Without Justification

• Where a term is strict, be ready to justify it commercially (e.g. risk profile, investment, industry norms).
• Consider whether you can offer a counterbalance (like a cap, review period or early termination option) to show fairness.

6) Execute Properly

• Make sure the person signing has authority and the process is correct - see the basics on signing legal documents in Australia.
• Use execution blocks that clearly identify the signatory’s role and capacity.

If the agreement is important to your business (think supply, distribution, investment, or a long lease), build a few extra days into your timeline and get a fast, focused contract review. It’s one of the easiest ways to prevent disputes.

Which Contracts And Policies Help Manage This Risk?

Well-drafted, plain-English contracts don’t just set expectations - they also show a fair process. The following documents commonly help demonstrate real, informed consent and reduce the chance of an undue influence claim:

• Customer Contract or Terms: Clear scope, pricing, changes and termination build transparency and help avoid “surprise” terms. If you sell via a website or app, use appropriate online terms.
• Supplier or Distribution Agreement: Sets out service levels, variations, exclusivity and exit rights so neither side feels boxed into unexpected outcomes.
• Shareholders Agreement: If you have co-founders or investors, a Shareholders Agreement clarifies decision-making, share transfers and dispute resolution, reducing pressure tactics at sensitive moments.
• Non-Disclosure Agreement (NDA): Use an NDA in early discussions so parties can ask questions and explore options openly before the “sign or don’t sign” stage.
• Heads of Agreement/Term Sheet: A short document that captures key commercial points up front. It helps ensure both parties truly understand the deal they’re about to formalise.
• Variation and Renewal Templates: Keep midstream changes controlled, documented and balanced. Sudden, unexplained changes are a common flashpoint for pressure claims.

Not every business needs all of these, but most will benefit from several. The common thread is clarity, balance and a record that the other party knew what they were agreeing to.

Key Takeaways

• Undue influence occurs when one party’s influence overbears another’s free will - it’s more than hard bargaining and can make a contract voidable.
• Courts look at evidence of actual pressure or, in some cases, presume influence based on certain relationships or proven trust and dependence. Commercial relationships aren’t automatically presumed - it depends on the facts.
• Separate legal tools may also apply: section 18 ACL (misleading or deceptive conduct), section 21 ACL (unconscionable conduct in business contexts), and unfair contract terms rules (ss 23–28 ACL) for standard form contracts.
• Reduce risk by encouraging independent advice, allowing time to consider, explaining key terms, documenting the process, avoiding unjustified one‑sided clauses, and executing correctly.
• Use clear, tailored contracts to show transparency and informed consent. Consider a Shareholders Agreement, NDA, and robust customer and supplier terms, and get a quick contract review for high‑stakes deals.

If you’d like a consultation about managing undue influence risks in your commercial agreements, contact Sprintlaw on 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.