Contracts - Kirti Dubey - 208 - C
Contracts - Kirti Dubey - 208 - C
Contracts - Kirti Dubey - 208 - C
● SUBJECT
THE INDIAN CONTRACT ACT,
1872
● TOPIC:
⮚ FREE CONSENT AND ITS EFFECT ON
CONTRACTS AS PER INDIAN CONTRACTS
ACT, 1872
● Section 2(h) of the Indian Contract Act, 1872 defines contract as under:
An agreement enforceable by law is a contract;
Thus there are two essential requirements for a valid contract: An Agreement and Enforceability by law.
Certain conditions need to be fulfilled for an agreement to be called a valid contract under law. Thus the law
of contract is the field of law that establishes the conditions under which promises is legally binding on the
persons who make it.
Section 10 of the Indian Contract Act mentions that all agreements are contracts if they are made by:-
● Free consent of parties,
● Parties competent to contract,
● For a lawful consideration and with a lawful object, and
● Not expressly declared void.
Expanding the above points, we can say that the essential elements or necessary conditions of an agreement
to become a valid contract are as follows:-
● Existence of more than two parties
● Agreement between the parties
● Intention of the parties to create legal relationship
● Exchange of lawful consideration between the parties
● Capacities of the parties to contract
● Free consent of the parties to contract
● Lawful object of the contract
● Certainty of meaning
● Agreements which are not expressly
void The same can be pictorially depicted as under
Consent' as a word is heard very often by individuals
around the globe, as the feeling of ‘individuality’ is
given importance more and more, consent as a
provision is also evolving. Derived from the Merriam
Webster dictionary, ‘Consent’ is explained a
‘compliance in or approval of what is done or
proposed by another.’
In simple words a voluntary agreement of one party to the proposal of others in order to reach or not reach
the desired motive. Now even consents are of different types, these include implied, expressed, informed
consent and unanimous consent.
Consent is defined as under as per section 13 of the Contracts Act as under:
Two or more persons are said to consent when they agree upon the same thing in the same sense.
Thus Consent occurs when parties mutually agree to form a contract with each other. Consent given under
pressure will not be considered valid consent, and therefore the contract will become void.
But, again for a person to provide consent, he/she should not be diagnosed with a mental disorder, age more
than 18 years etc. Both consent and free consent are different and are often misunderstood as similar terms,
but both the terms are different under The Contracts Act.
Further, consent is when two or more individuals agree on the same thing in the same sense. According to
section 13 of the Indian Contract Act, the principle of consensus-ad-idem (the meeting of minds) is very
important while making a contract. It means that the person who is accepting the offer must accept it in such
a way as it was told to him by the offered without any interpretations or changes.
Example of consent: Z agrees to sell his house to X. Z owns two houses and wants to sell his flat. X thinks
he is buying a villa. In this case, Z and X did not agree on the same thing in the same sense. As a result,
there is no consent and, therefore, no contract.
Free Consent
Free consent is defined under section 14 of the Indian Contract Act, 1872 which is as under:
Consent is said to be free when it is not caused by--
(1) coercion, as defined in section 15, or
(2) undue influence, as defined in section 16, or
(3) fraud, as defined in section 17, or
(4) misrepresentation, as defined in section 18, or
(5) mistake, subject to the provisions of sections 20, 21 and 22.
It is important to note, that not every consent is a free consent. Agreeing on same subject and in same
manner may constitute “”consent”, but if such consent is caused by certain external force like coercion,
fraud, undue influence, fraud, misrepresentation or mistake. etc, it shall not constitute free consent.
Free consent is an essential element for a contract to be valid. Devoid of free consent, a contract becomes
voidable at the option of one party. This means if the consent obtained by any of the parties for a contract is
not free and is caused by either coercion, undue influence, fraud or misrepresentation, then the party has a
right to make the contract voidable at his wish. It is important that such external factors mentioned in the
section, must be instrumental for giving consent. If there were such external factors available, but if they
were remote or non-instrumental in obtaining consent, or such consent was given irrespective of coercion or
undue influence, such consent will fall under the definition of free consent.
The presence of factors which have effect on free consent to make a contract voidable are defined and
explained as under
Explanation.—It is immaterial whether the Indian Penal Code (45 of 1860) is or is not in force in the place
where the coercion is employed.
A, on board an English ship on the high seas, causes B to enter into an agreement by an act amounting to
criminal intimidation under the Indian Penal Code. (45 of 1860).
A afterwards sues B for breach of contract at Calcutta.
A has employed coercion, although his act is not an offence by the law of England, and although section
506 of the Indian Penal Code (45 of 1860) was not in force at the time when or place where the act was
done.
Meaning: Coercion is nothing but forcing a person to enter into a contract by adopting unfair means. In this
case the basic idea of Coercion arises where a person may be forced to make an agreement by use of fear or
physical harm. It is in a way threatening to commit or committing, any act forbidden by IPC (45 of 1860),
or the illegal retarding, or intimidating to retard, any property, to the preconception of any person however,
with the objective of inducing any person to set foot into an agreement.
Committing or threatening to commit any act: In this one party to contract actually commits or
threatens to commit any act which is forbidden by IPC in order to get consent from the party to contract.
E.g. “A” threatens to shoot “B” if “B” does not sign promissory note of 20,000 Rs to “A”. In this “B’s”
consent is obtained due to Coercion & “B” can cancel this agreement ( has right to cancel this agreement).
Unlawfully detaining or threatening to detain property: In this if the party to contract actually detains
or threatens to detain any property of the other party to contract in order to get consent to contract.
Coercion may move & direct towards anyone: The coercion may move from one person and may move
to any person other than contracting party to the contract. It may even move to the close relations of the
contracting party. E.g. “A” kidnaps “B’s” son in order to obtain the consent of “B” to contract. Even though
“B’s” son is not party to contract, the coercion has moved to him. Not only that but also Coercion may be
directed towards any person. In this case it is not necessary that the coercion should always be performed by
the parties to contract, sometimes it can also be exercised by a third party to contract. E.g. “A” hired “B” to
kidnap “C’s” son in order to get consent from “C” to contract.
Does threat to commit suicide comes under coercion? Suicide or threat to commit suicide is not an offence
under IPC, but attempt to commit suicide is an offence. A threat to commit suicide may amount to Coercion
if the relation between the parties are close enough.
Intention: This is a very important factor and an act should be done to induce the other party with an
intention to make the party agree for a contract.
Effects of coercion: When coercion is employed, pursuant to which a contract has been entered then the
contract is voidable at the option of the aggrieved party. This means the contract is voidable at the option of
the party whose consent was not free. So the aggravated party will decide whether to perform the contract or
to void the contract. In this case any benefit received by the either parties to contract must be restored back.
Also, if any monies have been paid or goods delivered under coercion must be repaid or returned once the
contract is void. And the burden of proof proving coercion will be on the party who wants to avoid the
contract. So the aggravated party will have to prove the coercion, i.e. prove that his consent was not freely
given If the aggrieved party has suffered loss, he can recover the loss from the other party to contract..
Duress vs Coercion: The term Duress has been applied under the English Contract Act as Coercion is a
term applied under Indian Contract Law. However both are distinct as in coercion even third party can
perform the act but in duress only the party to contract should perform the act. Further in Duress, it can only
be applied for person and cannot detain property. Therefore the scope of coercion applied in Indian Contract
Act is wider than duress.
Coercion Duress
Duress can be employed against life or liability of
Coercion can be employed against any person
another party to the contract or members of his
including the stranger.
family.
Duress may be employed only by the party to the
Coercion may be employed by any person.
contract or his agent.
Unlawful detention of goods is a kind of Unlawful detention is not duress under English law.
coercion.
The following case laws explain Coercion more elaborately
In the famous case of Ranganayakamma Vs. Alwar Setti (1889), AaHindu Widow of 13 years, was coerced
into adopting a boy under the threat of not allowing cremation of her husband’s death. On the death of her
husband, the husband’s dead body was not allowed to be removed from her house by the relatives of the
adopted boy until she adopted the boy. Following which, the widow feared and adopted the boy. Later she
even applied for cancellation of the adoption. The matter was escalated to the High Court wherein The
Hon’ble Court decided in favour of the Widow. It was held that the adoption was voidable at her option as
her consent was not free and was rather obtained by coercion due to applicability of the offence under Sec
297 of the Indian Penal Code.
In another case Chikkam Ammiraju Vs. Chikkam Seshama (1918) the question before the Madras High
Court was that whether coercion could be caused by a threat to commit suicide. In this case a Hindu by a
threat of suicide induced his wife and son to execute a release deed in favour of his brother in respect of
certain properties claimed as their own by the wife and the son. The question before the court was whether a
threat to commit suicide could be considered to be an act forbidd en by the Indian Penal Code. It was held
by Wallis, C.J. and Seshagiri Ayyar, J. that a threat to commit suicide amounted to coercion within the
meaning of Section 15 of the Indian Contract Act and therefore the release deed was voidable.
Meaning: Undue influence occurs when a person abuses a position of ‘trust and confidence' to pressure
another party to enter a legally binding contract against their will. A finding of undue influence requires that
there is a relationship where one party is dependent on the other. The person who is depended on must
occupy a position of ‘trust and confidence'. For undue influence to happen, this position will be abused,
resulting in the dependent party being pressured to enter a legally binding contract and subsequently put at a
disadvantage. When one of the parties is in a position to dominate the will of the other and utilises that
position to gain an unfair advantage over the other, the contract is said to be induced by undue influence.
When one party is in a position to dominate the will of others and actually misuses the power, then it is a
case of undue influence, and the contract becomes voidable. When all the following three conditions are
fulfilled then only the situation is considered as an undue influence:
The word undue means unnecessary, unwarranted, or more than required. Influence means convincing the
mind of a counterparty through changing his mind or changing his will, but this influence must be undue i.e
it is not required. Undue influence applies to a relationship which may be blood relation or some other kind
of relation i.e fiduciary or relation based on trust. It means the unfair use of one’s superior position to obtain
the consent of a person who is in a weak position. For example, A police officer bought a property worth Rs
1 lakh for Rs 5000 from Ram, an accused under his custody. Later this contract can be cancelled and it can
be held as void because there is a mental pressure on a person.
Ability to dominate the will of other
The dominant position is not defined in the Indian Contract Act but Section 16(2) provides certain
conditions when a person is in a position to dominate the will of another. Cases, where a person is in a
position to dominate the will of others, are as follows:
b) Fiduciary relation is the relation which is made upon the belief and trust between the parties. One
party must believe the other. For example, Advocate and client, teacher and student, Doctor and patient.
2. Mental or bodily distress means the mental capacity of a person is affected. It can be either
permanently or temporarily affected. The reason behind such health condition can be age, illness, mental or
bodily distress.
Consent under pressure means when consent is obtained forcefully. In this manner, consent is not lawful, so
it had no binding effect.
FRAUD - "Fraud" means and includes any of the following acts committed by a party to a contract, or with
his connivance, or by his agent1 , with intent to deceive another party thereto of his agent, or to induce him
to enter into the contract:—
(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
(2) the active concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent.
Explanation.—Mere silence as to facts likely to affect the willingness of a person to enter into a contract is
not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the
person keeping silence to speak2 , or unless his silence is, in itself, equivalent to speech.
Illustrations
(a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horses
unsoundness. This is not fraud in A.
(b) B is As daughter and has just come of age. Here, the relation between the parties would make it As
duty to tell B if the horse is unsound.
(c) B says to A—"If you do not deny it, I shall assume that the horse is sound." A says nothing. Here, As
silence is equivalent to speech.
(d) A and B, being traders, enter upon a contract. A has private information of a change in prices which
would affect Bs willingness to proceed with the contract. A is not bound to inform B.According to Section 17
of the Indian Contract Act, when a party contracts with the other party with the intention to deceive, it
amounts to fraud by misleading the facts.
In simple terms, “Fraud” under section 17 of the Indian contract act, has been defined to include false
representation of a material fact related to the contract—regardless of whether by words or by conduct, by
bogus or misleading allegations, or by non-disclosure of what ought to have been revealed—that is intended
to deceive and deceives the other in such a way that the person acting on such misrepresentation, acts to his
own injury. Furthermore, it includes promises made without the intent of performing them and any other
act/omission declared fraudulent by law.
Fraud is of infinite variety and is thus hard to define. The use of the phrase “includes” indicates the intent of
the drafters to enlarge the definition of the phrase to include even those matters which would not be included
within its ordinary meaning. The essential features of fraud include –
1. Fraud must be committed by a party to the contract directly or indirectly or by his agent. However,
where the contract was a result of a 3rd person being instrumental for his own ulterior motives, the contract
cannot be avoided;
2. Intention to deceive or inducing the other party to contract is a must.
3. In a suit against fraud, to claim relief, the plaintiff has to show that the defendant made fraudulent
representations and the plaintiff was in fact deceived and acted to his prejudice. In lay terms, a plaintiff
cannot claim any right to redress in cases of both deceit without damage and damage without deceit.
WHAT CONSTITUTES FRAUD?
Based on the definition of fraud under section 17, the circumstances that constitute fraud are:
2. ACTIVE CONCEALMENT
Active concealment is a situation where one party conceals material information related to the contract
despite having a duty to disclose such information. In simpler words, it refers to failure in disclosing private
information. It is more than mere passive concealment, that is to say, it requires an overt act for
concealment. It is crucial to note here that passive concealment referred to above means silence. The section
makes it clear that though mere silence doesn’t amount to fraud, it may constitute fraud under situations
where the party has a duty to speak or where such silence is equivalent to speech.
EVIDENCE AND BURDEN OF PROOF – The circumstances which comprise fraud have to be pleaded
by the plaintiff by furnishing the specific details of the case. A case of fraud (irrespective of whether civil or
criminal suit) has to be proved beyond a reasonable doubt. It is to be noted that every allegation of fraud
must be specific and fraud of a type other than the one alleged cannot be proved. Fraud may not be directly
proved but may have to be deduced from the surrounding circumstances and the conduct of parties prior to
the agreement and post-contract. The conclusive decision of the commission of fraud cannot have its basis
on mere speculation; such a conclusion must be based on some constructive and worthwhile material placed
on record. The burden of proof in case of an alleged fraud is upon the plaintiff. However, where a party
stands in a fiduciary relation to the other party, the former party is required to exercise extreme good faith
and honesty in his dealings with the latter party and examine those transactions with vigilance and caution
higher than that ordinarily required. In situations where the parties do not stand on the same level, an
appropriate presumption of fraud is raised by law. However, where both parties to a contract stand in pari
delicto, none of them can take advantage of such a transaction. The court shouldn’t insist on direct proof in
case of fraud as fraud has been by its very nature – discreet, thereby leaving a higher unlikelihood of finding
direct proof. Thus, fraud can be deduced from such circumstantial evidence that overcomes the natural
presumption of good faith and fair transaction and convinces a reasonable person that such a presumption
has been negated satisfactorily.
EFFECT OF FRAUD – When consent has been obtained by fraud, the contract becomes voidable u/s 19 of
the Indian Contracts act. Thus, the party defrauded has an option either to rescind the contract or insist that
the contract be performed to place him in such a position as he would have been if the misrepresentation had
been true. If the defrauded party chooses to avoid the contract, he is liable to restore the benefit received (if
any) back to the fraudulent party u/s 64 and may claim damages. In order to ascertain damages for fraud, the
court ought to refer to certain principles which were laid down in Doyle v. Olby (Ironmongers) Ltd. and
reiterated by the Hon’ble Supreme court in Avitel Post Studioz Limited and Ors. vs. HSBC PI Holdings
(Mauritius) Limited and Ors. –
“(1) the Defendant is bound to make reparation for all the damage directly flowing from the transaction;
(2) although such damage need not have been foreseeable, it must have been directly caused by the
transaction;
(3) in assessing such damage, the Plaintiff is entitled to recover by way of damages the full price paid by
him, but he must give credit for any benefits which he has received as a result of the transaction;
(4) as a general rule, the benefits received by him include the market value of the property acquired as at
the date of acquisition; but such general Rule is not to be inflexibly applied where to do so would prevent
him obtaining full compensation for the wrong suffered;
(5) although the circumstances in which the general Rule should not apply cannot be comprehensively
stated, it will normally not apply where either
(a) the misrepresentation has continued to operate after the date of the acquisition of the asset so as to
induce the Plaintiff to retain the asset or
(b) the circumstances of the case are such that the Plaintiff is, by reason of the fraud, locked into the
property;
(6) In addition, the Plaintiff is entitled to recover consequential losses caused by the transaction;
(7) the Plaintiff must take all reasonable steps to mitigate his loss once he has discovered the fraud.”
The right of rescission may however be lost, when –
1. The party affirms the contract even after becoming aware of his/her right to rescind;
2. The party doesn’t exercise his right of rescission within a reasonable period of time, i.e., by lapse of time
3. A third party, in good faith, has acquired rights in the subject matter of the contract. However, if the
defrauded party rescinds/shows an intention to rescind the contract by doing an overt act before the 3rd
party acquires any rights in the contract property, rescission shall be granted. For instance, in Car &
Universal Finance Co. Ltd. v. Caldwell, the plaintiff gave possession of his car in return for a cheque, which
later turned out to be worthless. He was unable to get the defendant to rescind the contract. Thus, he filed a
complaint with the police and Automobile Association to tract his car. This overt act showed his intention to
rescind the contract and he was granted relief.
Essentials of Misrepresentation
● There must be a false representation of the fact.
● The cause of the consent must be such a false representation.
● The statement should be made with the intention to induce the other party to the agreement.
● The statement must be made before the conclusion of the contract.
● The statement should not be made to deceive the other party.
In Rickview Construction Co. v. Raspa, it has been held that when a contract is made by misrepresentation,
the disadvantaged party man, not only avoid the contract but also sue for
damage.
Historical Perspective -
The Principle of Misrepresentation in the INDIAN CONTRACT ACT, 1872 evolved from the English Law
Concept of Misrepresentation. In English Contract law, misrepresentation is divided into
● Fraudulent Misrepresentation- established when a person makes a false statement which he knows
is not true and has no belief in its truth or which he makes recklessly not caring whether it is true or
not.
● Negligent Misrepresentation- established when a false statement is made by the person which the
person may honestly believe to be true but with- out reasonable grounds for believing it to be true.
● Innocent misrepresentation: The last one of the three recognised types of misrepresentation is the
innocent misrepresentation in which the representer believes that the statement is factual and he can
demonstrate reasonable grounds for his belief in the truth of his statement. There is a special element
unique for the innocent misrepresentation. If the misrepresentation made does not benefit the person
who made it, or hurts both parties to the contract, it will not be considered a case of
misrepresentation by the courts.
Misrepresentation is mentioned in Section 18 of the Indian Contract Act, 1872. Misrepresentation becomes
a ground to make a contract voidable as mention in Section 19 of the INDIAN CONTRACT ACT, 1872.
But this is not an absolute ground, for making a contract voidable:
● If such a statement could have been found with ordinary diligence, then the contract is not voidable.
● If such a statement does not cause the consent to contract on whom the statement was
made. The following case is an example of Misrepresentation:
# Derry v. Peek
In this case, the defendant owned a tramways company and they issued a notice stating that the company
had received permissions for steam trams instead of the animal powered trams. But this statement was
actually false and was still pending approval. But the defendants honestly believed that it would be approved
and the process is just a formality. The plaintiff bought shares in the company believing the statement but
the permission was not approved and hence the Defendant company had to wind up creating injury to the
plaintiff. The court held that the Defendant company is not liable as they were honestly believing in the
statement.
The burden of proof for the misrepresentation is always on the party alleging the misrepresentation.
Comparative Analysis
● Misrepresentation and Fraud
Fraud and Misrepresentation are two terms which has just a hairline difference. Both fraud and
misrepresentation uses a false statement for making the other party enter the terms of a contract, but the
difference is that, in fraud, the statement is deliberately made to deceive the party whereas in the case of
misrepresentation, the statement is made in good faith and truly believing the statement to be true.
Effects of Misrepresentation
The Section 19 of the Indian Contract Act, when the consent to an agreement is caused by
misrepresentation, the aggrieved party to the contract may insist that the contract shall be performed or
avoid or rescind the contract.
In Long v. Lloyd (1958), the defendant sold his lorry to the plaintive by convincing falsely that it was in
very good condition. The plaintiff on his very first journey discovered serious defects but accepted the
defendants offer to bear half the cost of repairs. The Laurie completely broke down on the next journey and
the plaintiff claimed for the cancellation of the contract. But, it was held that the plaintiff had got known
about the representation in the very first drive and he could have had backed out of the contract, but, he did
not do it. Hence the Plaintiff could not claim for the damages.
Innocent Misrepresentation
Walker v. Boyle(1982), while selling his wife's house to the plaintiff, Walker, innocently represented that
there were no dispute regarding the land boundary. It has been held that Walker was entitled to get refund of
his deposit. Misrepresentation results not only from misstatement of facts, but also from suppression of
material facts as laid down in R V. Kylsant (1932).
In Babul v. R.A. Singh (1968), the father of the bride told her that the proposed bridegroom for her was a
young man. Believing this statement by her father, the bride gave her consent to marry but actually ended up
that the bridegroom was 60 years old. It was observed that it was the duty of the petitioner’s father to
disclose to the petitioner that the respondent was a man of nearly 60 years old and that she might be free to
give or withhold her consent to the marriage proposal. Therefore, the elements of fraud and
misrepresentation was undoubtedly present in this case.
Effects of misrepresentation
Misrepresentation means a false statement of fact. The consent of parties to a contract obtained by false
statement to enter into a contract. The consent obtained by misrepresentation is not a free consent. A
contract is voidable and the opinion of the party who entered the contract believing such a statement.
Misrepresentation may include positive assertions but there must be a false representation of the fact. Such a
statement of misrepresentation should be made with an intention to induce the other party and it must be
made before the contract is concluded.
E. Mistake (Section 20 to 22) Section 20 of the Indian Contracts Act defines mistakes as under:
20. Agreement void where both parties are under mistake as to matter of fact.
Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement,
the agreement is void.
Explanation.--An erroneous opinion as to the value of the thing which forms the subject-matter of the
agreement is not to be deemed a mistake as to a matter of fact.
21. Contract caused by mistake of one party as to matter of fact.—A contract is not voidable merely
because it was caused by one of the parties to it being under a mistake as to a matter of fact.
Mistake means wrong belief which is innocent, and leads one party to rise misunderstanding against other.
Mistake happened when the terms and conditions of the agreement is not clear between the parties. When
one said something and white was not clear in the mind of other. The both parties understand consequences
on the different terms and there was no consensus-ad-idem i.e. meeting of mind , and thus not understanding
same thing in same sense.
Mistake has been further classified into two cases under Indian Contract Act , 1872.
1. Mistake of Fact
2. Mistake of law.
● Exceptions
1. Mistake regarding foreign law.
Under section 21 of Contract Act , Mistake regarding foreign law is considered as an excuse. Because no
party is supposed to know the provision and law enforced in foreign country. Hence it will be treated as a
exception of this law.
For example : An Indian company was supposed to sell 200 cans of concentrated sulphuric acid containing
45% of solution to American company. Although more than 30% of solution was banned in America
unknowingly to this fact the Indian company took defense of Mistake of law. It was acceptable as a defence
because no one is supposed to know the laws of foreign.
Conclusion
The legitimacy of an agreement is obstructed when assent is increased because of a mix-up by the
gatherings. As examined, an error can be of two kinds, Mistake of certainty and Mistake of law. At the point
when agree to an agreement is increased because of a two-sided misstep of actuality, the agreement is said to
be void yet when the slip-up happens because of a one-sided mix-up of certainty, the understanding is
legitimate with the exception of in the instances of mix-up in regards to the idea of the agreement or
character of the gatherings to the agreement. Correspondingly, when agree to an agreement is increased
because of a slip-up of the Indian law it is a substantial agreement yet in the event that it is expected an
outside law by both the gatherings, the agreement is said to be void.