B lesson 3

BRF Lesson 3

CONSENT

According to Section 13 of the Act has defined consent as “two or more persons are said to consent when they agree upon the same thing in the same sense”. According to this section which has laid down the basic principle of consensus ad idem on which the law of contract is based, the parties to an agreement should have identity of minds regarding the subject matter of the agreement.

FREE CONSENT

If the consent is there but it is not free or real, then the contract will be voidable at the option of the aggrieved parties whose consent is not free. The word “free consent” is defined in Section 14 of

the Contract Act as follows –

“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.

Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake”.

COERCION [SEC. 15]

Coercion means compelling or forcing a person to enter into a contract under a pressure or threat.

Section 15 of the Indian Contract Act defines coercion as “the committing or threatening to commit, any act forbidden by the Indian Penal Code, or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatsoever, with the intention of causing any person to enter into an agreement”.

Example: X beats Y and compels him to sell his car for Rs. 50,000. Here, Y’s consent has been obtained by coercion because beating someone is an offence under the Indian Penal Code.

ESSENTIALS CHARACTERISTICS OF COERCION

(a) The committing of any act forbidden by Indian Penal Code: When the consent of a person is obtained by committing any act which is forbidden by the Indian Penal Code, the consent is said to be obtained by coercion.

(b) The threatening to commit any act forbidden by Indian Penal Code: If a person attempts to commit an act which is punishable under the Indian Penal Code, it leads to coercion, e.g., consent obtained at the pistol point, or by threatening to cause death or by intimidation.

(c) The unlawful detaining of any property: If a person unlawfully detains the property of another person and forces him to enter into a contract, the consent is said to be induced by coercion.

(d) The threatening to detain any property unlawfully: If a threat is given to detain any property of another person, this amount to coercion.

(e) The act of coercion: It must be done with the object of inducing or compelling any person to enter into an agreement.

EFFECTS OF COERCION

According to Section 19 states that, ‘when the consent of a party to an agreement is obtained by coercion, the contract becomes voidable at the option of the party, i.e., such party can put an end to the contract if he so chooses’.

According to Section 72 of the Act, which is based on the principle of equitable restitution, a person to whom anything has been delivered or money paid under coercion must return or repay it.

 

UNDUE INFLUENCE [SEC. 16]

 

When a party enters into a contract under any kind of mental pressure, unfair influence or  persuasion by the superior party, the undue influence is said to be employed. According to Section 16 (1) of the Act, a contract is said to be induced by undue influence, “where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other, and uses that position to obtain an unfair advantage over the other”.

Presumption of undue influence

Section 16 (2), a person is deemed to be in a position to dominate the will of the other is the following cases:

a) Real or apparent authority: Where he holds a real or apparent authority over the other, e.g., master and the servant, parent and child, Income Tax officer and assessee, etc.

b) Fiduciary relationship: Fiduciary relation means a relation of mutual trust and confidence, e.g., guardian and the ward, solicitor and client, doctor and patient, guru and disciple, trustees

and beneficiaries, etc.

c) Mental distress: Where he contracts with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress.

BURDEN OF PROOF [SEC. 16 (3)]

Where a person who is in a position to dominate the will of another, makes a contract and the transaction appears to be unconscionable, the burden of proving that the contract has not been induced by undue influence shall lie on the person who is in a position to dominate the will of the other.

The presumption of undue influence can be rebutted or opposed by showing the following:

(i) that full disclosure of all material facts was made;

(ii) that the consideration was adequate.

FRAUD [Sec. 17]

 

The term ‘fraud’ may be defined as an intentional, deliberate or wilful misstatement of facts, which are material for the formation of a contract.

According to Section 17, “fraud means and includes any of the following acts committed by a party to a contract or with his connivance or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:

(a) the suggestion, as to a fact, of that which is not true, by one who does not believe it to be true;

(b) the active concealment of a fact by one having knowledge or belief of the fact;

(c) a promise made without any intention of performing it;

(d) any other act fitted to deceive;

(e) any such act or omission as the law specially declares to be fraudulent”.

ELEMENTS OF FRAUD

On the basis of aforesaid definition of fraud, the essential elements of fraud are as follows:

1. The act must have been committed by a party to the contract: The fraud must be committed by a party to a contract or by anyone with his connivance or by his agent. Thus, the fraud by a stranger to the contract does not affect the validity of the contract.

2. Acts committed may be of the following nature:

a) Suggestion of an untrue fact: If a person knowingly states an untrue fact or fact which he does not believe to be true, it will be taken as a fraud on his part.

b) Active concealment of a fact: An active concealment is considered as a fraud when (i) there is a concealment of fact, and (ii) the concealment is active (i.e., all efforts are made to

conceal fact), and (iii) the concealment is made by a party who has the knowledge of it.

c) A promise made without any intention of performing it: If a party while entering into a contract has no intention to perform his promise, it will be taken as a fraud on his part.

d) Any other act fitted to deceive: The expression ‘act fitted to deceive’ means any act which is done with the obvious intention of committing fraud. Thus, this clause covers all tricks and unfair ways which are used by cunning and clever people to cheat others.

e) Any such act or omission which the law specially declares to be fraudulent: Under theTransfer of Property Act, any transfer of immovable property with the intention of defrauding the creditors, is taken as a fraud.

3. The act must have been committed with the intention of inducing the deceived party to act upon it: It implies that the assertion should be such that it would necessarily influence and induce the other party to act.

4. The act must have in fact deceived the other party: If a person has committed a fraudulent act to deceive the other party, but the other party has not been actually deceived by his act, it will not be taken as a fraud on his part.

5. Plaintiff must have suffered: There is no fraud without damages, and therefore, to constitute fraud it is necessary that the plaintiff must have suffered some loss of money or money’s worth or some other tangible detriment capable of assessment.

 

Mere silence is not a fraud

 According to explanation to Section 17, “mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud”.

Example: A sells, by auction, to B a horse which A knows to be unsound. A says nothing to B about the horse’s unsoundness. This is not fraud by A.

Exceptions

1. Duty to Speak: Mere silence amounts to fraud when the person keeping silent, is under a duty to speak. The duty to speak arises, where one party reposes trust and confidence in the other.

The duty to speak arises in the following types of contracts:

 Contracts uberrimae fidei, i.e., contracts of good faith such as contracts of insurance; contracts for the sale of immovable properties; contracts of marriage  Contracts of partnership Contracts of guarantee etc.

 

2. Where silence is equivalent to speech: For instance, B says to A, "If you do not deny it, I shall presume that the horse is sound". A says nothing. Here A’s silence is equivalent to speech. If the horse turns out to be vicious A can be held liable for fraud.

 

Effect of Fraud

1. Right to rescind the contract: The party whose consent was caused by fraud can rescind (cancel) the contract but he cannot do so in the following cases:

a) where silence amounts to fraud, the aggrieved party cannot rescind the contract if he had the means of discovering the truth with ordinary diligence;

b) where the party after becoming aware of the fraud takes a benefit under the contract;

c) where an innocent third party before the contract is rescinded acquires for consideration some interest in the property passing under the contract;

d) where the parties cannot be restored to their original position.

 2. Right to insist upon performance: The party whose consent was caused by fraud may, if he thinks fit, insist that the contract shall be performed and that he shall be put in the position in which he would have been if the representation made had been true.

3. Right to claim damages: The party whose consent was caused by fraud, can claim damage if he suffers some loss.

 

MISREPRESENTATION [Sec. 18]

 

The term ‘Misrepresentation’ means a false representation of fact made innocently of a material fact without any intention to deceive the other party. A false representation made by a person may be either:

 According to Section 18 defines the term ‘misrepresentation’ as follows:

“Misrepresentation” means and includes –

i) the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;

ii) any breach of duty which, without any intent to deceive, gains an advantage to the person committing it, or anyone claiming under him, by misleading another to his prejudice, or to the prejudice of any one claiming under him;

iii) Causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement.

Essentials of Misrepresentation

1. There must be a representation or breach of duty.

2. The representation must be of facts material to the contract.

3. The representation must be untrue.

4. The representation must be made with a view to inducing the other party to enter into contract.

5. The other party must have acted on the faith of the representation.

6. The person making the representation honestly believes it to be true.

 

Thus misrepresentation may be committed in any of the following ways:

1. Unwarranted Statements: If a person makes a statement of fact which is not warranted by his information, he is said to make a misrepresentation.

2. Breach of Duty: When a person commits a breach of duty without any intention to deceive the other party and thereby gains something while the other party loses, it will be termed as misrepresentation.

3. Inducing Mistake about Subject Matter: If a party to an agreement induces the other party, although innocently to commit a mistake as to the nature or quality of the subject matter of the

agreement, he becomes guilty of misrepresentation.

Effects of Misrepresentation

The effect of misrepresentation is that it makes the contract voidable the option of the party whose consent is so obtained. And such party may put an end to the contract if he so chooses.

Exceptions

1. Where the other party had the means of discovering the truth with ordinary diligence: The party cannot complain of misrepresentation if he had the means of discovering the truth with

ordinary means.

2. Where the misrepresentation does not induce the other party to enter into contract, the contract is not voidable: If the consent is given independently in spite of misrepresentation, the contract is not voidable.

Difference between Fraud and Misrepresentation

Fraud Misrepresentation

1. There is misstatement of concealment of fact, deliberately made with the intention to deceive the others party or to induce him to enter into a contract. 1. The misstatement of fact is made innocently without any bad intention.

 

2. The fraud is intentional or wilful wrong. The person making an untrue statement knows that it is not true. 2. The misrepresentation is an innocent wrong. The person making the false statement believes it to be true.

 

3. In case of active fraud, the aggrieved party in addition to the

normal remedies can claim also damages. 3. The aggrieved party cannot rescind the contract if he had the means of discovering the truth.

4. A fraud is a criminal act too. 4. It is not a criminal act.

 

 

MISTAKE        

 

A mistake is said to have occurred where the parties intending to do one thing by error do something else. Mistake is an erroneous belief concerning something.

Kinds of Mistake

Mistake may be of two kinds: (I) Mistake of Law; and (II) Mistake of Fact.

(I) Mistake of Law: It may be of the following types:

a) Mistake of law of the country: It does not render the agreement void. This is based on the well

established rule of law namely, ignorantia juris non excusat (i.e., ignorance of law is no excuse).

Section 21 lays down that "a contract is not voidable because it was caused by a mistake as to any law in force in India".

b) Mistake of foreign law: The mistake of the foreign law has the same effect as a mistake of fact.

Therefore, it renders the agreement void. Section 21 lays down that “a mistake as to a law not in force in India has the same effect as a mistake of fact”.

(II) Mistake of Fact: Mistake of fact may be of two types –

(1) Bilateral mistake; and

(2) Unilateral mistake.

(1) Bilateral mistake: Where both the parties to an agreement are under a mistake as to matter of fact essential to the agreement, the agreement is void. An agreement shall be void if the following conditions are satisfied:

(i) Both the parties must be under a mistake: This means the mistake must be mutual or common.

(ii) Mistake must relate to an essential fact: It is necessary that the mistake must relate to a matter of fact which is essential to the agreement.

Types of Bilateral Mistake

The following types of bilateral mistake, which render the agreement void, are important from the subject point of view:e

a) Mistake as to subject matter

Where both the parties working under a mistake relating to the subject matter of contract, the contract is void. It may be of the following types:

(i) Mistake regarding existence of the subject matter: Where both the parties are under a mistake regarding the existence of the subject matter, the contract is void.

(ii) Mistake regarding identity of the subject matter: If both, the parties are mistaken about the identity of subject matter, the contract shall be void.

(iii) Regarding the title to the subject matter: If a person buys some property which neither party knew that it already belonged to the buyer, the contract will be void.

(iv) Regarding the quantity of the subject matter: Where the quantity purchased is fundamentally, different from the quantity intended to be sold, there occurs mutual mistake which prevents the formation of an enforceable contract.

(v) Regarding the quality of the subject matter: It occurs, where the subject matter is entirely different from that contemplated by the parties.

(vi) Regarding the price of the subject matter: Where a seller while writing the price of the goods intending to write Rs. 2,250 by mistake writes Rs. 1250, the agreement is void.

b) Mistake as to the possibility of performance

Where the parties to an agreement believe that the agreement is capable of performance, while in fact it is not so, the agreement is treated as void. The impossibility may either be physical or legal.

(2)Unilateral mistake

The term unilateral mistake means where only one party to the agreement is under a mistake. A contract is not voidable merely because it was caused by one of the parties to it being under a

mistake as to matter of fact.

Types of Unilateral Mistake

1. Mistake about the identity of the parties to an agreement: If there is a mistake regarding the identity of the person contracted with, even if the mistake is caused by fraud or misrepresentation of another party, the contract will be void.

2. Mistake about the nature of the agreement: If a party does not disclose the true nature of the document but fraudulently induces the other party to sign it who believes that he is signing some other document, in such a case there is no real agreement.