Contract Law

FREE CONSENT

• Meaning of consent: it means an act of assenting to an offer. According to section 13, "Tow or more persons are said to consent when they agree upon the same thing in the same thing in same sense." Thus, consent involves identity of minds in respect of the subject matter of the contract. In English Law, this is called 'consensus-ad-idem'.
• Effect of Absence of consent:

When there is no consent at all, the agreement is void ab-initio, i.e. it is not enforceable at the option of either party. Example: X has one Maruti car and one fiat car. He wants to sell fiat car. Y does not know that X has two cars. Y offers to buy X's Maruti car Rs 50,000. X accepts the offer thinking it to be an offer for his Fiat car. Here, there is no identity of mind in respect of the subject of the subject matter. Hence there is no consent at all and the agreement is void ab-initio.

• Meaning of Free consent: It is one of the essential elements of a valid contract as it is evidenced by section 10 which provides that all agreements are contracts if they are made by the free consent of the parties... according to section 14, consent is said to be free when it is not caused by (a) Coercion, or (b)Undue influence, or (c) Fraud, or (d) Misrepresentation, or (e) Mistake.
• Effect of Absence of free consent:

When there is consent but it is not free (i.e. when it is caused by coercion or undue influence or fraud or misrepresentation), the contract is usually voidable at the option of the party whose consent was so caused.

1. COERCION

Meaning of coercion[section 15]: It means compelling a person to enter into a contract, by use of physical force/activities forbidden by Indian penal code, OR

threatens to do activities forbidden by I.P.C, OR

threatens to damages the property.

Effect of coercion: Voidable and can be canceled at the option of aggrieved party. OR A 'suicide and a 'threat to commit suicide' are not punishable but an attempt to commit suicide is punishable under the Indian penal code.

X threatens to kill Y if he does not sell his house for Rs. 1,00,000 to X. Y sells his house to X and receives the payments. Here, V's consent has been obtained by coercion. Hence, this contract is voidable at the option of Y. If Y decides to avoid the contract, he will have to return Rs 1,00,000 which he had received from X.

"Y" (aggrieved party) will return Rs. 1,00,000

"X" (defendant party) will return the house and any benefit from the goods.

When voidable contract cannot be canceled:

When the third party become interested into a voidable contract. E.g. A obtain the car of B through coercion. Let, A sold it to "C" an innocent buyer, now B cannot get the contract canceled.

When the aggrieved party ratify/confirm/affirm then contract can not be cancel.

2. UNDUE INFLUENCE:

Meaning of Undue influence[section 16(1)]: The term 'undue influence' means dominating the will of the other person to obtain an unfair advantage over the other. According to section 16(1), a contract is said to be induced by undue influence

1. where the relations subsisting between the parties are such that one of them is in a position to dominate the will of the other, and
2. the dominant party uses that position to obtain an unfair advantage over the other.

When two-partner are in relation, and one of them is dominant and other is in weaker position and dominant person takes undue-Advantage, then it is called"Undue- influence."

No presumption of domination of will

According to judicial decisions held in various cases, there is no presumption of undue influence in the following relationships:

1. Husband and wife
2. landlord and tenant
3. Creditor and debtor

Effect of undue influence [section 19A]: when consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused.

Comparison between coercion and undue influence:

Similarities: In case of both coercion and undue influence, the consent is not free and the contract is voidable at the option of the aggrieved party.

3. FRAUD

Meaning and essential elements of fraud [section 17] : The term 'fraud' means a false representation of fact made willfully with a view to deceive the other party. Fraud includes following:

• Wrong suggestion about a fact, knowing that it is not-true;

E.g. X sells to Y locally manufactured goods as imported goods charging a higher price, it amounts to fraud. OR A seller claimed that his projector is made in Singapore, and sold it for Rs. 100,000/- However the fact is that "Projector was made in south India".

• Active concealment (Hide) of defect in goods:

E.g. "A car-painter, uses paint to hide the scratches over the old furniture and sold it claiming that is Now". This is fraud. OR X a furniture dealer, conceals the cracks in furniture sold by him by using some packing material and polishing it in such a way that the buyer even after reasonable examination can not trace the defect, it would tent amount to fraud through active concealment.

• Promise made without intention to perform:

E.g. "A man and a woman underwent a ceremony of marriage with the husband not regarding it as a real marriage. Held, the husband had no intention to perform the promise from the time he made it and hence the consent of the wife was obtained under fraud. OR "A farmer agrees to supply 100kg potato that will be produced by him out of his field, after three month". Two months has been lapsed, but the farmer neither implant seeds, nor does cultivation. This is case of fraud.

• Any activity declared fraud as per other law; under companies act and insolvency acts, certain kinds of transfers have been declared to be fraudulent.

Note: In case of fraud, the seller is always liable even though buyer has an opportunity to check the fraud.

• Any activity fitted (supported) to deceive. It covers those acts which deceive but are not covered under any other clause.

Effect of Fraud[section-19]

The effects of fraud are as follows:

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

• Where silence amounts to fraud, the aggrieved party cannot rescind the contract if he had the means of discovering the truth with ordinary diligence;
• Where the party gave the consent in ignorance of fraud;
• Where the party after becoming aware of the fraud takes a benefit under the contract;
• Where an innocent third party before the contract is rescinded acquires for consideration some interest in the property passing under the contract.
• Where the parties cannot be restored to their original position.

(b) 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.

1. The party whose consent was caused by fraud, can claim damage if he suffers some loss.

Weather silence is fraud? Comment:

General concept: 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".

In other words, Silence is not fraud. It is buyer, who must check the goods & suitability.

E.g. X purchased a used computer from Z thinking it as a computer imported from USA, Z failed to disclose the fact to X. On knowing the fact X wants to repudiate the contract. So, here X cannot repudiate/rescind/cancel the contract.

Exceptions to the general rule:

The general rule that silence does not amount to fraud has the following exceptions. Where the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak. Such duty arises in the following two cases:

• When silence is equivalent to speech: E.g. "A student of BBA select a Business law-book and asks the seller". If seller don't stop me from buying this book, I will assume that "it is best". The seller remained silent here the student will treat "silence" as speech. If the book was inferior, then it is a case of fraud.
• Disclosure of dangerous nature: E.g. Shyam sold his horse to Ram a buyer for Rs. 11000/- Shyam knows that horse was "wicked" but fails to disclose it to buyer. Here seller has committed fraud by remaining silent.

4. Misrepresentation

The term "misrepresentation" means a false representation of fact made innocently or non-disclosure of a material fact without any intention to deceive the other party. Section 18 defines the term "misrepresentation" as follows

"Misrepresentation" means and includes-

• 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;
• Any breach of duly which, without an intent to deceive, gains an advantage to the person committing it, or anyone claiming under him, by misleading an other to his prejudice or to the prejudice of anyone claiming under him;
• 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.

Essential elements of misrepresentation:

• By a party to a contract: The representation must be made by a party to a contract or by anyone with his connivance or by his agent. Thus, the misrepresentation by a stranger to the contract does not affect the validity of the contract.
• False representation: There must be a false representation and it must be made without the knowledge of its falsehood i.e. the person making it must honestly even it is to be true.
• Representation as to fact: The representation must relate to a fact. In other words, a mere opinion, a statement of expression or intention does not amount to misrepresentation.

"Innocent misstatement made into good faith OR without any intention to cause loss"

E.g. A farmer says that his land is very productive and produces 100 quintal per acre. This is misrepresentation and buyer can cancel the contract.

Note: When the buyer has an opportunity to check the misrepresentation, but he fails then buyer cannot cancel the contract.

E.g. An owner of factory, while selling his factory, express his opinion as my factory produces 1000 kg per ann-um and requested the buyer to find out exact production by checking "production-record". If the buyer fails to check the production record then buyer cannot blame seller.

Effect of misrepresentation[section 19]

The effects of misrepresentation are as follows:

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

• where the party whose consent was caused by misrepresentation had the means of discovering the truth with ordinary diligence;
• where the party gave the consent in ignorance of misrepresentation;
• where the party after becoming aware of the misrepresentation, takes a benefit under the contract;
• where an innocent third party, before the contract is rescinded, acquires for consideration some interest in the property passing under the contract;
• where the parties cannot be restored to their original position.

(b) Right to insist upon performance The party whose consent was caused by misrepresentation 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.

Comparison between fraud and misrepresentation

Similarities: There are basically two similarities in case of fraud and misrepresentation as follows:

1. In both the cases, a false representation is made by a party;
2. In both the cases, the contract is voidable at the option of the party whose consent is obtained by fraud or misrepresentation.

5. Mistake

Meaning of mistake [section 20]

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

Classification of Mistake of Law:

(a) Mistake of Indian Law(In sense of penalty): The contract is not voidable because everyone is supposed to know the law of his country. e.g. disobeying traffic rules"

(b) Mistake of Foreign Law(void-ab-initio): A mistake of foreign law is treated as mistake of fact, i.e. the contract is void if both the parties are under a mistake as to a foreign law because one cannot be expected to know the law of other country.

Mistake of fact

Mistake of fact be either Unilateral mistake or Bilateral mistake.

Unilateral mistake [section 22]: The term 'unilateral mistake' means where only one party to the agreement is under a mistake. According to section 22, "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."

Bilateral mistake [section 22]: The term 'bilateral mistake' means where both the parties to the agreement are under a mistake. According to section 20, "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." thus, the following three conditions must be satisfied before declaring a contract void under this section:

1. Both the parties must be under a mistake
2. Mistake must be of fact but not of law.

According to explanation to section 20. "An erroneous opinion as to the value of the thing which forms the subject matter of agreement is not to be deemed a mistake as to a matter of fact."

Note: Mistake about price is valid.