ELEMENTS VITIATING FREE CONSENT
We shall now explain these elements one by one.
(I) Coercion (Section 15) THE INDIAN CONTRACTACT, 1872
“Coercion is 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 whatever, with the intention of causing any person to enter into an agreement.”
Analysis of Section 15 THE INDIAN CONTRACTACT, 1872
The section does not require that coercion must proceed from a party to the contract; nor is it necessary that subject of the coercion must be the other contracting party, it may be directed against any third person whatever.
Following are the essential ingredients of coercion:
(i) Committing or threatening to commit any act forbidden by the India Penal Code; or
(ii) the unlawful detaining or threatening to detain any property to the prejudice of any person whatever,
(iii) With the intention of causing any person to enter into an agreement.
(iv) It is to be noted that is immaterial whether the India Penal Code is or is not in force at the place where the coercion is employed.
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Effects of coercion under section 19 of Indian Contract Act, 1872
(i) Contract induced by coercion is voidable at the option of the party whose consent was so obtained.
(ii) As to the consequences of the rescission of voidable contract, the party rescinding a void contract
should, if he has received any benefit, thereunder from the other party to the contract, restore such benefit so far as may be applicable, to the person from whom it was received.
(iii) A person to whom money has been paid or anything delivered under coercion must repay or return it. (Section 72)
Example 10: Where husband obtained a release deed from his wife and son under a threat of committing suicide, the transaction was set aside on the ground of coercion, suicide being forbidden by the Indian Penal Code. The threat of suicide amounts to coercion within Section 15.
Example 11: An agent refused to give books of accounts to the principal unless he frees him from all his liabilities. The principal had to give the release deed. Held, the contract was under coercion by unlawful detaining of the principal’s property.
II Undue influence (Section 16) THE INDIAN CONTRACTACT, 1872
According to section 16 of the Indian Contract Act, 1872, “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 he uses that position to obtain an unfair advantage over the other”.
A person is deemed to be in position to dominate the will of another:
(a) Where he holds a real or apparent authority over the other; or
(b) Where he stands in a fiduciary relationship to the other; or
(c) Where he makes a contract with a person whose mental capacity is temporarily or permanently affected
by reason of age, illness, or mental or bodily distress, for example, an old illiterate person.
Example 12: A having advanced money to his son, B, during his minority, upon B’s coming of age obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence.
Example 13: A, a man enfeebled by disease or age, is induced by B’s influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services. B employs undue influence.
Example 14: A, being in debt to B, the money-lender of his village, contracts a fresh loan on terms that appear to be unconscionable. It lies on B to prove that the contract was not induced by undue influence.
Example 15: A applies to a banker for a loan at a time when there is astringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence.
Analysis of Section 16 THE INDIAN CONTRACTACT, 1872
The essential ingredients under this provision are:
(1) Relation between the parties: A person can be influenced by the other when a near relation between the two exists.
(2) Position to dominate the will: Relation between the parties exist in such a manner that one of them is in a position to dominate the will of the other. A person is deemed to be in such position in the following circumstances:
(a) Real and apparent authority: Where a person holds a real authority over the other as in the case of master and servant, doctor and patient and etc.
Example 16: A father, by reason of his authority over the son can dominate the will of the son.
(b) Fiduciary relationship: Where relation of trust and confidence exists between the parties to a contract. Such type of relationship exists between father and son, solicitor and client, husband and wife, creditor and debtor, etc.
Example 17: By reason of fiduciary relationship, a solicitor can dominate the will of his client and a trustee can dominate the will of the beneficiary.
Example 18: A spiritual guru induced his devotee to gift to him the whole of his property in return of a promise of salvation of the devotee. Held, the consent of the devotee was given under undue influence. Here, the relationship was fiduciary relationship between Guru and devotee and Guru was in a position to dominate the will of devotee.
(c) Mental distress: An undue influence can be used against a person to get his consent on a contract where the mental capacity of the person is temporarily or permanently affected by the reason of mental or bodily distress, illness or of old age.
Example 19: A doctor is deemed to be in a position to dominate the will of his patient enfeebled by protracted illness.
(d) Unconscionable bargains: Where one of the parties to a contract is in a position to dominate the will of the other and the contract is apparently unconscionable i.e., unfair, it is presumed by law that consent must have been obtained by undue influence. Unconscionable bargains are witnessed mostly in money-lending transactions and in gifts.
Example 20: A youth of 18 years of age, spendthrift and a drunkard, borrowed ` 90,000 on a bond bearing compound interest at 2% per mensem (p.m.). It was held by the court that the transaction is unconscionable, the rate of interest charged being so exorbitant [Kirpa Ram vs. Sami-Ud-din Ad. Khan (1903)]
(3) The object must be to take undue advantage: Where the person is in a position to influence the will of the other in getting consent, must have the object to take advantage of the other.
Example 21: A teacher asks her daughter to get marry to one of his brilliant students. Both the girl and boy were smart, settled and intelligent. Here the teacher had a relationship that can have an influence on both of them. But as no undue advantage of such influence was taken such a contract of marriage is said to be made by free consent.
(4) Burden of proof: The burden of proving the absence of the use of the dominant position to obtain the unfair advantage will lie on the party who is in a position to dominate the will of the other.
Power to set aside contract induced by 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.
Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the Court may seem just.
Example 22: A, a money lender advances ` 1,00,000 to B, an agriculturist, and by undue influence induces B to execute a bond for ` 2,00,000 with interest at 6 percent per month. The court may set aside the bond, ordering B to repay ` 1,00,000 with such interest as may seem just.
Case study: A student was induced by his teacher to sell his brand-new car to the latter at less than the purchase price to secure more marks in the examination. Accordingly, the car was sold. However, the father of the student persuaded him to sue his teacher. State on what ground the student can sue the teacher?
Yes, the student can sue his teacher on the ground of undue influence under the provisions of Indian Contract Act, 1872. A contract brought as a result of coercion, undue influence, fraud or misrepresentation would be voidable at the option of the person whose consent was caused.
(III) Fraud (Section 17)
Definition of Fraud under 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 an intent to deceive another party thereto or 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 to Section 17
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 speak, or unless his silence is, in itself, equivalent to speech.
Example 23: A sell, by auction, to B, a horse which A knows to be unsound, A says nothing to B about the unsoundness of the horse. This is not fraud by A.
Example 24: B is A’s daughter and has just come of age. Here, the relation between the parties would make it A’s a duty to tell B if the horse is unsound.
Example 25: B says to A –“If you do not deny it, I shall assume that the horse is sound”. A says nothing. Here A’s silence is equivalent to speech.
Example 26: A and B being traders, enter into a contract. A has private information of a change in prices which would affect B’s willingness to proceed with the contract. A is not bound to inform B.
Analysis of Section 17 THE INDIAN CONTRACTACT, 1872
The following are the essential elements of the fraud:
(1) There must be a representation or assertion and it must be false. However, silence may amount to fraud or an active concealment may amount to fraud.
(2) The representation must be related to a fact.
(3) The representation should be made before the conclusion of the contract with the intention to induce the other party to act upon it.
(4) The representation or statement should be made with a knowledge of its falsity or without belief in its truth or recklessly not caring whether it is true or false.
(5) The other party must have been induced to act upon the representation or assertion.
(6) The other party must have relied upon the representation and must have been deceived.
(7) The other party acting on the representation must have consequently suffered a loss.
Effect of Fraud upon validity of a contract: When the consent to an agreement in caused by the fraud, the contract is voidable at option of the party defrauded and he has the following remedies:
(1) He can rescind the contract within a reasonable time.
(2) He can sue for damages.
(3) He can insist on the performance of the contract on the condition that he shall be put in the position in which he would have been had the representation made been true.
Mere silence is not fraud
A party to the contract is under no obligation to disclose the whole truth to the other party. ‘Caveat Emptor’ i.e. let the purchaser beware is the rule applicable to contracts. There is no duty to speak in such cases and silence does not amount to fraud. Similarly, there is no duty to disclose facts which are within the knowledge of both the parties.
Example 27: H sold to W some pigs which were to his knowledge suffering from fever. The pigs were sold ‘with all faults’ and H did not disclose the fact of fever to W. Held there was no fraud. [Word vs. Hobbs. (1878)].
Example 28: A sells by auction to B, a horse which A knows to be unsound, A says nothing to B about the unsoundness of horse. This is not fraud by A.
Silence is fraud when:
1. Duty of person to speak: Where the circumstances of the case are such that it is the duty of the person observing silence to speak. For example, in contracts of uberrimae fidei (contracts of utmost good faith).
Following contracts come within this category:
(a) Fiduciary Relationship: Here, the person in whom confidence is reposed is under a duty to act with utmost good faith and make full disclosure of all material facts concerning the agreement, known to him.
Example 29: A broker was asked to buy shares for client. He sold his own shares without disclosing this fact. The client was entitled to avoid the contract or affirm it with a right to claim secret profit made by broker on the transaction since the relationship between the broker and the client was relationship of utmost good faith. (Regier V. Campbell Staurt)
(b) Contracts of Insurance: In contracts of marine, fire and life insurance, there is an implied condition that full disclosure of material facts shall be made, otherwise the insurer is entitled to avoid the contract.
(c) Contracts of marriage: Every material fact must be disclosed by the parties to a contract of marriage (Hazi Ahmed v. Abdul Gassi).
(d) Contracts of family settlement: These contracts also require full disclosure of material facts within the knowledge of the parties.
(e) Share Allotment contracts: Persons issuing ‘Prospectus’ at the time of public issue of shares/debentures by a joint stock company have to disclose all material facts within their knowledge.
2. Where the silence itself is equivalent to speech: For example, A says to B “If you do not deny it, I shall assume that the horse is sound.” A says nothing. His silence amounts to speech.
In case of fraudulent silence, contracts are not voidable if the party whose consent was so obtained had the means of discovering the truth with ordinary diligence (Exception to section 19)
(IV) Misrepresentation (Section 18)
Misrepresentation means and includes -
(1) 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;
(2) any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him; by misleading another to his prejudice or to the prejudice of any one claiming under him;
(3) 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.
Analysis of Section 18 THE INDIAN CONTRACTACT, 1872
According to Section 18, there is a misrepresentation:
(1) statement of fact, which of false, would constitute misrepresentation if the maker believes it to be true but which is not justified by the information he possesses;
(2) When there is a breach of duty by a person without any intention to deceive which brings an advantage to him;
(3) When a party causes, even though done innocently, the other party to the agreement to make a mistake as to the subject matter.
Example 30: A makes a positive statement to B that C will be made the director of a company. A makes the statement on information derived, not directly from C but from M. B applies for shares on the faith of the statement which turns out to be false. The statement amounts to misrepresentation because the information received second-hand did not warrant A to make the positive statement to B.
Example 31: ‘A’ believed the engine of his motor cycle to be in an excellent condition. ‘A’ without getting it checked in a workshop, told to ‘B’ that the motor cycle was in excellent condition. On this statement, ‘B’ bought the motor cycle, whose engine proved to be defective. Here, ‘A’s statement is a misrepresentation as the statement turns out to be false.
Example 32: A while selling his mare to B, tells him that the mare is thoroughly sound. A genuinely believes the mare to be sound although he has no sufficient ground for the belief. Later on, B finds the mare to be unsound. The representation made by A is a misrepresentation.
Example 33: A buy an article thinking that it is worth ` 1000 when in fac
t it is worth only ` 500. There has been no misrepresentation on the part of the seller. The contract is valid.
Difference between Coercion and Undue influence:
Distinction between fraud and misrepresentation:
Legal effects of agreements without free consent - (Section 19) THE INDIAN CONTRACTACT, 1872
When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.
A party to the contract, whose consent was so caused by fraud or 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.
Exception - If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.
Explanation to Section 19 - A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practiced, or to whom such misrepresentation was made, does not render a contract voidable.
Example 34: A, intending to deceive B, falsely represents that 500 maunds of indigo are made annually at A’s factory, and thereby induces B to buy the factory. The contract is voidable at the option of B. This is because when consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.
Analysis of Section 19 THE INDIAN CONTRACTACT, 1872
It has already been considered that when consent to an agreement is caused by coercion, undue influence, fraud or misrepresentation, though the agreement amounts to a contract, such a contract is voidable at the option of the party those consent was so obtained. The party, however, may insist that the contract should be performed and that he should be put in the same position in which he would have been, if the representation made had been true.
But a person who had the means of discovering the truth with ordinary diligence cannot avoid a contract on the ground that his consent was caused by misrepresentation or silence amounting to fraud.
Example 35: A by a misrepresentation leads B to believe erroneously that 750 tons of sugar is produced per annum at the factory of A. B examines the accounts of the factory, which should have disclosed, if ordinary diligence had been exercised by B, that only 500 tons had been produced. Thereafter B purchases the factory. In this circumstance, B cannot repudiate the contract on the ground of A’s misrepresentation.
Where a party to a contract commits fraud or misrepresentation, but the other party is not, in fact, misled by such fraud or misrepresentation, the contract cannot be avoided by the later. (Explanation to Section 19). Thus, when a seller of specific goods deliberately conceals a fault in order that the buyer may not discover it even if he inspects the goods but the buyer does not in fact, make any inspection, the buyer cannot avoid the contract, as he is not in fact deceived by the conduct of the seller.
Effect of mistake on validity of a contract:
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