According to the Indian Contract Act 1872, an agreement enforceable by law is a contract.[1] All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.[2]
Consent has been defined under S.13 as when two or more persons agree upon the same thing in the same sense.[3] For a contract to be valid under this Act, such consent must be valid and free, and the person consenting must be capable of doing so.
Under S.11 of the Act, every person is competent to contract who is of the age of majority according to the law to which he is subject[4], and who is of sound mind and is not disqualified from contracting by any law to which he is subject.[5]
Further, a person is said to be of sound mind for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his/her interests. A person, who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. A person, who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.[6]
For example, a patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals. Again, a sane man, who is delirious from fever or who is so drunk that he cannot understand the terms of a contract, or form a rational judgment as to its effect on his interests, cannot contract whilst such delirium or drunkenness lasts.
So, to be able to give valid consent, at the time of making the contract a person must be –
- A major
- Of sound mind
- Not disqualified by any law from contracting
Consent is said to be free when it is not caused by –
- Coercion
- Undue influence
- Fraud
- Misrepresentation, or
- Mistake
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.[7]
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 a contract whose consent was 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 representations made had been true.
An exception to the rule is that if such consent was caused by misrepresentation or by silence, fraudulent within the meaning of S.17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence. A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practised, or to whom such misrepresentation was made, does not render a contract voidable.[8]
Illustrations
1. ‘A’, intending to deceive ‘B’, falsely represents that five hundred mounds 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’.
2. ‘A’, by a misrepresentation, leads ‘B’ erroneously to believe that, five hundred mounds of indigo are made annually at ‘A’s factory. ‘B’ examines the accounts of the factory, which show that only four hundred mounds of indigo have been made. After this ‘B’ buys the factory. The contract is not voidable on account of ‘A’s misrepresentation and ‘B’ had opportunity to inspect the conditions for himself.
3. ‘A’ fraudulently informs ‘B’ that ‘A’s estate is free from encumbrance. ‘B’ thereupon buys the estate. The estate is subject to a mortgage. ‘B’ may either avoid the contract, or may insist on its being carried out and the mortgage debt redeemed.
4. ‘B’, having discovered a vein of ore on the estate of ‘A’, adopts means to conceal, and does conceal, the existence of the ore from ‘A’. Through ‘A’s ignorance ‘B’ is enabled to buy the estate at an under-value. The contract is voidable at the option of ‘A’.
5. ‘A’ is entitled to succeed to an estate at the death of ‘B’. ‘B’ dies. ‘C’, having received intelligence of ‘B’s death, prevents the intelligence reaching ‘A’, and thus induces ‘A’ to sell him his interest in the estate. The sale is voidable at the option of ‘A’.
Coercion
“Coercion” is the committing, or threatening to commit, any act forbidden by the Indian Penal Code (IPC), 1860, 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. It is immaterial whether the IPC is in force or not in the place where the coercion is employed.[9]
Illustrations, ‘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 IPC.[10] ‘A’ afterwards sues ‘B’ for breach of contract at Calcutta. ‘A’ has employed coercion under the IPC,[11] although his act is not an offence by the law of England, and although the IPC was not in force at the time when or place where the act was done.
Undue Influence
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. In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of another –
1. where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or
2. 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.
Where a person who is in a position to dominate the will of another, enters into a contract with him/her, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other.[12] But nothing in this/her sub-section shall affect the provisions of S.111 of the Indian Evidence Act, 1872.[13] Some illustrations are provided below –
1. ‘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.
2. ‘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.
3. ‘A’, being in debt to ‘B’, the money-lender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on ‘B’ to prove that the contract was not induced by undue influence.
4. ‘A’ applies to a banker for a loan at a time when there is stringency 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.
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 there under, upon such terms and conditions as to the Court may seem just.[14] Some examples are –
1. ‘A’s son has forged ‘B’s name to a promissory note. ‘B’ under threat of prosecuting ‘A’s son, obtains a bond from A for the amount of the forged note. If ‘B’ sues on this bond, the Court may set the bond aside.
2. ‘A’, a money-lender, advances Rs. 100 to ‘B’, an agriculturist, and, by undue influence, induces ‘B’ to execute a bond for Rs. 200 with interest at 6 per cent per month. The Court may set the bond aside, ordering ‘B’ to repay the Rs. 100 with such interest as may seem just.
Fraud
“Fraud” means and includes any of the following acts committed by a party to a contract, or with his/her connivance, or by his/her agent , with intent to deceive another party thereto of his/her agent, or to induce him/her to enter into the contract –
- the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
- the active concealment of a fact by one having knowledge or belief of the fact;
- a promise made without any intention of performing it;
- any other act fitted to deceive;
- any such act or omission as the law specially declares to be fraudulent.
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/her silence is, in itself, equivalent to speech.[15] Some illustrations are –
1. ‘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 in ‘A’ as he has no duty to speak here.
2. ‘B’ is ‘A’s daughter and has just come of age. Here, the relation between the parties would make it ‘A’s duty to tell ‘B’ if the horse is unsound.
3. ‘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.
4. ‘A’ and ‘B’, being traders, enter upon 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’.
Misrepresentation
“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 duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him/her; by misleading another to his/her prejudice, or to the prejudice of any one claiming under him/her;
- 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.[16]
Mistake of fact and law
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. 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.[17] Some examples are –
1. ‘A’ agrees to sell to ‘B’ a specific cargo of goods supposed to be on its way from England to Bombay. It turns out that, before the day of the bargain, the ship conveying the cargo had been cast away and the goods lost. Neither party was aware of the these facts. The agreement is void.
2. ‘A’ agrees to buy from ‘B’ a certain horse. It turns out that the horse was dead at the time of bargain, though neither party was aware of the fact. The agreement is void.
3. ‘A’, being entitled to an estate for the life of ‘B’, agrees to sell it to ‘C’. ‘B’ was dead at the time of the agreement, but both parties were ignorant of the fact. The agreement is void.
A contract is not voidable because it was caused by a mistake as to any law in force in India, but a mistake as to a law not in force in India has the same effect as a mistake of fact.[18] For example if ‘A’ and ‘B’ make a contract grounded on the erroneous belief that a particular debt is barred by the Indian Law of Limitation; the contract is not voidable.
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.[19]
Edited by Sakshi Raje
Reference
[1] S.2 (h), INDIAN CONTRACT ACT, 1872.
[2] S.10, INDIAN CONTRACT ACT, 1872.
[3] S.13, INDIAN CONTRACT ACT, 1872.
[4] At present, a person is subject to the Indian Majority Act, 1875 (9 of 1875) in matters of majority.
[5] S.11, INDIAN CONTRACT ACT, 1872.
[6] S.12, INDIAN CONTRACT ACT, 1872.
[7] S.14, INDIAN CONTRACT ACT, 1872.
[8] S.19, INDIAN CONTRACT ACT, 1872.
[9] S.15, INDIAN CONTRACT ACT, 1872
[10] S.503, INDIAN PENAL CODE, 1860 – Criminal intimidation.—
“Whoever threatens another with any injury to his person, reputation or property, or to the person or reputation of any one in whom that person is interested, with intent to cause alarm to that person, or to cause that person to do any act which he is not legally bound to do, or to omit to do any act which that person is legally entitled to do, as the means of avoiding the execution of such threat, commits criminal intimidation.”
[11] S.506, INDIAN PENAL CODE, 1860 – Punishment for criminal intimidation.—
“Whoever commits the offence of criminal intimidation shall be punished with imprisonment of either description for a term which may extend to two years, or with fine, or with both;
If threat be to cause death or grievous hurt, etc.—
and if the threat be to cause death or grievous hurt, or to cause the destruction of any property by fire, or to cause an offence punishable with death or 8 [imprisonment for life], or with imprisonment for a term which may extend to seven years, or to impute unchastity to a woman, shall be punished with imprisonment of either description for a term which may extend to seven years, or with fine, or with both.”
[12] S.16, INDIAN CONTRACT ACT, 1872.
[13] S.111, INDIAN EVIDENCE ACT –
“Proof of good faith in transactions where one party is in relation of active confidence ––
Where there is a question as to the good faith of a transaction between parties, one of whom stands to the other in a position of active confidence, the burden of proving the good faith of the transaction is on the party who is in a position of active confidence.”
[14] S.19A, INDIAN CONTRACT ACT, 1872.
[15] S.17, INDIAN CONTRACT ACT, 1872.
[16] S.18, INDIAN CONTRACT ACT, 1872.
[17] S.20, INDIAN CONTRACT ACT, 1872.
[18] S.21, INDIAN CONTRACT ACT, 1872.
[19] S.22, INDIAN CONTRACT ACT, 1872.
