One of the essentials of a valid contract mentioned in Section 10 is that the parties should enter into contract with free consent. According to Section 14, Consent is said to be free when it is not caused by –
- coercion, as defined in Section 15, or
- undue influence, as defined in section16, or
- fraud, as defined in Section 17, or
- misrepresentation as defined in Section 18, or
- mistake, subject to the provisions of Section 20, 21 and 22.
Consent is said to be caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake.
If the consent of one of the parties is not free consent, i.e., it has been caused by one or other of the above stated factors the contract is not a valid one. When consent to an agreement is caused by fraud, coercion, misrepresentation or undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused. If, however, the consent is caused by mistake the agreement is void.
According to Section 15, “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.
(i) committing, or threatening to commit any act forbidden by the Indian Penal Code, or by
(ii) unlawful detaining, or threatening to detain any property, to the prejudice of any person whatever.
(i) Act forbidden by the Indian Penal Code
It has been noted that if a person commits or threatens to commit an act forbidden by the Indian Penal Code with a view to obtain the consent of the other person to some agreement, the consent in such case is deemed to have been obtained by coercion. For instance, A threatens to shoot B if B does not agree to sell his property to A at a stated price, B’s consent in this case has been obtained by coercion.
For coercion to be there it is not necessary that the Indian Penal Code should be applicable at the place where the consent has been so caused. Explanation to section 15 makes it clear that to constitute coercion, “it is immaterial whether the Indian Penal Code is or is not in force in the place where the coercion is employed.” The following illustration would explain the point :
A, on board an English ship on the high seas, causes B to enter into an agreement by act amounting to criminal intimidation under the Indian Penal Code. 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 was not in force at the time when, or at the place where, the act was done.
In Ranganayakamma Vs. Alwar Setti (1889) the question before the Madras High Court was regarding the validity of the adoption of a boy by a widow, aged 13 years. 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. It was held that the adoption was not binding on the widow.
In 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 forbidden 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.
(ii) Unlawful detaining of property
According to Section 15 coercion could also be caused by unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any per to enter into an agreement. For example, if an outgoing agent refuses to handover the accounts books to the new agent until the principal executes release in his favour, it is coercion. ( Muthiah Chettiar Vs. Karupan (1927) If the detention of property is not unlawful there is no coercion. Thus, if a mortgagee refuses to convey the equity of redemption except on the terms dictated by him, there is nothing unlawful in it and, therefore, no coercion is caused in this case. (Bengal Stone Co. Ltd. Vs. Joseph Hyam (1918)
To the prejudice of a person
Section 15 requires that there is 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 an intention of any person to enter into an agreement.
It means that the act causing coercion should not necessarily be directed against the contracting party, it is enough that the act is to the prejudice of any person whatever, and with the intention of any person to enter into an agreement. If, for example, A unlawfully detains B’s friend C, in order to coerce B to enter into agreement, the case would be covered within this section.
Threat to strike is no coercion
In Workmen of Appin Tea Estate Vs. Industrial Tribunal (1966) the demand of the workers for bonus was accepted after a threat of strike. The question which had arisen was, whether such a decision between the Union of the workers and the Indian Tea Association could be declared void on the ground that there was coercion. It was held that because of the doctrine of collective bargaining under the Industrial Dispute Act the demand of the workers could be backed by a threat of strike. Such a threat was neither a threat to commit an offence under the Indian Penal Code, nor was it unlawful detaining or threatening to detain any property and hence it did not amount to coercion, and as such the agreement was valid.
Statutory Compulsion is no coercion
When a Statue requires a contract to be entered into the consent in such a case is not deemed to be caused by coercion, undue influence, fraud, misrepresentation or mistake. In Andhra Sugars Ltd. Vs. State of A.P. (1968) if any cane grower offered to sell his sugarcane to a factory in a certain zone, the factory was bound to accept the offer under the Andhra Pradesh Sugarcane (Regulation of Supply and Purchase) Act, 1961, and accordingly the agreement was entered into. It was held that in such a case even though there was a legal compulsion for the factory to make the agreement, the agreement could not be said to be entered into by lack of free consent, and there was no coercion either.
“Duress” under English law
Under common law duress consists in actual violence or threat of violence to a person. It only includes fear of loss to life or bodily harm including imprisonment, but not a threat of damage to goods. The threat must be to do something illegal, i.e., to commit a tort or a crime. The duress must be directed against a party to the contract, or his wife, child, parent or other near relative, and also caused by the party to the contract, or within his knowledge. It has been noted above that the common law recognises only a threat to a man’s person, and not to his goods to constitute duress. It may be noted that Indian law also recognises an action for the recovery of money paid or goods delivered under coercion, through the provision contained in section 72,Indian Contract Act. The provision is as under :
“ A person to whom money has been paid. Or anything delivered, by mistake or undue coercion, must repay or return it “
For example, a railway company refuses to deliver up certain goods to the consignee, except upon the payment of an illegal charge for carriage. The consignee pays the sum charged in order to obtain the goods. He is entitled to recover so much of the charge as was illegally excessive.
Difference between Coercion and Duress
1. Coercion in India means committing or threatening to commit an act forbidden by the Indian Penal Code, or unlawful detaining or threatening to detain the property. Thus it may be an act or threat directed against a person or his property. In England duress is constituted only by acts or threats against the person of a man and not against his property.
2. In India coercion may proceed from a person who is not a party to the contract, and it may also be directed against a person who, again, may be a stranger to the contract. In England duress should proceed from a party to the contract and is also directed against the party to the contract himself, or his wife, parent, child, or other near relative.
2. UNDUE INFLUENCE
If the consent of a party to the contract has been obtained by undue influence the consent is not free consent which is needed for the validity of a contract and if the consent has been caused by undue influence, the contract is voidable at the option of the party whose consent had been so obtained. Section 16 defines undue influence as under :
“16. “Undue influence” defined.—(1) 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 obtain an unfair advantage over the other.
(2) 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—
(a) where he holds a real or apparent authority over the other ; or where he stands in a fiduciary relation to the other ; or
(b) 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.
(3) Where a person who is in a position to dominate the will of another, enters into contract with him, 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.
Nothing in this sub-section shall affect the provisions of Section 111 of the Indian Evidence Act, 1872.”
Explaining the nature of the provisions contained in section 16, Indian Contract Act and the adoption of English law in India, our Supreme Court has observed in the case of Ladli Parshad Vs. Karnal Distillery Co., (1963)
“The doctrine of undue influence under the common law was evolved by the courts in England for granting protection against transactions procured by exercise of insidious forms of influence spiritual and temporal. The doctrine applies to acts of bounty as well as to other transactions in which one party by exercising his position of dominance obtains an unfair advantage over another. The Indian enactment is founded substantially on the rules of English Common law. The first Sub-section of Section 16 lays down the principle in general terms. By sub-section (2) a presumption arises that a person shall be deemed to be in a position to dominate the will of another if the conditions set out therein are fulfilled. Sub-section (3) lays down the conditions for raising a rebut table presumption that a transaction is procured by the exercise of undue influence. The reason for the rule in the third sub-section is that a person who has obtained an advantage over another by dominating his will, may also remain in a position to suppress the requisite evidence in support of the plea of undue influence.”
Effect of undue influence
Section 19-A declares that 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. For example, 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.
Because of undue influence one party to the contract may take an undue advantage under the contract, or the party entitled to avoid the contract may have already received some benefit under the contract. The court in cases has been empowered to set aside the contract either absolutely or upon such terms and conditions as the Court may deem just. Second para to Section 19-A incorporates the following provision in this regard :
“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”
For example, a , a money-lender, advances Rs. 100 to B, an agriculturalist, 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 Rs.100 with interest as may seem just.
Essentials of undue influence
In order to constitute undue influence it is necessary that :
(1) 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.
(2) such a person uses his dominant position to obtain an unfair advantage over the other.
It is manifest that both the conditions have ordinarily to be established by the person seeking to avoid the transaction : he has to prove that the other party to the transaction was in a position to dominate his will and that the other party had obtained an unfair advantage by using that position.
Person in dominant position and obtaining of unfair advantage
Sometimes one of the parties to the contract may be in such a dominant position in relation to the other that he has peculiar opportunity of exercising that position to the prejudice of the other party. If the dominant party takes an undue advantage of his position in procuring a contract to the detriment of the other contracting party, the contract is voidable at the option of the party whose will is so dominated.
In the following cases 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,
(2) where he stands in a fiduciary relation to the other, or,
(3) 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.
(1) Real or apparent authority
If a person has an authority over the other contracting party it is expected that he would not abuse that authority to gain an undue advantage from the other. An employer may be deemed to be having authority over his employee, an income-tax authority over the assessee, a police or a judicial officer over the accused, or a licensing authority over the licence.
(2) Fiduciary relation
Fiduciary relationship means a relationship of confidence and trust. When a person reposes confidence in the other, it is expected that he will not be betrayed. If a person betrays the confidence and trust reposed in him and gains an unfair advantage over the other party in any contract, the suffering party has an option to avoid the contract. The principle of undue influence applies to every case, where influence is acquired and abused, where confidence is reposed and betrayed.
Examples of fiduciary relationship are solicitor and client, spiritual advisor and devotee, medical attendant and patient, parent and child, husband and wife, master and servant, creditor and debtor, principal and agent, land lord and tenant, lover and beloved, guardian and ward.
For example, 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.
In MannuSingh Vs. Umadat Pande, (1890) the plaintiff, an aged person executed a deed of gift in respect of whole of his property in favour of the defendant, who was plaintiff’s guru or spiritual adviser.
The only reason for the gift was his desire to secure benefits to his soul in the next world and also in view of the plaintiff having heard recitation of the holy book, Bhagwat. Soon after the execution of the said deed the plaintiff applied for the cancellation of the same by a suit brought by him under section 39 of the specific relief Act, 1877.
Section 111, Indian Evidence Act, 1872 was applied to this situation, according to which in case of a person being in a position of active confidence, the burden of proof lies on such a person who enjoys such a confidence. It was held that because of the fiduciary relationship between the parties, and the absurdity of the reason given by the plaintiff in the gift deed for executing the gift deed, and in view of the provision contained in section 111, Indian Evidence Act, the defendant must prove the absence of undue influence. And since he failed to prove the same the plaintiff is entitled to obtain the cancellation of the deed.
Similarly in Diala Ram Vs Sarga (1927) where there was a debtor-creditor relationship between the parties and the defendant signed a bond agreeing to pay exorbitant rate of interest on the loan taken from the plaintiff, who was a money lender of his village, the presumption of undue influence was raised.
Person in mental or bodily distress
A person is deemed to be in a position to dominate the will of another also in a situation, 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. A person’s mental capacity may have been affected on account of his old age, illness, or mental or bodily distress, and there is every possibility that such a person’s position may be exploited and unfair advantage taken in such a situation. The law tries to afford protection to such persons also. If a contract is made to the prejudice of such a person, there is deemed to be undue influence in such a case. For example. 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.
Presumption of undue influence in Unconscionable Bargains
In cases of unconscionable bargain between the parties on an unequal footing the law raises a presumption of undue influence. Where a person who is in a position to dominate the will of another, enters into a contract with him, 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.
1.. One of the parties who has obtained the benefit of a transaction is in a position to dominate the will of the other, and
2. The transaction between the parties appears to be unconscionable, the law raises a presumption of undue influence.
It is, in such a case, for the dominant party to rebut the presumption of undue influence. If a party has got exorbitant gain at the cost of the other party, it is for him to prove that this advantage had not been gained by undue influence.
For example, A being in debt to B , a 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.
In Diala Ram Vs. Sarga, (1927) the defendant, who was already indebted to the plaintiff, a village money lender, took a fresh loan from the plaintiff and executed a bond, wherein he agreed to pay interest up to 371/2 %, per annum, and also to deliver some bhoosa (wheat husk) in addition thereto. It was held that the position in this case was similar to that in illustration © to Section 16,the contract was unconscionable and, therefore, the burden of proof was on the plaintiff to show that there was no undue influence in this case.
In Wajid Khan Vs. Raja Ewaz Ali Khan (1891) an old, illiterate, pardanashin lady, who was herself incapable of transacting any business, conferred a grant of her substantial property without any valuable consideration in favour of her confidential managing agent. The Privy Council held that it was incumbent on the grantee to show that he had made proper use of confidence reposed by the lady in him and there was no undue influence.
When the consent of a party to the contract has been obtained by fraud, the consent is not free consent, which is necessary for the formation of a valid contract. In such a case the contract is voidable at the option of the party whose consent has been so obtained. Fraud or deceit is also9 tort, for which an action for damages can also lie. Section 17 defines fraud as follows :
“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---
(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 speak, or unless his silence is, in itself, equivalent to speech.
The essentials of fraud are :
- There should be a false statement of fact by a person who himself does not believe the statement to be true.
- The statement should be made with a wrongful intention of deceiving another party thereto and inducing him to enter into the contract on that basis.
1. False statement of fact.
In order to constitute fraud it is necessary that there should be a statement of fact which is not true. Mere expression of opinion is not enough to constitute fraud. Thus, if while taking a policy of marine insurance, the insured communicates to the insurers a letter from the master of his vessel mentioning that in the master’s opinion the anchorage of a place of destination of the vessel is safe and good, there is only an expression of opinion and not a statement of fact, which could constitute fraud.
If A intending to deceive B , falsely represents that five hundred 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.
Representation as to untrue facts may be made either by positively stating certain fats or by conduct. In Edington Vs. Fitzmaurice (1885) a company was in great financial difficulties and needed funds to pay some pressing liabilities. The company raised the amount by issue of debentures. While raising the loans the directors stated that the amount was needed by the company for its development, purchasing assets and completing buildings. It was held that the directors has committed fraud.
When there is an active concealment of a fact by one having knowledge or belief of the fact, that can also be considered to be equivalent to a statement of fact and would amount to fraud. Active concealment is different from merely keeping silent as to certain facts. By an active concealment of certain facts, there is an effort to see that the other party is not able to know the truth and he is made to believe as true which is in fact not so.
1. B, having discovered a vein of ore on the estate of A, adopts means to conceal, and does conce4al, the existence of the ore from A. Through A’s ignorance, B is enabled to buy the estate on an under value. The contract is voidable at the option of A.
2. 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.
Mere silence is no fraud
It has been noted above that for constituting fraud there should be representation as to certain untrue facts. Active concealment has also been considered to be equivalent to a statement because in that case there is a positive effort to conceal the truth and create untrue impression on the mind of the other, Mere silence, however, as to facts is no fraud. Explanation to Section 17, in this connection, incorporates the following provisions :
“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.”
A contracting party is not obliged to disclose each and everything to the other party. If a person is to sell his goods he is under no duty to disclose the defects in his goods. If he makes false statement as to the quality of his goods, it would be fraud, but if he merely keeps silence as regards the defects in them there is no fraud. In case of sale of goods the rule is caveat emptor, i.e., buyer be aware, which means that it is the duty of the buyer to be careful while purchasing the goods, and there is no implied condition or warranty by the seller as to the quality or fitness of the goods for any particular purpose.
If 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 not fraud in A . Similarly, if 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.
In Keates Vs. Lord Cadogan (1851), A let his house to B which he knew was in a ruinous condition. He also knew that the house is going to be occupied by B immediately. A did not disclose the condition of the house to B. It was held that he had committed nom fraud.
In Shri Krishan Vs. Kurushetra University 1976 SC, Shri Krishan, a candidate for the LL.B. Part I exam., who was short in attendance, did not mention that fact himself in the admission form for the examination. Neither the Head of the Law Department nor the University authorities made proper scrutiny to discover the truth. It was held by the Supreme Court that there was no fraud by the candidate and the University had no power to withdraw the candidature of the candidate.
Although as a general rule mere silence or non-disclosure of facts do not amount to fraud, but in some exceptional cases keeping silence may de deemed to be an act of deception. Explanation to Section 17, which mentions the rule that mere silence is not fraud also mentions the following two exceptions :
(1) When there is a duty to speak, keeping silence is fraud.
(2) When silence is, in itself, equivalent to speech, such silence is a fraud.
(1) Duty to speak
When the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, keeping silence in such a case amounts to fraud. When there is a duty to disclose fats, one should do so rather than to remain silent. By remaining silent one may be responsible for creating a false impression in the mind of the other. Certain contracts are uberrima fides , i.e., contracts of utmost faith. In such a case it is supposed that the party in whom good faith is reposed would make full disclosures and not keep silent. Suppression of truth in such cases is equivalent to suggestion of false hood. Withholding the facts, which ought to be disclosed, is fraud. Contracts of insurance are contracts of utmost good faith. Since some of the facts may be in the in the sole knowledge of the insured, he must make full disclosure to the insurer.
Speaking half—truth may also amount to misrepresentation as regards those facts which have not been disclosed. Withholding a part of the information may be enough to convey a false impression and it amounts to fraud. Thus, if the cleaner of clothes makes a customer sign a document orally telling him that the terms exempt the cleaner from liability for damage to beads and sequins, but in fact the document contains a clause giving him exemption from any damage however arising, this is a fraud. (Curtis Vs. Chemical Cleaning and Dyeing Co. 1951)
Duty to disclose changes
If a statement is true when made, but subsequently becomes false by the change of circumstances, there is a duty to disclose the change, before the other party acts upon it. If the change is notifies to the other party it would amount to fraud (Briess Vs. Woolley, 1954)
In with Vs. O’Flanagan (1936) a medical practitioner started negotiations in January, 1934 for the sale of his practice. He stated that his average practice was worth 2000 pounds per annum. The contract for the sale of practice was signed on May1, 1934, but by that time the position of his practice had changed as his practice had fallen considerably owing to his illness and consequent absence from practice. These changed circumstances were not disclosed to the purchasers of the practice and when they took charge they found that the practice was non-existent. They brought an action for the rescission of the contract on the ground that the changed circumstances were not communicated to them. It was held that the representation made in this case to induce the other party to the contract to enter into contract was a continuing one and it was the duty of the vendor to notify the change of circumstances to the purchaser if the same occurred before the contract was signed. Under these circumstances the plaintiff were entitled to rescind the contract
(2) Silence being equivalent to speech
Sometimes keeping silent as to certain facts may be capable of creating an impression as to the existence of a certain situation. In such a case silence amounts to fraud.. For example, B says to A -- “if you don not deny it, I shall assume that the horse is sound.” A says nothing. Here A’s silence is equivalent to speech. Here, the relation between the parties would make it A’s duty to tell B if the horse is unsound.
Means of discovering the truth
Even if, in any case, the silence is fraudulent, but if the other party could have discovered the truth by ordinary diligence he cannot avoid the contract. In this connection the provision in the Indian contract Act is as under :
“If such a consent was caused by misrepresentation or by silence, fraudulent within meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was caused had the means of discovering the truth with ordinary diligence.” (Case of Shri Krishan Vs. Kurukshetra Univeersity ) In this case it was observed :
“In the instant case the admission form of the appellant must have been forwarded in December 1971 where as the examination was to take place in April/May 1972. It is obvious that during this period of four to five months it was the duty of the University authorities to scrutinise the form in order to find out whether it was in order. Equally it was the duty of the Head of the Department of Law before submitting the form to the University to see that the form complied with all the requirements of law. If neither the Head of the Department nor the University authorities took care to scrutinise the admission form, then the question of the appellant committing a fraud did not arise. It is well settled that where a person on whom fraud is committed is in a position to discover the truth by due diligence, fraud is not proved. It is neither a case of suggestio falsi, nor supressio veri. The appellant never wrote to the University authorities that he had attended the prescribed number of lectures. There was ample time and opportunity for the University authorities to have out the defect. In these circumstances, therefore, for the University authorities acquiesced in the infirmities which the admission form contained and allowed the appellant to appear in Part I Examination in April, 1972, then by force of the University Statute the University had no power to withdraw the candidature of the appellant.”
Promise made without any intention to perform it
When a person makes a promise there is deemed to be an undertaking by him to perform it. If there is no such intention when the contract is being made, it amounts to fraud. Thus if a man takes a loan without any intention to repay, or when he is insolvent, or purchases goods on credit without any intention to pay for them, there is fraud. If, however, there is no such wrongful intention at the time of making of the contract, but the promisor does not perform the contract, it does not amount to fraud.
Any other act fitted to deceive
We have already noted that either a false statement of fact, or active concealment, or a promise made without any intention to perform it have been declared to be fraudulent according to clauses (1), (2) and (3) to section 17 respectively. Clause (4) further provides that “any other act fitted to deceive” will also amount to fraud. This clause is general and is intended to include such cases of fraud which would otherwise not come within the purview of the earlier three clauses.
Any act or omission which the law declares as fraudulent
According to section 17 (5) fraud also includes any such act or omission as the law specially declares to be fraudulent. In some cases the law requires certain duties to be performed, failure to do which is expressly declared as a fraud. For instance, section 55, Transfer of property Act, 1882 declares certain kinds of omissions on the part of the seller or the buyer as fraudulent. It provides that :
- The seller of immovable property is bound to disclose to the buyer any material defect in the property or in the seller’s title thereto of which the seller is, and the buyer is not, aware, and which the buyer could not with ordinary care discover. And
- The buyer of immovable property is bound to disclose to the seller any fact as to the nature or extent of the seller’s interest in the property of which the buyer is aware, but of which he has reason to believe that the seller is not aware and which materially increases the value of such interest, and
An omission to make the above stated disclosures is fraudulent.
In Aktar Jahan Begam Vs. Hazarilal, the defendant sold some property to the plaintiff stating in the sale deed that he would not be liable to the buyer if he suffered any loss owing to the seller’s defective title. The defendant had, earlier to this transaction, sold this property to somebody else, but did not inform the buyer about it. It was held that the defendant had committed fraud and the contract was voidable at the option of the buyer.
2. Wrongful intention
In order to constitute fraud it is necessary that a person should intentionally make a false statement with an intent to deceive another party thereto to induce him to enter into the contract. If that intention to deceive the other party is absent there is no fraud. It may, in such a case, be a mere misrepresentation as defined in section 18 of the Act.
In Derry Vs. Peek, the directors of a company issued a prospectus stating that they had got the authority to run tramways with steam or mechanical power instead of animal power. In fact a plan had been submitted for the same and directors honestly believed that the Board of Trade, who had to accord its sanction for the same, would do so as a matter of course. The board of Trade refused the sanction and the company had to be wound up. The respondent, who had taken shares in the company on the faith of the representation by the directors in the prospectus, brought an action for the tort of deceit. It was held by the House of Lords that since the statement had not been made with an intention to deceive there was no fraud.
Contract on the basis of a false statement
It is necessary that the false statement must have been made to induce the other party to enter into the contract. “If”, said Lord Blackburn, “it is proved that the defendants with a view to induce the plaintiff to enter into a contract made a statement to the plaintiff of such a nature as would be likely to induce a person to enter into a contract, it is fair inference of fact that he induced to do so by the statement.” If a man, being induced by false statement enters into a contract which he would not have done otherwise, there is fraud. But if in spite of the false statement he was not misled. or did not enter into the contract on that basis, there is no fraud. This may be explained by the following illustration :
(a) A, intending to deceive B , falsely represents that five hundred 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 A.
(b) A, by a misrepresentation, leads B erroneously to believe that five hundred maunds of indigo are made annually at A’s Factory. B examines the accounts of the factory, which shows that only four hundred maunds of indigo have been made. After this B buys the factory. The contract is not voidable on account of A’s misrepresentation.
In Kamal Kant Vs. PrakashDevi the Plaintiff, Kamal Kant filed a suit against his mother, Prakash Devi and some others seeking cancellation of a trust deed on the ground that his signatures to it were obtained by fraud by falsely telling him that it was attested by the plaintiff’s father and advocate. The plaintiff was an educated man and had all the means to know the contents of the document. Under these circumstances it was held that there was no fraud in this case.
In Horsfall Vs. Thomas the plaintiff contracted to manufacture a gun for the defendant and supply the same to him. Thegun was made for the defendant and supplied to him, but the defendant never examined the gun and he started using it. There was a defect in the gun, and if the defendant had carefully examined the gun he could detect the same and then he would have been justified in rejecting it. The defendant accepted two bills of exchange towards the payment for the gun. After some time the gun burst flew to pieces. On e of the bills of, was paid by him, but when the second bill was not paid, the p-lainti9ff sued him for the same. At this stage the defendant contended that because of a concealed defect in the gun it was weak and consequently it had burst and broken into pieces and thus it amounted to fraud, as such he is not liable to pay.
If there is a patent defect in an article supplied to a buyer and the buyer having an opportunity to examine the same neglects to do so, the supplier cannot be considered guilty of fraud for not pointing out the defect.
Statement should be meant for the party misled
It is necessary that the misleading statement should be meant for the party who is misled. In Peek Vs. Gurney (1873, a person purchased some shares of a company from the market and then sued the promoters of the company for fraud on the ground that there were some false statements contained in the prospectus. It was held that the prospectus is meant for an original allot tee of the shares by the company and not a person like the present appellant, who buys the shares subsequently from the original allot tee and therefore the promoters were not liable for fraud.
When a false statement is made with the knowledge that it is false and also with the intention to deceive the other party and make him to enter into a contract on that basis, it is known as fraud. But when the person making a false statement believes the statement to be true and does not intend to mislead the other party to the contract it is known as “Misrepresentation”. When the consent of a party to a contract has been obtained by misrepresentation it is not free consent and the contract is voidable at his option. Section 18 defines misrepresentation as under :
“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 intention 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.
Positive assertion, i.e. an explicit statement, of fact by a person of that which is not true, but he believes it to be true amounts to misrepresentation. There should be a false statement made innocently, i.e., without any intention to deceive.
When there is a breach of duty whereby the person making a false statement gains some advantage at the cost of the other party, and the statement though false is made without an intention to deceive, it also amounts to misrepresentation. For example, Section 57, Indian Easement Act, 1882, lays down that the grantor of a licence i8s bound to disclose to the licensee any defect, which is likely to be dangerous to the person or property of the licensee, of which the grantor is aware but the licensee is not. Omission to make such a disclosure, if it is without any intention to deceive, would amount to misrepresentation.
If one party, acting innocently, causes another party to make a mistake as to the substance of the thing which is the subject of the agreement, there is said to be misrepresentation.
In case of misrepresentation the person making the statement is innocent and he makes the statement without any intention to deceive the other party. His statement is false although he himself believes that the same is true. It is known as innocent misrepresentation as against fraud, where the person making the false statement knows that the same is false but makes the same intentionally to deceive the other party and make him enter into an agreement which he would not have done otherwise. For instance, A sells his horse to B which is unsound but A himself does not know about this fact. He tells B that the horse is sound. There is misrepresentation.
Fraud and Misrepresentation distinguished
- Both in fraud and misrepresentation the statement is false, but in fraud the false statement is made by a person, who knows that it is false or does not believe in its truth, whereas in misrepresentation the person making the statement believes the same to be true.
- In fraud the intention of the person making a false statement is to deceive the other party and induce him to enter into the contract on that basis. There is no such wrongful intention in case of misrepresentation. It has been noted in Derry Vs. Peek that when the statement, although false, was made without any intention to deceive it did not amount to fraud.
- According to section 19, when the consent of a party to the contract has been obtained either by fraud or by misrepresentation, the contract is voidable at the option of the party whose consent has been so obtained. In other words the contractual remedy for both is the same. In case of fraud, however, there is an additional remedy available to the victim of fraud, i.e., an action for damages under the law of torts, because fraud is also a tort. No remedy under the law of torts is available if it is an innocent misrepresentation. Indian Contract Act, however, provides that “a person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfilment of the contract” This remedy of damages is available in every kind of rescission, whether on ground of misrepresentation or fraud, or on other ground and it is not similar to the remedy of damages available to a victim of the fraud under the law of torts.
- Although when there is misrepresentation by one party the contract is voidable at the option of the other party, but no such remedy is available if the party seeking to avoid the contract had the means of discovering the truth with ordinary diligence. But except in case of fraudulent silence, a person obtaining the consent of the other party by fraud cannot be allowed to say that the other party could have discovered the truth with ordinary diligence.
Effect of flaw in consent
Section 19 deals with the effect of flaw in consent caused by coercion, misrepresentation and fraud and section 19-A when the consent has been obtained by undue influence. The relevant provision contained in these sections are as follows :
19. Void ability of agreement without free consent -- 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 representation made had been true.
19-A Power to set aside contract 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 is entitled to avoid it has received any benefit there under, upon such term and conditions as the Court may seem just.
When the consent of a party to the contract has been caused by coercion, misrepresentation or fraud the contract is voidable at the option of such party. In case of fraud, apart from avoiding the contract, the person whose consent has been so caused may also bring an action for damages because fraud is a tort also. When a person at whose option the contract is voidable rescinds it, he is bound to restore the benefit, if any, received by him under such a contract.
In case of undue influence also the contract is voidable at the option of the party whose consent has been 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.
Thus, in case of the flaw in consent one party or the other may have either,
- a right of recession of the contract, i.e., the contract may be voidable at his option, or
- a right to claim compensation.
The two rights are discussed below.
1. Right to Rescission of the contract
It has been noted above that even when the consent of a party to a contract has been obtained by coercion, misrepresentation, fraud or undue influence, rescission of the contract is the common remedy available in all these cases. The party entitled to rescind a voidable contract may do so by a notice to the other party, or taking such steps as may be necessary under the circumstances of the case. A voidable contract will be avoided only if the party having a right to do so avoids it. If instead, he affirms the contract then the contract will be binding on both the parties. Ordinarily, a notice to the other party of the intention to avoid the contract would suffice. If, however, the other party is not available then taking necessary steps which may be possible under the circumstances of the case would be enough.
In Car and Universal Finance Co. Ltd. Vs. Caldwell, (1961) the purchaser of a car committed a fraud against the seller by making the payment through a cheque which was dishonoured. The seller wanted to avoid the contract and regain the possession from the buyer, but the buyer was not traceable. The seller immediately informed the police and also the Automobile Association about the same. In the meanwhile the purchaser of the car sold it further to the plaintiffs, who had been acting in good faith. The question was whether the plaintiffs had purchased it after rescission of the contract by the seller, and if that was so the plaintiffs could not have a good title to the car. It was held that even though the seller could not communicate the rescission to the purchaser himself, information to the police and the Automobile Association had resulted in the rescission of the contract and therefore, the plaintiffs did not get a good title to the car.
Limits to the rights of rescission
The right of rescission of the contract is subject to the following limitations. In such situations the law may not permit the exercise of the right to rescind the contract.
(i) When the contract is affirmed
There are two alternatives open to a party having a right to avoid a contract, either to rescind it, or to affirm it. If the contract is rescinded it becomes void and unenforceable. On the other hand, if it is affirmed then it is valid and binding contract against both the parties. Section 19, which deals with the right of rescission of a contract where the consent of a party has been obtained by misrepresentation or fraud states :
“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 shall be put in the position in which he would have been if the representation made had been true”
The affirmation of the contract may be made either expressly, or impliedly or it could be inferred from a person’s conduct. In Long Vs. Lloyd (1958) the defendant sold his lorry to the plaintiff by making a false representation that the lorry was in “excellent condition.” On the lorry’s first journey the plaintiff discovered serious defects in the lorry. He did not rescind the contract, but instead accepted the defendant’s offer of half the cost of repairs. The lorry completely broke in the next journey and then the plaintiff wanted to rescind the contract. It was held that the plaintiff, by accepting the offer of sharing the cost of repairs by the defendant and thereafter continuing using the car, had affirmed the contract and he had now no right to rescind it.
(2) Lapse of time
A person having a right to avoid the contract must do so within a reasonable time. Failing to exercise this right in time may mean affirmation of the contract. If a person transfer his property to another person while under a spiritual influence, but does not take steps to take back the property for six years after such influence has ceased, the right to retrieve the property comes to an end. (Allcord Vs. Skinner . 1887) Similarly, if a person purchasing a picture on the basis of an innocent but false representation that it has been painted by a particular renowned artist, wants to avoid the contract after five years of its purchase, the rescission would not be allowed (Leaf Vs. International Galleries, 1950)
(3) Acquisition of a right by a third party
The right of rescission may be gone if before the contract has been rescinded some third party has acquired a right in the subject matter of the contract. A voidable contract is valid until avoided and it becomes void only after it has been avoided, there is a possibility that so long as the contract has not been avoided, there could be creation of an instrument in favour of a third party. Section 29, Sale of Goods Act, 1930, contains the following provision in respect of a contract of sale of goods :
“When the seller of goods has obtained possession thereof under a contract voidable under section 19 or section 19A of the Indian Contract Act, 1872, but the contract has not been rescinded at the time of sale, the buyer acquires a good title to the goods, provided he buys them in good faith and without notice of the seller’s defect of title.”
For example, in a contract of sale of certain goods between A and B, A’s consent has been obtained by misrepresentation and so he has a right to avoid the contract, B sells those goods to C, while C is acting in good faith and he has no notice of the defective title of B. C has acquired a good title to the goods and A’s right of avoiding the contract and taking back the goods has come to an end.
If a shareholder is induced by misrepresentation to purchase shares, he may rescind the contract. In case the proceedings for winding up of the company starts, shareholder’s right of rescission cannot be exercised because that wou8ld affect the interest of the creditors.
(4) Inability to restore the goods
When a party wants to avoid the contract he must do so, so long as the parties to the contract can be placed in the same situation in which they were before the contract was made. If restitutio in integrum is not possible there can be no rescission. For example, A purchases a suit piece from B under a contract voidable at A’s option. A gets the piece converted into a suit. A’s right to avoid the contract cannot be exercised because he will not be in a position to return the suit piece. In a contract of sale of goods if the buyer has a right to avoid the contract because of breach of a condition, the buyer’s right of rejecting those goods comes to an end if the buyer has accepted those goods. In such a case buyer’s only remedy is to claim compensation by treating the breach of condition as a breach of warranty. Section 13 (2), of the Sale of Goods Act, 1930 makes the following provisions :
“Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is a term of the contract, express or implied, to that effect.”
In Wallis Vs. Pratt the buyer purchased seeds described as “English sainfoin seeds.” The seeds supplied by the seller were of an inferior and a different variety known as “Gaint sainfoin seeds.” At the time of supply of seeds the buyer could not make out the defect as the two varieties were indistinguishable. The defect could only known after the seeds had been sown and the crop was ready. The buyer could claim compensation only. There was no chance of avoiding the contract and rejecting the goods.
(5) Damages in lieu of rescission of contract
Misrepresentation Act, 1967 has given power to the English Courts to grant damages in lieu of rescission, if in the opinion of the Court it would be just and equitable to do so. Section 2 (2) of the Act which contain the above mentioned provision is as under :
“Where a person has entered into a contract after a misrepresentation has been otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation, to rescind the contract, that the contract ought to be or has been rescinded, the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of the opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract was upheld, as well as to the loss that rescission would cause to the other party.”
The remedy of damages in lieu of recession provided here is in respect of innocent misrepresentation. When the misrepresentation is fraudulent, the aggrieved party may recover damages in addition to the of avoiding the contract, because fraud is also a tort.
2. Right to claim compensation
Apart from the remedy of rescission of contract, the remedy of damages or compensation may also sometimes be available to the parties to the contract, in cases where the consent of one of the parties has been obtained by coercion, misrepresentation, fraud or undue influence.
(1) Damages in case of fraud : It has already been noted that fraud is a tort. Therefore, a party whose consent has been obtained by a fraudulent statement, may seek rescission of the contract as a contractual remedy and may also claim damages under the law of torts.
(2) Damages in case of non-fraudulent misrepresentation
It has already been noted that the Misrepresentation Act, 1967 empowers the court in case of other than fraudulent misrepresentation to allow damages in lieu of rescission of contract.
(3) Duty of a party rescinding the contract to pay compensation
Sometimes a party entitled to rescind a voidable contract may have already received some benefit under the contract. Equity demands that if he avoids the contract, he should also restore the benefit which he may have received from the other party. (refer to section 64 of the Act)
For example, 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 percent per month. The Court may set the bond aside, ordering B to repay Rs. 100 with such interest as may seem just.
Section 30, Specific Relief Act, 1963 also empowers the court to order payment of compensation when ordering rescission of a contract. It provides as follows :
“On adjudging the rescission of a contract, the court may require the party to whom such relief is granted to restore, so far as may be, any benefi9t which he may have received from the other party and to make any compensation to him which justice may require.”
When the consent of the parties is caused by mistake, it is not the free consent which is needed for the validity of a contract. One, or both, of the parties may be working under some misunderstanding or misapprehension of some fact relating to the agreement. If such a misunderstanding or misapprehension had not been there, probably they would not have entered into the agreement. Such contracts are said to be have been caused by mistake.
Mistake may work in two ways :
- Mistake in the mind of the parties is such that there is no genuine agreement at all. They may be no consensus ad idem. i.e. the meeting of the two minds. The offer and acceptance do not coincide and thus no genuine agreement is constituted between the parties.
- There may be a genuine agreement, but there may be mistake as to a matter of fact relating to that agreement.
1. Mistake may work in two ways :
For a valid contract both the parties should have given their consent and the consent should be free also. According to section 13 :
“Two or more persons are said to consent when they agree upon the same thing in the same sense.”
Sometimes even such a consent, where two or more persons agree to the same thing in the same sense, may not be there. In other words, there may be absence of meeting of the minds of the parties, or there may be no consensus ad idem. In such case there is no contract which can be enforced.
In Raffles Vs. Wichelhaus (1864) the buyer and the seller entered ito an agreement under which the seller was to supply a cargo of cotton to arrive “ex peerless from Bombay”. There were two ships of the same name. i.e., Peerless, and both were to sail from Bombay, one in October and the other in December. The buyer in mind Peerless sailing in October, whereas the seller thought of the ship sailing in December. The seller dispatched cotton by December ship but the buyer refused to accept the same. In this case the offer and acceptance did not coincide and there was no contract and, therefore, it was held that the buyer was entitled to refuse to take delivery.
2. Mistake as to a matter of fact essential to the agreement
Section 20 deals with such mistake. It provides :
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 is not to be deemed a mistake as to a matter of fact.
(a) 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 these facts. The agreement is void.
(b) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void.
c) 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 the parties were ignorant of the fact. The agreement is void.
When the type of mistake contemplated is section 20 is present in an agreement, the agreement is void. Section 20 requires that :
(1) Both the parties to the contract should be under a mistake and
(2) Mistake should as regards a matter of fact.
(3) The fact regarding which the mistake is made should be essential to the agreement.
1. Mistake of both the parties
Section 20 makes the agreement void if there is mistake on the part of both the parties. For example, A and B make an agreement for the sale and purchase of a particular horse. Unknown to both the parties the horse was dead at the time of the agreement. Since both the parties are under a mistake the agreement is void. If the mistake is a unilateral one, i.e., only one of the parties is having some mis-impression, the validity of the agreement is not affected thereby. This is made clear by section 22, which reads as under :
22. 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 matter of fact.
In Ayekam Angahal Singh Vs. The Union of India, A.I.R. 1970 there was auction for the sale of fishery rights and the plaintiff was the highest bidder making a bid of Rs. 40,000. The fishery right had been auctioned for 3 years. The rental in fact was Rs. 40,000 per year. The plaintiff sought to avoid the contract on the ground that he was working under a mistake and he thought that he ha made a bid of Rs. 40000 being the rent for all the three years. It was held that since the mistake was unilateral the contract was not affected thereby and the same could not be avoided.
(2) Mistake of fact
There should be mistake of fact and not of law. The validity of the contract is not affected by mistake of law. Regarding mistake of law the provision contained in section 21 is as follows :
21. Effect of mistake as to law.--- 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 law not in force in India has the same effect as a mistake of fact.
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.
Every one is supposed to know the law of the land. Ignorance of law is no excuse. If a person wants to avoid the contract on the ground that there was a mistaken impression in his mind as to the existence of some law while he entered into the contract, he will get no relief.
(3) Mistake essential as to agreement
It is also essential that the fact regarding which the mistake is made should be essential to the agreement. Whether the mistake is regarding a fact essential to the agreement or not depends on a particular contract.