Law of Contract

1. Consent, Free Consent and Factors Affecting Free
Consent
Mr. Amit Guleria (Double Medalist; Gold and Silver)
Assistant Professor,
Dr. B.R. Ambedkar National Law University Sonepat
Email: amitdbranlu@gmail.com

2. Consent
Two or more persons are said to consent when they agree upon the same thing in
the same sense. (Sec. 13, ICA, 1872)
For a Contract to be valid, the consent of the parties must be genuine. The principle
of consensus-ad-idem is followed which means that the parties entering into the
contract must mean the same thing in the same sense. The parties to the contract must
have the same understanding in regards to the subject matter of the contract.
In Central National Bank v. United Industrial Bank AIR 1954 SC 181, it was held that
we must understand by “the same thing” the whole contents of the agreement,
whether it consists, wholly, or in part, of delivery of material objects, or payment, or
other executed acts or promises.
Meeting of minds for the “same thing”.
* Consent given must be free and voluntary.

3. In Prem Singh v. Birbal AIR 2006 SC 3608, it was observed that a man who has
put his name to an instrument of one kind understanding it to be an instrument
of a wholly different kind may be entitled, not only to set aside the same
document against the other party on the ground of any fraud or
misrepresentation which caused such error, but also to treat it complete nullity,
under which no right can be acquired against him by anyone.

4. Sec. 14, ICA, 1872: “Free consent” defined.—Consent is said to be free when it is
not caused by—
(1) coercion, as defined in section 15, or
(2) undue influence, as defined in section 16, or
(3) fraud, as defined in section 17, or
(4) misrepresentation, as defined in section 18, or
(5) mistake, subject to the provisions of sections 20, 21 and 22.
Consent is said to be so caused when it would not have been given but for the existence
of such coercion, undue influence, fraud, misrepresentation or mistake.
Free Consent means the absence of any kind of coercion, undue influence, fraud,
misrepresentation or mistake.
Therefore consent given under coercion, undue influence, fraud, misrepresentation or
mistake invalidates the contract.

5. Factors Affecting Free Consent
Sec. 15, ICA, 1872: “Coercion”— “Coercion” is the committing, or
threatening to commit, any act forbidden by the Indian Penal Code (45 of
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.
Explanation.—It is immaterial whether the Indian Penal Code (45 of 1860) is or
is not in force in the place where the coercion is employed.

6. Always keep it in mind that it is not necessary that the Indian Penal Code is
applicable at the place the consent was obtained. A very significant part of the
law is the phrase “to the prejudice of any person whatever” which means the
coercion could be directed against the prejudice of any person and not just the
party to the contract. It is also not necessary that only the party to the contract
causes the coercion. Even a third party to the contract can cause coercion to
obtain the consent.
Burden of Proof:
The burden of proof in cases of coercion lies on the party whose consent was
coerced or on the party taking the defence of the coercion. (Palanippa
Mudaliar v Kandaswamy Mudaliar, (1971) 1 Mys LJ 258)

7. ❖Mere probability or suspicion doesn’t amounts to coercion.
❖To establish coercion a person must prove there was a threat which was forbidden by
law and that compelled him to get into a contract which otherwise he wouldn’t have.
Effect of Coercion:
When consent of a party was obtained through coercion, the contract becomes voidable
at the option of the party whose consent was so obtained (aggrieved party). (Section
19, ICA, 1872).
❖ Under English Common-Law, Duress in Contract consists of actual violence or threat of
violence to a person. It only includes fear of loss to bodily harm including imprisonment,
but not a threat of damage to goods. (Atlee v. Backhouse, (1838) 3 M & W 633).
❖ In English law threat of duress to the person is limited and there should be a threat of
personal violence.

8. In Bishundeo Narain v. Seogeni Rai 1951 SCR 548 it was held thus:
“Undue influence and coercion may overlap in part in some cases but they are
separate and separable categories in law and must be separately pleaded.
Elements of Coercion:
The elements that the definition carries which are important to state that the
coercion has been caused are:
❖ Committing or threatening to commit, act forbidden by the Indian Penal
Code 1860.
❖ Unlawful detaining or threatening any property to the prejudice of any
person.

9. ❖Acts forbidden by the Indian Penal Code 1860
In Askari Mirza v. Bibi Jai Kishori (1912) 16 PC 344, Privy council observed
that “cases brought under this particular branch of Section 15, ICA, 1872 must be
of rare occurrence”. e.g. consent obtained at the point of pistol or threatening to
cause hurt, or by intimidation or by burning the house of somebody.
In Chikaham Amiraju v. Chikham Seshamma ILR (1918) 41 Mad 33 the
question before The High Court of Madras was that, if a man induces his wife and
son to execute a release in favour of his brother in respect of some properties
which they claimed as their own by way of threat of committing suicide, is
covered under this category under Section 15, ICA, 1872.
It was held by majority “that the threat of suicide amounted to coercion within the
preview of Section 15, therefore, the release deed was voidable”.

10. ❖Unlawful Detention of Property
The High Court of Madras in Muthiah Chettiar v. Karupan Chetti (1927) 50
Mad 414 observed that “ refusal by the outgoing agent, whose term has been
expired, to handover the account books to the new incoming agent until, the
principal gave him the complete release would constitute coercion under this
Section”.
In English Law ‘duress’ is applicable at the place of ‘coercion’ In Kesarmal
V. Valliappa Chettiar (1954) 1 WLR 380 and Barton v. Armstrong (1975) 2
All ER 465 it was observed that under English Law, actual or threatened violence
to the victim’s person has long been recognized to constitute duress.
The High Court of Bombay in Dai-ichi Karkaria Pvt. Ltd. V. ONGC AIR 1992
Bom 309, observed that the doctrine of ‘economic duress’ is the part of Indian
law.

11. Sec. 16, ICA, 1872: “Undue influence”.— (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 dominate the will of the other and uses
that 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.

12. (3) 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.
Nothing in this sub-section shall affect the provisions of section 111 of the Indian
Evidence Act, 1872 (1 of 1872).
Sec. 111. Indian Evidence Act, 1872, 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.

13. Essentials of Undue Influence:
(1) One of the contracting parties dominates the will and mind of another; or
▪ One of the contracting parties has a real or apparent authority over the other; or
e.g. Magistrate or Police/Investigating Officer for an accused.
Apparent Authority: Not having real authority but capability to approach the real
authority (the colour of authority).
▪ One of the contracting parties stands in fiduciary relationship (relationship of
trust) with other; e.g. husband-wife, trustee-beneficiary, guardian-minor; or
The relationship between the parties so as to enable one of them to dominate the
will of other is a sine qua non for undue influence to come into play as a defense
(Bellachi v. Pakeeran (2009) 12 SCC 95).

14. In Chand Singh v. Ram Kaur (1987) 2 PLR 70 a woman of 70 years
observing veil (pardha) having 3 daughters, was supposed to have gifted her
entire land to the defendant, who was the tenant of the land, it was observed that
from the position of his possession of the said land he must have dominated the
woman and the burden to prove the circumstances of gift lies upon that man.
▪ One of the contracting parties is strong enough and upon whom the other has
to depend because of some physical or mental disability e.g. mental
incapacity, due to illness or age or due to mental distress.
▪ In Surjit Singh v. Bimla Devi, AIR 2008 NOC 969 (HP) an illiterate old
woman was taken by her collateral, in whom she had confidence, to his house
and put under “dhooni” (a kind of smoke treatment) and in that state her
signatures were taken on two papers representing her pension papers, when
she came to know that the papers she signed were gift deeds, she promptly
took action and challenged the deed, the deeds were set aside.

15. In Lakshmi Amma v. Talengala Narayana AIR 1970 SC 1367 a person was
suffering from a number of ailments which confined him to a nursing-home and
from there he made a deed gifting all his properties to one of his sons to the
exclusion of others, the Supreme Court held that the preseumption of undue
influence was there, and set aside the gift deed.
(2) The dominating/superior party has taken an unfair advantage over the
weaker party or the transaction is unconscionable (which is not reasonable).
❖The doctrine of Undue Influence is an equitable doctrine: As it equitably
makes a contract voidable at the option of the party whose consent has been so
taken.

16. In Mannu Singh v. Umadat Pande, ILR (1888-90) 12 All 523 a spiritual adviser
(guru) induced the plaintiff, his devotee, to gift to him the whole of his property to
secure benefits to his soul in the next world, such a consent is said to be taken by
way of undue influence.
In Akshoy Kumar Patil v. New India Assurance Co. AIR 2007 Del 136 Delhi
High Court held that if in a mediclaim insurance policy, the insured was forced
and pressurised to consent to exclusion of cover for cardiac ailments, the consent
cannot be treated as lawful and therefore, it has no binding effect.

17. Sec. 17, ICA, 1872: “Fraud” defined.— “Fraud” means and includes any of the
following acts committed by a party to a contract, or with his connivance, or by his
agent2, with intent to deceive another party thereto of 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 speak3, or unless his
silence is, in itself, equivalent to speech.

18. Ingredients of Fraud:
1. The expressions “with intent to deceive” and “any other act fitted to deceive”
make it clear that in order to constitute fraud under this Section intention to
deceive the party to a contract is an essential ingredient.
2. The act may be done by a party to a contract or with his connivance by some
one or by his/her agent.
3. A suggestio falsi.
4. An active concealment of a fact which it is his/her duty to disclose
(suppression veri).

19. 5. A false promise with an intention not to perform.
In DDA v. Skipper Construction Co. Pvt. Ptd. (2000) 10 SCC 130, A builder
entered into a large number of bookings, nearly three times the available units of
accommodation and collected money for the same. It was held to be fraud by
Hon’ble Supreme Court, because the builder should have known that he would
not be able to perform the contract with all of them. Even there was no provision
for interest on the deposit money. Inspite of this he was held liable to pay interest.
The court said that there was fraud causing inducement for booking by the
purchasers; such fraud creates liability even beyond the agreement.
6. Any act or omission which the law may declare as fraudulent.
Sec. 25, IPC. “Fraudulently”.—A person is said to do a thing fraudulently if he does that thing
with intent to defraud but not otherwise.
7. Pursuant to any of the above elements, the party defrauded or his/her agent must have
entered into a contract or must have done some act.

20. Fraud was defined by House of Lords in Derry v. Peek (1889) LR 14 AC 337 Lord
Herschell said, “Fraud is proved when it is shown that a false representation has been
made:
A 3-part test:
1. knowingly, (the party knows the statement to be false), or
2. without belief in its truth, (the party does not believe in the statement),or
3. recklessly careless whether it be true or false” (the defendant is reckless as to its
truth).

21. In this case a the prospectus of a company contained a representation that the
company had been authorised by a special Act of Legislature to run trams by
steam or mechanical power. The authority to use steam was, in fact subject to the
approval of the Board of Trade, But no mention was made of this The Board
refused consent and consequently the company was wound up. The plaintiff who
had bought some shares of that company, sued the directors of the company for
fraud. But they were not held liable for fraud, as they honestly believed that once
the legislature had authorised the use of steam, the consent of the board was
practically concluded. Therefore, if the person making a false representation is
not guilty of fraud, if he/she believes in its truth. Thus, we can say that intentional
misrepresentation is very essential to constitute fraud under Section 17, ICA.

22. Silence as a fraud
Explanation to Sec 17 says
‘ Mere silence is no 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, unless his silence, is, in itself, equivalent to
speech’
The silence amounts to fraud in the following two cases
1. Where there is a duty to speak.
2. Where the silence is equivalent to speech/ Where silence is deceptive.
For example: Mr. ‘X’ takes a coin (gold coin) believing it to be of brass visits to a goldsmith for selling
the coin by asking him, what is the resale value of brass coins. Mr. ‘Y’ Goldsmith, tells him the value
of brass coin and takes it for the same value, but he had recognized that it’s a gold coin. He, kept silent
on the fact and deceived Mr. ‘X’. The contract entered into by Mr. ‘X’ and Goldsmith, is entered into
by way of fraud and may be voided at the option of Mr. ‘X’.
3. Half truth (“Half a truth is no better than a downright falsehood”- Lord Macnaughtan in Gluckstein
v. Barnes, 1900 AC 240)
4. Change of circumstances(circumstantial changes in contractual clauses)

23. Sec. 18, ICA, 1872: “Misrepresentation” defined —“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; It means that
innocent misrepresentation does not give cause for avoiding a contract unless the
representation is made “without any reasonable ground”. Mohan Lall v. Sri
Gungaji Cotton Mills Co. (1899) 4 CWN 369 High Court of Calcutta held that an
assertion cannot be said to be warranted for the said purpose if it is based on mere
hearsay.
(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.

24. Burden of Proof: In Alva Aluminium Ltd. V. Gabriel India Ltd. (2011) 1
SCC 167 the Court held that heavy burden lies upon the party who seeks to
avoid a contract on the ground of misrepresentation, fraud or coercion to
prove any such allegations.

25. Fraud v. Misrepresentation
Fraud
1. Fraud‘ means a willful misrepresentation of a
material fact.
2. It is an untrue statement given by one party
that indues other party to enter to the
contract.
3. Fraud is done with an aim of deceiving
others.
4. Fraud entitles the aggrieved party to avoid
the contract and also file a suit against other
party for damages.
5. In a fraud, the party making the
representation knows that the statement is not
true.
6. The contract is voidable even if the truth can
be discovered in normal diligence.
Misrepresentation
1. ‘Misrepresentation‘ means a bonafide
representation which is false.
2. It is the statement of fact, made by one party,
believing that it is true, then this is innocent
misrepresentation
3. Deceiving others is not essential in case of
misrepresentation.
4. In case of misrepresentation aggrieved party
cannot sue the other party for damages but
can avoid the contract.
5. In misrepresentation, the party making the
representation believes the statement made
by him is true, which subsequently turned
out as false.
6. The contract is not voidable if the truth can
be discovered in normal diligence.

26. Sec. 19, ICA, 1872: Voidability of agreements 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 representations made had been true.
Exception.— If such consent was caused by misrepresentation or by silence,
fraudulent within the meaning of section 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.
Explanation.— 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.

27. Sec. 19A, ICA, 1872: 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 was entitled to
avoid it has received any benefit thereunder, upon such terms and conditions as to the
Court may seem just.
Who can Take plea: A plea of undue influence can be taken/raided by the party to
the contract and not by a stranger/third party. In Venkatasubbiah v. Subbamma,
AIR 1956 AP 195, a registered gift deed can be challenged only by a donor, and not
by a third party.
Sec. 20, ICA, 1872: 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, the agreement is void.
Explanation.—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.

28. Ingredients of Section 20, ICA:
1. Both the parties to an agreement must be under a mistake. (Bilateral mistake)
2. Mistake must be of fact not of law.
3. That fact must be essential to the present agreement.
What is a mistake?
• A mistake is an erroneous belief (sometime it may be ignorance) held by one or both
parties to a contract at the time of its formation. A mistake may arise as to the:
• subject matter or terms of the contract
• identity of the other party
• nature of the transaction
Do not confuse the ‘mistake’ with a ‘misrepresentation’ where a party is induced to
enter into a contract on the basis of a misrepresentation, whether innocent, negligent or
fraudulent.

29. Simply we can say that if parties are involved in an agreement without knowing any
essential facts related to the agreement, then it is considered as a Bilateral Mistake
and that agreement will be void.
For instance- Mr. ‘X’ agrees to sell to Mr. ‘Y’ any goods supposed to be on its way
from Chennai to Sonepat. It is found that before the day of the bargain, the
transport transiting the goods met with an accident and goods were lost. But,
neither party was aware of these facts. The agreement is void.
‘Mr Raj’ and ‘Mr. Harsh’ are involved in a contract to sell a dog in a specific amount.
But, dog dies before the contract is performed and both the are unaware of this fact
that the dog does not exist/has been died. In this case, the Contract is void.

30. What facts are essential in Bilateral Mistake?
Now, It is very important to know what are the essential facts which make an
agreement void. An agreement is a void where there is a bilateral mistake as to the
subject matter. A bilateral mistake as to the subject matter includes the following:
Mistake as to the quantity of subject matter.
Mistake as to the quality of subject matter.
Mistake as to the price of subject matter.
Mistake as to the performance of subject matter.

31. Sec. 21, ICA, 1872: Effect of mistakes 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 a law not in
force in India has the same effect as a mistake of fact.
‘Based on the Latin maxim Ignorentia facit excusat,
ignorentia juris non excusat’ which literally means that
ignorance of fact is an excuse but ignorance of the law is not
an excuse.
Mistake of foreign law is = mistake of fact.

32. Sec. 22, ICA, 1872: 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 a matter
of fact.
Unilateral Mistake
Such a mistake does not invalidate the contract, it is treated valid contract. For example, ‘A’ and ‘B’ made a
contract in which only ‘A’ was under a misbelief for any product which is in the transaction. Then, the
contract is not voidable for ‘A’ and will be classified as a valid contract.
Exceptions: Cases in which Unilateral Mistake makes a contract void and voidable
There are a few cases which make a contract void and voidable, merely by a mistake of the fact of a
one-party.
Unilateral Mistake makes a contract voidable
If any unilateral mistake is induced by fraud or misrepresentation, then the contract is voidable for that
party who has done the mistake in the contract (whose consent has been obtained so). In simple words, if
‘Mr. Rahul’ creates such types of situations and do such types of activities in order to deceive ‘Mr. Dinesh’
and ‘Mr. Dinesh’ has also done a mistake as a result of Mr. Rahul’s action and made a contract in to
contract. Then, Contract will be voidable at the option of ‘Mr. Dinesh’.

33. Unilateral Mistake makes a contract void
Unilateral mistake makes a contract void in two cases:
1. Unilateral mistake about the nature of Contract: If a person wants to enter a contract
but he enters into an altogether different contract by mistake. For example- Suppose,
any illiterate person gives thumbprint on any papers by mistake, then that contract
formed because of thumbprint will be void.
2. Unilateral mistake about the identity of the person: If ‘Mr. A’ wants to enter into a
contract with ‘Mr. B’ but enters into a contract with ‘Mr. C’ by mistake. Then, the
contract will be void.
For example- If ‘A’ is a regular customer of ‘C’. He gives order to ‘C’ to deliver the
goods. But he was not aware of the fact that ‘B’ is the new owner of the shop and he
makes a contract with ‘B’ by mistake. In this case, the contract will be void.