Factors Rendering Consent Not Free and Their Effect upon the Validity of Contract | Indian Contract Act, 1872

Under Section 14 of the Indian Contract Act, 1872, consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake.

The general rule is that when consent is not free, the legal effect depends upon the particular vitiating factor. Coercion, undue influence, fraud and misrepresentation generally make a contract voidable, whereas a bilateral mistake of an essential fact under Section 20 makes the agreement void.

Coercion [Section 15]

Section 15 defines coercion as committing or threatening to commit any act forbidden by the Indian Penal Code, or unlawfully 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. Thus, coercion involves pressure which destroys the voluntary character of consent.

The essential ingredients are:

1. There must be committing or threatening to commit an act forbidden by the Indian Penal Code, or
2. There must be unlawful detention or threat of detention of property;
3. The act or threat must be made to the prejudice of any person whatever; and
4. There must be an intention to cause a person to enter into an agreement.

An important feature of Section 15 is that coercion need not be exercised by a party to the contract. It may proceed from a stranger. Similarly, the person against whom the coercion is exercised need not himself be the contracting party. The words “any person whatever” make the provision wider in this respect.

The Explanation to Section 15 makes it clear that it is immaterial whether the Indian Penal Code is or is not in force at the place where the coercion is employed.

• For example, if A threatens B with physical harm and thereby induces B to enter into an agreement, B’s consent is not free. Similarly, if A unlawfully detains property belonging to B and uses that situation to compel C to enter into an agreement, the circumstances may amount to coercion even though C’s property is not detained.

Threat of suicide

A well-known illustration is Chikkam Ammiraju v. Chikkam Seshamma. The husband threatened to commit suicide unless his wife and son executed a release deed in favour of his brother. The Madras High Court held that the threat amounted to coercion within Section 15. The case is important because coercion under Section 15 is not confined to ordinary physical violence; a threat amounting to an act forbidden by the penal law can also fall within the section.

Other Illustrations of Coercion

• In Ranganayakamma v. Alwar Setti, a young widow was prevented from removing her deceased husband’s body for cremation unless she agreed to an adoption. The court treated the pressure as coercion under Section 15. The case is significant because the pressure was not simply a threat of physical violence; the unlawful detention of the dead body and the circumstances surrounding the funeral were used to compel the consent.
• In Muthia v. Muthukaruppa, a release was obtained from a principal when the agent refused to hand over the agency accounts/books unless the principal released him from liability. The circumstances were treated as coercion.

A mere threat to take lawful legal action does not ordinarily amount to coercion. The threat must fall within the conduct contemplated by Section 15.

Effect of coercion

Under Section 19, when consent to an agreement is caused by coercion, the contract is voidable at the option of the party whose consent was so caused. The aggrieved party may therefore rescind the contract.

When a voidable contract is rescinded, Section 64 requires restoration of benefits received under the contract, subject to the terms of the section.

Section 72 provides for repayment or return of money or thing delivered under coercion.

Coercion and English Law of Duress

The Indian concept of coercion is wider than the traditional common-law concept of duress. Under English law, traditional duress principally concerned threats of violence to the person. Section 15 of the Indian Contract Act is wider because it also covers unlawful detention or threatened detention of property, and coercion need not necessarily come from the other contracting party.

Undue Influence [Section 16]

Section 16 deals with situations in which consent is obtained not by physical force but by taking unfair advantage of a relationship in which one person is capable of dominating the will of another.

Section 16(1) provides that a contract is induced by undue influence where:

• the relations between the parties are such that one party is in a position to dominate the will of the other, and
• that party uses that position to obtain an unfair advantage over the other.

Therefore, two things are particularly important; domination of will and use of that position to obtain an unfair advantage.

Mere influence is not enough. Influence becomes “undue” when it is improperly used to secure an unfair advantage.

When is a person in a position to dominate the will of another?

Section 16(2) recognises the following situations –

• Real or Apparent Authority: Where one person has authority over another, there may be an opportunity to dominate the other’s will. The relationship between a superior and subordinate may, depending upon the circumstances, fall within this principle.
• Fiduciary Relationship: A fiduciary relationship is one based upon trust and confidence. Examples include solicitor and client, trustee and beneficiary, spiritual adviser and devotee, doctor and patient and, in appropriate circumstances, parent and child. The existence of such a relationship does not automatically prove undue influence. It provides the circumstances in which domination of will may arise.
• Mental Capacity affected by Age, Illness or Distress: Section 16 also applies where a person contracts with another whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress. For example, a person suffering from serious illness may be particularly vulnerable to pressure from a person upon whom he depends.

Unconscionable Transactions and Burden of Proof

Section 16(3) contains an important rule regarding the burden of proof.

Where:

• one party is in a position to dominate the will of the other, and
• the transaction appears to be unconscionable,

the burden of proving that the contract was not induced by undue influence lies upon the person who was in the position to dominate the will of the other.

An unconscionable bargain is one which is so unfair or oppressive that it strongly suggests exploitation of the weaker party. However, every hard bargain is not an unconscionable bargain. A person may sometimes voluntarily agree to commercially disadvantageous terms.

• The illustration to Section 16 makes this clear. If a person approaches a banker for a loan during a period of financial stringency and the banker charges an unusually high rate in the ordinary course of business, the transaction is not automatically one of undue influence.

Therefore, mere financial need or a high rate of interest is not by itself sufficient. The surrounding circumstances and the relationship between the parties must be examined.

Case: Raghunath Prasad v. Sarju Prasad

The Privy Council decision in Raghunath Prasad v. Sarju Prasad, AIR 1924 PC 60 is a leading authority on the proper approach to Section 16.

The important principle is that the court should first determine whether the relationship placed one party in a position to dominate the will of the other. Only after this is established does the question of whether the transaction was unconscionable become important for the purpose of shifting the burden of proof.

The case is therefore authority against the proposition that an unconscionable bargain alone automatically proves undue influence.

Case: Ladli Prasad Jaiswal v. Karnal Distillery Co.

In Ladli Prasad Jaiswal v. Karnal Distillery Co., AIR 1963 SC 1279, the Supreme Court considered the principles relating to undue influence and the burden of proof under Section 16. The case is commonly relied upon for the proposition that where the circumstances bring the case within Section 16(3), the burden may shift to the person occupying the dominant position.

Relationship of Blood is not Essential

A relationship by blood, marriage or adoption is not necessary for undue influence. What matters is the nature of the relationship and whether the circumstances show that one party was in a position to dominate the will of the other and used that position unfairly.

Conversely, even a close family relationship does not automatically establish undue influence.

• Subhas Chandra Das Mushib v. Ganga Prasad Das Mushib, AIR 1967 SC 878. In this case, a grandfather had gifted property to his grandson. The Supreme Court held, in substance, that merely because the parties were closely related, or because the donor was old, undue influence could not automatically be presumed. There must be evidence of domination of will and unfair advantage. The case also approved the approach in Raghunath Prasad.
• Lakshmi Amma v. Talengal Narayana Bhatta, AIR 1970 SC 1367. In this case, the circumstances surrounding a settlement in favour of one grandson were found sufficiently unnatural and unconscionable, particularly considering the donor’s condition and the inadequate provision made for other members of the family. The circumstances supported the inference of undue influence. The case illustrates an important point; a transaction may be examined in the light of all surrounding circumstances, and an apparently unnatural or unconscionable disposition may require explanation from the person who benefited.

Pardanashin and Vulnerable Women

Transactions entered into by a pardanashin woman are carefully scrutinised because complete seclusion and lack of ordinary interaction with the outside world may make independent understanding of legal transactions difficult.

• In Kharbuja Kuer v. Jang Bahadur, AIR 1963 SC 1203, the Supreme Court dealt with the burden of proving that a transaction executed by a pardanashin woman was entered into with a proper understanding of its nature and effect.

The principle is not that every woman observing purdah is automatically incapable of contracting. The question is whether the circumstances show that she could properly understand the transaction and whether it was fairly explained to her.

Hard Bargain is not necessarily Undue Influence

It is important to distinguish between:

• Hard bargain – A commercially unfavourable transaction which a person freely accepts.
• Unconscionable bargain – A transaction so unfair, oppressive or unreasonable, in the circumstances, that it may indicate exploitation of a position of dominance.

Thus, the mere fact that one party obtained a better bargain does not establish undue influence.

Section 19A: Power of Court to Set Aside Contract

Section 19A specifically deals with contracts induced by undue influence. A contract induced by undue influence is voidable at the option of the party whose consent was so obtained.

The court may:

• set aside the contract absolutely; or
• set it aside upon such terms and conditions as the court considers just, particularly where the party seeking relief has received some benefit.

For example, if a moneylender advances ₹1,00,000 but, by undue influence, obtains a bond for ₹2,00,000 carrying an extremely high rate of interest, the court may set aside the transaction on appropriate terms, including requiring repayment of the amount actually advanced with such interest as justice requires.

Case: Central Inland Water Transport Corporation v. Brojo Nath Ganguly

Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, (1986) 3 SCC 156 is an important Supreme Court decision concerning unconscionable contractual terms and inequality of bargaining power.

The Court considered a service rule permitting termination of a permanent employee’s service in an arbitrary manner. The case is particularly important for the broader principle that courts may refuse to enforce unconscionable contractual terms where there is a serious inequality of bargaining power and the weaker party has effectively had no meaningful choice. The Court discussed Sections 16, 19-A and 23 in this context.

Difference between Coercion and Undue Influence

Fraud [Section 17]

Fraud involves intentional deception. Section 17 provides that fraud includes certain acts committed by a party to a contract, or with his connivance or by his agent, with intent to deceive another party or to induce him to enter into the contract.

The following acts constitute fraud:

1. False suggestion of fact - Making a statement of fact which is false, while knowing that it is false or not believing it to be true.
2. Active concealment - Deliberately hiding a material fact by a person who knows or believes that fact to exist.
3. Promise without intention to perform - Making a promise while having no intention of performing it.
4. Any other act fitted to deceive.
5. Any act or omission specially declared fraudulent by law.

Essentials of Fraud

The important elements are:

• there must ordinarily be a representation or conduct which is false or deceptive;
• it must relate to a fact, or fall within one of the other categories recognised by Section 17;
• it must be made with the requisite intention to deceive or induce the other party;
• it must actually induce the other party to enter into the contract.

The crucial distinction between fraud and misrepresentation is intention.

Case: Derry v. Peek (1889)

In this case, the directors of a tramway company stated in a prospectus that the company had the right to use steam power. In fact, the use of steam power was subject to the consent of the Board of Trade. The directors honestly believed that the necessary consent would be obtained.

The House of Lords held that fraud requires more than merely making a false statement. Fraudulent intention is established where the statement is made knowingly, without belief in its truth, or recklessly as to whether it is true or false.

Thus, an honestly held belief may prevent a statement from being fraudulent, even though the statement subsequently proves to be wrong.

Active Concealment

Active concealment is different from mere silence.

If a person deliberately takes steps to hide a material fact which he knows, with the intention of preventing the other party from discovering it, the conduct may amount to fraud.

Mere Silence is Generally Not Fraud

The general rule under the Explanation to Section 17 is that mere silence regarding facts likely to affect the willingness of another person to contract is not fraud. The principle is commonly expressed through caveat emptor; “let the buyer beware.”

For example, if A sells by auction a horse which he knows to be unsound and says nothing about its condition, mere silence does not ordinarily amount to fraud.

Similarly, where two traders are dealing with each other and one possesses private information concerning a change in market prices, there is ordinarily no duty to disclose that information.

However, silence becomes fraudulent in certain circumstances.

When silence amounts to fraud

• Where there is a duty to speak: A duty of disclosure may arise from the nature of the relationship or transaction. This is particularly important in contracts requiring utmost good faith (uberrimae fidei). Insurance contracts are the classic example. Material facts which are within the knowledge of the insured and relevant to the insurer’s decision must be disclosed. The Supreme Court’s decision in Mithoo Lal Nayak v. Life Insurance Corporation of India, AIR 1962 SC 814 is an important authority in this context.
• Fiduciary relationships: Where trust and confidence exist, material facts may have to be disclosed.
• Family settlements and similar relationships: Parties may be required to disclose material information depending on the circumstances.
• Where silence is equivalent to speech: If one party expressly indicates that he will take the other’s silence as confirmation of a fact, remaining silent may amount to a representation. For example, A says to B, “If you do not deny it, I shall assume that the horse is sound.” If A knows the horse is unsound and remains silent, the silence may amount to fraud.

Half-truths

A person who chooses to speak cannot deliberately disclose only part of the truth while creating a false impression. Such half-truths may amount to fraud.

Change in circumstances

Where a statement was true when made but becomes false before the contract is concluded, the person who made the statement may have a duty to disclose the changed circumstances.

• In With v. O’Flanagan (1936), a doctor had represented that his medical practice generated a particular annual income. Before the contract was completed, his illness caused a substantial decline in the practice. The change was not disclosed. The case establishes that a representation which becomes false before completion of the transaction cannot simply be left uncorrected.

Effect of fraud

Under Section 19, a contract induced by fraud is voidable at the option of the party whose consent was obtained by fraud.

The defrauded party may generally:

• rescind the contract;
• in appropriate circumstances, claim damages for the fraud; or
• insist upon performance of the contract and require that he be placed in the position in which he would have been had the representation been true.

However, the fraud must have actually caused the consent. A fraudulent statement which did not influence the other party’s decision to contract does not make the contract voidable under Section 19.

Misrepresentation [Section 18]

Misrepresentation is a false representation made without fraudulent intention. Section 18 covers three broad situations.

• First, a person makes a positive assertion which is not justified by the information available to him, although he believes it to be true.
• Secondly, there is a breach of duty which, without an intention to deceive, gives an advantage to the person committing the breach by misleading another to his prejudice.
• Thirdly, a person innocently causes another party to make a mistake regarding the substance of the subject matter of the agreement.

Example

A tells B that the engine of his motorcycle is in excellent condition. A genuinely believes this to be true but has never had the engine checked. B purchases the motorcycle relying on the statement, but the engine turns out to be defective.

If the statement was not warranted by the information available to A, it may amount to misrepresentation.

Statement of opinion

A mere opinion is ordinarily not a representation of fact.

• For example, a seller’s general statement that his land is “excellent” or “highly fertile” may be mere sales talk rather than a definite representation of fact.

However, whether a statement is really an opinion or contains an implied statement of fact depends upon the circumstances.

Change in circumstances

As with fraud, a representation which was true when made may become false before the contract is concluded. The maker cannot knowingly allow the other party to contract on the basis of a representation which has become materially false.

• With v. O'Flanagan is relevant here as well.

Effect of misrepresentation

Under Section 19, a contract induced by misrepresentation is voidable at the option of the party whose consent was caused by the misrepresentation. The aggrieved party may also choose to insist that the contract be performed and that he be placed in the position in which he would have been if the representation had been true.

However, Section 19 contains an important exception; where consent was caused by misrepresentation or fraudulent silence, the contract is not voidable if the party whose consent was obtained had the means of discovering the truth with ordinary diligence.

Distinction between Fraud and Misrepresentation

Thus,

• Fraud = false representation + knowledge/lack of belief/recklessness + intention to deceive.
• Misrepresentation = false representation + honest belief in its truth + no intention to deceive.

Effect of Absence of Free Consent [Sections 19 and 19-A]

Sections 19 and 19-A are important because they explain the effect of coercion, fraud, misrepresentation and undue influence.

Section 19

Where consent is caused by:

• coercion,
• fraud, or
• misrepresentation,

the contract is voidable at the option of the party whose consent was so caused.

A voidable contract is not automatically void. It remains legally effective unless and until the entitled party exercises the right to avoid it.

The party affected by fraud or misrepresentation may instead choose to affirm the contract and insist upon performance on the basis stated in Section 19.

Section 19-A

Section 19-A specifically applies to undue influence. The court has greater flexibility in granting relief. It may set aside the contract completely or do so on terms which it considers just.

Limitations on the Right of Rescission

The right to avoid a voidable contract is not unlimited. A person entitled to rescind may lose that right in circumstances such as:

1. Affirmation of the contract: If, after discovering the defect, the aggrieved party expressly or impliedly chooses to affirm the contract, he cannot ordinarily later seek rescission.
2. Delay: Rescission must be sought within a reasonable time where the circumstances make delay significant. In Leaf v. International Galleries (1950), the purchaser discovered several years after purchasing a painting that it was not by the artist represented. The Court of Appeal held that rescission was barred by the lapse of time.
3. Rights of third parties: A voidable contract remains valid until avoided. Therefore, if before rescission a third party acquires rights in good faith and without notice, the original party’s ability to rescind may be affected.
4. Restitution: Where a party seeks rescission, the benefits received under the contract may have to be restored in accordance with the law of restitution, particularly Section 64.

Mistake [Sections 20, 21 and 22]

A mistake is an erroneous belief concerning a fact or circumstance relevant to the agreement.

Mistake is different from coercion, fraud and misrepresentation because the problem is not necessarily that one party has improperly influenced the other. The problem may be that the parties never genuinely agreed upon the same thing.

Section 13 embodies the principle of consensus ad idem; the parties must agree upon the same thing in the same sense. A mistake may therefore prevent genuine consent altogether.

Mistake may broadly be:

• mistake of fact; or
• mistake of law.

It may also be:

• bilateral/common mistake; or
• unilateral mistake.

Bilateral mistake of fact [Section 20]

Section 20 applies where both parties are under a mistake as to a matter of fact essential to the agreement. Three requirements are therefore important:

1. Both parties must be mistaken.
2. The mistake must concern a matter of fact.
3. The fact must be essential to the agreement.

When these requirements are satisfied, the agreement is void. The mistake must be fundamental. A minor or collateral mistake is not enough.

Important matters may include the:

• identity of the subject matter;
• existence of the subject matter;
• title or rights relating to the subject matter;
• nature of the transaction; or
• other essential characteristics of the agreement.

Common and Mutual Mistake

The distinction between “common” and “mutual” mistake should be understood carefully.

• A common mistake occurs when both parties share the same mistaken belief about an essential fact.
• A mutual mistake is often used to describe a situation where each party has a different understanding and the parties are at cross-purposes.

In the latter situation, there may be no real consensus ad idem at all.

The Supreme Court discussed this distinction in I.T.C. Ltd. v. George Joseph Fernandes, AIR 1989 SC 839.

Mistake as to identity

A mistake as to identity may, in exceptional circumstances, prevent a contract from coming into existence.

For example, A intends to contract only with B, a particular identifiable person, but C fraudulently represents himself as B. If identity is fundamental to the transaction, the apparent contract may be void for mistake as to identity.

• Lake v. Simmons (1927) – In this case, a woman falsely represented herself as the wife of a wealthy customer and obtained jewellery from a jeweller on approval. The circumstances were treated as involving a fundamental mistake as to the identity of the person with whom the jeweller intended to contract.
• Boulton v. Jones – In this case, an order was sent to a particular businessman, but before the order was acted upon his business had been transferred to another person. The new owner supplied the goods, but the customer had never intended to contract with him. The case illustrates the importance of identity where identity is fundamental to the contract.

Mistake as to Subject Matter

The agreement may be void where both parties are mistaken about the very subject matter of the contract.

For example, A agrees to sell B a specific cargo which both believe is on its way to Bombay. Unknown to both, the ship carrying the cargo had already been lost before the agreement. The agreement is void because the subject matter no longer existed.

Similarly, if A agrees to sell B a particular interest in property but the interest had already come to an end before the agreement, and both parties are unaware of the fact, Section 20 may apply.

• In Raffles v. Wichelhaus, the contract referred to cotton arriving on a ship named Peerless. There were two ships bearing that name, and each party had a different ship in mind. The parties were therefore not ad idem regarding the subject matter.

The case illustrates how a genuine difference in understanding about an essential term may prevent formation of a binding agreement.

• In Tarsem Singh v. Sukhminder Singh, (1998) 3 SCC 471; AIR 1998 SC 1400, the parties entered into an agreement for sale of agricultural land. A dispute arose because the parties understood the relevant unit of measurement differently, bighas and kanals, which affected the area and consequently the consideration. The Supreme Court held that the mistake concerned an essential matter of fact. The agreement was therefore void under Section 20. The Court further held that a forfeiture clause contained in such an agreement could not be enforced because the agreement itself was void.

This case demonstrates that a mistake concerning the extent or area of the subject matter can be fundamental where it affects the very basis of the bargain.

Mistake as to Nature of the Transaction

A person may sign a document believing it to be one kind of document when in reality it is fundamentally different. This is connected with the doctrine of non est factum, meaning “it is not my deed/document.”

For example, if a person is told that a document is merely a receipt or guarantee but is actually made to sign a fundamentally different legal instrument, the document may, in appropriate circumstances, be treated as void.

• In Foster v. MacKinnon, a person was induced to sign a document which he was told was an ordinary guarantee, whereas it was in fact a bill of exchange. The defence of non est factum was accepted because the document was fundamentally different from what the signer believed he was executing.

The doctrine, however, is not available merely because a person did not understand every legal consequence of a document. A person who is capable of understanding the document and carelessly signs without taking reasonable precautions cannot ordinarily escape liability simply by saying that he did not read it.

The distinction was clearly recognised by the Supreme Court in Ningawwa v. Byrappa, AIR 1968 SC 956.

The Court distinguished between:

• a mistake as to the character or nature of the document, which may make the transaction void; and
• fraud or misrepresentation concerning the contents of a document, which ordinarily makes the transaction voidable rather than void.

The decision is important because it prevents the doctrine of non est factum from being used for every case in which a person claims not to have understood a document.

Unilateral Mistake [Section 22]

Section 22 provides that a contract is not voidable merely because one of the parties was under a mistake as to a matter of fact.

Thus, as a general rule, bilateral mistake of essential fact results in agreement being void under Section 20. Whereas, in case of unilateral mistake, contract ordinarily remains valid under Section 22.

There are, however, important exceptional situations. A unilateral mistake may have legal consequences where it concerns:

• the identity of the person with whom the contract is intended to be made, in appropriate circumstances; or
• the nature or character of the document signed.

Further, if the unilateral mistake has been caused by fraud or misrepresentation of the other party, the matter is no longer merely a case of unilateral mistake; the provisions relating to fraud or misrepresentation become relevant.

Mistake of Law [Section 21]

Section 21 provides that a contract is not voidable merely because it was caused by a mistake as to any law in force in India. The basic principle is that ignorance of Indian law cannot ordinarily be used as a ground for avoiding a contract.

• For example, if A and B enter into an agreement on the mistaken belief that a particular debt is barred by the Indian law of limitation, that mistake of Indian law does not ordinarily make the contract voidable.

A mistake regarding foreign law, however, is generally treated like a mistake of fact. Thus, a mistake as to law not in force in India has the same effect as a mistake of fact.

Mistake as to Value

An erroneous opinion about the value of the subject matter is not treated as a mistake of fact for Section 20.

• For example, if A buys a painting believing it to be worth ₹5 lakh when its actual value is only ₹2 lakh, his mistaken assessment of value does not by itself make the agreement void.

The law generally does not protect a person merely because he made a bad bargain.