Law of Contract – Free Consent

Absence of “consensus-ad-idem” arises when there is error on the part of the parties regarding

(a) nature of transaction or

(b) identity of party or

(c) subject matter of agreement

In such cases there would be no consent. For example, where parties refer to a name of a ship in the contract but each of them had a different ship in mind though of same name, there is no identity of minds and hence there is no consent.

The consent referred above must be a “free consent”. Consent is free when it is not caused by –

• Coercion

• Undue influence

• Fraud

• Misrepresentation or

• Mistake

Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake.

It is important to note here itself that when the consent is caused by mistake, the agreement is void, but when caused by any other of the aforementioned factors it is voidable. Now, we will discuss each of these elements.

(a) Coercion

“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.

Thus, coercion is –

• Commit, or threat to commit

• Act forbidden by IPC or

• Unlawful detaintion, or threat to detain

• Property

• Prejudice of any person

• With intention of causing any person to enter into an agreement.

For example, A says to B ‘I shall not return the documents of title relating to your property, unless you agree to sell your house to me for Rs. 5 Lacs. B replies, “All right, I shall sell my house to you for Rs. 5 Lacs, do not detain documents of title.” A has employed coercion.

Here A cannot therefore enforce the contract. But B can do so. This is because an agreement induced by coercion is not void but merely voidable at the option of the party coerced.

(b) Undue influence

A contract is said to be induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. A person is deemed to be in a position to dominate the will of another where he holds a real or apparent authority over the other or where he stands in a fiduciary relation to the other; or 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.

Thus, the essential ingredients of undue influence are –

(1). One party in position to dominate the will of the other

(2). Such domination is presumed where one party –

(A). holds real or apparent authority over the other or

(B). stands in a fiduciary relation to the other

(C). 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). Position is used to obtain an unfair advantage over other.

Example where one person may be able to dominate the will of the other are –

• A father is able to dominate will of financially dependent son.

• A solicitor can dominate the will of the client.

• A doctor can dominate the will of his patient having protracted illness, and

• A trustee can dominate the will of the beneficiary.

When the transaction appears, on the face of it, to be unconscionable, the burden of proof that there is no undue influence in an agreement would be on the person who is in a position to dominate the will of the other. This is to ensure that the party in dominant position acts in good faith.

Examples of agreements where undue influence has been exercised are –

(a). An old person making a gift of whole of his property to his spiritual advisor without even having regard to his own physiological and medical needs.

(b). An illiterate pardanashin lady makes a contract while acting on advice and complete belief of manager of her estate, which is apparently more beneficial to the manager and detrimental to the interest of the lady.

(c) Fraud

In common parlance, Fraud means to cheat by intentionally misleading a person. In law, “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.

Intention is very important aspect of fraud. Without intent, there can be no fraud although there can an honest misrepresentation of fact. Examples of fraud are –

(a). A company issues prospectus containing misstatement having complete knowledge of the same. Any person who purchases shares on the faith of such misstatement can repudiate the contract on the ground of fraud.

(b). B discovered an ore mine in A’s estate. B conceals the information about the mine. A in ignorance agrees to sell the estate to B at a price that is grossly undervalued had mine been known. The contract would be voidable of A’s option on the ground of fraud.

(c). Buying goods with the intention of not paying the price is an act of fraud.

A seller of a property is under a duty to disclose any material defect in the property. Concealing the information would be an act of fraud.

As a general rule, mere silence is no fraud. But where it is the duty of the person keeping silence to speak, or unless his silence is in itself equivalent to speech, Silence may amount to fraud. Consider following examples –

a. B is A’s daughter and has just come of age. Here, the relation between the parties would make it A’s duty to tell B if the horse is unsound.

b. B says to A – “If you do not deny it, I shall assume that the horse is sound”. A says nothing. Here A’s silence is equivalent to speech.

c. 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.

(d) Misrepresentation

“Misrepresentation” means and includes-

(1) the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;

(2) any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him, by misleading another to his prejudice or to the prejudice of any one claiming under him;

(3) causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement.

Thus, “Misrepresentation” means making an assertion of an untrue statement honestly believing it to be true. Thus, misrepresentation does not involve deception or deceit. A contract person misled may A contract which is hit by misrepresentation can be avoided by the person who has been misled.

For example, A makes the statement on an information derived, not directly from C but from M. B applies for shares on the faith of the statement which turns out to be false. The statement amounts to misrepresentation, because the information received second-hand did not warrant A to make the positive statement to B

To understand the difference between fraud and misrepresentation, take this example. The promoters of a company mentioned in their prospectus that they had a right to run steam powered tramway. A person purchased shares on the basis of the said statement. But the company could not get the permission of board of trade to run steam powered engines. The person brought action for fraud against the promoters. The promoters plead that since they had a right under the Act of parliament for using steam, they had presumed, they would also get the consent of Board of trade. The Court held that there was no deceit.

Consequence of Coercion, Undue Influence. Fraud or Misrepresentation on a Contract

As a general rule, a contract in which a party’s consent is caused by coercion, undue influence, fraud or misrepresentation is voidable at the option of the party whose consent was so obtained. That is the effected party may compel its performance in the court of law, but successfully defend a similar legal action by the opposite party.

For example, where A intending to deceive B, falsely represents that 500 tons of sugar are made annually at A’s factory, and thereby induces B to buy the factory. The contract is voidable at the option of B.

In cases of Fraud or misrepresentation, the effected party may 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.

For example, A fraudulently informs B that his estate is free from encumbrance, therefore B buys the estate. But the estate is subject to mortgage. B may avoid the contract or insist on the debt being redeemed and mortgage being released.

Exception

There are three exceptions to the aforementioned general rule. Firstly, where it is possible to discover the truth with ordinary diligence, and though the consent might have been obtained by misrepresentation or silence, fraudulent then the contract is not voidable.

For example, A, by a misrepresentation, leads B erroneously to believe that 500 tons of sugar are made annually at A’s factory. B examines the accounts of the factory, which show that only 400 tons of sugar have been made. After this B buys the factory. The contract is not voidable on account of A’s misrepresentation.

Note, that this exception is limited to cases of misrepresentation and fraud by silence. And cases of active fraudulent statements are not covered there-in.

Secondly, where a party to contract perpetrates fraud or misrepresentation, but the other party is not misled by such fraud or misrepresentation, then the contract cannot be avoided by the latter.

For example, a used car seller deliberately conceals a scratch in order that the buyer may not discover it even if he inspects the goods, but the buyer in fact does not make any inspection at all, the buyer cannot avoid the contract as his consent has not resulted from fraud. That he is in-fact not deceived by the seller.

Thirdly, in cases of undue influence, where the effected party has received any benefit under the contract, the Court may set aside the contract upon such terms and conditions as it may seem just.

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 per cent. per month. The Court may set the bond aside, ordering B to repay the Rs. 100 with such interest as may seem just. The whole idea here is to set thing right rather than tilt the balance other way round.

It is important to note that where a contract is voidable and the party entitled to avoid it decides to do so by rescinding it, he must restore any benefit which he might have received from the other party. He cannot avoid the contract and at the same time enjoy the benefit under the rescinded/avoided contract.

(e) Mistake

Mistake means unintentional error. 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. It is so because Mistake vitiates Consent. Such an agreement cannot be enforced at all.

To vitiate an agreement, the characteristics of a mistake must be as follows –

A. Mistake must be of a fact
B. Mistake should not be of a law
C. The fact mistaken be essential to the agreement
D. Mistake should be mutual, that is, of both the parties and not merely a unilateral mistake
E. Mistake as to foreign law is deemed to be a mistake of fact.

For example, A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Bombay. It turns out that, before the day of the bargain, the ship conveying the cargo had been cast away and the goods lost. Neither party was aware of the facts. The agreement is void.

Where two persons enter into an agreement believing wrongly that a particular debt is not barred by law of limitation, then the contract is valid because there is no mistake of fact but of law only.

Where A agrees to purchase from B 18 carat gold thinking it to be pure gold, but B was not instrumental for creating such an impression. The contract is a valid one. As A’s mistake is a unilateral one.