Capacity of Parties and Free Consent Indian contract act 1872

Contractual Capacity of the Parties

Introduction

A foundational principle of contract law is that only certain individuals are legally competent to enter into a contract. Section 10 of the Indian Contract Act explicitly states that an agreement becomes a valid contract only if it is made by parties who are competent to contract. For an agreement to be legally enforceable, the parties involved must have the capacity to contract; otherwise, the agreement is void. This chapter, therefore, will delve into the concept of contractual capacity and identify the categories of individuals who possess this capacity.

Meaning

The ability of a person to give an agreement a legal basis is known as contractual capacity. Without this capacity, a contract is not legally binding. According to Section 10 of the Act, all agreements are contracts if they are made by parties who possess free consent, a lawful consideration, and a lawful object, and are not expressly declared void.

It is clear, therefore, that contractual capacity is an essential element for forming a valid contract. Section 11 of the Indian Contract Act specifies that every person is competent to contract who is of the age of majority, who is of sound mind, and who is not disqualified from contracting by any law to which they are subject.

Analysis

To be legally competent to contract, a person must fulfill three conditions as per Section 11:

They must be an adult (i.e., have attained the age of majority).
They must be of a sound mind.
They must not be legally disqualified from contracting.

We will now examine these three points in detail to understand which individuals lack the capacity to enter into a contract. The following individuals are not competent to contract:

1. Minors (Minor)

According to the Indian Majority Act, 1875, an individual is a minor until they complete the age of 18 years. A person who has completed 18 years of age is considered an adult. However, if a guardian has been appointed for a minor by a court, or if their property is under the superintendence of the Court of Wards, the age of majority is extended to 21 years. Therefore, a person is considered a major only if they have reached the age of 18 (or 21 in the aforementioned specific cases).

A landmark case of Mohori Bibee v. Dharmodas Ghose (1903) is that a contract with a minor is void ab initio (void from the very beginning). The text further explains that this principle acts as a "shield and a blessing" for minors. The legal system protects minors because they are not considered fully mature individuals with the full capacity for judgment and foresight required for business transactions. The law, therefore, provides a protective cover for them.

2. Persons of Unsound Mind (Unsound Mind)

Section 12 of the Act clarifies that a person is considered to be of a "sound mind" for the purpose of a contract if, at the time of making the contract, they are capable of understanding it and can form a rational judgment about its effect on their interests.

The law recognizes two scenarios for a person of unsound mind:

An individual who is typically of an unsound mind (e.g., a lunatic, a madman) can make a valid contract during the lucid intervals when they are of sound mind.
Conversely, a person who is usually of a sound mind cannot make a valid contract during a period when they are of an unsound mind (e.g., due to temporary insanity or intoxication).

3. Persons Declared Disqualified by Law

Section 11 also applies to individuals who are explicitly disqualified from contracting by law. This disqualification can arise from various factors, including:

Status or Position: Certain public officials, such as heads of state, ambassadors, or other diplomatic representatives, may have contractual limitations.
Professional Standing: Individuals in certain professions (e.g., doctors, lawyers) may face specific restrictions in their contractual relationships.
Legal Status: A person who has been declared insolvent, a criminal, or a company undergoing liquidation may be legally barred from entering into certain types of contracts

Rules Regarding Agreements Made by Minors

Case Law: Mohori Bibee v. Dharmodas Ghose (1903), 30 I.A. 114, 30 Cal. 539

Facts: A minor named Dharmodas Ghose mortgaged his property to a moneylender, Brahmodatt, for a loan of ₹20,000. He only received ₹5,000 of the loan amount. Dharmodas Ghose, through his mother and legal guardian, later filed a lawsuit seeking to have the mortgage declared void on the grounds of his minority.

Decision: The Calcutta High Court and subsequently the Privy Council ruled in favor of Dharmodas Ghose. The Privy Council held that a contract with a minor is not merely voidable but is absolutely void. The court ordered the cancellation of the mortgage. This case established the principle that a minor lacks the capacity to enter into a contract, and therefore, any such agreement is non-existent in the eyes of the law.

Liability for Necessities of Life

Section 68 of the Act provides an exception for necessities. It states that if a person supplies a minor with necessities suitable to their living standard, they can be reimbursed from the minor's property. The minor is not personally liable. The term "necessities" is not precisely defined in the Act, but court rulings have helped to shape its meaning.

Case Law: Kedarnath v. Ayodhya Prasad (Punjab Record, 1888)

Facts: Money was loaned to a minor to save his property from a lawsuit. The lender sought to recover the amount as a necessity.

Decision: The court held that the loan was a necessity because it was for the preservation of the minor's property.

Case Law: Peters v. Fleming

Facts: A jeweler supplied a minor with goods, including a watch chain and rings.

Decision: The court ruled that these items were considered necessities suitable for a minor of the defendant's status.

Case Law: Shyam Charan Lal v. Choudhary Deviya Singh (1894), 81 Cal. 872

Facts: A lender provided a minor with a loan to pay off a mortgage on his property.

Decision: The court considered this loan a necessity, as it was for the preservation of the minor's estate.

Agreement is Absolutely Void: An agreement with a minor is void from the beginning (ab initio). Section 11 of the Indian Contract Act establishes this. This principle was confirmed in the landmark case of Mohori Bibee v. Dharmodas Ghose, 30 I.A. 114, 30 Cal. 539 (1903), where the Privy Council ruled that a minor's contract is not merely voidable but absolutely void, and thus a minor cannot be forced to return benefits.
Liability for Necessities of Life: Under Section 68, a minor's property can be held liable for necessities supplied to them. The minor is not personally liable. The term "necessities" is not strictly defined but includes goods and services appropriate to the minor's social status. This is demonstrated in cases like Kedarnath v. Ayodhya Prasad (Punjab Record, 1888) and Peters v. Fleming.
Minor as a Partner: Under Section 30 of the Indian Partnership Act, a minor cannot be a partner in a firm, but can be admitted to the benefits of a partnership with the consent of all existing partners. They will not be liable for losses.
Minor as an Agent: A minor can be appointed as an agent according to Section 184. They can perform acts on behalf of the principal, but the minor cannot be held liable for their actions.
Minor Cannot be Declared Insolvent: A minor cannot be declared a debtor or insolvent, as they are legally incapable of contracting debts.
Minor's Position in a Joint Stock Company: A minor can hold shares in a joint stock company and is entitled to the profits but cannot be held personally liable for any unpaid calls on the shares. A notable case is Jaffer v. Credit Bank Ltd.
No Ratification on Attaining Majority: An agreement made by a minor cannot be ratified (confirmed) after they reach the age of majority. A void agreement cannot be made valid. An example is the case of Bindeshwari Charan v. Banalata Chandra.
Contract by a Minor's Guardian: A guardian can make a valid contract on behalf of a minor, provided it is for the minor's benefit. Cases like Subramanyam v. Subba Rao (1837) and Rajrani v. Prem Adib (1949) AIR Mumbai 215 affirm this.
Minor and Negotiable Instruments: According to Section 26 of the Negotiable Instruments Act, a minor can draw, endorse, or negotiate a negotiable instrument, but they cannot be held liable on it.
Minor and Contract for their Benefit: A minor can enter into a contract for their benefit and can sue to enforce it. The other party, however, cannot hold the minor liable. Relevant cases are Jaffar Hussein v. Jabida Khatun (1922) and Raghav v. Srinivasan (1977).
Minor and Contract of Surety: A minor cannot be a surety (guarantor). A contract of guarantee for a minor’s debt is void, but the surety remains liable to the creditor.
Minor as a Joint Promisor: If a minor and an adult jointly promise to do something, the adult is solely responsible for fulfilling the promise. The minor is not liable.
Restitution: Under Section 33 of the Specific Relief Act, if a minor who has received a benefit under a void agreement seeks legal relief from the court, the court may compel them to restore the benefit to the other party. The case of Jagnath Singh v. Lalta Prasad (1808) is cited as an example.
Doctrine of Estoppel: The doctrine of estoppel, which prevents a person from denying a previous statement, does not apply to a minor. Even if a minor misrepresents their age to enter a contract, they can later plead their minority to avoid liability. The case of Bernard v. Hoggins (1863) is a relevant example.
Liability for Torts: A minor is generally liable for their torts (civil wrongs). However, they cannot be held liable for a tort that is directly connected to a breach of contract.
Contract of Service: An employment contract with a minor is void, even if it is for their benefit. However, a contract of apprenticeship is considered a legal contract. This is shown in Rajrani v. Prem Adib.
Minor and Sale of Goods Act: A minor is not liable for the price of goods purchased under the Indian Sale of Goods Act, 1930.
Compromise: A minor cannot enter into a valid compromise agreement.
Lease and Other Business: A minor cannot enter into a valid lease or any business agreement that would impose personal liability on them.
Property Division: An agreement for the division of property with a minor is not legally enforceable.
Marriage Contract: A marriage contract made by a minor is void.

Mortgage Contract: A mortgage executed by a minor is void, but a mortgage given in favor of a minor is a valid contract. This was established in Mohori Bibee v. Dharmodas Ghose.

Minor and Parents: Parents are not legally liable for the actions of their minor children. However, if a parent acts as a guardian and makes a contract on the minor’s behalf, the parent can be held liable.
Specific Performance by a Minor: A contract entered into by a minor is void, and therefore cannot be enforced against them. However, a minor can initiate legal action for specific performance if the contract is for their benefit.

PERSON DECLARED DISQUALIFIED BY LAW

According to Section 11 of the Indian Contract Act, a person who has been declared disqualified to contract by any law to which he is subject does not have the capacity to enter into a contract.

Some individuals are disqualified from contracting due to their political position or high-status profession, or due to the influence of the Contract Act or any other act. This includes the following parties or individuals:

Alien Enemies: If a person is a citizen of a country that is at war with India, that person cannot enter into a contract with an Indian citizen without the prior permission of the government. They also cannot file a case in court, nor can a case be filed against them. Therefore, any contract made with a citizen of an enemy country is void and invalid.
President of India: Due to the dignity of his office and his constitutional position, the President of India cannot be called into court to present a case. Therefore, a case cannot be filed against him under any contract.
Barrister: In India, a barrister cannot file a case to recover his fees on account of his high-status position. This rule also applies to a municipal council. This rule came into force after the Barrister Act was enacted. A case was filed against the council in 1927, and from 1927 to 1976, the rule was not applied. Therefore, today, a barrister can file a case in court to recover his fees.
Physician: In India, a physician can file a case to recover their fees, but if the government or employers have a condition in this regard, the physician cannot file a case to recover their fees.
Foreign Sovereigns, Ambassadors, and Representatives: Foreign sovereigns, ambassadors, and representatives are exempt from the jurisdiction of Indian courts due to their dignity. However, a case can be filed against these individuals with their consent. They are allowed to contract in India and their contracts can be enforced by the state. According to Section 83 of the Civil Procedure Code, a case cannot be filed against a foreign sovereign, ambassador, or representative without the prior permission of the Central Government.
Convicts: A person who has been convicted of a crime and is serving a prison sentence is not capable of contracting. Therefore, such a person cannot enter into any contract. However, if the court has decided the duration of the sentence, a trustee can be appointed to enter into a contract on their behalf.
Incorporated Companies: A company is a legal entity created by a company's constitution, which has a distinct existence from its members. Therefore, a company can only enter into business contracts through its authorized representatives.
Clubs: Clubs, societies, or associations are unincorporated bodies that do not have any legal existence. They cannot file a case in court in their own name, nor can a case be filed against them. They are not capable of entering into any contract.
Insolvent: An individual is disqualified from contracting if the court declares them insolvent.
Married Women: A married woman can enter into a contract separately from her husband regarding her separate property. In addition, a married woman can enter into a contract for necessities of life, but she can be held liable only to the extent of her separate property when her husband has not made any arrangements for such necessities.
Contracts with Government: To enter into a contract with any government, it is necessary to follow the prescribed legal formalities. Otherwise, in the absence of these formalities, the contract is void. All contracts made by the Central Government under Section 299 of the Indian Constitution and by the state government through the governor are valid.
Foreign Minister: A foreign ruler or their authorized representatives cannot be sued in Indian courts against their will. If they want to, they can contract and their contracts can be enforced by the state. If someone wants to file a lawsuit against a foreign ambassador, it is necessary to obtain prior permission from the Central Government. The Central Government can grant such permission under appropriate rules or laws, but a lawsuit can be filed against a former ruler.

Query successful

Person of Unsound Mind

Section 10 of the Indian Contract Act makes it clear that for a valid contract, the parties must have the capacity to contract. Section 11 of the Contract Act clarifies the capacity to contract and states that a person of sound mind is necessary for a contract.

Sound Mind

Meaning: A person is said to be of a "sound mind" if they have the ability to think and understand what they are doing and what its effect will be on their interests. The person who has this knowledge is called a person of sound mind.

Definition: Section 12 states, "For the purpose of entering into a legal contract, a person is said to be of sound mind if they have the capacity to understand the contract and have the ability to make rational decisions about the effects of the contract at the time of making the contract."

From the above provision, it is clear that for a person of sound mind, the following characteristics must be present:

Capacity to Understand: A person who has the capacity to understand the subject matter, terms, and important facts of a contract.
At the Time of Making the Contract: A person who has the ability to understand at the time of making the contract what they are doing and what its effect will be on their interests, i.e., good or bad.

Section 12 of the Contract Act also makes it clear as to when a person is considered to be of unsound mind.

(i) Usually of Unsound Mind: A person who is usually of unsound mind but sometimes is of sound mind can enter into a contract only at that time when they are of sound mind.

(ii) Usually of Sound Mind: A person who is usually of sound mind but sometimes is of unsound mind can enter into a contract only when they are of sound mind.

Persons of Unsound Mind

We do not consider the following persons to be of sound mind:

Idiot: An idiot is a person who is mentally deficient from birth and lacks the ability to think or make rational decisions. Contracts made with such persons are void. However, contracts made to fulfill their necessities of life will be valid.
Madman: A madman is a person who loses their ability to think. A contract made with such a person is void. However, money can be recovered for the necessities of life provided to a madman.
Drunkard or Delirious Person: A person who loses their ability to think and understand due to drinking alcohol or a high fever or some other disease is considered to be of unsound mind. Therefore, contracts made with them during these two situations are void.
Person Suffering from an Illness: A person who is mentally incapacitated due to an illness or old age and loses the ability to think or make rational decisions, or due to any other reason, lacks the capacity to contract. Therefore, a contract made with such a person is void.
Hypnotism: This refers to a state of artificial sleep. A person in this state is not capable of entering into a valid contract.

Burden of Proof

Regarding contracts with persons of unsound mind, the burden of proof to prove that the contract is valid lies on the person claiming it, according to the provisions of the other rules and sub-provisions.

Example 1: Ram is a madman who usually lives in a mental asylum, but sometimes his mind is sound. In this situation, the contract made by Ram when his mind is sound is valid. This is because Section 12 makes it clear that a person of unsound mind can enter into a contract only when they are of sound mind.

Example 2: Gopal is usually of a sound mind, but he drinks so much alcohol that he loses the ability to think and reason. If Gopal enters into a contract while drunk, the contract will not be legally valid because Gopal does not have the capacity to contract at the time of making the contract

Legal View: The law presumes that every person is of sound mind.
Burden to Prove: The person or party who claims to be of unsound mind must prove that they were of unsound mind.
Usually of Sound Mind: If a party or person is usually of sound mind but sometimes becomes of unsound mind, and wants to be discharged from the contract, then they themselves will have to prove that they were of unsound mind at the time of entering into the contract.
Usually of Unsound Mind: If a party or person is usually of unsound mind but sometimes becomes of sound mind, and wants to prove that they were of sound mind at the time of entering into the contract, the burden of proof will be on the other party.
Hypnotism: If a person wants to take advantage of the annulment of a contract on the basis of hypnotism, then they will have to prove that they were not capable of understanding the matter and making a sound decision due to hypnotism at the time of entering into the contract.
Giving Arguments: When it is proved that a person was of unsound mind at the time of entering into a contract, the other party cannot argue that they were not aware of the unsoundness of mind. Therefore, the contract is void.

Effects:

A contract made with a person of unsound mind is void.
If goods are supplied to a madman for the necessities of life, the value of those goods can be recovered from their property.
A person cannot be indemnified on the grounds that they were of sound mind.

Free Consent

In the Indian Contract Act, “Free Consent” means that a party’s agreement to something must be given freely, without any pressure, misrepresentation, fraud, mistake, or undue influence.

**Characteristics of Consent (Section 13):**

1. There must be at least two persons to form an agreement.

2. Consent is when two or more persons agree upon the same thing in the same sense.

**Key Points:**

- If both parties agree to the same thing, their consent is valid.

- If there is any misunderstanding, the consent is not valid.

- Consent must be free of any external influence, such as force or fraud.

Example 1: Raffles vs. Wichelhaus (1864) H & C 906

In this case, Raffles made an agreement with Wichelhaus to buy 125 bales of cotton, which were to arrive on a ship named "Peerless" from Bombay. Raffles intended to buy the bales from a ship named Peerless that was to arrive in October, while Wichelhaus understood that he was selling the bales from a ship named Peerless that was to arrive in December.

When the case went to court, the learned judge decided that since both parties, Raffles and Wichelhaus, did not agree on the same thing in the same sense at the time of making the agreement, their consent was not mutual. Therefore, due to a lack of consensus, the agreement was deemed void.

Example 2: Baladevi vs. Majumdar

In this case, a contract was made with an illiterate woman for the sale of land, which was also a contract with her nephews. The woman understood that she was giving a power of attorney to her nephews for the management of the land, while the nephews had a contract prepared for the sale of the land and had it signed by the illiterate woman.

When the case went to court, the learned judge decided that there was a lack of consensus between the parties when the agreement was made. Therefore, the agreement was not a valid contract. The effect of the agreement was zero.

**Meaning of Free Consent (Section 14):**

Consent is said to be free when it is not caused by:

1. Coercion (Section 15)

2. Undue Influence (Section 16)

3. Fraud (Section 17)

4. Misrepresentation (Section 18)

5. Mistake (Sections 20, 21, 22)

If consent is caused by any of these, the contract becomes voidable

Coercion (Section 15)

Meaning of Coercion : The meaning of this is the use of force, compulsion, threat, etc.

Definition : According to Section 15 of the Indian Contract Act, Coercion is "when, for the purpose of causing any person to enter into an agreement, a person is compelled or influenced to do any of the following things:"

(A) Committing or threatening to commit any act which is forbidden by the Indian Penal Code; or

(B) Unlawfully detaining, or threatening to detain, any property, to the prejudice of any person whatever.

"This means that whether the use of coercion is punishable or not under the Indian Penal Code is not a consideration."

Characteristics of Coercion:

To commit any act forbidden by the Indian Penal Code: The essential condition for coercion is to commit or threaten to commit any act forbidden by the Indian Penal Code to obtain the consent of the other party. The Indian Penal Code (IPC) considers such acts as murder, assault, kidnapping, and rape as crimes.
Example: The case of Ranganayakamma vs. Alwar Setti is notable in this regard.
In this case, a 13-year-old girl was not allowed to perform the last rites of her deceased husband until she agreed to adopt a child. The husband's body was not allowed to be moved from the courtyard. In this situation, the family members and relatives, after consulting with lawyers and experts, presented the matter to the court. The court held that the girl's consent for the adoption was obtained under coercion. The act of preventing the last rites is a crime punishable under Section 297 of the Indian Penal Code.
Threatening to commit an act forbidden by the Indian Penal Code (Threaten for Committing an Act Forbidden by Indian Penal Code): Section 15 of the Indian Contract Act clearly states that the threat itself is sufficient for coercion. The act does not need to be carried out. The threat to harm another party's property or to commit a crime against their person also falls under coercion. Such threats are considered in the category of coercion and include threats of theft, kidnapping, murder, dacoity, and assault.
Example: The case of Muthiah Chettiar vs. M. P. Arunachalam is notable in this regard.
In this case, a man was appointed as a director in a company on the condition that he would not engage in any business or undertake any significant work with a competing company for a certain period of time. However, due to personal reasons, he was unable to comply with this condition. He was threatened with legal action and other consequences if he did not fulfill his duties. The court ruled that the director's consent was not obtained through coercion, as he was a capable person and was not compelled to do so by any unlawful means.
Illustration of Sarrey Bin - Madras High Court (1917):
In this case, a person, by threatening to harm their wife and children, made them sign a deed to relinquish their rights to the property. The court held that the deed was obtained under coercion and was therefore void.
Unlawful Detention or Threatening for Unlawful Detention of Property (Unlawful Detention or Threatening for Unlawful Detention of Property of Any Party): If any party, with the intention of obtaining the consent of another party, unlawfully detains or threatens to detain the property of that party, it is considered coercion.
(i) The case of Mulaiya vs. Captain is notable in this regard.
(ii) Bansraj vs. Secretary of State.
In this case, a person paid a fixed amount for a government job. The court held that the payment was made under coercion, as the person was threatened with the loss of their property if they did not pay the amount.
Object of Coercion (Object of Coercion): If a party uses coercion with the intention of causing an agreement, and the coercion has an objective, it is considered coercion. However, if the coercion does not have an objective, it is not considered coercion under the Indian Contract Act. The coercion must be to obtain an agreement, and the objective of the coercion must be to obtain the consent of the party.

Example: Ram, Shyam, and Leta threaten to kill a person. This cannot be considered coercion, but rather a murder threat. However, to consider it as coercion, the threat must be used to get the person to enter into an agreement.

6 . Use of Coercion by the Party Itself or Through Someone Else: Coercion can be used by a party to the contract or by someone else on their behalf. The text clarifies that the use of coercion to get the consent of a party is sufficient, and it is not necessary that the coercion be used by the party themselves.

Example: A person, with the intent of obtaining a loan of ten lakh rupees, threatens to kidnap the son of the lender if they do not provide the loan. The lender, due to the threat, gives the loan. The court held that the loan was obtained under coercion.

7. Coercion may be used against the Party itself or its near Relatives: Any party can use coercion against the party itself or any of its near relatives with the purpose of entering into a contracte Consent

Provided that the purpose of using coercion must be to enter into an agreement, only then will it be considered coercion from a legal point of view, otherwise not.

Example: Jalim Singh kidnaps Hathimal, the son-in-law of Dhanpatram, a jeweler from Jawaharat, and threatens him that he should sell his house in Swarnagari, a plot of land with number B-420, for 21,000 rupees, otherwise Hathimal will be killed. Here, coercion has been used against the other party, i.e., his son-in-law. Therefore, the agreement for this type of transaction will be considered to have been made on the basis of coercion.

8. Place of Coercion The Indian Contract Act does not specify that the coercion must take place in India. The law applies wherever the contract is made. The key point is that the act of coercion, even if it happens outside India, must be an act forbidden by the Indian Penal Code.

9. Different Types of Coercion (Particular Type of Threatening is not Coercion): It is important to know which threats are considered coercion and which are not. The following are not considered coercion:

(i) Threat to Sue: A threat to file a lawsuit to compel a person to enter into a contract is not generally considered coercion, unless the lawsuit is groundless and malicious. A bona fide threat to sue for a valid claim is not coercion.

Example: Rajeev threatens to sue a company for 75,000 rupees. The company is not able to pay the money within six months, but the company is in a difficult financial situation and a threat to sue will not be considered coercion, as it is a legal right.

(ii) Statutory Compulsion: When a person is compelled by law to enter into a contract, it is not coercion. For example, a person is legally obligated to renew their license, which involves entering into a new contract. This is not coercion as it is a legal requirement.

In this regard, the case of Ashok Surana vs. State Bank of Andhra Pradesh is notable.

(iii) Detaining Property under Mortgage: A person is forced to enter a contract due to the detention of their property under a mortgage. This is not considered coercion because it is a legal right of the mortgage holder. However, if the mortgage holder threatens to unlawfully detain other property, it can be coercion. Therefore, this type of transaction will be considered coercion only if the detention of the property is unlawful.

(iv) Threatening by the Employees: A threat by employees to go on strike is generally not coercion unless the threat involves committing an act forbidden by the Indian Penal Code.

10. Burden of Proof: The burden of proof to show that consent was obtained through coercion lies with the person who is alleging it. If a person's consent was obtained under coercion, they must prove that their consent was not free and was a result of coercion.

II. Undue Influence

Definition:

According to section 16(1), a contract is said to be induced by "undue influence" when 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.
An undue influence is a type of moral or mental coercion. In this, the dominant party misuses their dominant position against the weaker party to influence the weaker party's freedom of consent in making the contract.

a contract is said to be induced by undue influence when a dominant party misuses their influence to affect the will of a weaker party to gain an unfair advantage. It's a form of moral or mental coercion where the dominant party misuses their position to interfere with the weaker party's freedom to make their own decision. The text cites a case, Mehboob Khan vs. Abdul Rahim, where the Rajasthan High Court stated that undue influence can be considered a type of fraud or cunning act, establishing dominance over the victim's mind through hypnosis, deceit, or fabrication.

Essentials of Undue Influence

Undue influence is said to have occurred when the following elements are present:

Relationship between the parties: A contract is presumed to be induced by undue influence when a relationship exists between the parties where one person is in a position to dominate the will of the other. This dominant position can arise in the following situations according to Section 16(2) of the Indian Contract Act:

The person holds actual or apparent authority over the other (e.g., a police officer over an accused).
The person is in a fiduciary relationship (a relationship of trust and confidence) with the other (e.g., a doctor and a patient).
The contract is made with a person whose mental capacity is temporarily or permanently affected by age, illness, or bodily distress.

Use of influence for an unfair advantage: It is a crucial element of undue influence that the dominant party uses their position to gain an unfair advantage. If the dominant party does not use their influence to gain an unfair advantage, the contract is not considered to be a result of undue influence.
Unconscionable transactions: A contract is also presumed to be induced by undue influence when it appears to be unconscionable or unreasonable. The burden of proof then shifts to the dominant party to show that the contract was made with free consent. That a person in a dominant position cannot gain an unfair advantage just by the mere presence of the other person.

Parties with Dominant Position

A person is considered to be in a position to influence the will of another party in the following circumstances:

Real or Apparent Authority: A party is in a position to exert undue influence on the other when they hold real or apparent authority over them. Examples of such relationships where one party holds power and authority over the other include:

Commercial Tax Officer and a shopkeeper.
Income Tax Officer and an assessee.
Police and a criminal.
Officer and subordinate.

Example

The case of J.R. Bhatt v. State of U.P. is a notable example in this regard. In this case, the plaintiff, Bhatt, was a court employee in Uttar Pradesh. He applied to the court's Registrar for a long leave. The Registrar proposed to grant the leave on the condition that Bhatt write a letter stating he would never return to his job. The Registrar exerted pressure, so the plaintiff wrote that he would not return to his job after his leave ended and would be considered retired. However, when the plaintiff returned after his leave, the Registrar refused to consider him for the job. The court ruled that the Registrar had exercised undue influence with his authority. Therefore, the plaintiff was considered to be back on the job.

2. Fiduciary Relationship

A fiduciary relationship is a relationship of trust and confidence, and it gives one party the opportunity to exert undue influence over the other. Examples of such relationships where undue influence can be presumed include:

Officer and subordinate.
Lawyer and client.
Teacher and student.
Doctor and patient.
Creditor and debtor.
Trustee and beneficiary.

That while a fiduciary relationship is presumed between a spiritual advisor and their follower, the High Court has held that a fiduciary relationship does not exist between a husband and wife, or a lover and their beloved.

Example:

In the case of Howes v. Bishop (1909) 2 KB 390, a person named Anna gives her spiritual guru a large sum of money during a time of need. She later writes a promise to give a large portion of her property to him. The court held that Anna considered the guru her spiritual guide, and she was told that if she wished to find peace in the afterlife, she should donate all her property to him. Anna agrees and transfers her property to him. The court ruled that this consent was obtained through undue influence, and the burden was on the guru to prove that undue influence was not used.

3. Mental or Bodily Distress

When a person enters into a contract with someone whose mental or physical health, illness, or age has caused them to be temporarily or permanently weak, that person is in a strong position to use their influence to take advantage of the weaker party. The weaker party has the right to get the contract annulled.

Example:

A wealthy old woman, who was physically weak, was attended by a doctor. She gave him a gift after a few days. The court, in the case of Sunder Kumari v. Kishore (5 WR 246), held that since the woman was almost 90 years old, physically weak, and suffering from a serious illness, she was in a weak position. The person who received the gift was her close relative who was not her daily caretaker. It was assumed that the relative (Rajiv) was the one who was in a position to influence the woman's will.

No Presumption of Undue Influence

That based on various court decisions, undue influence is not presumed in the following relationships:

Husband and wife (with the exception of Pardanashin women).
Debtor and creditor.

Effects of Undue Influence

When a contract is entered into under undue influence, it has the following effects:

Contract is Voidable: The contract is voidable at the option of the party whose consent was obtained through undue influence. The affected party can either choose to cancel the contract or enforce it.

Example: Anna, a widow, gives a gift of ₹5 lakh to a police officer. The officer compels her to write a bond promising to pay another ₹2 lakh. The court held that the officer used his authority to get the bond and that the contract was voidable.

Court Can Annul the Contract: The court has the authority to cancel a contract that was entered into under undue influence.

Example: A father gives a bond to his son for a certain amount. A month later, the father claims that his son used undue influence to get the bond and asks the court to cancel it. The court can cancel the bond if it finds that the son used undue influence.

Court Can Annul the Contract on Specific Conditions: The court can cancel a contract that was obtained through undue influence, but it may do so with certain conditions to ensure justice.

Example: Anna, who is illiterate, takes a loan of ₹5,000 at a 10% interest rate from a dominant party, who uses undue influence to get a bond of ₹10,000 at a 10% interest rate. The court may cancel the bond and order Anna to repay only the original loan of ₹5,000 with a reasonable interest rate.

Burden of Proof of Undue Influence

The burden of proving undue influence depends on the circumstances:

In Normal Circumstances: The burden of proving undue influence is on the person who alleges it. To do this, they must prove the following:

One party was in a position to influence the will of the other.
The dominant party used their position to influence the other.
The dominant party gained an unfair advantage from the contract.

In Cases of Unconscionable Transactions: When the transaction appears to be unconscionable (unreasonable or grossly unfair), the burden of proof shifts to the dominant party. The dominant party must prove that:

They were not in a position to influence the weaker party's will.
The contract was entered into with free consent, without any deceit or misrepresentation.

Undue Influence: Presumption and Rebuttal

That if the relationship between the parties is such that the court presumes undue influence, the dominant party must prove that it was not used. To rebut the presumption, the dominant party must show:

(i) The affected party was in a position of complete independence.
(ii) All important facts concerning the contract were known to the affected party.
(iii) The affected party received a reasonable consideration for the contract.
(iv) The affected party was given the opportunity to seek independent legal or other advice.

An example: Rahim takes a loan from a moneylender and signs a blank promissory note. The court can presume undue influence in this case, and the moneylender will have to prove that no undue influence was used.

Rebutting the Presumption of Undue Influence

The presumption of undue influence can be rebutted by proving the following:

Proving that all important facts were disclosed to the affected party.
Proving that the consideration was sufficient.
Proving that the affected party had the opportunity to seek independent advice.
Proving that the affected party did not have the capacity to make a fair decision.

Unconscionable or Unreasonable Transactions

An unconscionable transaction is one where the terms are so unfair that the dominant party is considered to have taken an undue advantage of the weaker party. The court will presume undue influence in such a case. The text explains that if a person uses their position to influence another person's will and enters into a contract that appears unreasonable or grossly unfair, it is considered an unconscionable transaction. The burden of proof then shifts to the dominant party to show that the contract was fair and that the other party's consent was not obtained through undue influence.

Pardanashin Women

A Pardanashin woman is a woman who, due to social customs, lives in seclusion and does not have contact with the outside world. She cannot be considered a regular person in the legal sense. The Indian legal system provides special protection to such women.

In the case of Smt. Kalyani v. Bishwanath Lal, the Supreme Court of India held that in a contract with a Pardanashin woman, the burden of proving that no undue influence was used is on the other party. The court also held that a woman who is uneducated but not in a state of seclusion is not a Pardanashin woman.

The emphasizes that when a contract is made with a Pardanashin woman, it is presumed to be induced by undue influence. To rebut this presumption, the other party must prove the following:

That the Pardanashin woman fully understood the terms and conditions of the contract.
That she had the opportunity to seek independent advice.
That the contract was executed with her free and voluntary consent.
That the contract was not obtained through physical or mental pressure.

Its also clarifies that a "Quasi-Pardanashin" woman is a woman who is not strictly secluded but is in a situation where she cannot fully understand the transaction. The law does not give them the same protection as Pardanashin women, but the courts still consider their circumstances.

Difference Between Coercion and Undue Influence

The briefly touches on the difference between coercion and undue influence, stating that both result in a contract being voidable, but the key difference is that coercion involves physical force or threats, while undue influence is a more subtle form of moral or mental pressure.

Basis	Coercion	Undue Influence
1. Definition	An act done with the intent to compel a person to do something that is forbidden by the Indian Penal Code or to threaten to harm them.	When a party is in a position to influence the will of another and uses that position to gain an unfair advantage in a contract.
2. Intention to Influence	The intention to influence the will of the other party is not a necessary element.	The intention to influence the will of the other party is an essential element.
3. Use of Force	Force is used against the other party.	Mental or moral pressure is used on the other party.
4. Relationship	A specific relationship between the parties is not required.	A specific relationship of trust or dominance is required.
5. Effect	A contract based on coercion is voidable.	A contract based on undue influence is voidable.
6. Object	The object is to get the other party to enter a contract against their will.	The object is to get an unfair advantage by influencing the other party's will.
7. Type of Force	Involves physical or criminal threats.	Involves mental or moral pressure.
8. Punishment	It is a criminal offense under the Indian Penal Code.	It is a civil wrong.
9. Burden of Proof	The burden of proof is on the party who alleges coercion.	The burden of proof is on the dominant party.
10. Location	It can be done anywhere.	It is often done within the context of a relationship of trust or dominance.

Fraud

Meaning: "When a party or a person obtains an undue and wrongful gain from another party by using any dishonest act, it is called fraud."

Definition: Fraud is an intentional misrepresentation made knowingly, without belief in its truth, or carelessly, without regard to whether it is true or false.

Lord Harsheel's statement: "Made knowingly or without belief in its truth or recklessly careless, whether it be true or false."

According to Lord Herschell: "Fraud includes all illegal or inequitable acts which a person is sought to be deprived of by illegal or inequitable means, of what he is entitled to do."

According to Section 17, fraud includes any of the following acts committed by a party to a contract or with his connivance, or by his agent, with an intent to deceive another party thereto or his agent to induce him to enter into the contract:

The suggestion, as a fact, of that which is not true by one who does not believe it to be true.
The active concealment of a fact by one having knowledge or belief of the fact.
A promise made without any intention of performing it.
Any other act fitted to deceive.
Any such act or omission as the law specially declares to be fraudulent.

Silence as Fraud

The meaning of silence is generally considered fraud in the following two conditions:

(i) Where the circumstances are such that, having regard to them, it is the duty of the person keeping silence to speak. (ii) Where the silence is equivalent to speech.

Characteristics of Fraud

Based on the broad interpretation of Section 17 and other definitions, fraud is of the following types:

Fraud by the Party of the Contract or his Representative: Fraud must be committed by a party to the contract or their authorized representative. Fraud cannot be committed by a third party. Therefore, if a contract is related to fraud, we can keep it in the category of a voidable contract.

Example: This is an important case in Ressu River Silver Mining Co. Vs. Smith, in which the court gave a decision that if a director, with the intent to mislead a person to buy shares in the company, gives a misleading prospectus to the person, it will be considered fraud by the company's directors.

Knowledge of Actual Reality: Any act done to deceive is considered fraud if the person committing the fraud has actual knowledge of the reality. If the party is aware of the reality and still calls it fraud, it is not considered fraud.
Fraud with the Intention to Deceive: Any matter can be put in the category of fraud with the intention of deceiving, whereas a party to a contract should intentionally deceive the other party to enter into the contract. Therefore, the following points are not considered fraud: (i) Any act whose purpose is not to deceive, but as a result, the other party is deceived. This is not considered fraud. (ii) If a party makes a misleading representation, but the other party is not deceived, they cannot file a lawsuit on the basis of fraud. The decision in this regard in the case of Marsfall Vs. Thomas and Smith Vs. Chandurick is important.
Actual Deceit to Another Party: Any contract induced by fraud is considered void, whereas if a party to a contract wants to deceive another party and the other party is actually deceived, then the contract will be considered void.
The Suggestion, as a Fact of that which is not true: If a suggestion is given as a fact of a true thing which is not true, then it is considered fraud.

Example 1: Kamla's father tells her that the boy is fair and handsome to marry her. On this basis, Kamla gives her consent to marry the boy. This consent is void because Kamla's father made a false statement to obtain her consent, which is a category of fraud.

Example 2: In the case of Ram and Co. Vs. Damodar Lal, the court held that in this case the directors of the company, with the intention of recovering the debt, published and distributed a prospectus, in which they falsely showed the old debts and inventories as new assets to deceive the lenders. This was considered fraud.

To Motivate for Making Contract: It is necessary for fraud that a person or their representative should deceive or motivate for making a contract. That is, the act done for fraud is to motivate the other party to act on it and enter into a contract. This is considered fraud. In this regard, the decision in Michael Vs. Wilson and Langridge Vs. Kevy is important.
Actually Sustaining of Loss to the Concerned Party: Fraud is obtained when the other party actually suffers a loss due to the fraud, because a legal proceeding cannot be based on a loss without fraud.
Regarding Material Fact of Fraudulent Contract: It is also important for fraud that the fraud is done in a matter of a material fact related to the contract, and not in relation to a minor or irrelevant fact. In this regard, the decision in Abdul Gulab Vs. Girdhari Lal (1904) Punjab Records No. 94 is notable.
Promise Made without any Intention of Performing it: A promise is considered fraud when a party makes a promise without any intention of performing it.

Example: Ram and Shyam agree to build two identical desert coolers for a fixed price, and Ram builds the coolers. But he does not build the coolers as per the agreement, and this is considered fraud.

To Perform any other Act with the Deceive: A person's mindset of deceiving is highly receptive and they keep looking for new ways. Therefore, from a legal point of view, any other act which is meant to deceive the other party is included in the category of fraud. [Section 17(4)]
Any such act or omission as the Law Specially Declared to be Fraudulent: In our country, many acts and omissions have been specially declared to be fraudulent. If any act or omission is included in them, then it is considered fraud. For example, if a debtor transfers immovable property with the intention of deceiving the creditors, then this kind of transfer is considered fraud under Section 53 of the Transfer of Property Act. In this way, if any debtor cannot repay the debt, then for this purpose, he transfers his property and is declared bankrupt under the Insolvency Act, this is also considered fraud.
Fraud by Concealment: [Section 17(2)] When a party to a contract intentionally conceals a material fact related to any contract, and due to this concealment, the other party is forced to enter into the contract, it is considered that the person has committed fraud by concealment.

Example: In a partnership contract, it is the duty of the insurer to disclose all the facts to the other party. However, in some circumstances, the concealment of facts is not considered fraud, such as: "Caveat Emptor" (let the buyer beware). Until the seller is asked something, he is not responsible for telling anything, but in a contract of utmost good faith, it is considered a crime to hide material facts in an insurance contract. In this regard, the following is a notable case:

Example: Smt. Ramibai Vs. Indian Life Insurance Corporation. In this case, at the time of taking insurance, Smt. Ramibai had given her age as 48 years instead of 60 years and based on this, she got a life insurance policy from the Indian Life Insurance Corporation. After the death of Smt. Ramibai, her dependents approached the Life Insurance Corporation for the money, but the corporation refused to give the money on the grounds that the insured had hidden facts. In this dispute, the court gave the decision that the consent obtained by the Life Insurance Corporation was due to fraud.

In this regard, it is important to note that if the victim has such means available, by which the truth of the hidden facts can be found out by normal means, then in no case can such a victim be saved on the basis of fraud.

In this regard, the case of Krishna Vs. Kurukshetra University, Kurukshetra is particularly notable. In this case, the Supreme Court said this in its decision that it is a general rule in this regard, that if a person with whom fraud has been committed, is in such a position that they can find out the truth by some means or diligence, then it will not be considered fraud.

In this case, a student of LLB second year, Krishan, whose attendance in class was less than the prescribed requirement, filled out the university examination form and actively hid the fact of low attendance. The court decided in this matter that this does not fall into the category of fraud, because it was the duty of the university administration to see that the examination form was correct. That is, the university administration could find out the truth of all the facts hidden by Krishna through normal efforts.

Fraud by Silence

Based on the analysis of Section 17 of the Indian Contract Act, this important fact has been clarified regarding fraud: "Silence regarding a fact that can influence the will of a contracting party is not considered fraud, unless the circumstances of the case are such that it is the duty of the person keeping silent to speak, or his silence is, in itself, equivalent to speech."

1. When Speech is the Legal Duty of the Party: Under the Contract Act, in some situations, it is the legal duty of the parties to a contract to clearly provide the details of important facts related to the contract that they have actual knowledge of, and which directly influence the contract. Such contracts are called "Contracts of Utmost Good Faith," and they fall into the following categories:

Prospectus of the Company: When a company prepares a prospectus with the intention of inducing people to buy shares, it is the duty of its directors to clearly disclose all the important and necessary facts and matters related to the company, which may influence people's desire to buy shares.
Partnership Contracts: Partnership contracts are based on the principle of utmost good faith. Sometimes, a partner has knowledge of all the important matters related to the business that other partners do not. In such a situation, it becomes his duty to tell those matters to the other partners.
Guarantee Contracts: Guarantee contracts are contracts of utmost good faith. In a guarantee contract, it is the duty of the guarantor to provide the necessary information regarding the debtor and his debt.
Family Settlement: In family matters, if any member of the family has some special information, and the other members of the family do not have it, then it is his duty to clearly inform the other members of that information as well.
Contracts for Sale of Land: In the case of land, it is a legal and moral duty to tell all the important facts and information related to the land. If there is any defect related to the land, then it should be clearly told to the buyer.
Marriage Contracts: Marriage contracts are also based entirely on the principle of utmost good faith. In a marriage contract, it is the duty of each party to clearly tell the other party all the facts related to the contract that may influence the desire of the other party to marry.
Contracts of Fiduciary Relations: If a contract has a fiduciary relationship between the contracting parties, then it is the duty of the party with the fiduciary relationship to clearly tell all the important facts and matters related to the contract to the other party, which may influence their desire to enter into the contract. For example: father-son, lawyer-client, doctor-patient, guru-disciple, director-representative, teacher-student, etc.

Example: A husband tells his wife nothing about his serious illness. After some days, the wife comes to know about the husband's illness. She has the right to cancel the contract because it was the legal and moral duty of the husband to tell his wife about his illness. In this situation, the silence between the husband and wife is considered fraud. All contracts based on utmost good faith are based on the intent to deceive on important facts. Therefore, in this regard, keeping silent is considered fraud.

2. When Silence is Equivalent to Speech: In some situations, silence is considered equivalent to speaking and deceiving the other party. In such a situation, this silence is considered a category of fraud.

Example 1: Paritosh has a horse, which he wants to sell to Madhuri. If Madhuri, before buying the horse, says something about it, and Paritosh knows that the horse is seriously ill, and he remains silent, then this silence will be considered fraud.

Example 2: Shyam agrees to sell 5,000 bags to Sitaram. Shyam has information that the price of the bags is going to fall in the market. If he does not tell this information to Sitaram and Sitaram agrees to buy the bags, then this will not be considered a category of fraud.

3. Changes in Facts: When a party tells some facts and after the contract, due to a change in the circumstances, the situation is different from what was told, and it is likely to influence the desire of the other party to make a decision, then it is the duty of that party to inform the other party about the change.

Example: Ramlal tells Babulal that his garden is full of mangoes. At that time, it was full of fruits, but later due to some reason, all the fruits were destroyed. In this case, Ramlal should have informed Babulal about this before he bought the garden.

4. Traditions: In the business field, it is important to follow business traditions. The important facts related to the contracts are told according to the business traditions. It is the duty of the related parties to clearly tell all the facts related to the contracts.

5. Fraud on not disclosing the facts: In some countries, not disclosing the facts is also considered a category of fraud, which is as follows: (i) Where the entire fact is broken due to the concealment of truth. (ii) Where a person is in a position of trust related to the contract. (iii) Where a party makes a constructive attempt to establish a fact as true.

Effect of Fraud

The effects of a contract made on the basis of fraud are as follows:

Voidable at the Option of the Aggrieved Party: The aggrieved party who has obtained the consent through fraud has the option to either terminate the contract or validate the contract. But if the consent was obtained by fraudulent silence, and the other party could have obtained knowledge of the truth or found out the truth by normal efforts, then the contract cannot be terminated.
Affirmation: The aggrieved party can affirm the contract and compel the other party to fulfill the terms of the contract or compensate for the loss caused by not fulfilling these terms.
Restitution: If the aggrieved party cancels the contract and has given money or property to the other party, then the aggrieved party has the right to get it back.

Misrepresentation

(Meaning)

When a party makes a statement about an untrue fact, believing it to be true, this kind of statement is called misrepresentation, i.e., an innocent statement made unintentionally that is not true in reality.

Forms of Misrepresentation

(A) Fraudulent Misrepresentation: It is a misrepresentation or statement made by a party with the deliberate intention to deceive another party by stating an untrue fact.

(B) Innocent Misrepresentation: If a party honestly believes a statement to be true, and it is untrue, this is called innocent or non-fraudulent misrepresentation.

Definitions

R.C. Tucker vs. Housing Board: In this case, the learned judge gave the definition, "Misrepresentation is the misstatement of material facts of a contract." A misrepresentation can only be false if it is both material and false.
According to Anson: "Misrepresentation is an untrue statement, which the person making it believes to be true and does not consider it to be false."
Section 18 of the Indian Contract Act includes the following in misrepresentation: (i) An affirmative statement or assertion of a fact that is not true in reality, but the person making the statement believes it to be true. (ii) A breach of duty made in such a way that the person who breaches the duty does not intend to deceive the other party, but such a breach of duty causes a loss or harm to the other party.

Duty of Disclosure

(By Breach of Duty) [Section 18(2)] : A person commits a breach of duty if they have a duty to deceive another party or they have such a duty that by breaching it, they give an advantage to another party who has a dominant position, or they cause harm to another party who has a dominant position.

Example 1: Lalit is 32 years old, but his father incorrectly tells a life insurance company that he is 26 years old. He believes this is correct because his life insurance policy states the age of 26 years. Later, it is discovered that his age is 32 years. This is a misrepresentation by breach of duty. The life insurance policy is void on the grounds of his misstatement of age.

Innocent Misrepresentation (to make a mistake) [Section 18(3)]: When an innocent party causes a mistake in relation to the subject matter of the agreement of another party, this is considered a misrepresentation. This is called innocent misrepresentation because the misrepresentation was made by one party to another unintentionally or in good faith.

The case of Orissa Government vs. a forest contractor is mentioned in this context.

In this case, the Orissa government constructed a jungle dam. The contractor was told that it was not empty. But, in reality, there was water in the jungle and the contractor was not informed about this. The court held that this was a misrepresentation.

Example 2: Naresh's house has cracks due to heavy rain, but he tells Satish while selling the house that the house is in good condition and there are no defects. Satish, believing this, buys the house. This contract is induced by innocent misrepresentation.

Essential Characteristics of Misrepresentation

(1) Misrepresentation is made by a party.

(2) Misrepresentation is not made deliberately.

(3) The purpose of the statement is not to deceive.

(4) The misrepresentation is related to a specific fact.

(5) Misrepresentation is made with the intention to induce the other party to give consent.

(6) Misrepresentation is made in relation to the actual state of the contract.

Modes of Misrepresentation

1. Positive Assertion (Section 18(1))

This occurs when a person makes a definitive statement of fact that they believe to be true, but in reality, it is false. The person making the statement has no solid basis or knowledge to support their claim.

Example: In the case of Oceanic Steamship vs. Sundar Das Dharamsey, a person (Y) leased a ship to another person (X). Y stated that the ship's carrying capacity was 2,800 tons, believing this to be true. However, the ship had never carried more than that, and Y had no actual knowledge of its true capacity. X believed this and suffered a loss. This was considered a positive assertion misrepresentation because Y, without any knowledge, asserted a false fact.

2. Breach of Duty (Section 18(2))

This mode of misrepresentation happens when a party, through a breach of a duty, unintentionally deceives another party. The intent is not to defraud, but the breach of duty benefits the party in a position of power or causes a loss to the other party.

Example: In a life insurance case, a father tells the insurance company that his son, who is actually 32, is 26 years old. The father believes this to be true because an old insurance policy states the age as 26. This is a breach of the duty to accurately disclose information, and although there was no intent to deceive, it is considered a misrepresentation.

3. Innocent Misrepresentation (to cause a mistake) (Section 18(3))

This occurs when one party, through an innocent and honest mistake, causes the other party to have a mistaken belief about a material fact related to the contract's subject matter.

Example: In the Orissa government vs. a forest contractor case, the government built a dam in a jungle and told the contractor the land was empty. In reality, there was water in the jungle. The government's statement was an innocent mistake that caused the contractor to have a wrong belief about the condition of the land, which was a material fact of the contract.

Effects of Misrepresentation

Voidable Contract: When a contract is obtained by misrepresentation, it is voidable at the option of the aggrieved party. Therefore, if the aggrieved party wishes, they can cancel the contract. But, the contract cannot be canceled in the following circumstances: (i) The aggrieved party could have discovered the truth by normal efforts. (ii) The aggrieved party had knowledge of the truth before giving consent. (iii) The effect of the misrepresentation has ceased to exist. (iv) The aggrieved party has confirmed the contract after having knowledge of the misrepresentation. (v) The aggrieved party has received some benefit from the contract after knowing the misrepresentation. (vi) The misrepresentation does not relate to the material facts or subject matter of the contract. (vii) The aggrieved party cannot restore the position of the contract before the misrepresentation.
Affirmation of Contract: The aggrieved party can affirm the contract and can compel the other party to fulfill all the terms of the contract and be bound by their position.
Restitution [Section 64]: If the aggrieved party cancels the contract and has given any property or money to the other party under the contract, the aggrieved party has a legal right to get it back.
Rights for Compensation: Generally, the aggrieved party affected by misrepresentation does not have the right to receive compensation from the other party involved in the contract. But, in the following situations, an aggrieved party can demand compensation: (i) When the misrepresentation is about a main term or assurance of the contract. (ii) Prospectus: When a shareholder buys shares after being influenced by misrepresentation in the company's prospectus, the shareholder can compel the responsible company to pay compensation. (iii) By Representation: When a person represents himself as an agent of another person and induces another person to enter into a contract, the aggrieved party can receive compensation from the agent.

Burden of Proof

The party who wants to cancel the contract on the grounds of fraud and misrepresentation has the responsibility to legally prove that the consent received in the contract was obtained by misrepresentation.

Distinguishing between Fraud and Misrepresentation

S. No.	Basis of Difference	Fraud	Misrepresentation
1.	Meaning	Any act where a party obtains some concrete benefit from another party by unjust and wrongful means is called fraud.	When a party describes an untrue fact believing in its truth, this kind of statement is called misrepresentation, i.e., such statements are made unintentionally that are not true in reality.
2.	Section	It is described in Section 17 of the Indian Contract Act.	It is described under Section 18 of the Indian Contract Act.
3.	Definition	An act done with the intention of defrauding, which includes any of the following acts, where one party to a contract or its agent, with the intention of deceiving the other party or its agent or inducing them to enter into a contract, does any of the following: 1. Stating a fact to be true which is in reality false and the person making the statement believes it to be false. 2. The active concealment of a fact by a person who has knowledge or belief of the fact. 3. A promise made without any intention of performing it. 4. Any other act intended to deceive. 5. Any such act or omission which the law specifically declares to be fraudulent. 6. Sometimes, even silence can amount to fraud.	Misrepresentation includes the following: 1. An affirmative statement or assertion that is not true in reality, but the person making the statement believes it to be true. 2. A breach of duty made in a way that is not intended to deceive the other party, but such a breach of duty causes a loss to the other party. 3. Causing another party to a contract to make an innocent mistake about the subject matter of the contract.
4.	Intention	The intention of fraud is to deceive the other party.	The intention of misrepresentation is not to deceive the other party.
5.	Nature	Fraud is always done deliberately.	Misrepresentation is done innocently or unintentionally.
6.	Knowledge of Truth	The party committing fraud always has knowledge of the truth.	The guilty party in a misrepresentation does not have knowledge of the actual state of affairs.
7.	Means of Investigation	In addition to the fraud, the guilty party cannot say that the aggrieved party could have discovered the truth by normal efforts and had the means to know the truth by normal efforts.	The guilty party can say that the other party could have discovered the actual situation by normal efforts.
8.	Duty to Give Notice	The aggrieved party under fraud is not required to give notice of their intention to cancel the contract to the other party within a reasonable time.	If the aggrieved party does not declare the contract void within a reasonable time after discovering the truth, they are later deprived of the right to cancel the contract.
9.	Validity	The law does not consider such a contract valid, and the contract automatically becomes voidable, even without any action by the aggrieved party within the stipulated time.	If a contract made on the basis of misrepresentation is not declared void after having knowledge of it, and any benefit is derived from it, then the contract cannot be canceled later.
10.	Compensation	The aggrieved party under fraud has the right to receive compensation.	The aggrieved party can cancel the contract, but they do not have the right to claim compensation.
11.	Punishment	The purpose of fraud is to deceive deliberately, and it is a criminal act; hence, it is punishable.	The purpose is always unintentional; therefore, it is not punishable.

Mistake (Sections 20, 21, 22)

According to the Indian Contract Act, no contract should be affected by a mistake. If a mistake relates to a material fact of the contract, the contract will be void, and if the contract is not related to a material fact, the contract will not be void. Therefore, it is important that, according to Section 13 of the contract, the parties must have a consensus or agreement on the material facts of the contract in the same way and in the same sense. If a consensus cannot be reached between both parties, the contract will be void in such a situation.

Meaning of Mistake:

"A mistake is a false belief about a fact related to the agreement." According to Section 20 of the Act, "When both parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void." These types of mistakes arise from a lack of consensus between the two parties.

Types of Mistakes

According to the provisions of Sections 20, 21, and 22, mistakes can be broadly studied by dividing them into two parts:

I. Mistake of Law or Mistake of Indian Law Mistake of Foreign Law

I. Mistake of Law (Law of Mistake)

Generally, every person or citizen of the country is expected to be fully aware of the laws of their own country. Therefore, it is not necessary that if a person makes a mistake about the law, they will be forgiven.

In this regard, an explanation of Section 21 of the Indian Contract Act is essential: "If a mistake relates to an Indian law, the person who made the mistake cannot be forgiven on the basis of that mistake, and the contract cannot be voidable. But if the mistake is about a foreign law, which is not prevalent in India, then it will be considered a mistake of fact."

Thus, from the analysis of this section, it is clear that a mistake of law can be of two types:

1. Mistake related to Indian Law (Mistakes related to Indian Law): A mistake made by both parties in a contract regarding the prevalent Indian laws. This type of mistake is not forgivable, as every citizen is expected to have knowledge of the prevalent laws of the country. Therefore, no person can avoid a contract by arguing about a lack of knowledge of the law. Hence, any agreements made on this basis will be void.

Example: Ashok and Manoj enter into a contract on the assumption that a particular provision is prohibited under the Indian Limitation Act. This is a mistake of Indian law, so the contract is not voidable.

Example 2: Suresh tells Hiralal about a murder he committed, which he did not know was punishable by law, and he was caught later. After finding out about it, he was punished. This is not a mistake of law and he will be punished.

2. Mistake related to Foreign Law (Mistake as to Foreign Law): When both parties entering into a contract make a mistake regarding the law of a foreign country, it will be considered a mistake of fact. In such a situation, the validity of the contract is affected. In such a situation, a mistake of foreign law makes the contract void.

Example: Balbir Singh and Bina Mal enter into a contract of mortgage, which is made according to the provisions of the "Commercial Goods Act" of Canada. This contract will be void.

Mistake Related to Personal Rights (Mistake Relating to Personal Rights): When the parties to a contract make a mistake regarding personal rights, it is considered a mistake of fact according to the provisions of the Act, and the contract becomes void.

Example: Ram and Shyam agree to give a loan of ₹50,000. Ram believes that Shyam will repay the amount. Shyam has no knowledge of this and is ready to give ₹50,000. This is a mistake of fact. Here, Ram will not get back ₹50,000.

II. Mistake of Fact (Section 20)

Mistakes of fact relate to the material facts or subject matter of the contract. Such mistakes are generally of two main types, which we will study in detail:

Bilateral Mistakes and
Unilateral Mistakes

1. Bilateral Mistakes (Bilateral Mistakes): When both parties to a contract are under a mistake regarding an essential fact or subject matter, this type of mistake is called a bilateral mistake. Therefore, in such a situation, the contract is void.

Bilateral mistakes are generally of two types: (i) Mistakes related to the subject matter. (ii) Mistakes related to the impossibility of performance.

Mistakes Related to Subject-matter (Mistakes Related to Subject-matter): Generally, mistakes related to the subject matter can be of the following types: (a) Mistake Regarding the Existence of the Subject: If, at the time of making the contract, both parties are under the mistaken belief that the subject matter of the contract exists, when in reality it does not, the contract will be void.

Example: The case of Couturier vs. Hastie is noteworthy in this context. In this case, some goods were sent from Australia to England. The parties had entered into a contract for the sale of the goods, but they were sold on the way because they had started to get spoiled before the contract was made. The court held that the contract was void, as the subject matter of the contract did not exist at the time the contract was made.

(b) Mistake Regarding Identification of the Subject-matter (Regarding Identification of the Subject-matter): If, while making a contract, the parties are under a mistake regarding the identification of the subject matter, such a mistake in identification will make the contract void.

Example: The case of Raffles vs. Wichelhaus is noteworthy in this context, in which the plaintiff had sent two ships named 'Peerless' to England. The defendant had bought goods from one of them. Both parties were unaware of this. The court held that the contract was void on the ground of mistake.

(c) Mistake Regarding the Attributes of the Subject-matter (Mistake Regarding the Attributes of the Subject-matter): If the parties to a contract are not in agreement regarding the attributes of the subject matter, then such an agreement is considered void.

Example: The case of Nicholson and Venn vs. Smith-Marriot is mentioned in this context. In this case, an auction included a picture of a king in a locket, which was believed to be of the period of King Charles I, while in reality, it was not. The court held that the contract was void because both parties were mistaken about the attributes of the item.

(d) Mistake Regarding Ownership of the Subject-matter (Mistake Regarding Ownership of the Subject-matter): When the person making the contract believes that they have the right to sell the goods and that the buyer will become the real owner, but in reality, this is not the case, such a mistake makes the contract void.

Example: The case of Cooper vs. Phibbs is mentioned in this context. In this case, Naveen agreed to sell a house to Mohini for ₹2 lakhs. But it was later discovered that Naveen had no right to sell the house. Therefore, such a contract is void on the ground of mistake regarding the subject matter.

(e) Mistake Regarding the Price of the Subject-matter (Mistake Regarding the Price of the Subject-matter): When the buyer and seller sometimes do not agree on the price of the subject matter of the contract, such a mistake is considered a mistake of fact and the resulting contract is considered void.

Example: The case of Webster vs. Cecil is noteworthy in this context. In this case, a seller mistakenly wrote ₹1,240 instead of ₹2,240 as the price. The buyer, knowing this, accepted the offer. The court, considering this a mistake of fact, declared the contract void.

(f) Mistake Regarding the Quantity of the Subject-matter (Mistake Regarding the Quantity of the Subject-matter): When both parties making the contract are under a mistake regarding the quantity of the subject matter, the contract in such a situation is void.

Example 1: The case of Gompertz vs. Bartlett is important in this context. In this case, the buyer gave a contract to the seller to purchase paper from the seller, which had a different number of papers for sale and purchase. The court declared the contract void, considering it a mistake of a material fact.

Example 2: The case of Hope vs. Hope is also important. In this case, a person wrote a letter to the buyer regarding the purchase of 50 guns for a price of ₹50. The letter was a mistake by the typist, who was supposed to write "Send only 3 guns." After the typo, Hope sent 50 guns, and out of them, Hope took back 3 and returned the remaining guns. In this dispute, the court held that the typist was responsible for the payment of the price of the 3 guns due to the mistake.

(g) Mistake Regarding Impossibility of Performance (Mistake Regarding Impossibility of Performance): When the parties to a contract enter into a contract, believing it to be fully possible to perform, but later, under certain circumstances, it becomes impossible for the parties to fulfill their obligations, the contract becomes void due to the mistake regarding the possibility of performance.

These types of mistakes can generally be of a physical, commercial, or legal nature.

Example: The case of Ramakrishna vs. Harikrishna is an important one. In this case, to watch a special puja procession, Ramakrishna rented a room from Harikrishna, which was later canceled. Both parties were unaware of this. In this case, the contract will be void.

2. Unilateral Mistake (Unilateral Mistake): When only one of the two parties to a contract makes a mistake regarding the subject matter or a material fact, the contract is voidable on the basis of the mistake. Unilateral mistakes are of the following types:

(i) Mistake Regarding the Nature of the Contract (Mistakes Regarding the Nature of the Contract): When a person entering into a contract does not understand the nature of the contract correctly, while the other party to the contract understands it correctly, the contract will be void in such a situation.

Example: The case of Foster vs. Mackinnon (1869) is noteworthy. In this case, an old man with poor eyesight was tricked into signing a promissory note for ₹20,000 by misrepresenting it as a guarantee deed. The court held that the old man would not be held responsible for the promissory note.

(ii) Mistake Regarding Identification of the Party (Mistake Regarding Identification of the Party): When a person intends to enter into a contract with a specific party and they enter into a contract with that person, but that person is not the person they intended to enter into a contract with, the contract will be void on the basis of a mistake regarding the identification of the party.

The case of Cundy vs. Lindsay is important in this context. In this case, the defendant Lindsay was a well-known person, and the plaintiff Cundy made a purchase from him by sending him a letter. Blenkarn, whose name was similar to that of Lindsay, received the letter and sent the goods to Cundy. The court, in its decision on this case, held that a mistake had been made regarding the identity of the party, due to which the contract between the parties was void, and Cundy could not get any rights over the goods or their value. The court also ordered that the goods be returned to Lindsay.

(iii) Mistake Regarding the Attributes of the Person (Mistake Regarding Attributes of the Person): When the party entering into a contract makes a mistake in identifying the attributes of the other party, the contract is not void due to such a mistake, but is considered a mistake of fact. This type of mistake makes the contracts voidable on the basis of fraud.

The case of Phillips vs. Brooks is especially noteworthy in this context. In this dispute, a person named Nath went to the shop of the plaintiff, Phillips. He selected some diamonds, pearls, and rings and bought them, whose total value was ₹3,000 pounds. While Nath was writing a check to pay the price, he said to the shopkeeper, "Do you know who I am? My name is Sir George Bullough." The shopkeeper checked in the telephone directory and found it to be correct. The shopkeeper accepted the check. Nath only took the ring. Nath immediately pawned the ring with the defendant Brooks, who had kept the ring in good faith. Later, the check was dishonored. The plaintiff filed a case in court to get the ring or its value back from the defendant.

The court gave this decision in this regard that the plaintiff had the intention of entering into a contract with the person standing in front of him. Therefore, the plaintiff made a mistake not in the identification of the person but in recognizing his attributes. Therefore, this contract is not void due to a mistake but is voidable on the basis of fraud.

Effects of Mistakes

(1) When both parties to an agreement are under a mistake as to a material fact, the agreement is void. [Section 20]

(2) If both parties to any agreement are under a mistake as to any law in force in India, the contract is not voidable. [Section 21]

(3) The contract will be void if the mistake is regarding foreign law or personal rights. [Section 22]

(4) In the case of a mistake of a material fact by one of the parties to the contract, the contract is not voidable, provided that this mistake was not caused by fraud or misrepresentation by the other party. [Section 22]

(5) The court does not have the power to rectify a contract, but it can rectify the words written in the contract.

Effects of Consent which is not Free

Contract is Voidable: When a contract is made on the basis of consent obtained by coercion, undue influence, fraud, and misrepresentation, such a contract is voidable at the option of the aggrieved party. [Section 19]
Affirmation of Contract: In the case of fraud or misrepresentation, if the aggrieved party deems it appropriate, they can affirm the contract. This means they can do so if it is in their interest. In this case, the other party cannot escape their duties under the contract.
Right for Compensation: The aggrieved party has the right to receive compensation only in the case of fraud.
Setting Aside of Contract: A contract made due to undue influence can be set aside. If the party who has obtained any kind of benefit under the contract has received it, such a contract can be rescinded or set aside on terms that are just in the opinion of the court.
Contract Becoming Void: A contract made on the basis of a mistake is void.

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