Other Essential Elements of a Contract (Part-2) CA Foundation Notes | EduRev

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We shall now explain these elements one by one.
(I) Coercion (Section 15)
“Coercion’ is the committing, or threatening to commit, any act forbidden by the Indian Penal Code or the unlawful detaining, or threatening to detain any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.”
Analysis of Section 15
The section does not require that coercion must proceed from a party to the contract; nor is it necessary that subject of the coercion must be the other contracting party, it may be directed against any third person whatever. Following are the essential ingredients of coercion:
(i) Committing or threatening to commit any act forbidden by the India Penal Code.
(ii) the unlawful detaining or threatening to detain any property to the prejudice of any person whatever.
(iii) With the intention of causing any person to enter into an agreement.
(iv) It is to be noted that is immaterial whether the India Penal Code is or is not in force at the place where the coercion is employed.

Effects of coercion under section 19 of Indian Contract Act, 1872
(i) Contract induced by coercion is voidable at the option of the party whose consent was so obtained.
(ii) As to the consequences of the rescission of voidable contract, the party rescinding a void contract should, if he has received any benefit, thereunder from the other party to the contract, restore such benefit so far as may be applicable, to the person from whom it was received.
(iii) A person to whom money has been paid or anything delivered under coercion must repay or return it. (Section 71)
Example: Where husband obtained a release deed from his wife and son under a threat of committing suicide, the transaction was set aside on the ground of coercion, suicide being forbidden by the Indian Penal Code. The threat of suicide amounts to coercion within Section 15.

II Undue influence (Section 16)
According to section 16 of the Indian Contract Act, 1872, “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 he uses that position to obtain an unfair advantage over the other”.

A person is deemed to be in position to dominate the will of another:
(a) Where he holds a real or apparent authority over the other; or
(b) Where he stands in a fiduciary relationship to the other; or
(c) 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 for example, an old illiterate person.

Example 1: A having advanced money to his son, B, during his minority, upon B’s coming of age obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence.

Example 2: A, a man enfeebled by disease or age, is induced by B’s influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services. B employs undue influence.

Example 3: A, being in debt to B, the money-lender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on B to prove that the contract was not induced by undue influence.

Example 4: A applies to a banker for a loan at a time when there is a stringency in money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence.

Analysis of Section 16
The essential ingredients under this provision are:
(1) Relation between the parties: 
A person can be influenced by the other when a near relation between the two exists.
(2) Position to dominate the will: Relation between the parties exist in such a manner that one of them is in a position to dominate the will of the other. A person is deemed to be in such position in the following circumstances:
(a) Real a nd apparent authority: Where a person holds a real authority over the other as in the case of master and servant, doctor and patient and etc.

Example: A father, by reason of his authority over the son can dominate the will of the son.
(b) Fiduciary relationship: Where relation of trust and confidence exists between the parties to a contract. Such type of relationship exists between father and son, solicitor and client, husband and wife, creditor and debtor, etc.

Example: By reason of fiduciary relationship, a solicitor can dominate the will of his client and a trustee can dominate the will of the beneficiary.
(c) Mental distress: An undue influence can be used against a person to get his consent on a contract where the mental capacity of the person is temporaily or permanently affected by the reason of mental or bodily distress, illness or of old age.

Example: A doctor is deemed to be in a position to dominate the will of his patient enfeebled by protracted illness.
(d) Unconscionable bargains: Where one of the parties to a contract is in a position to dominate the will of the other and the contract is apparently unconscionable i.e., unfair, it is presumed by law that consent must have been obtained by undue influence. Unconscionable bargains are witnessed mostly in money-lending transactions and in gifts. Example: A youth of 18 years of age, spend thrift and a drunkard, borrowed Rs. 90,000 on a bond bearing compound interest at 2% per mensem (p.m.). It was held by the court that the transaction is unconscionable, the rate of interest charged being so exorbitant [Kirpa Ram vs. Sami-Ud-din Ad. Khan (1903)]
(3) The object must be to take undue advantage: Where the person is in a position to influence the will of the other in getting consent, must have the object to take advantage of the other.
(4) Burden of proof: The burden of proving the absence of the use of the dominant position to obtain the unfair advantage will lie on the party who is in a position to dominate the will of the other.

Power to set aside contract induced by undue influence- (Section 19A) When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused.

Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the Court may seem just.

Example 1: A, a money lender advances Rs. 1,00,000 to B, an agriculturist, and by undue influence induces B to execute a bond for Rs. 2,00,000 with interest at 6 percent per month. The court may set aside the bond, ordering B to repay Rs. 1,00,000 with such interest as may seem just.

Case study: A student was induced by his teacher to sell his brand new car to the latter at less than the purchase price to secure more marks in the examination. Accordingly the car was sold. However, the father of the student persuaded him to sue his teacher. State on what ground the student can sue the teacher?

Yes, the student can sue his teacher on the ground of undue influence under the provisions of Indian Contract Act, 1872. A contract brought as a result of coercion, undue influence, fraud or misrepresentation would be voidable at the option of the person whose consent was caused.
(III) Fraud (Section 17)
Definition of Fraud under Section 17: 
‘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 an intent to deceive another party thereto or his agent, or to induce him to enter into the contract:
(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
(2) the active concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent.
Explanation to Section 17
Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.

Example 1: A sells, by auction, to B, a horse which A knows to be unsound, A says nothing to B about the unsoundness of the horse. This is not fraud by A.

Example 2: 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.

Example 3: 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.

Example 4: A and B being traders, enter into 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.

Analysis of Section 17
The following are the essential elements of the fraud:

(1) There must be a representation or assertion and it must be false. However, silence may amount to fraud or an active concealment may amount to fraud.
(2) The representation must be related to a fact.

(3) The representation should be made before the conclusion of the contract with the intention to induce the other party to act upon it.
(4)  The representation or statement should be made with a knowledge of its falsity or without belief in its truth or recklessly not caring whether it is true or false.
(5)  The other party must have been induced to act upon the representation or assertion.
(6) The other party must have relied upon the representation and must have been deceived.
(7) The other party acting on the representation must have consequently suffered a loss.

Effect of Fraud upon validity of a contract: When the consent to an agreement in caused by the fraud, the contract is voidable at option of the party defrauded and he has the following remedies:
(1) He can rescind the contract within a reasonable time.
(2) He can sue for damages.
(3) He can insist on the performance of the contract on the condition that he shall be put in the position in which he would have been had the representation made been true.

Mere silence is not fraud A party to the contract is under no obligation to disclose the whole truth to the other party. ‘Caveat Emptor’ i.e. let the purchaser beware is the rule applicable to contracts. There is no duty to speak in such cases and silence does not amount to fraud. Similarly there is no duty to disclose facts which are within the knowledge of both the parties.

Example: H sold to W some pigs which were to his knowledge suffering from fever. The pigs were sold ‘with all faults’ and H did not disclose the fact of fever to W. Held there was no fraud. [Word vs. Hobbs. (1878)].

Silence is fraud:
1. Duty of person to speak: Where the circumstances of the case are such that it is the duty of the person observing silence to speak. For example, in contracts of uberrimae fidei (contracts of utmost good faith).

Following contracts come within this category:
(a) Fiduciary Relationship: Here, the person in whom confidence is reposed is under a duty to act with utmost good faith and make full disclosure of all material facts concerning the agreement, known to him.

Example: A broker was asked to buy shares for client. He sold his own shares without disclosing this fact. The client was entitled to avoid the contract or affirm it with a right to claim secret profit made by broker on the transaction since the relationship between the broker and the client was relationship of utmost good faith. (Regier V. Campbell Staurt)
(b) Contracts of Insurance: In contracts of marine, fire and life insurance, there is an implied condition that full disclosure of material facts shall be made, otherwise the insurer is entitled to avoid the contract.
(c) Contracts of marriage: Every material fact must be disclosed by the parties to a contract of marriage (Hazi Ahmed v. Abdul Gassi).
(d) Contracts of family settlement: These contracts also require full disclosure of material facts within the knowledge of the parties.

(e) Share Allotment contracts: Persons issuing ‘Prospectus’ at the time of public issue of shares/ debentures by a joint stock company have to disclose all material facts within their knowledge.
2. Where the silence itself is equivalent to speech:
For example: A says to B “If you do not deny it, I shall assume that the horse is sound.” A says nothing. His silence amounts to speech.

In case of fraudulent silence, contracts is not voidable if the party whose consent was so obtained had the means of discovering the truth with ordinary diligence (Exception to section 19)
(IV) Misrepresentation (Section 18)
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.
Analysis of Section 18
According to Section 18, there is misrepresentation:
(1) statement of fact, which of false, would constitute misrepresentation if the maker believes it to be true but which is not justified by the information he possesses;
(2) When there is a breach of duty by a person without any intention to deceive which brings an advantage to him;
(3) When a party causes, even though done innocently, the other party to the agreement to make a mistake as to the subject matter.

Example 1: A makes a positive statement to B that C will be made the director of a company. A makes the statement on 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.
Example 2: ‘A’ believed the engine of his motor cycle to be in an excellent condition. ‘A’ without getting it checked in a workshop, told to ‘B’ that the motor cycle was in excellent condition. On this statement, ‘B’ bought the motor cycle, whose engine proved to be defective.

Here, ‘A’s statement is misrepresentation as the statement turns out to be false.

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