Other Essential Elements of a Contract (Part-3) CA Foundation Notes | EduRev

Business Laws for CA Foundation

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CA Foundation : Other Essential Elements of a Contract (Part-3) CA Foundation Notes | EduRev

The document Other Essential Elements of a Contract (Part-3) CA Foundation Notes | EduRev is a part of the CA Foundation Course Business Laws for CA Foundation.
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Difference between Coercion and Undue influence:

Basis of difference
Coercion
Undue Influence
Nature of action
It involves the physical force or threat. The aggrieved party is compelled to make the contract against its will.
It involves moral or mental pressure
Involvement of criminal action

It involves committing or threatening to commit and act forbidden by Indian Penal Code or detaining or threatening to detain property unlawfully.

No such illegal act is committed or a threat is given.
Relationship between parties
It is not necessary that there must be some sort of relationship between the parties.
Some sort of relationship between the parties is absolutely necessary.
Exercised by whom
Coercion need not proceed from the promisor nor need it be the directed against the promisor. It can be used even by a stranger to the contract.
Undue influence is always exercised between parties to the contract.
Enforceability
The contract is voidable at the option of the party whose consent has been obtained by the coercion.
Where the consent is induced by undue influence, the contract is either voidable or the court may set it aside or enforce it in a modified form
Position of benefits received
In case of coercion where the contract is rescinded by the aggrieved party, as per Section 64, any benefit received has to be restored back to the other party.
The court has the discretion to direct the aggrieved party to return the benefit in whole or in part or not to give any such directions.

Distinction between fraud and misrepresentation:

Basis of difference
Fraud
Misrepresentation
Intention
To deceive the other party by hiding the truth.
There is no such intention to deceive the other party.
Knowledge of truth
The person making the suggestion believes that the statement as untrue.
The person making the statement believes it to be true, although it is not true.
Recission of the contract and claim for damages
The injured party can repudiate the contract and claim damages.
The injured party is entitled to repudiate the contract or sue for restitution but cannot claim the damages.
Means to discover the truth
The party using the fraudulent act cannot secure or protect himself by saying that the injured party had means to discover the truth.
Party can always plead that the injured party had the means to discover the truth.


Legal effects of agreements without free consent - (Section 19)
When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.

A party to contract, whose consent was so caused by fraud or misrepresentation may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representation made had been true.
Exception: If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.

Explanation to Section 19: A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practiced, or to whom such misrepresentation was made, does not render a contract voidable.

Example: A, intending to deceive B, falsely represents that 500 maunds of indigo are made annually at A’s factory, and thereby induces B to buy the factory. The contract is voidable at the option of B. This is because when consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.

Analysis of Section 19

It has already been considered that when consent to an agreement is caused by coercion, undue inuence, fraud or misrepresentation, though the agreement amounts to a contract, such a contract is voidable at the option of the party those consent was so obtained. The party, however, may insist that the contract should be performed and that he should be put in the same position in which he would have been, if the representation made had been true.

But a person who had the means of discovering the truth with ordinary diligence cannot avoid a contract on the ground that his consent was caused by misrepresentation or silence amounting to fraud.

Example: A by a misrepresentation leads B to believe erroneously that 750 tons of sugar is produced per annum at the factory of A. B examines the accounts of the factory, which should have disclosed, if ordinary diligence had been exercised by B, that only 500 tons had been produced. Thereafter B purchases the factory. In the circumstance, B cannot repudiate the contract on the ground of A’s misrepresentation.

Where a party to a contract commits fraud or misrepresentation, but the other party is not, in fact, misled by such fraud or misrepresentation, the contract cannot be avoided by the later. (Explanation to Section 19).

Thus, when a seller of specific goods deliberately conceals a fault in order that the buyer may not discover it even if he inspects the goods but the buyer does not in fact, make any inspection, the buyer cannot avoid the contract, as he is not in fact deceived by the conduct of the seller.
Other Essential Elements of a Contract (Part-3) CA Foundation Notes | EduRev

Mistake: Mistake may be defined as innocent or erroneous belief which leads the party to misunderstand the others. Mistake may be either Bilateral or Unilateral. Bilateral mistake is when both the parties to a contract are under a mistake. Unilateral mistake is when only one party to the contract is under a mistake.

Effect of mistake on validity of a contract: Mistake is some unintentional act, omission or error, arising from unconsciousness, ignorance or forgetfulness, imposition or misplaced confidence. It may be of two kinds
Other Essential Elements of a Contract (Part-3) CA Foundation Notes | EduRev
It is essential for the creation of a contract that both the parties should agree to the same thing in the same sense. Thus, if two persons enter into a contract, each of them thinking about a different subject matter,
no contract will arise. As a result, a mistake may lead a contract towards voidness. Its effect can be broadly studied as under:
(i) Mistake of Law: A mistake of law does not render a contract void as one cannot take excuse of ignorance of the law of his own country. But if the mistake of law is caused through the inducement of another, the contract may be avoided. Mistake of foreign law is excusable and is treated like a mistake of fact. Contract may be avoided on such mistake. (ii) Mistake of fact: Where the contracting parties misunderstood each other and are at cross purposes, there is a bilateral or mutual mistake. Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.
Example: A offers to sell his Ambassador Car to B, who believes that A has only Fiat Car, agrees to buy the car. Here, the two parties are thinking about different subject matter so that there is no real consent and the agreement is void.

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