Undue Influence | Law Optional Notes for UPSC PDF Download

Understanding Consent in Contracts

Section 13 of the Indian Contract Act defines Consent as "when two parties entered into the contract there should agree upon the same thing in the same manner", there should be a meeting of minds between the two parties. Consent occurs when one person voluntarily agrees to the proposal or desires of another.

Meaning and Definition of Free Consent

Consent exists when one person voluntarily acknowledges the proposal or desire of another person. The definition of Free consent under the Indian Contract Act is consent that is free from coercion, undue influence, fraud, misrepresentation, or mistake.

According to Section 13, "Two or more persons are said to be in consent when they agree upon the same thing in the same sense (consensus-ad-idem)". Free consent means consent given to an individual for the performance of an act on his will.

Free consent under the Indian Contract Act has been defined in Section 14. The section says that consent is considered free consent when it is not caused or affected by coercion, undue influence, fraud, misrepresentation, or mistake.

• Coercion
• Undue influence
• Fraud
• Misrepresentation
• Mistake

Importance of Free Consent

• Ensures the validity and enforceability of an agreement.
• Protects parties from various forms of coercion, such as undue influence, misrepresentation, fraud, and mistake.
• Essential principle of consensus-ad-idem is upheld.

Illustration

When an older individual, referred to as "A", resides with their nephew, "B", who provides care, and "B" manipulates "A" into signing over his property, this constitutes a situation of undue influence. An example from the case law of Nokhia vs State of H.P[1] illustrates that consent given under such circumstances cannot be considered genuine. In the absence of coercive, deceptive, or manipulative influences, a contract remains binding and cannot be unilaterally voided.

Vitiating Factors to Free Consent

Vitiating factors are elements in contract law that undermine the freedom of consent. These factors include:

• Coercion
• Mistake
• Undue influence
• Fraud
• Misrepresentation

Coercion under the Indian Contracts Act

Definition of Coercion (Section 15) 

Coercion, as per Section 15 of the Indian Contracts Act, involves committing or threatening to commit any act prohibited by the Indian Penal Code. It also includes unlawfully detaining or threatening to detain property to the detriment of any individual, all with the aim of compelling someone to enter into an agreement.

Chikkam Ammiraju v. Chickam Seshamma

• In the case of Chikkam Ammiraju v. Chickam Seshamma, coercion was evident when a husband used the threat of suicide to coerce his wife and son into signing a release deed in favor of his brother for certain properties claimed by the wife and son. 
• The court ruled that the act of threatening suicide constituted coercion under Section 15 of the Indian Contract Act, rendering the release deed voidable.

Illustration

An example of coercion can be seen when 'A' coerces 'B' into giving his car. 'A' threatens to harm 'B' unless he gives 'C' a substantial amount of money. Believing the threat, 'B' gives the money to 'C'. This agreement is considered to be coerced. By understanding coercion under the Indian Contracts Act, we see how the use of threats or unlawful actions to force someone into an agreement can render that agreement voidable. It's essential to recognize these situations to ensure fair and lawful contractual relationships.

Undue Influence under the Indian Contracts Act

Undue Influence involves manipulating a vulnerable individual to sway their decisions based on the existing relationship dynamics.

Definition of Undue Influence (Section 16)

• According to Section 16, a contract is considered to be influenced by undue influence when one party is in a position to control the will of the other, exploiting this power for unfair gains.
• The dominating party could hold authority over the other or be in a fiduciary relationship, exploiting situations where the other party's mental capacity is compromised due to factors like age, illness, or distress.
• If a person in a dominant position engages in a contract that appears unconscionable, the burden of proof lies on them to show that undue influence was not involved.

Illustration

• In an example, an elderly cancer patient named James is coerced by his doctor, Daniel, to transfer a considerable sum for treatment, showcasing a clear case of undue influence.
• In the legal case of Lakshmi Amma Vs T. Narayana, a person with multiple health issues was manipulated into gifting all his assets to one son while excluding others, leading the court to deem the gift voidable due to undue influence.

Fraud under the Indian Contracts Act

• A false statement knowingly made with the intent to deceive is a key element in proving fraud.
• Wrongful intention to deceive the other party is essential to establish fraud in a contract.

Illustration

For instance, if 'A' sells a horse to 'B' at an auction, knowing that the horse is unsound but fails to disclose this fact, it does not constitute fraud on the part of 'A'.

Simply remaining silent about facts that could impact a person's decision to enter a contract does not qualify as fraud.

Fraud Definition in English Law

• Fraud involves making a false representation knowingly, without believing in its truth, or recklessly careless about its truthfulness.

In the case of Derry v. Peek, the company made a false statement in their prospectus about having permission to use steam trams, leading to legal consequences.

Active Concealment in Contracts

• Actively concealing information in a contract can render it invalid and result in liability for the concealing party. This includes intentionally hiding key details from the other party.
• For example, persuading someone to sign documents under false pretenses constitutes active concealment.

Mere Silence is not Fraud

• Simply remaining silent about facts that might influence someone's decision to enter a contract is not considered fraud, unless there is a duty to disclose or the silence itself is misleading.
• Parties are not obligated to reveal all material facts unless there is a duty to disclose, silence amounts to fraud, half-truths are spoken, or circumstances change.
• For instance, if 'A' sells a mentally unstable horse to 'B' without being asked about its condition, 'A' cannot be held liable as there was no duty to disclose.

When Silence is Fraud

• Silence can constitute fraud when there is a duty to speak, when silence is deceptive, in cases of half-truths, or due to a change in circumstances.

Case Laws

1. A.L Mustaneer Establishment v. Varuna Overseas Pvt. Ltd.: This case highlights fraud in connection with letters of credit.
2. Ratan Lal Ahluwalia v. Jai Janider Parsad: Under common law, fraud not only makes a contract voidable but also leads to potential damages for deceit.

Misrepresentation under the Indian Contracts Act

Misrepresentation refers to the misstatement of a significant fact in a contract.

Misrepresentation, as per Section 18 of The Indian Contract Act, entails an untrue statement of law or fact by one party, leading the other party to enter into an agreement or contract.

• Misrepresentation involves false statements that impact another party's decision regarding a contract.
• Misrepresentation can render a contract void and, in certain instances, enable the affected party to claim damages.
• Misrepresentation serves as grounds for breaching a contract in transactions, irrespective of their size.
• Misrepresentation pertains solely to statements of facts and not to opinions or predictions.

Types of Misrepresentation

• Fraudulent Misrepresentation: This type involves a knowingly false representation, made without belief in its truth or recklessly, leading to contract voidance and potential damages for the aggrieved party.
• Negligent Misrepresentation: Negligent misrepresentation occurs when a party makes a declaration to another party carelessly or without reasonable grounds for believing its accuracy. The remedy typically involves contract rescission and potential damages.
• Innocent Misrepresentation: Innocent misrepresentation refers to a misrepresentation made without any fault. In such cases, the usual remedy involves contract rescission or cancellation.

Distinguishing Fraud and Misrepresentation

Damages under Section 75 of the Indian Contract Act

• Party rightfully rescinding contract entitled to compensation
• A person who rightfully cancels a contract is eligible for compensation for any losses incurred due to the contract not being fulfilled.

Raharman Prodhan v. State of West Bengal

• A case where a work order was issued to repair a river bank, but the given alignment was incorrect, leading to damages caused by floods.
• The plaintiff's claim for compensation for work already completed was acknowledged.
• Illustration: A singer, A, agrees to perform at a theater for two nights a week for two months for a fee. If A misses a night and the contract is terminated, the theater manager, B, is entitled to compensation for the losses incurred.

Mistake under the Indian Contracts Act

• Definition of Mistake: Mistake is not explicitly defined in the Indian Contract Act. Sections 20, 21, and 22 address the concept of mistake. It occurs when parties intend to do one thing but, by error, end up doing something different.
• Void Agreement Due to Mistake: If both parties are mistaken about a crucial fact essential to the agreement, the agreement becomes void.
• Case Law Example (Phillips v. Brooks Ltd.): The case established that a person is considered to contract with the person in front of them unless they can prove they intended to deal with someone else.
• Illustration: For instance, if A agrees to sell goods that were lost before the agreement due to a shipwreck unknown to both parties, the agreement is void.
• Section 20:
  • Applies when both parties are mistaken.
  • The mistake pertains to a matter of fact.
  • The mistaken fact is essential to the agreement.
• Effect of Mistake of Law (Section 21): A contract is not voidable if it was caused by a mistake regarding any law in force in India. However, a mistake about a law not in force in India is treated similarly to a mistake of fact.
• Case Law Example (Grant v. Borg): This case illustrates that a mistake of law, such as not being aware of certain legal clauses, cannot be used as a defense.
• Contract Caused by Mistake of One Party (Section 22): A contract is not automatically voidable if one party is mistaken about a matter of fact.
• Case Law Example (The State of Maharashtra v. Mayer Hans George): In this scenario, a mistake by an officer of the court led to the arrest of the wrong person. Here, a genuine intention can be used as a defense in the case of a mistake.

Effect on Contracts Influenced by Any Factor Vitiating Free Consent

Coercion

• Coercion involves forcing an individual to enter into a contract through intimidation or threats, thus negating free consent.
• Effect of Coercion: A coerced contract is voidable, meaning the affected party can choose to either enforce or void the contract.

Undue Influence

• Undue Influence occurs when one party holds a dominant position over the other, affecting the freedom of consent.
• Effect of Undue Influence: If consent is influenced unduly, the contract becomes voidable, with the burden of proof on the dominant party to show lack of influence.

Fraud

• Fraud denotes deceit by a party, typically involving knowingly false statements.
• Effects of Fraud:
  • A contract based on fraud is void.
  • The deceived party can choose to withdraw from the contract.
  • The defrauding party is liable for damages.

Misrepresentation

• Misrepresentation occurs when the truth is misrepresented, involving false or incorrect representations by a party.
• Effect of Misrepresentation:
  • If misrepresentation is proven, the contract can be voided. The affected party may terminate the contract within a reasonable time as per the Specific Relief Act 1963.

Mistake

• Mistake arises from a misunderstanding between parties about a crucial fact in the contract.
• Effect of Mistake:
  • A mutual mistake can invalidate a contract if it is fundamental and nullifies the agreement. If the mistake strikes at the core of the contract, it renders the contract void.