Coercion, Fraud and Misrepresentation | Law of Contracts - CLAT PG PDF Download

Coercion 

• Coercion refers to the act of obtaining consent through force or threats.
• When a person commits or threatens an act forbidden by the Indian Penal Code to gain another's consent for an agreement, it is considered coercion.

 Essential Ingredients of Coercion 

•  Committing or threatening to commit an act forbidden by the Indian Penal Code:  This involves actions that are illegal and prohibited by law.
•  Unlawful detention or threat of detention of property:  This refers to holding or threatening to hold someone's property unlawfully.
•  Intention to cause someone to enter into an agreement:  The purpose behind the act is to compel a person to agree to the terms.

 Chikkam Ammiraju V. Chickam Seshamma: 

In this case, a husband threatened to commit suicide to force his wife and son to sign a release deed, transferring property to his brother. The court ruled that the threat of suicide constituted coercion under Section 15 of the Indian Contract Act, making the release deed voidable.

 Committing or Threatening Acts Forbidden by the IPC 

• The term "act forbidden by the Indian Penal Code (IPC)" in a civil action requires the court to determine whether the alleged act of coercion constitutes an offense under the IPC.
• Threatening to file a false complaint to coerce someone into doing something is considered blackmail or coercion.
• In the case of  Ranganayakamma v Alwar Setti  , the court ruled that the widow's consent to the adoption was not freely given, as it was obtained under coercion when she was prevented from removing her husband's corpse.
• Coercion, therefore, involves committing or threatening to commit any act that is against the law.

 Unlawful Detaining of Property

• Consent can be considered as being influenced by coercion if it is obtained through the unlawful confinement or detention of property, or the threat of such actions.

 Coercion and Duress

• Under English law, actual or threatened violence against a person's body is recognized as a form of duress.
• Duress is a concept in English Contract Law, while coercion is used in Indian Contract Law.
• In cases of coercion, a third party can carry out the action, whereas in duress, only the party involved in the contract is required to act.
• Duress applies only to individuals and cannot involve the detention of property.
• Coercion can be viewed as putting someone under duress, which is akin to stress.
• Coercion involves forcing someone, while duress refers to the stressful feeling or consequence that results from coercion.
• Thus, coercion has a broader scope than duress.

Fraud 

According to Section 17 of the Indian Contract Act, 1872, fraud includes various acts committed by a party to a contract or their agent with the intent to deceive another party or induce them to enter into the contract. These acts include:

• Suggesting a false fact by someone who does not believe it to be true.
• Actively concealing a fact, known as "suppresio veri" or suppression of a fact.
• Making a promise without the intention of fulfilling it.
• Any other act that is intended to deceive.
• Any act or omission specifically declared by law to be fraudulent.

 Explanation:  Mere silence about facts that could influence a person's decision to enter into a contract is not considered fraud unless there are circumstances that require the person to speak or make silence equivalent to speech.

 Essentials of Fraud 

• There must be a false statement of fact made by a person who does not believe the statement to be true.
• The statement should be made with the intention of deceiving another party and inducing them to enter into the contract based on that false information.

 False Statement of Fact 

•  For fraud to be established, there must be a statement of fact that is not true. Mere expressions of opinion are insufficient to constitute fraud. For instance, if a person over 60 years old, beyond the insurable age, falsely claims to be 48 years old to obtain an insurance policy, it constitutes fraud, and the insurer has the right to void the policy.
•  In the case of Edington vs. Fitzmaurice, a company facing significant financial difficulties needed funds to address pressing liabilities. The company raised the funds by issuing debentures. During this process, the directors misrepresented the purpose of the funds, stating they were needed for development, asset purchase, and construction completion. This misrepresentation was deemed fraudulent.

 Mere Silence is No Fraud 

• To establish fraud, there must be a representation regarding certain untrue facts.  Mere silence does not constitute fraud  unless there is a duty to speak, or the silence is equivalent to speech.
• In  Keates v Lord Cadogan  , A rented a house to B, knowing it was in a dilapidated condition and that B would occupy it immediately. A did not disclose the house's condition to B, and it was ruled that A did not commit fraud.
• In  Shri Krishan v. Kurukshetra University  , Shri Krishan, an L.L.B. exam candidate, did not mention his insufficient attendance in the admission form. The law department head and university authorities failed to scrutinize properly to uncover the truth. The Supreme Court ruled that the candidate did not commit fraud, and the university lacked the authority to disqualify him on that basis.

Exceptions 

• Keeping silent when there is a duty to speak is considered fraud.
• Silence that is equivalent to speech is also considered fraud.

 Duty to Speak (Contracts of Uberrimae Fide) 

• In certain situations, if a person is expected to speak and they choose to remain silent, it is considered fraudulent.
• When there is an obligation to disclose information, failing to do so is misleading.
• Contracts of uberrimae fide, or utmost good faith, require full disclosure.
• A common example is insurance contracts, where the policyholder must disclose all relevant facts to the insurer.
• In the case of  Srinivasa Pillai v LIC of India  , the Supreme Court emphasized the need for utmost good faith in insurance contracts.
• The insured must provide truthful answers to the insurer's questions.
• Failure to disclose certain facts that do not impact the risk involved does not invalidate the contract.

 Silence Equated to Speech 

•  Silence as Fraud:  Keeping silent about certain facts can create a false impression about a situation, making silence equivalent to fraud.
•  Means of Discovering Truth:  Even if consent is obtained through misrepresentation or silence, the contract is not voidable if the aggrieved party could have discovered the truth with ordinary diligence.
•  Illustration of Silence:  For example, if A tells B that he will assume the horse is sound if B does not deny it, B's silence implies agreement. If the horse is later found to be unsound, B is guilty of fraud.

 Active Concealment 

•  Definition:  Active concealment of a fact by someone with knowledge or belief about the fact can be treated as a statement of fact and constitutes fraud.
•  Nature of Active Concealment:  Active concealment involves efforts to prevent the other party from knowing the truth, leading them to believe something false. This concept is known as  suppressio veri  .
•  Contrast with Silence:  Merely keeping silent may not constitute fraud, except in certain situations.
•  Caveat Emptor:  In the context of goods sales, the principle of  caveat emptor  , or "let the buyer beware," applies. It is the buyer's responsibility to exercise caution, as there are no implied conditions or warranties regarding the quality or fitness of the goods.

Promise Made Without Any Intention to Perform It 

• When an individual commits to a promise, it is interpreted as a commitment to fulfill it.
• If there is no genuine intention to uphold the contract at the time of its creation, it constitutes fraud. For instance, if someone borrows money without the intent to repay, is bankrupt, or buys goods on credit with no intention of payment, it is considered fraudulent.
• However, if the intention was not malicious when entering the contract, but the promise is not fulfilled later, it does not amount to fraud.

 Any act or omission which any other act fitted to deceive 

• Clause (4) of the section states that any action or omission intended to deceive falls under the category of fraud. This provision is broad and aims to encompass instances of fraud that might not be covered by the previous three clauses.

 Any act or omission which the law declares as fraudulent 

• According to Section 17(5), fraud includes any act or omission specifically designated by law as fraudulent. In such situations, the law mandates certain obligations to be fulfilled, and failure to do so is explicitly considered fraud.
• In the case of Akhtar Jahan Begam v Hazarilal, a scenario was presented where A sold property to B, assuring in the sale deed that he would not be liable for any loss incurred by B due to A's defective title. A had previously sold the same property to someone else without informing B about it. It was determined that A had committed fraud, rendering the contract voidable at B's discretion.

 Statement should be meant for the party misled 

• It is essential that the misleading statement is directed towards the party who is deceived. For instance, if an individual is buying shares in a company from the open market based on a prospectus, they cannot sue the company later because the prospectus is intended for the original share allottee by the company, not for someone like the current appellant who purchases shares from the original allottee. Consequently, the promoters are not held liable for fraud.

Damages for Fraud 

• If a contract is based on fraud, the victim (representee) has the right to seek either  rescission  (cancellation of the contract),  damages  (compensation), or both.
• Even if it's not possible to restore everything to its original state (restitutio in integrum), the victim can still pursue legal action.
• The person who committed the fraud (defendant) is responsible for compensating all the damages that directly result from the fraudulent transaction.
• When determining the amount of damages, the victim can claim the full price paid but must account for any benefits received from the transaction.
• Generally, benefits include the market value of the acquired property, but this rule may not apply if it would prevent the victim from receiving fair compensation for the harm suffered.
• The victim can also claim compensation for any consequential losses caused by the fraudulent transaction.
• Once the victim discovers the fraud, they are obligated to take reasonable steps to minimize their losses.

Misrepresentation 

Misrepresentation refers to a false statement made by one party to another, either before or at the time of entering into a contract. This statement is about a fact that is important for the contract and is made with the intention of persuading the other party to agree to the contract. When a representation is made incorrectly, either unintentionally or intentionally, it is called misrepresentation. If the false representation is made deliberately to deceive the other party, it is known as fraud. However, if it is made innocently, without any intention to deceive, it is termed misrepresentation.

In cases of misrepresentation, the party making the false statement genuinely believes it to be true. For example, if person A is selling their car to person B and tells B that the car gives 18 kilometers per liter of petrol, believing it to be true, but later B discovers that it only gives 15 kilometers per liter, A has committed a misrepresentation.

 Positive Assertion: 

When someone makes a positive statement about material facts, sincerely believing it to be true, even though it is false, it is considered misrepresentation.

 Breach of Duty

• According to Section 18(2), a breach of duty without intent to deceive that gives an advantage to the wrongdoer or someone under them through misleading another to their prejudice constitutes misrepresentation.
• Misrepresentation occurs when a party fails to disclose information they are obligated to, such as in a life insurance policy where the assured does not disclose previous serious ailments.
• This duty of disclosure exists in relationships like banker and customer, landlord and tenant, and all contracts of utmost good faith.
• Breach of duty cases can also be referred to as 'constructive fraud.'

 Inducing Mistake about Subject-Matter

• It is essential for all parties involved in an agreement to have a clear understanding of the subject matter.
• If one party, even innocently, leads the other to make a mistake regarding the nature or quality of the subject matter, it is considered misrepresentation.

Essentials of Misrepresentation

• The representation must be made innocently, with a genuine belief in its truth, and without the intention to deceive the other party.
• Misrepresentation should pertain to facts that are material to the contract; merely expressing an opinion does not constitute a statement of fact.
• The representation must be false, but the person making it should honestly believe it to be true.
• The representation should be made with the intention of inducing the other party to enter into the contract, and the other party must have relied on the representation. If the misled party had the means to discover the truth with ordinary diligence, they cannot claim misrepresentation.
• The false representation must be made by one party to the other party who is misled. If it is not directed to the misled party, it does not constitute misrepresentation.

Effect of Misrepresentation 

According to  Section 19 of the Contract Act,  when a party's consent to an agreement is influenced by misrepresentation, the contract becomes voidable at the discretion of the aggrieved party. This means that the party misled by the misrepresentation has the right to either rescind the contract or enforce its performance.

Rights of the Aggrieved Party:

•  Rescind the Contract:  The aggrieved party can choose to cancel the contract if they were unable to discover the truth with ordinary diligence.
•  Accept the Contract:  Alternatively, the aggrieved party may decide to accept the contract and demand its performance, seeking damages from the other party if necessary.

Loss of Right to Rescind:

The right to rescind the contract due to misrepresentation can be lost in certain situations:

• If the aggrieved party could have discovered the truth with ordinary diligence.
• If the consent was not induced by misrepresentation.
• If the party, upon learning of the misrepresentation, expressly affirms the contract or acts in a way that indicates acceptance.
• If a third party acquires rights in the subject matter in good faith and for consideration before the contract is rescinded.
• If the parties cannot be restored to their original positions.

 Types of Mistake in Contract Law

Mistake in contract law refers to a situation where parties enter into an agreement based on an erroneous belief about something. When a mistake occurs, there is no genuine consent, and the agreement becomes invalid.

Mistakes can be broadly categorized into two types: mistake of law and mistake of fact. Mistake of law can be further divided into mistake of Indian law and mistake of foreign law. On the other hand, mistake of fact can be classified into bilateral mistake and unilateral mistake.

Mistake of Law (Section 21)

Mistake of Indian Law

•  General Rule:  Mistake of law of the land is generally not an excuse. According to Section 21, a contract is not voidable due to a mistake regarding any law in force in India.

•  Reason:  Individuals are expected to know the laws of their country. If someone is unaware of the law, they must bear the consequences.

Mistake of Foreign Law

•  Understanding:  While individuals are expected to know their country's laws, they cannot be expected to know the laws of other countries.

•  Rule:  The principle of 'ignorance of law is no excuse' does not apply to foreign law. Therefore, a mistake of foreign law is treated as a mistake of fact.

Mistake of Fact (Section 20)

•  Definition:  Mistake of fact refers to a misunderstanding regarding a fact related to the agreement.

•  Classification:  Mistake of fact can be further categorized into bilateral mistake and unilateral mistake.

 Bilateral Mistake

• A bilateral mistake occurs when both parties involved in an agreement are mistaken about a fact that is essential to the agreement.
• In such cases, there is no valid agreement because there is a complete absence of consent.
• Section 20 of the Act states that if both parties are mistaken about a matter of fact crucial to the agreement, the agreement is void.
• For an agreement to be declared void under this section, the following three conditions must be met:

 1. Both Parties Must Be Under a Mistake 

The mistake must be mutual. For instance, if A offers to sell his Fiat car to B, who mistakenly believes A has only one car and agrees to buy the Maruti instead, there is no consent, making the agreement void.

 2. Mistake Must Be of Fact, Not of Law 

•  The mistake must relate to an essential fact:  The mistake should pertain to a fact critical to the agreement. If A agrees to buy a horse from B, unaware that the horse is dead, the agreement is void because the horse's existence is vital to the contract.
• A bilateral mistake can involve:
•  Mistake regarding the subject-matter  or
•  Mistake regarding the possibility of performance. 

 Mistake Regarding the Subject Matter of the Contract 

 Unilateral Mistake 

• A unilateral mistake occurs when only one party involved in an agreement is mistaken about a certain aspect. In most cases, this does not render the agreement void. According to Section 22, a contract is not voidable simply because one party is mistaken about a factual matter. If a person fails to verify the terms of the contract due to negligence or lack of reasonable care, they must accept the consequences. For instance, in the case of Smith v. Hughes, when A sold oats to B believing they were old oats, B was still bound by the contract even though the oats were new.
• However, there are situations where a unilateral mistake can be so significant that it affects the fundamental nature of the contract, making the agreement void.

 Mistake as to the identity of the person contracted with: 

• When a mistake occurs regarding the identity of the person involved in the contract, it can invalidate the agreement. For example, if A intends to contract only with B but mistakenly contracts with C believing him to be B, the contract is void.
• A mistake about the identity of the contracting party will render the contract void only if:
• 
  
  • the identity of the party is crucial to the agreement, and
  • the other party is aware that they are not intended to be part of the agreement.
• For instance, in the case of Cindy v. Lindsay, where Blenkiron placed an order with Lindsay & Co. by imitating Blenkiron's signature, there was no contract between Lindsay and Blenkiron. As a result, even an innocent buyer like Cindy did not acquire a good title and had to return the goods.
• Similarly, in the case of Lake v. Simmons, a woman misrepresented herself as the wife of a wealthy Baron to obtain pearl necklaces from jewelers. Since there was no contract between the jeweler and the woman, the broker, who acted in good faith, also did not acquire a good title and had to return the necklaces to the jeweler.

 Mistake as to the nature of the contract 

• A contract is deemed void if one party, without any fault of their own, makes a mistake regarding the very nature of the contract. If a person is misled into signing a document that contains a contract fundamentally different from what they believe they are signing, the contract is void.
• For example, in Foster v. Mackinnon, an elderly illiterate man was tricked into signing a bill of exchange, believing it to be a mere guarantee. Since he never intended to sign a bill of exchange, he was not held liable for it.

Effect of Mistake

• When both parties in an agreement are mistaken about a crucial fact related to the agreement, the contract is considered void.
• In most cases of unilateral mistake, the contract remains valid. However, if the unilateral mistake undermines the true consent of the parties, the agreement is deemed void.
• Any individual who gains an advantage from such an agreement is obligated to return or compensate for it to the person from whom they received it.
• If someone receives money or goods by mistake, they must return or repay it.