CMA Foundation – Capacity to Contract Lesson 2.4 (Part II)

Prepare for your CMA Foundation Paper 1 Business Laws and Business Communication. using our CMA Foundation Study Materials. Here is Lesson 2.4 Capacity to Contract. Since this lesson is quite big, we will learn this lesson in two parts. Part I – Capacity to contract and Part II – Free Consent.

Free Consent

For an agreement to become a valid contract, the consent of the parties must be free and genuine. Consent means that both parties agree upon the same thing in the same sense — also known as consensus ad idem.
If the consent of either party is obtained through coercion, undue influence, fraud, misrepresentation, or mistake, then the contract is not free and hence not valid.

Sections 13 and 14 of the Indian Contract Act define consent and free consent.

• Section 13: “Two or more persons are said to consent when they agree upon the same thing in the same sense.”
• Section 14: Consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation, or mistake.

Meaning of Consent

When parties agree to the same thing in the same sense, consent is said to exist. If the minds of the parties do not meet, there is no real consent, and therefore, no contract.

Case: Foster vs. Mackinnon — The defendant endorsed a bill of exchange, believing it to be a guarantee. The court held that since he did not intend to sign a bill, there was no real consent, and the agreement was void ab initio.

Free Consent (Section 14)

Consent is considered free when it is not caused by:

• Coercion (Sec. 15)
• Undue Influence (Sec. 16)
• Fraud (Sec. 17)
• Misrepresentation (Sec. 18)
• Mistake (Secs. 20, 21, 22)

If consent is caused by any of these factors, the contract becomes voidable at the option of the aggrieved party.

Coercion (Section 15)

Coercion means using or threatening to use force to make someone enter into an agreement. Section 15 defines coercion as “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, with the intention of causing any person to enter into an agreement.”

Essentials of Coercion:

1. Committing or threatening to commit an act forbidden by IPC.
2. Unlawful detaining or threatening to detain property.
3. Intention must be to induce a person to enter into a contract.
4. It is immaterial whether the IPC is in force in that place or not.
5. Coercion may be exercised by any person — even a third party.

Examples:

• X threatens to kill A if A does not sell his house to B. This is coercion.
• N threatens L’s wife that their son would be abducted if L did not lease out land. This is coercion.

Effect of Coercion

As per Section 19, when consent is caused by coercion, the contract is voidable at the option of the aggrieved party. If rescinded, the party must return the benefits received under the contract.

Cases:

• Ranganayakamma vs. Alwar Setti — A widow was forced to adopt a boy under the threat that her husband’s body would not be cremated. Held: adoption voidable as consent was obtained by coercion.
• Ammiraju vs. Seshamma — A release deed obtained under a threat of suicide was held voidable.

Note: Threat to commit suicide amounts to coercion. However, mere threat to file a lawsuit or charge high interest is not coercion.

Undue Influence (Section 16)

Undue influence occurs when one party dominates the will of another to obtain an unfair advantage.

Section 16(1): A contract is said to be induced by undue influence where the relations between parties are such that one is in a position to dominate the will of the other and uses that position to obtain an unfair advantage.

A Person is Deemed to Dominate Another’s Will when:

1. he holds real or apparent authority (e.g., employer–employee).
2. he stands in a fiduciary (trust-based) relation (e.g., doctor–patient, trustee–beneficiary).
3. the other person’s mental capacity is affected by age, illness, or distress.

Relationships Where Undue Influence is Presumed

• Parent and child
• Guardian and ward
• Doctor and patient
• Solicitor and client
• Religious guru and disciple
• Trustee and beneficiary

Case Laws:

• Inche Noriah vs. Shaikh Alie Bin Omar — An old woman gifted all her property to her nephew who managed her affairs. Held: gift set aside for undue influence.
• Mannu Singh vs. Umadat Pandey — A disciple gifted all property to his guru in return for salvation. Held: contract voidable due to undue influence.

Effect of Undue Influence

As per Section 19A, a contract induced by undue influence is voidable at the option of the influenced party. The court may cancel the contract or order partial refund, as justice requires.

Illustrations:

1. A’s son forged B’s name. To avoid prosecution, A signed a bond under B’s threat. Held: Bond voidable.
2. A moneylender used undue influence to get a farmer’s signature for ₹200 when only ₹100 was lent. The court ordered repayment of ₹100 only.

Fraud (Section 17)

Fraud means intentional deception by one party to induce another to enter into a contract.

Section 17 defines Fraud as:

• Suggesting as a fact that which is not true.
• Active concealment of a fact.
• Promise made without intention to perform it.
• Any act fitted to deceive.
• Any act or omission the law declares fraudulent.

Examples and Case Laws

• Peek vs. Gurney — Non-disclosure of company liabilities in a prospectus was held fraudulent.
• Bisset vs. Wilkinson — Statement about land capacity was opinion, not fraud.
• Smith vs. Chadwick — False statement immaterial to buyer’s decision is not fraud.

Does Silence Amount to Fraud?

Mere silence is not fraud unless:

1. There is a duty to speak (e.g., relationship of trust).
2. Silence is equivalent to speech (e.g., partial disclosure or half-truth).

Case Example:
A sells a horse to his newly adult daughter knowing it is unsound but says nothing. Since there’s a duty to disclose, silence amounts to fraud.

Effect of Fraud

If consent is obtained by fraud, the contract is voidable at the option of the aggrieved party. The injured party can either:

• Rescind the contract, or
• Enforce it and demand to be placed in the position as if representations were true.

Exception: If the aggrieved party could have discovered the truth by ordinary diligence, the contract is not voidable.

Misrepresentation (Section 18)

Misrepresentation is a false statement made innocently (without intent to deceive) that induces another to enter into a contract.

Types of Misrepresentation:

1. Positive Assertion: Statement of fact believed true but actually false.
2. Breach of Duty: Gaining an advantage by misleading another, though without intent.
3. Causing Mistake: Inducing the other party to make an error about the substance of the agreement.

Effect of Misrepresentation

The contract is voidable at the option of the misled party. The injured party may:

• Rescind the contract, or
• Insist on performance as if the statement were true.

Exception:
If the party could discover the truth by ordinary diligence, he cannot avoid the contract. (Doctrine of Constructive Notice)

Mistake (Sections 20, 21 & 22)

Mistake refers to an erroneous belief about something. It may relate to law or fact.

Mistake of Law

(i) Mistake of Law of the Country

Ignorance of Indian law is no excuse. Contracts made under such mistake are valid.

(ii) Mistake of Foreign Law

Treated as a mistake of fact — hence, the agreement is void.

Mistake of Fact

(i) Bilateral Mistake (Section 20)

When both parties are mistaken about a fact essential to the agreement, the contract is void.

Examples and Cases:

• Couturier vs. Hastie — Goods sold had already perished. Contract void.
• Raffles vs. Wichelhaus — Two ships named “Peerless”; parties meant different ships. Contract void.
• Cooper vs. Phibbs — A leased property that he already owned. Lease void.
• Nicholson & Venn vs. Smith Mariott — Napkins described as “belonging to King Charles I” but were not. Contract void.
• Webster vs. Cecil — Price written wrongly as £1250 instead of £2250; contract void.

Bilateral mistake can relate to:

• Existence of subject matter
• Identity, title, quantity, or quality
• Possibility of performance (physical or legal)

(ii) Unilateral Mistake (Section 22)

When only one party is mistaken, the contract is generally valid unless the mistake was induced by fraud or misrepresentation.

Examples:

• Smith vs. Hughes — Buyer thought oats were old; they were new. Still bound.
• Philip vs. Brooks — Mistaken identity did not void the contract; fraud made it voidable.
• Cundy vs. Lindsay — Seller never intended to contract with impostor; contract void.
• Lake vs. Simmons — Woman pretending to be baron’s wife; no contract existed.

Conclusion

For a contract to be enforceable, the consent of the parties must be free, genuine, and voluntary. The Indian Contract Act safeguards individuals against exploitation or deception by providing remedies when consent is caused by coercion, undue influence, fraud, misrepresentation, or mistake. In such cases, the aggrieved party may rescind the contract or seek compensation, ensuring fairness and integrity in contractual dealings.

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