INDIAN CONTRACT ACT, 1872

The Indian Contract Act is one of our oldest laws. Everyday in our lives we are entering into agreements and contracts. Agreement: The term agreement for a layman means to agree. Here, one person offers or proposes to another, and the latter agrees to the offer or proposal made. This results in an agreement. Offer + Acceptance = Agreement Contract: Contract is an agreement, which is enforceable. So contract is an offer which when accepted is enforceable in the court of law, if any of the party backs out of his obligation. Agreement + Enforceability = Contract

INTRODUCTION
All contracts are agreements but all agreements are not contracts According to Section 10 of the Indian Contract Act, All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void Thus, free consent is one of the essentials of a contract

FREE CONSENT
The term consent means that parties to a contract must agree upon the same thing in the same sense, i.e. there should be consensus-ad-idem. For eg. X has two cars, Indica and Indigo. X offers to sell Indica, while B accepts thinking the car to be sold was Indigo. Here there is no consent. Also the parties must concede voluntarily, i.e. it is devoid of coercion, undue influence, fraud, misrepresentation or mistake.

When consent is not free due to mistake, the agreement is void but in all other cases, the contract is voidable at the option of the aggrieved party. Eg. L threatened to shoot B if B does not lend him Rs.2000 and B agrees to do it. Here the agreement is entered under coercion and hence voidable at the option of B.

COERCION
The term coercion means putting a person under fear. Here, the consent of a person to the contract is obtained by threatening or pressurizing. Section 15 of Indian Contract Act defines coercion as: committing or threatening to commit, any act forbidden by IPC or 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. Eg. X says to Y I shall not return the documents of title relating to your wifes property, unless you agree to sell your house to me for Rs.5 MILLION. Y says: ok, I will sell my house to you for Rs.5 MILLION; do not detain my wifes documents of title. In this case, X has employed coercion and thus the contract is voidable, that means that it can be enforced by the party coerced, i.e. Y, but not by the party using coercion i.e X.

ESSENTIALS OF COERCION
The essentials of coercion are: 1. Threatening to commit an act
2.

Act must be prohibited under IPC

3. Coercion may be exercised over person or property

4.

Coercion can be exercised by the contracting party or by anyone on his behalf

5. Coercion must be done with the intention of causing the other party to enter into a contract

THREATENING TO COMMIT AN ACT:

In order to establish coercion, there must be an act of force or a threat of force. Eg. An agent refused to hand over the account books of the principal, unless the principal released him from all his liabilities. This amounted to committing an act of coercion.

Act must be prohibited under IPC:

All acts committed or threatened to be committed do not amount to coercion Eg. A parent unplugging the T.V. Only those acts which are not permitted by Indian Penal Code (IPC) when used or threatened to be used amount to coercion Eg. Rahul receives a phone call from Amit to pay Rs.10 million and threatening to send shooters if not complied with. Extortion not permitted by IPC and hence, it amounts to coercion.

Coercion may be exercised over person or property:

Coercion may be directed against person or property. When it is directed against the person, it may be against the contracting party or against anyone whom the contracting party is interested. Eg. A threatens to takeover a business if B tries to increase its market share.

Coercion can be exercised by the contracting party or by anyone on his behalf:

It is not always necessary that only the contracting party alone must exercise coercion. Someone on his behalf can also exercise coercion. Eg. Suresh instructs Adesh to take the possession of Jacks car forcefully if he does not sell it for Rs.7 lacs.

Coercion must be done with the intention of causing the other party to enter into a contract
It is essential that the act of coercion must be done with the intention of obtaining the consent of the other party and inducing him wrongly to enter into a contract.

UNDUE INFLUENCE
The term undue influence is the unfair use of ones position or power. Section 16 states undue influence as: Where the relations subsisting between the parties are such that one of the parties is in position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. Unlike coercion where the pressure is of physical nature, in undue influence, the pressure is of mental nature. Eg. A lawyer took the case of X and later refused to proceed with the case unless X paid him Rs 50,000. This amounted to undue influence.

Existence of undue influence

Undue influence exists in the following conditions:

 When one party is fully dependent on another or trusts the other. Eg. A CEO of a company denies a manager to pay off his outstanding salaries and PF if he goes away and joins another company. When a persons mental health is affected by age, illness, mental or physical distress. Eg. X obtains consent to transfer the ownership of a business from Y wrongfully when Y is undergoing mental treatment. When there is a dominant authority among the parties involved in the contract. Eg. Income-tax officers threatened to conduct a raid on the business of a businessman unless the businessman paid him 2 million.

CONSEQUENCES OF UNDUE INFLUENCE

The contract is voidable in favour of innocent party.

The contract may be set aside absolutely or if the party who was entitled to avoid it has received any benefit there under it may be set aside.

BURDEN OF PROOF
In undue influence, the initial burden is on the aggrieved party to prove the contract is unconscionable. Once that is established the burden of proof is on the dominant party. The dominant party should establish the following: That the other party had independent advice. That the transaction was thoroughly explained. The consent was free consent.

DISTINCTION BETWEEN COERCION AND UNDUE INFLUENCE

FRAUD
Fraud literally means cheating. Section 17 of ICA states fraud as: Fraud means and includes any of the acts stated committed by a party to a contract or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into a contract. Eg. Bernard Madoff was accused of committing fraud through its Ponzi scheme which led to the huge loss of $67.7 billion to the investors in United States.

ESSENTIALS OF FRAUD

The essentials of fraud are:

1.

The act must be committed by a party to a contract False representation Representation as to fact Actually deceived Loss occurs

The act must be committed by a party to a contract: The act of fraud must be committed by a party to a contract or by authorized agent. Fraud committed by third party will not affect the validity of the contract. Eg. A was made to buy shares in a company on the false statement by B. B was neither a director nor an agent of the company. Here, the act did not amount to fraud. False representation: There should be a false representation and it should be made intentionally. A person making a false statement is not guilty of fraud if he believes it to be true.
2.

Eg. The directors of a company issued a prospectus stating steam power would be used for running the trains. The directors honestly believed permission would be granted as they had complied with the requirement. But permission was rejected. Here, no fraud was committed as intention to deceive was lacking. Representation as to fact: The false representation must be of material fact. Mere opinion, expression of intention does not amount to fraud
3.

Eg. Satyam computers presented inflated cash and revenues to retains shareholders confidence in a company Actually deceived: In order to constitute fraud, the innocent party must have been actually deceived. If not deceived then the act does not amount to fraud.
4.

Eg. A business went bankrupt. A sells it to B and he accepts deal without proper examination of its accounts. A cannot be held liable if B finds any wrongdoings of a business. Loss occurs: The party who has been deceived must suffer a loss. If there is no loss, it will not give rise to an action of fraud.
5.

Eg. Wipro accused its employee of committing fraud because company suffered a loss of $5million due to mismanagement of funds.

WHAT CONSTITUTES FRAUD?

The acts which constitute fraud are: Suggesting as to a fact by one who does not believe it to be true. Active concealment of a fact by one having belief of the fact. Any act fitted to deceive and declared fraudulent by law. A promise made without any intention of performing it.

MERE SILENCE AND FRAUD

Mere silence as to facts, likely to affect willingness of a party to enter into contract is not a fraud, as no party is under obligation to disclose the truth to the other party. Eg. Jay decides to sell his business as it might face loss in near future. Buyer of a business cannot allege Jay of committing fraud when it goes into loss. Exceptions to this rule are:

Where silence is equivalent to speech.

Where circumstances are such that there is a duty of person keeping silence to speak. EXAMPLE.

CONSEQUENCES OF FRAUD
The consequences of fraud are: The contract can be avoided. This may not be applicable when innocent party could have found truth or takes a benefit under it. Innocent party has a right to sue for damages.

The innocent party may insist that the contract be put in the position as it would have been if the representation was true.

MISREPRESENTATION
Misrepresentation is a false representation made innocently. Section 18 of Indian Contract Act defines misrepresentation as: A false representation of fact made innocently or non-disclosure of a material fact, without any intention to deceive the other party. Eg. Taiwan machinery &co. decides to sell machine which is in good condition. They are unaware of the fact that the machine requires the replacement of internal parts. They sell the machine to a customer. Customer finds out that it was faulty and internal parts need to be replaced. Thus, a customer cannot sue the company of misrepresentation of fact.

ELEMENTS OF MISREPRESENTATION
1.

BY A PARTY TO A CONTRACT: The false statement made must be made by the party to contract or by his agent. Also, it must be addressed to the party who is misled. Eg. Rahul, who had purchased shares from the first allottee, sued the company on the ground of having purchased shares on the basis of false statement in the prospectus.

This is not a case of misrepresentation as the prospectus was addressed to the first applicants only. It could not be supposed to extend to others.
2.

FALSE REPRESENTATION: The statement made by the party must be false but the person must honestly believe it to be true. Eg. A informs B that his estate is free from encumbrance, B thereupon buys the estate, but in fact the estate is subject to mortgage though unknown to A also. This is a case of misrepresentation and B may either avoid the contract or may interest on it being carried out and the mortgage debt redeemed.

3.

REPRESENTATION AS TO FACT: The false statement must be of material facts. A mere expression of ones opinion is not a statement of fact. Eg. Akash appoints an agent to buy a house. An agent estimates the price at Rs.50 million. Akash buys that house. However the price turned out to be lower at Rs 35 million. Akash cannot sue agent for overpaying for the house.

4.

OBJECT TO MAKE THE PARTY ENTER INTO CONTRACT: The representation must be made with a view to inducing the other party to enter into a contract but having no intention to deceive. EXAMPLE:

5.

ACTUALLY ACTED: The innocent party must have acted on the basis of the statement, which turns out to be false. Eg. A company issued a prospectus of 100 pgs, in which the contents on pg 80 were wrong. X bought the shares of the company after reading 60 pgs. In this case X cannot sue as he had not acted on the basis of the wrong statement.

CONSEQUENCES OF MISREPRESENTATION
The aggrieved party has the following remedies:
1.

The contract is voidable at his option. However, the aggrieved party cannot avoid the contract if the truth is found by ordinary diligence and where the party gives consent independent of the misrepresentation. The aggrieved party can affirm the contract and insist on being put in the same position in which he would have been had the representation been true.

2.

MISTAKE

Mistake is an incorrect belief about something. Unlike coercion, undue influence, fraud and misrepresentation, mistake has not been defined. However, it could be stated as an error of judgement.

CLASSIFICATION OF MISTAKE
Mistake can be classified into two parts; mistake of law and, mistake of fact.

MISTAKE OF LAW
Mistake of law includes mistake of Indian law as well as mistake of foreign law. Mistake of Indian Law: The mistake of the law of land is no excuse. Everyone is presumed to know the law of land. This is based on ignorantia juris non excusat (i.e. ignorance of law is no excuse) Eg. Factory law mentions the company to employ a safety officer if it employs more than 1000 employees. A company does not have safety officer in spite of employing 1500 employees because of ignorance. The company is liable to follow a suit in court even if it was ignorant to this law. Mistake of Foreign Law: Mistake of foreign law is treated as mistake of fact and is excusable. Mutual mistake of foreign law renders a contract void. Eg. An American indulges in a gambling business in India. He cannot be sued in the court of law if does it by mistake and being ignorant of such law he is excusable.

MISTAKE OF FACT
Mistake of fact is an erroneous belief as to facts. Mistake of fact can either be bilateral mistake of fact or unilateral mistake of fact. Eg. A entered into an agreement with B, to buy a ship called, xyz. B had to ships called xyz, one in the Mumbai dock and one in the London dock. B sold the ship on the London dock to A. But A wanted to buy the ship on the Mumbai dock.

Here, there is a unilateral mistake of fact and hence the contract is voidable. BILATERAL MISTAKE OF FACT: Bilateral mistake refers to mistake in minds of both the parties to agreement. Section 20 of Indian Contract Act defines bilateral mistake of fact as: 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. Eg. A agrees to sell a car at Rs.10 lacs to B. Car is stolen and remains unknown to both the parties. Hence, the contract is void. CONDITIONS FOR BILATERAL MISTAKE OF FACT Conditions for bilateral mistake of fact are: Both parties must be under a mistake The mistake must be with regard of fact The fact must be a relevant fact. CLASSIFICATION OF BILATERAL MISTAKE OF FACT
1.

Bilateral mistake as to the subject matter: Bilateral mistake as to the subject matter can be with regard to: Existence of subject matter Quantity of subject matter Quality of subject matter Price of subject matter

In these cases an agreement is void. Eg. A sells a painting to B. both believe it to be a painting by M.F.Hussain, the renowned artist. The painting turns out to be a painting by an imitator. The agreement is void due to bilateral mistake as to quality of subject matter.
2.

Bilateral mistake as to the possibility of performance: In this case both parties believe that the contract is capable of performance, while

in fact it is not so. The impossibility may be physical or legal. In this case the agreement is void. Eg. A rented a conference hall from Hotel Sahara Star to conduct a business meeting. However, meeting got cancelled. Hence there was a bilateral mistake of possibility of performance.

UNILATERAL MISTAKE OF FACT:

Section 22 states unilateral mistake as:

Unilateral mistake is where only one party to the contract is under a mistake.

A contract is voidable merely because it is caused by one of the parties to it being under a mistake as to matter of fact Eg. A buys the business of B and hopes to expand the business and earn higher profits. Due to slump the unit turns out to be the loss making one and led to the closure. The contract cannot be avoided by A due to unilateral mistake or errors in his opinion. CLASSIFICATION OF UNILATERAL MISTAKE OF FACT
1.

Mistake as to identity of the person: The contract becomes void if the identity of the party is of material importance to the agreement and the fraudulent party knows that he is not intended to be a party to the agreement. Eg. A sent a proposal to Mr. Sharma and associates. It reached another Mr. Sharma and associates and they accepted it. Here there is a unilateral mistake as to the identity of the person and hence the contract is voidable by the mistaken party.

2.

Mistake as to nature of the contract: Where a party to an agreement, without any fault of his own, makes a mistake about the nature, character or class of the contract, the contract will be void. Eg. X was induced to sign a sale deed by Z, on representation that it was a power of attorney. Hence, the contract was void.