Free Consent: Explained.

Consent Defined (Section 13 of LCA, Cap 345)

To form a valid contract, both parties must agree on the same subject matter in the same sense. Consent occurs when two or more individuals are in agreement on the same thing in the same sense.

Examples

A agrees to sell his 1983 Fiat Car for Rs. 80,000, and B agrees to purchase it. This is a valid contract as both parties consent to the same subject matter.

A owns three Fiat Cars and offers to sell one, ‘car X’, to B for Rs. 80,000. B agrees, believing A is selling ‘car Y’. Since A and B have agreed on different things, there is no consent, and hence, no contract.

In Foster v. Mackinnon (1869) L.R. 4 C.P. 704, the defendant endorsed a bill of exchange, believing it was a guarantee. The court held there was no consent, as the signature was not intended for the bill of exchange, and thus no agreement was formed.

Free Consent Defined (Section 14)

Consent is considered free when it is not influenced by:

(1) Coercion, (2) Undue influence (3) Fraud (4) Misrepresentation (5) Mistake

For a contract to be valid, both consent and free consent are necessary. If consent is not free, the contract is typically voidable at the option of the party whose consent was compromised.

1. Coercion (Sections 15, 19, and 72)

Coercion involves:

i. Committing or threatening to commit an act forbidden by the Penal Code, Cap 16.

ii. Unlawfully detaining or threatening to detain property to compel someone to enter into an agreement.

Examples

i. A Hindu widow is forced to adopt X under the threat that her husband’s body will not be removed unless she complies. The adoption is voidable (Ranganayakamma v. Alwar Setti, 13 Mad. 24).

ii. A threatens to kill B unless B transfers his house to A at a low price. The agreement is voidable due to coercion.

iii. An agent refuses to release a principal’s books of account unless released from liability. This release is void (Muthia v. Karuppan, 50 Mad. 780).

Coercion need not target only the promisor; it can affect any person. Additionally, coercion is applicable even if the PC is not enforced in the location where the coercion occurred.

Example

A on an English ship uses threats forbidden by the PC to force B into an agreement. Despite the PC not being applicable, the act constitutes coercion.

Threat to Commit Suicide as Coercion

Threats of suicide are considered coercion. In Ammiraju v. Seshamma (1917) 41 Mad. 33, A coerced his wife and son into signing a release deed by threatening suicide. The court invalidated the transaction.

Duress

Duress, the English equivalent of coercion, involves causing or threatening bodily harm or imprisonment to secure consent. Differences between coercion and duress include:

i. Coercion can be directed at any person, while duress targets the other party or their family.

ii. Coercion can be applied by anyone, but duress is limited to the promisor or their agent.

iii. Coercion includes unlawful detention of goods, unlike duress.

Consequences of Coercion (Section 19)

A contract formed under coercion is voidable at the option of the coerced party. The coerced party can either set the contract aside or enforce it.

Liability for Money or Goods Delivered Under Coercion (Section 72).

-A person receiving money or goods under coercion must return them.

Example

A railway company refuses to deliver goods unless the consignee pays an illegal charge. The consignee is entitled to recover the excess payment.

2. Undue Influence (Sections 16 and 19-A)

Undue influence occurs when one party uses their dominant position over another to gain an unfair advantage. A person is deemed to dominate another’s will if they:

i. Hold real or apparent authority over the other.

ii. Are in a fiduciary relationship with the other.

iii. Contract with someone whose mental capacity is compromised due to age, illness, or distress.

Examples

A father, using parental authority, obtains a bond for more than what his son owes. This is undue influence.

A doctor influences a sick patient to agree to unreasonable fees. This is undue influence.

A weak-minded individual conveys property to their father-in-law for nominal consideration. Undue influence is presumed (Ram Krishan v. Parmeshwara, 1931 M.W.N. 215).

Presumption of Undue Influence

Certain relationships inherently suggest undue influence, including:

i. Parent and child

ii. Guardian and ward

iii. Doctor and patient

iv. Lawyer and client

v. Spiritual guru and disciple

The presumption can be rebutted by proving the influenced party had independent legal advice (Inche Noria v. Shaik Allie Bin Omar, 1929 A.C. 127).

Consequences of Undue Influence (Section 19-A)

Contracts formed under undue influence are voidable at the coerced party’s option. Courts may set aside such contracts entirely or impose terms if benefits have been received.

Example

A moneylender uses undue influence to have an agriculturist sign a bond for Rs. 200, though only Rs. 100 was loaned. The court may annul the bond and require repayment of Rs. 100 with reasonable interest.

Burden of Proof for Undue Influence

Under Section 16(3), the burden of proof rests on the party accused of exercising undue influence if the transaction appears unconscionable. A presumption of undue influence arises in specific relationships where one party is in a position to dominate the will of another, as outlined in Section 16(2). However, this presumption does not apply to certain relationships, such as husband-wife, master-servant, creditor-debtor, and landlord-tenant, where undue influence must be explicitly proven by the party alleging it.

Undue Influence in Money Lending Transactions

Charging high-interest rates does not inherently indicate undue influence unless it is shown that the lender dominated the borrower’s will. Urgent financial needs or adverse market conditions alone do not place the lender in a dominant position. Courts generally do not invalidate transactions solely based on high-interest rates unless they are deemed unconscionable, in which case the burden shifts to the lender to prove the absence of undue influence. Cases like Ruknisa v. Mohib Ali Khan and Annapurani v. Swaminathan highlight judicial interventions to limit excessive interest rates.

3. Fraud Under Sections 17 and 18

Fraud involves deliberate actions to deceive or induce another party into a contract. This includes false assertions, active concealment of facts, unfulfilled promises, or any deceptive acts. Fraud requires the following elements:

i. A false representation or assertion of fact.

ii. Knowledge of the falsity or reckless disregard for the truth.

iii. An intent to deceive or induce reliance.

iv. Actual deception that leads to a party entering the contract.

v. Resulting loss or damage to the deceived party.

Silence does not typically amount to fraud unless there is a duty to disclose, such as in fiduciary relationships or contracts requiring utmost good faith. For instance, in Ward v. Hobbs, the seller's failure to disclose defects did not constitute fraud as there was no duty to speak. However, silence may be deemed fraudulent when it effectively equates to a false statement, as explained in the Explanation to Section 17.

Fraudulent misrepresentation also extends to reckless statements made without verifying their truth, as illustrated in Derry v. Peek, where the directors of a company issued misleading statements with honest but incorrect beliefs, which did not amount to fraud. Lastly, fraud without resulting damage does not give rise to legal action, emphasizing the principle that "there is no fraud without damages."

Consequences of Fraud (Section 19)

A party defrauded has the following remedies:

i. Avoidance of Contract: The defrauded party can opt not to perform the contract.

ii. Enforcement with Remedy: The defrauded party can insist on the performance of the contract and iii. demand to be put in the position they would have been in if the fraudulent representation were true.

Example:

A fraudulently informs B that A’s estate is free from encumbrance. B buys the estate but later discovers it is subject to a mortgage. B may either avoid the contract or insist on its performance, requiring A to redeem the mortgage.

iii. Suing for Damages: The defrauded party may file a suit for damages caused by the fraud.

Exceptions: When the Contract is Not Voidable

A contract affected by fraud is not voidable in the following situations:

i. When the party whose consent was obtained through fraud had the means to discover the truth with ordinary diligence (Exception to Section 19).

ii. When the defrauded party, upon discovering the fraud, affirms the contract or takes a benefit under it.

4. Misrepresentation (Sections 18 and 19)

Misrepresentation refers to incorrect or false statements made innocently, without any intent to deceive or defraud the other party. Section 18 of the Contract Act classifies misrepresentation into three categories:

i. Positive Assertion: A statement made without proper knowledge that turns out to be untrue, though the person believed it to be true.

Example:

X, based on hearsay from A, informs B that Y will become a director of a newly formed company. B purchases shares of the company based on this information. This is misrepresentation by X as he believed the statement to be true and had no intent to deceive.

Breach of Duty: A breach of duty that, without intent to deceive, misleads another to their detriment.

ii. Innocent Misleading: An act that causes a party to misunderstand the substance of an agreement.

Examples:

X enters into a contract to sell hops to Y, assuring that no sulphur was used in their cultivation. Sulphur was used in a minor portion of the crop, but X had forgotten this fact. The contract can be avoided as the misrepresentation was material.

Consequences of Misrepresentation (Section 19)

In cases of misrepresentation, the aggrieved party can:

i. Avoid the agreement.

ii. Insist on the contract’s performance, demanding to be put in the position they would have been in if the representation were true.

Example:

A informs B that an estate is free from encumbrance, but the estate is under a mortgage. B can either avoid the contract or demand its performance with the mortgage redeemed.

Unlike fraud, misrepresentation does not generally entitle the aggrieved party to claim damages, except in specific cases like breach of an agent’s warranty of authority or negligent misrepresentation within a confidential relationship (e.g., solicitor-client).

Fraud vs. Misrepresentation

The key distinctions between fraud and misrepresentation are as follows:

i. Fraud involves an intent to deceive, whereas misrepresentation is innocent.

ii. Both render a contract voidable, but only fraud allows the aggrieved party to claim damages.

iii. In misrepresentation, if the aggrieved party had the means to discover the truth with ordinary diligence, the contract cannot be avoided.

5. Mistake

Mistake can be defined as an erroneous belief about a matter of fact or law. It is categorized into two types:

i. Mistake of Fact

ii. Mistake of Law

Mistake of Fact

A mistake of fact may either be:

(a) Bilateral or

(b) Unilateral.

(A) Bilateral Mistake

A bilateral mistake occurs when both parties to an agreement are mistaken about a fact essential to the agreement. In such cases, the agreement is void.

Examples

i. A agrees to buy a horse from B, but unknown to both, the horse was already dead at the time of the agreement. The agreement is void.

ii. A agrees to sell to B a specific cargo of goods assumed to be on its way from England to Dar-es-salaam. Unknown to both parties, the ship carrying the goods had already been lost before the agreement. The agreement is void.

To invalidate an agreement, the mistake must concern an essential aspect of the contract. Typical cases include:

(a) Mistake as to the Existence of Subject-Matter

i. A, entitled to an estate for B's life, sells it to C. Unknown to both parties, B was already deceased. The agreement is void.

ii. A agrees to transfer an insurance policy on X's life to B. Unknown to them, X was already dead. Held: No contract existed [Scott v. Coulson (1903) 2 Ch. 249].

(b) Mistake as to Identity of the Subject-Matter

When the parties agree upon different things, the contract is void.

i. A contract for the purchase of cotton arriving on a ship named "Peerless" was void because two ships of the same name existed, and each party referred to a different ship.

ii. A offers to sell 'car X,' but B accepts believing it is 'car Y.' The contract is void due to mistaken identity.

(c) Mistake as to Title of the Subject-Matter

Where parties mistakenly believe the seller owns the subject-matter, but they do not, the contract is void.

Example: A leased a fishery from B, though A was already its tenant, and B had no title. Held: The contract was void [Cooper v. Phibbs (1867) 159 E.R. 375].

(d) Mistake as to Quantity of the Subject-Matter

A telegraph error caused confusion where P ordered three rifles, but the message transmitted read "Send the rifles," leading to 50 rifles being sent. Held: No contract existed for 50 rifles, but P was liable for three [Henkel v. Pape (1870) 6 Ex. 7].

(e) Mistake as to Price of the Subject-Matter

An agreement with a miswritten lease price (e.g., £230 as £130) was void. However, a mistaken opinion about the value of the subject-matter does not render an agreement void.

Example: A buys an item for Rs. 10,000, believing it is worth that amount, while its actual value is Rs. 5,000. The agreement remains valid.

(B) Unilateral Mistake

In cases where only one party is mistaken, the contract is generally valid. Section 22 states, "A contract is not voidable merely because it was caused by one party being under a mistake as to a matter of fact."

Exceptions:

(a) Mistake as to the Nature of the Contract

A contract is void when one party, through no fault of their own, makes a mistake about the nature of the contract due to the other party's actions.

Example: An illiterate man signed a bill of exchange, believing it was a guarantee. Held: The contract was void [Foster v. Mackinnon (1869) L.R. 4 C.P. 704].

(b) Mistake as to Quality of the Promise

Example: At an auction, a bidder mistakenly bid for tow instead of hemp. Held: The contract was void [Scriven v. Hindley (1913) 3 K.B. 564].

(c) Mistake as to the Identity of the Contracting Party

Example: A intends to contract with B but mistakenly contracts with C, believing him to be B. The contract is void.

Key Cases:

Cundy v. Lindsay (1878) 3 App. Cas. 459: Goods sold based on false identity were recoverable, as no valid contract existed.

Lake v. Simmons (1927) A.C. 487: A lady misrepresented her identity to obtain jewelry. The contract was void.

Contrast: Philips v. Brooks (1919) 2 K.B. 243 held that a contract made in person with an imposter was voidable for fraud, not void due to mistake.

Mistake of Law (Section 21)

Mistake of law may be:

(a) Mistake of Law of the Land or

(b) Mistake of Foreign Law.

Mistake of Law of the Land

The rule ignorantia juris non excusat (ignorance of law is no excuse) applies. Section 21 states that a contract is not voidable due to a mistake about the law in force.

Example: A and B contract based on the erroneous belief that a debt is barred by limitation. The contract remains valid.

Mistake of Foreign Law

Mistake of foreign law is treated as a mistake of fact. Section 21 provides that such mistakes have the same effect as factual mistakes.

Consequences of mistake

A mistake renders a contract void. If the contract is yet to be performed, the affected party may repudiate it. If executed, any advantage gained must be restored or compensated once the mistake is discovered.