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Effect of Consent Induced by Coercion and Fraud

The Indian Contract Act, 1872 is one of the oldest laws that have been in effect for the longest and are still in use in India, the purpose of this act is to govern the contractual relationship between two or more parties. It lays down rules and regulations which apply to the whole of India and needs to be honored while entering or performing a particular contract. The law is founded on English Common Law principles and was commenced on 1 September 1872.

The definition of Contract can be found in Section 2(h) of ICA, 1872; it states that:
An agreement enforceable by law is a contract
.[1]

It's a well-known fact that this is the only law that is used in daily life, whether intentionally or unintentionally. For example - 'A' goes to a medical store to buy medicines, he, therefore, purchases the medicine and gives the money to the store-owner as a part of the consideration. Here the contract is said to be formed right after he gives the money to the store owner and both of them will be bound by any obligations arising out of the contract.

To be legally binding and valid, a contract's essential elements must always be fulfilled, which is mentioned under Section 10 of ICA, 1872.[2]

The essential elements are as follows:
  1. Free Consent of the Parties
  2. Competency to Contract
  3. Lawful Object & Lawful Consideration
  4. Not forbidden by Law

The first being consent is also the most important part of a valid contract and it is mentioned under Section 13 of ICA, 1872.[3] Consent is simple terms means parties involved in a contract agree on the same thing in the same sense.

It works on the principle of consensus ad idem which means the meeting of minds.
For example - 'Z' offered to sell his dog named 'Whiskey' to 'X'. 'X' believed 'Whiskey' to be an alcoholic drink and agreed on the purchase. Here the principle of consensus ad idem was not fulfilled because both the parties didn't agree on the same things and hence there was no meeting of minds.

Sometimes while entering into a contract, the free consent may not be there and the consent might be induced in an improper way which may be forbidden by the law. Here the contract will be voidable at the option of the aggrieved party and he will have the option of either declaring the contract void or continuing with the contract as per the earlier terms.

Free consent can be induced or affected by coercion, undue influence, fraud, misrepresentation, or mistake. This article will mainly study the effect of consent induced by coercion and fraud by giving relevant illustrations and landmark case laws. It will analyze and delve deep into the topic by highlighting it with examples, its effects, and citing famous landmark judgments. Lastly, it will contain my personal thoughts and idea in form of a conclusion, in which I will try to form a rational judgment and will emphasize the important aspects of the research work.

What is Free Consent?
According to Section 10 of the Indian Contract Act, 1872, 'Free Consent' is one of the essential elements of a valid contract. Consent finds its definition under Section 13 of ICA, 1872, which states that when two parties involved in a contract agree on the same thing in the same sense is known as consent. It works on the Latin term consensus ad idem which means the meeting of minds. The concept of Consent can be better understood by the notable landmark case in English Contract Law, known as Peerless Case or Raffles v Wichelhaus.[4]

Raffles v Wichelhaus, 1864
The claimant offered to sell cotton to the defendant, to which the defendant agreed. The cotton was to be delivered on the ship called 'Peerless,' according to the agreement. Interestingly, the Peerless was the name of two ships. The defendant thought they had agreed on the first ship, which left in October. The claimant felt they had achieved an agreement over the second ship, which was scheduled to sail in December. When the defendant refused to accept the cargo, the other party was forced to sue to collect damages.

The court ruled that a reasonable person could not have known which sailing had been agreed to in advance. As a result, the contract was void because of no consensus ad idem.

Free Consent is defined under Section 14 of ICA, 1872[5] which states that consent is considered to be not free if it is influenced by the following factors
  • Coercion - Section 15;
  • Undue Influence - Section 16;
  • Fraud - Section 17;
  • Misrepresentation - Section 18;
  • Mistake
  • Mistake of Fact - Section 20 & 2
  • Mistake of Law - Section 21

Any of the five factors, except mistake of law, if involved in a contract will render the contract voidable at the whim of the aggrieved party (Section 19 & 19A of ICA, 1872). It is important to highlight that free consent must be voluntarily given and should be without any pressure or delusions.

For example: Z, a contractor is willing to purchase the land of X, a farmer, and made an offer to X, however, X refused to sell his land at any cost and denied the offer made by Z. The next day, Z forced X to sell his land at the gunpoint and X agrees due to his fear of life. Here the contract is made due to coercion and the consent was taken forcefully against his free will. Therefore, the contract stands voidable at the whim of X.

Under Section 19 of ICA, 1872, a contract can be declared voidable if the consent is induced by coercion, fraud, or misrepresentation whereas the power to set aside contract induced by undue influence is mentioned under Section 19A of the Indian Contract Act, 1872.

Effect of Consent Induced by Coercion
Section 15 of the Indian Contract Act of 1872 defines the concept of coercion, which is as follows:
  • Coercion is the committing or threatening to commit any act forbidden by the IPC or
  • The unlawful detaining or threatening to detain any property, with the intention of causing any person to enter into an agreement. [6]

In other words, coercion is defined as the act of compelling another person to enter into a contract by using force or threat of force only for the purpose of obtaining his or her consent. It is also important to note that the place where coercion is applied is immaterial to the contract and the said person shall be prosecuted in India.

For example: X, with an ulterior motive was traveling from Vietnam to Malaysia in a ship with Z, the marine pilot. X threatened Z to enter into a contract to sell Z's ship at a gunpoint to which Z reluctantly consented. After that X diverted the ship to India and reached there and then Z brought a suit against X for applying coercion. The suit will be successful because the place of employing coercion is immaterial and will be punished under the Indian Penal Code.

Important Case Laws related to Coercion:
  • Chikham Amiraju v Chikham Seshamma [7]
    In this case, a person threatened his wife and son to commit suicide, if they both did not execute a release deed in favor of his brother with respect to certain properties. Subsequently, the wife and the son released the deed by coming under the threat of suicide.

    The court held that the consent was taken involuntarily and therefore the contract will be said to be voidable. The court further decided that the threat to commit suicide comes under IPC and committing any act forbidden by IPC will amount to coercion under Section 15 of ICA, 1872.
     
  • Askari Mirza v Bibi Jai Kishori [8]
    In this case, a minor mortgaged two properties and borrowed money from a money lender. But a contract with a minor is voidable. The moneylender threatened the minor that he would prosecute him for misrepresenting his age if he didn't make a compromise to which the minor agreed. The minor afterward refused to pay to claim that the compromise was done under the threat of criminal prosecution.
The court ruled that threatening with criminal prosecution will not amount to coercion. However, if it involves false charges, then it will fall under coercion.

Effect of Coercion
Under Section 19 of ICA, 1872, if the consent is induced by coercion in a contract, then the party whose consent was forcefully taken has the option to get the contract declared voidable by the court of law.

Similarity with English Law
Coercion is similar to Duress, used in English Law. However, Duress has a narrower scope than coercion and it must be caused due to immediate violence, unlike coercion. Unlawful detention of goods is not covered under the ambit of Duress, unlike in Coercion which covers it.

Effect of Consent Induced by Fraud
Section 17 of the Indian Contract Act, 1872 defines the concept of fraud. It can be defined as an intentional misrepresentation of the facts by one of the parties. It can be done by the party involved in the contract or his/her agent with an intention to deceive another party to enter into a contract. It could involve the following acts:

Assertion of facts without belief in the truth
When a person makes a statement or suggestion believing it to be not true or knowing that it is false, then it will constitute a fraudulent act. In a landmark case given by the House of Lords, one of the judges stated that:
Fraud is proven when a fraudulent representation is made:
  • Voluntarily, or
  • Without believing its truthfulness, or
  • Recklessly careless whether it be true or false.
In the landmark case Derry v Peek [9], the court held that if a person honestly thinks a fraudulent statement to be true, he or she is not committing fraud. Therefore, only intentional misrepresentation will amount to fraud. This case also cleared the blurred line between misrepresentation and fraud.

The active concealment of a fact
General Rule of Fraud is that:
Mere silence is to facts likely to affect the willingness of a person to enter into a contract is not fraud. [10]

Exception of this General Rule:
Unless the circumstances of the cases are such that, regard being had to them, it is the duty of the person keeping silence to speak, unless his silence is, in itself, equivalent to speech. [11]
  1. This duty arises in the following cases:
    The Duty to Speak arises as a result of their connection, in which one party puts his trust and confidence in the other with the utmost good faith. (Contract of uberrima fides). Ex - mother & daughter, brother & sister. If there is no relation between the parties then there is no duty to speak. The following case law is an example of this duty:
    • Haji Ahmad Yarkhan v Abdul Gani Khan [12]
      In this case, the plaintiff spent money on his son's engagement, which later broke due to the discovery of the girl's abnormality. He sued the defendant on the account of deliberate suppression of vital facts. The court ruled that there existed no duty to speak due to the fact that they were not in a fiduciary relationship hence the plaintiff cannot recover the compensation from the defendant.
       
  2. When Silence is equivalent to speech. In this, a party to the contract stays silent knowing the fact that his silence may amount to deception and he will be guilty of fraud.
     
  3. When a representation is true at the time when it is made but becomes false later in time due to Change in Circumstances. In this case, the change must be communicated.
     
  4. If a person does not have a duty to speak but still, speaks and stops speaking mid-way, then he becomes bound to speak the whole truth and not keep the Half-Truth with himself.
     
Making promise without any intention of performing it:
This is as simple as its heading. In this case, if a party enters into a contract with no intention of performing the contract, then this act will amount to fraud. For ex- X makes a contract with Z to purchase ration supplies with the intention of not paying the amount. In this instance, his actions will constitute fraud.

Any other act fitted to deceive
This is a residuary clause, and it is of a broad character. Since all fraudulent acts cannot be covered under one section that's why this act encompasses all circumstances that are not mentioned in the above fraudulent acts.

Any act or omission specially declared to be fraudulent
Evident by the heading, this act covers all other acts which are declared to be fraudulent by the law.
For ex: The Insolvency Act, 2016 and Companies Act, 2013 declares certain kinds of transfer to be of "fraudulent preference".

Under Section 19 of ICA, 1872 [13]:
If consent in a contract is induced by fraud, then the said contract will be voidable at the option of the aggrieved party.

Section 64 of ICA, 1872 states that when the aggrieved party, whose consent was induced by fraud rescinds or cancels the contract then the other party has no obligation to perform the contract. The party, if benefited or received anything from the other party can restore such benefit so as to put them back to the original place.

Section 65 of ICA, 1872 deals with the doctrine of restitution, which comes into play when the contract is discovered to be void after some time and does not apply to void-ab-initio. It states that the advantageous party has the obligation to compensate or restore the loss that occurred to the other party of the contract.

Conclusion
To sum up the above-mentioned facts with case laws related to the Indian Contract Act, 1872, it is evident that why free consent becomes one of the most essential elements of a valid contract and how its voluntariness forms the very basis of a contract.

If the party whose consent is involuntarily taken by applying coercion, undue influence, fraud, misrepresentation, or mistake of fact then the consent will be held valid and the contract becomes voidable at the option of the person whose consent was induced.

The aggrieved party then has the option:
  • To rescind/cancel the contract which makes the contract unenforceable by a court of law or make the contract; or
  • To insist upon the performance of the contract if he may so; or
  • To claim damages for the loss suffered due to inducement by the above-mentioned factors.

Lastly, the point to be noted is that the Indian Contract Act, 1872 also includes acts or omissions which is not included in the sections due to the fact that all types of acts cannot be covered under one umbrella. To solve this problem, a residuary clause is also mentioned in Fraud which covered certain other fraudulent activities not written or mentioned there.

References:
  1. Avtar Singh, Law of Contract & Specific Relief 176-225, (12th ed. 2017).
  2. Duhan Roshni, Indian Contracts: Role of Free Consent and Factors Responsible for Vitiating Consent, 4 International Journal in Management & Social Science 264, 267 (2016). https://www.indianjournals.com/ijor.aspx?target=ijor:ijmss&volume=4&issue=12&article=027. 3. Teesha, Factors Vitiating Free Consent - Coercion and Undue Influence, Legal Services India (Oct. 5, 2021, 9:30 PM), https://www.legalserviceindia.com/legal/article-5220-factors-vitiating-free-consent-coercion-and-undue-influence.html.
  3. Aditya Mehrotra, Free Consent (Section 13 & 14), Law Times Journal (Oct. 2, 2021, 6:58 PM), https://lawtimesjournal.in/free-consent-section-13-14/.
  4. Subodh Asthana, Free Consent of Parties to Contract, I Pleaders (Oct. 3, 2021, 9:20 PM), https://blog.ipleaders.in/free-consent-parties-contract/
End-Notes:
  1. Indian Contract Act, 1872, 2(h), No. 9, Act of Imperial Legislative Council, 1872 (India
  2. Indian Contract Act, 1872, 10, No. 9, Act of Imperial Legislative Council, 1872 (India).
  3. Indian Contract Act, 1872, 13, No. 9, Act of Imperial Legislative Council, 1872 (India).
  4. (1864) 2 Hurl & C 906
  5. Indian Contract Act, 1872, 14, No. 9, Act of Imperial Legislative Council, 1872 (India).
  6. Indian Contract Act, 1872, 10, No. 9, Act of Imperial Legislative Council, 1872 (India).
  7. Chikham Amiraju v Chikham Seshamma, ILR (1918) 41 Mad 33, 36.
  8. Askari Mirza v Bibi Jai Kishori, (1912) 16 IC 344.
  9. Derry v Peek, (1889) LR 14 AC 337 at p. 374.
  10. Indian Contract Act, 1872, 17, No. 9, Act of Imperial Legislative Council, 1872 (India).
  11. Indian Contract Act, 1872, 17, No. 9, Act of Imperial Legislative Council, 1872 (India).
  12. Haji Ahmad Yarkhan v Abdul Gani Khan, AIR 1937 Nag 270.
  13. Indian Contract Act, 1872, 19, No. 9, Act of Imperial Legislative Council, 1872 (India).

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