ORIENTAL INSTITUTE OF

MANAGEMENT

LEGAL AND TAX ASPECTS OF

BUSINESS

“FREE CONSENT”

MMS-I-B - 9164

AMIT ABICHANDANI

SUBMITTED TO
PROF. PANJWANI
 INTRODUCTION:-

CONSENT (sec.13)
(approval/assent/agreement):-
Consent means “Two or more persons are said to be consent
when they are agree upon the same thing in the same
sense”. The whole agreement must be considered in the
same sense.
When both the parties agree upon the same thing in the
same sense, they are said to be “ad-item.” Where both the
parties are not “ad-item” or when the minds of both the
parties are directed to both the objects, there is no consent.
Some instances when consent is not free:
1. Where a person endorses a bill of exchange which, he
was told was signing as a guarantee.
2. Where a document is read over, but it is different from
one pretended to be read over, signature thereon would
be of no force.
FREE CONSENT(sec 14)
One of the essentials of a valid contract mentioned in
Section 10 is that the parties should enter into contract with
free consent. According to Section 14, Consent is said to be
free when it is not caused by –

1. Coercion, (Section 15), or

2. Undue influence,(section16), or

3. Fraud,(section 17 & 18)

4. Misrepresentation, (Section 18), or

5. Mistake, subject to the provisions of (Section 20, 21

and 22).

Consent is said to be so caused when it would not have been

given but for the existence of such coercion, undue influence,
fraud, misrepresentation or mistake.
If the consent of one of the parties is not free consent, i.e., it
has been caused by one or other of the above stated factors
the contract is not a valid one. When consent to an
agreement is caused by fraud, coercion, misrepresentation or
undue influence, the agreement is a contract voidable at the
option of the party whose consent was so caused. If,
however, the consent is caused by mistake the agreement is
void.

COERCION (sec.15):-

When a person is compelled to enter into a contract by the

use of force or under a threat by the other party, coercion is
said to be employed sec.15 defines ‘coercion’ as

(i) The committing or threatening to commit any act

forbidden by the Indian Penal Code or

(ii) The 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.

From the above definition, it is clear that coercion need not

proceed from a party to the contract.. it may proceed from a
stranger. Similarly, coercion may or may not be against a
person who is a party to the contract. It may be against any
member of his family, relative, property or it may be
specifically to his prejudice.
Liability Of A Person To Whom Money
Is Paid Or Thing Delivered Under
Coercion- Effects Of Coercion:-

i. When consent to an agreement is caused by coercion,

the agreement is a contract voidable at the option of
the party whose consent was so caused (sec.19)

ii. A person to whom money had been paid, or anything

delivered under coercion must repay or return it (sec 72)

iii. He may rescind the contract within a reasonable time

under the Specific Relief Act, 1963

E.g.:

A threatens to shoot B if he not let ou his house to A. B

agrees to do so. This agreement has been brought by
coercion
UNDUE INFLUENCE [sec 16(1)] (undue
use of power/authority/control):-

If the consent of a party to the contract has been obtained by

undue influence the consent is not free consent which is
needed for the validity of a contract and if the consent has
been caused by undue influence, the contract is voidable at
the option of the party whose consent had been so obtained.
Section 16 defines undue influence as under:
(1) A contract is said to be induced by “undue influence”
where the relations subsisting between the parties are such
that one of the parties is in a position to obtain an unfair
advantage over the other.
(2) In particular and without prejudice to the generality of
the foregoing principle, a person is deemed to be in a
position to dominate the will of another—
(a) Where he holds a real or apparent authority over
the other; or where he stands in a fiduciary relation to
the other; or
(b) Where he makes a contract with a person whose
mental capacity is temporarily or permanently affected
by reason of age, illness, or mental or bodily distress.
(3) Where a person who is in a position to dominate the will
of another, enters into contract with him, and the
transaction appears, on the face of it or on the evidence
adduced, to be unconscionable, the burden of proving that
such contract was not induced by undue influence shall lie
upon the person in a position to dominate the will of the
other.

Effect of undue influence:-

Section 19-A declares that when consent to an agreement is
caused by undue influence, the agreement is a contract
voidable at the option of the party whose consent was so
caused. For example, A’s son has forged B’s name to a
promissory note. B, under threat of prosecuting A’s son,
obtains a bond from A, for the amount of the forged note. If
B sues on this bond, the court may set the bond aside.

Because of undue influence one party to the contract may

take an undue advantage under the contract, or the party
entitled to avoid the contract may have already received
some benefit under the contract. The court in cases has
been empowered to set aside the contract either absolutely
or upon such terms and conditions as the Court may deem
just. Second para to Section 19-A incorporates the following
provision in this regard:
“Any such contract may be set aside either absolutely, or, if
the party who was entitled to avoid it has received any
benefit there under, upon such terms and conditions as to
the Court may seem just”

For example, a , a money-lender, advances Rs. 100 to B, an

agriculturalist, and, by undue influence, induces B to
execute a bond for Rs. 200 with interest at 6 per cent per
month. The court may set the bond aside, ordering B to
repay Rs.100 with interest as may seem just.

Essentials of undue influence:-

In order to constitute undue influence it is necessary that:

(1) The relations subsisting between the parties are such

that one of the parties is in a position to dominate the
will of the other, and.

(2) Such a person uses his dominant position to obtain an

Unfair advantage over the other.
Person in dominant position and obtaining of unfair
advantage
Sometimes one of the parties to the contract may be in such
a dominant position in relation to the other that he has
peculiar opportunity of exercising that position to the
prejudice of the other party. If the dominant party takes an
undue advantage of his position in procuring a contract to
the detriment of the other contracting party, the contract is
voidable at the option of the party whose will is so
dominated.

In the following cases a person is deemed to be in a position

to dominate the will of another –

1. Where he holds a real or apparent authority

over the other, or,

2. Where he stands in a fiduciary relation to the

other, or,

3. Where he makes a contract with a person

whose mental capacity is temporarily or permanently
affected by reason of age, illness, or mental or bodily
distress.
 Difference between coercion and undue
influence
Coercion Undue influence

 Consent is obtained by  Consent is obtained by the

threat of an offence. The dominating will of the other.
person is forced to give his Consent is given in good
consent belief, but under moral
influence.
Confidence is reposed, but
betrayed.

 It is mainly of physical  It is moral character

character

 It is of violent character.  It is most subtle in character

However, in both coercion and undue influence, freedom of

will does not exist. Both are equally effective.
FRAUD(sec.17)
(Intentional/premeditated):-

When the consent of a party to the contract has been

obtained by fraud, the consent is not free consent, which is
necessary for the formation of a valid contract. In such a
case the contract is voidable at the option of the party whose
consent has been so obtained. Fraud or deceit is also tort,
for which an action for damages can also lie

Section 17 defines fraud as “Fraud means and includes any of

the following acts committed by a party to a contract, or by
his agent, with intent to deceive another party thereto or his
agent, or to induce him, to enter into the contract”

i. The suggestion, as a fact, of that which is not true by

one who does  not believe it to be true :

ii. The active concealment of a fact by one having

knowledge or belief  of the fact :

iii. A promise made without any intention of performing it :

iv. Any other act fitted to deceive :

v. Any such act or omission as the law specially declares to

be fraudulent.
Explanation :-- Mere silence as to facts likely to affect the
willingness of a person to enter into a contract is not fraud,
unless the circumstances of the case are such that, regard
being had to them, it is the duty of the person keeping
silence to speak, or unless his silence is, in itself, equivalent
to speech.

THE ESSENTIALS OF FRAUD ARE:

i. There should be a false statement of fact by a person
who himself does not believe the statement to be true.

ii. The statement should be made with a wrongful

intention of deceiving another party thereto and
inducing him to enter into the contract.

iii. It is a common rule of law that “there is no fraud

without damages”. As such party subjected to fraud
must have suffered some losses.
CONSEQUENCES OF FRAUD (sec 19):

A person, who has been induced to enter into an

agreement by fraud, has following remedies available
to him.
i. He can avoid the performance of contract.

ii. He can insist that the contract shall be performed

and that he shall put in the position in which he
would have been if the representation had been
true.

iii. He can sue for damages.

Mere silence is no fraud:-

It has been noted above that for constituting fraud there
should be representation as to certain untrue facts. Active
concealment has also been considered to be equivalent to a
statement because in that case there is a positive effort to
conceal the truth and create untrue impression on the mind
of the other, mere silence, however, as to facts is no fraud.
Explanation to Section 17, in this connection, incorporates the
following provisions:-

“Mere silence as to facts likely to affect the willingness of a

person to enter into a contract is not fraud, unless the
circumstances of the case are such that, regard being had to
them, it is the duty of the person keeping silence to speak, or
unless his silence is, in itself, equivalent to speech.”

A contracting party is not obliged to disclose each and

everything to the other party. If a person is to sell his goods
he is under no duty to disclose the defects in his goods. If he
makes false statement as to the quality of his goods, it would
be fraud, but if he merely keeps silence as regards the
defects in them there is no fraud. In case of sale of goods the
rule is caveat emptor, i.e., buyer be aware, which means that
it is the duty of the buyer to be careful while purchasing the
goods, and there is no implied condition or warranty by the
seller as to the quality or fitness of the goods for any
particular purpose.

If A sells, by auction, to B, a horse which A knows to be

unsound. A says nothing to B about the horse’s
unsoundness. This is not fraud in A. Similarly, if A and B,
being traders, enter upon a contract A has private
information of a change in prices which would affect B’s
willingness to proceed with the contract. A is not bound to
inform B.
Exceptions:-

Although as a general rule mere silence or non-disclosure of

facts do not amount to fraud, but in some exceptional cases
keeping silence may be deemed to be an act of deception.
Explanation to Section 17, which mentions the rule that mere
silence is not fraud, also mentions the following two
exceptions:

(1) When there is a duty to speak, keeping silence is fraud.

(2) When silence is, in itself, equivalent to speech, such

Silence is a fraud.

Misrepresentation (sec.18) (Unintentional

Lying):-

When a false statement is made with the knowledge that it is

false and also with the intention to deceive the other party
and make him to enter into a contract on that basis, it is
known as fraud. But when the person making a false
statement believes the statement to be true and does not
intend to mislead the other party to the contract it is known
as “Misrepresentation”. When the consent of a party to a
contract has been obtained by misrepresentation it is not
free consent and the contract is voidable at his option
Section 18 defines Misrepresentation as under :

“Misrepresentation” means and includes—

i. The positive assertion, in a manner not warranted by the
information of the person making it, of that which is not true,
though he believes it to be true;

ii. Any breach of duty which, without an intention to deceive,

gains an advantage to the person committing it, or any one
claiming under him, by misleading another to his prejudice or
to the prejudice of any one claiming under him ;

iii. Causing, however, innocently, a partly to an agreement, to

make a mistake as to the substance of the thing which is the
subject of the agreement.

Positive assertion, i.e. An explicit statement, of fact by a

person of that which is not true, but he believes it to be true
amounts to misrepresentation. There should be a false
statement made innocently, i.e., without any intention to
deceive.

When there is a breach of duty whereby the person making a

false statement gains some advantage at the cost of the
other party, and the statement though false is made without
an intention to deceive, it also amounts to
misrepresentation. For example, Section 57, Indian
Easement Act, 1882, lays down that the grantor of a licence is
bound to disclose to the licensee any defect, which is likely to
be dangerous to the person or property of the licensee, of
which the grantor is aware but the licensee is not. Omission
to make such a disclosure,if it is without any intention to
deceive, would amount to misrepresentation.

If one party, acting innocently, causes another party to make

a mistake as to the substance of the thing which is the
subject of the agreement, there is said to be
misrepresentation.

In case of misrepresentation the person making the

statement is innocent and he makes the statement without
any intention to deceive the other party. His statement is
false although he himself believes that the same is true. It is
known as innocent misrepresentation as against fraud,
where the person making the false statement knows that
the same is false but makes the same intentionally to deceive
the other party and make him enter into an agreement which
he would not have done otherwise. For instance, A sells his
horse to B which is unsound but A himself does not know
about this fact. He tells B that the horse is sound. There is
misrepresentation.
 Differences between misrepresentation and fraud

MISREPRESENTATION FRAUD
There is a misstatement or There is an intention either to
concealment of fact without the deceive or to induce the other
intention to deceive the other party to enter the contract.
party.

It is innocent It is deliberate or wilful.

Aggrieved party can rescind the The remedy available to aggrieved
contract or sue for restitution. party is not limited to rescission. He
can also sue for damages.

There can be no suit for damages Aggrieved party can also claim the
damages.
The aggrieved party cannot avoid It is avoidable even though the
the contract if he had the means aggrieved party had the means of
to discover the truth with discovering the truth with ordinary
ordinary diligence. diligence.

MISTAKE (sec 20 & 21):-

When the consent of the parties is caused by mistake, it is
not the free consent which is needed for the validity of a
contract. One, or both, of the parties may be working under
some misunderstanding or misapprehension of some fact
relating to the agreement. If such a misunderstanding or
misapprehension had not been there, probably they would
not have entered into the agreement. Such contracts are said
to be have been caused by mistake.

Therefore Mistake is defined as an “erroneous belief”.

Mistakes are of two types :-

i. Mistake of fact
ii. Mistake of law

(i) Mistake of fact:-

Where both the party to an agreement are under a mistake
as to a matter of fact essential to the agreement , the
agreement is void (sec.20)
E.g.: A agrees to by horse from B. It turns out that horse was
dead at time of bargain though neither party was aware of
the fact. The agreement is void.

ESSENTIAL:-
 i. Both the parties must labour under the mistake of
fact at the time of formation of the contract to
vitiate the contract. Mistake coming into existence
subsequently does not make the contract void.
ii. The mistake as to manner of fact must be essential
to the agreement.
iii. Mistake must be one of the fact and not of law.

Types of Mistake of Fact:-

i. BILATERAL OR MUTUAL MISTAKE:- as to existing fact
essential to the agreement, renders the agreement void.
In the bilateral mistake, both the parties are under a
mistake as to matter of fact.

ii. UNILATERAL MISTAKE:- a contract is not voidable

merely because it was caused by one of the parties to it
being under s mistake as to matter of fact (sec.22). in
unilateral mistake, only one party is under a mistake as
to matter of fact. The agreement is not rendered void.
The agreement is void only when both the parties are
under a mistake, i.e., the mistake is mutual or bilateral
and not unilateral.

(ii) MISTAKE OF LAW:-

Section 21 of the act provides that a contract is not
voidable because it was caused by a mistake as to any law
in force in India; but a mistake as to a law not in force in
India has the same effect as a mistake of fact.

E.g.:-
A and B make a contract on the erroneous belief that a
particular debt is barred by the Indian law of limitation.
The contract is not voidable.

Types of mistake of law:-

I. Mistake of law in force in India:- A contract

entered into on an erroneous belief as to law in force
in India is very much valid and cannot be avoided

Exception to rule:
a.Private rights: A mistake as to the
exsistence of a private right has to be
treated on par with a mistake of fact
b.Wilful misrepresentation: If a contract is
brought out by wilful misrepresentation of
law, it can be set aside
 c. Foreign law: Mistake as to any foreign law is
a mistake of fact and therefore, it vitiates
the contract.

II. Mistake Of Law Not Force In India:- A

mistake of law not force in India , for e.g., a
foreign law would vitiate a contract as a
mistake of fact does.

Where a contract is caused by mistake

which is void, the following remedies are
available to the parties who enter into an
agreement:

I. Any person who has received any

advantage under the agreement under
the agreement is bound to restore it, or
to make compensation for it to the
 person from whom he received it
(sec.65)

II. A person to whom money has been paid

or anything delivered by mistake, must
repay or return it (sec.72)

Effect of mistake:-
Following remedies are available to the parties who enter the
agreement.
Any person who has received any advantage under the
agreement is bound to restore it, or to make compensation
for it to the person from whom he received it (sec.65);
A person to whom money has been paid or anything
delivered by mistake must repay or return it (sec.72)

STATUTORY ANALYSIS
 I. CONSENT (SEC.13)
II. FREE CONSENT (SEC 14)
III. COERCION (SEC.15)
IV. UNDUE INFLUENCE [SEC 16(1)]
V. EFFECT OF UNDUE INFLUENCE (SEC19-A)
VI. FRAUD (SEC.17)
VII. CONSEQUENCES OF FRAUD (SEC 19):
VIII. EXCEPTION TO SILENCE (SEC.17)
IX. MISREPRESENTATION (SEC.18)
X. MISTAKE (SEC 20 & 21)
XI. MISTAKE OF LAW FORCE IN INDIA (SEC 65 & 72)

JUDICIAL ANALYSIS
1. In Chikkam Ammiraju Vs. Chikkam Seshama (1918) the
question before the Madras High Court was that
 whether coercion could be caused by a threat to commit
suicide. In this case a Hindu by a threat of suicide
induced his wife and son to execute a release deed in
favour of his brother in respect of certain properties
claimed as their own by the wife and the son. The
question before the court was whether a threat to
commit suicide could be considered to be an act
forbidden by the Indian Penal Code. It was held by
Wallis, C.J. and Seshagiri Ayyar, J. that a threat to
commit suicide amounted to coercion within the
meaning of Section 15 of the Indian Contract Act and
therefore the release deed was voidable.

2. Threat to strike is no coercion

In Workmen of Appin Tea Estate Vs. Industrial Tribunal
(1966) the demand of the workers for bonus was accepted
after a threat of strike. The question which had arisen was,
whether such a decision between the Union of the workers
and the Indian Tea Association could be declared void on the
ground that there was coercion. It was held that because of
the doctrine of collective bargaining under the Industrial
Dispute Act the demand of the workers could be backed by a
threat of strike. Such a threat was neither a threat to commit
an offence under the Indian Penal Code, nor was it unlawful
detaining or threatening to detain any property and hence it
did not amount to coercion, and as such the agreement was
valid.

3. MERE SILENCE IS NOT FRAUD:-

In Keates Vs. Lord Cadogan (1851), A let his house to B

which he knew was in a ruinous condition. He also knew that
the house is going to be occupied by B immediately. A did
not disclose the condition of the house to B. It was held that
he had committed no fraud.

In Shri Krishan Vs. Kurushetra University 1976 SC, Shri

Krishan, a candidate for the LL.B. Part I exam, who was short
in attendance, did not mention that fact himself in the
admission form for the examination. Neither the Head of the
Law Department nor the University authorities made proper
scrutiny to discover the truth. It was held by the Supreme
Court that there was no fraud by the candidate and the
University had no power to withdraw the candidature of the
candidate.

4. WRONGFUL INTENTION

In Derry VS. Peek, the directors of a company issued a

prospectus stating that they had got the authority to run
tramways with steam or mechanical power instead of animal
power. In fact a plan had been submitted for the same and
directors honestly believed that the Board of Trade, who had
to accord its sanction for the same, would do so as a matter
of course. The board of Trade refused the sanction and the
company had to be wound up. The respondent, who had
taken shares in the company on the faith of the
representation by the directors in the prospectus, brought an
action for the tort of deceit. It was held by the House of
Lords that since the statement had not been made with an
intention to deceive there was no fraud.