Effect of Coercion, Undue Influence, Fraud, Misrepresentation and Mistake

By | October 2, 2019
Effect of Coercion, Undue Influence, Fraud, Misrepresentation and Mistake

This article deals with the effect of Coercion, Undue Influence, Fraud, Misrepresentation and Mistake on a Contract.

Ingredients of ‘Free Consent’

According to section 10 of the Indian Contract Act, 1872 without the contracting parties entering into the agreement with ‘free consent’, conditions of enforceability of the said contract will not be met. Parties involved in contract formation should consent to it, it is the only way that the contract may come into existence.

Yet, there are many contracts made till date where the consent of the parties has been ‘not’ free. Section 14  of the ICA states that-

“Free consent defined- Consent is said to be free when it is not caused by –

  1. Coercion

  2. Undue influence

  3. Fraud

  4. Misrepresentation

  5. Mistake”

The contract becomes voidable at the option of the party whose consent was objectionably taken, thus not having ‘free consent’. An example to understand the options available to the said party, If X uses coercion to make Z party to a contract, Z may uphold or reject the same. If Z decides to uphold the contract, the contract will become binding upon both the parties.

Hence, a contract which has not been taken with an individual or groups ‘free consent’, becomes enforceable at the option of only of the parties whose consent was not free.

Coercion

Section 15 of the Indian Contract Act, 1872 defines coercion as; “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 whatever, with the intention of causing any person to enter into an agreement”

In the explanation of the act, it is mentioned that at the time the coercion is being employed it is immaterial whether the particular element of the Indian Penal Code in question is in force or not.

In the case Askari Mirza v Bibi Jai Kisori[1], Askari claimed to have given consent for the contract between the two parties under coercion employed by Bibi. Yet, prior to the contract formation. Askari had lied in order to receive a loan from Bibi. It was so then held that a plaintiff needs to provide proof of being coerced;

  1. Has to establish that the threat was uttered or committed
  2. Thereafter has to establish, that it was a threat to commit an act forbidden by the Indian Penal Code.
  3. The threat was uttered or committed by the defendant having the intention of causing the plaintiff to enter into the agreement.

To threaten a criminal prosecution is not per se an act forbidden by the Indian Penal Code (IPC). Such an act could only be forbidden by IPC if it is constituted a threat to file a false charge. If the charge of cheating (lying to get a loan) was true, there is an end to the plaintiffs’ case. This is as a threat to bring such a charge would be an act forbidden by IPC. If the act fails under IPC, it fails under section 15 of the ICA. The privy council in the matter stated: “cases brought under this particular branch of section 15 of the Contract Act must be of rare occurrence”.

Dr. Avtar Singh illustrates this by saying that consent obtained at gunpoint or in such cases would fall under the said section.

In another well-known case Chikham Amiraju v. Chikham Seshamma (1917) 41 Mad 33 the idea of the threat of self-harm and its coercive nature was discussed.  In the case, a wife and son executed a ‘release deed’ under threat from her husband who was holding out the threat of committing suicide. The release deed’s biased nature was to favour the husbands brother, which the mother and the son earlier opposed. The judgment of the lower courts left the plaintiff dissatisfied as it was held that the respondent’s consent was not free.

The aggrieved plaintiff appealed the matter to the high court, the lower courts judgment was upheld. In the judgement the term ‘forbidden act’ was interpreted to be a broad term with a wider meaning, and hence a wider application.

Specific to the case, it was discussed the suicide and attempt to commit suicide may both be punishable offences in the eyes of the law, yet in practicality ‘suicide’ cannot be. This is it was understood that it would be impossible to reach the culprit as the act would have been completed and there would be no one to prosecute. It was held by the higher court that the threat of suicide provided by the husband/father was coercive in nature and so the deed was not executed with the respondent’s free consent, therefore being a contract which would not be enforceable by law.

Stance according to English Law

What in India is considered as ‘coercion’ in accordance with English law it may be referred to as ‘duress/Menace’. Duress has been defined as-

“ Occurs when one party exerts improper pressure on another party and that party feels they have no choice but to enter into the agreement or transaction as a result. Duress makes the agreement voidable. The court considers factors such as:

  • The seriousness of the improper pressure.
  • Whether the complaining party protested.
  • Whether the complaining party had a real choice or realistic alternative to entering the agreement.” (“Duress”)

Undue Influence

If an observable asymmetrical relationship between the parties can be seen taking a decision that moves away from favouring the weaker party, it can be then said that undue influence has been employed. Section 16 of the ICA,1872 states in this regard that-

“(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 dominate the will of the other and uses that 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 a 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 be upon the person in a position to dominate the will of the other. Nothing in the sub-section shall affect the provisions of section 111 of the Indian Evidence Act, 1872 (1 of 1872).”

Clause (2) of the said section which talks about ‘dominating the will of another’ can be understood via the case Manu Singh v. Umadat Pande[2]. The asymmetrical relationship, in this case, was shared between Guru or spiritual coach Mr. Umadat Pande who is the respondent and his delusional devotee Mr Manu Singh who is the plaintiff. Such a unbalanced relationship became sine quo non for an act of undue influence to take place.

The respondent used his position over the plaintiff and got Mr Manu Singh to gift him his entire property in exchange for his soul being blessed in his next life. Even though it may seem that such a decision was taken with the consent of the plaintiff, the Allahabad High Court held that undue influence had been employed by the respondent.

The court even discussed that no reasonable man would have been a party to the agreement and that the guru’s influence on the plaintiff influenced his ill-informed decision. Similarly, consent may be given if the party is under pressure. This is common when parties share relations of domination and submission, the authority exercised by the dominant party may be real or apparent. This case can also be looked at as a case that is about the practice of undue influence that takes place in fiduciary relationships.

The legal definition of the same is “a relationship in which one party places special trust, confidence, and reliance in and is influenced by another who has a fiduciary duty to act for the benefit of the party”

(“FIDUCIARY RELATIONSHIP”)

Thus, the relationship between Guru and devotee fits the bill when it comes to a relationship which is based on trust and confidence.

The facts of the case Ramnee Annapurni Nachiar v. Swaminatha Chettiar (1910) 20 MLJ 785 are, a poor Hindu widow in dire need for financial relief entered into a money lending agreement with a money lender. The moneylender took advantage of the lady and set an interest rate of 100%. This case falls under undue influence and within it in a category of ‘mental distress’. The Madras High Court recognized the application of undue influence used by the moneylender an issued to reduce the interest to 24%.

Burden of proof

If a plaintiff wishes to bring forward an action to avoid a contract they have entered on the grounds of undue influence, there are two things that must be kept in mind. The law has been stated in the Indian Evidence Act, 1872 and the Indian Contract Act, 1872. The law states that in order for a plaintiff to prove that undue influence has been used on them, they must establish these two things;

  1. “not only must the defendant have a dominant position but,
  2. He must use it.”

What clause (2) means is that it is not enough for the plaintiff to show the possibility of undue influence that may have been exercised by the dominant party. It must be certain that did use his position to influence the plaintiff. A possibility of the same is not enough for the plaintiff to avoid contract.

Unconscionable bargains

In such a case, the burden of proof is on the stronger party, one that is in a position to dominate the will of the other party. In other cases ones that do not fall under ‘unconscionable bargain,’ the burden of proof lies on the plaintiff. In the case of Subash Chandra v. Ganga Prasad (AIR 1967 SC 878)it was seen that the same set of laws apply to a ‘gift’ with relation to undue influence. It was understood through this case that the mere time of death and gift given cannot be presumed to be an act done under undue influence.

The Supreme Court in the matter found that there was no evidence to prove that undue influence was present. It was held that there was nothing unconscionable when it comes to a grandfather gifting something to his grandson.

In this matter section 16(2) (b) was looked at which states-

“(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—

(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.”

Misrepresentation

Section18 defines misrepresentation as “(1) 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;

(2) any breach of duty which, without an intent to deceive, gains an advantage of the person committing it, or anyone claiming under him, by misleading another to his prejudice, or to the prejudice of anyone claiming under him;

(3) causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement.”

It is often said that misrepresentation affects the very substance of the contract. In order for misrepresentation to take place, the misrepresentation needs to be directly addressed to the party who has been misled. The said misrepresentation must be of the nature to induce the contract. It is also essential for the misrepresentation to be of facts which are material to the contract.

Difference between Misrepresentation and Non-disclosure

There is a general rule followed in common law for ‘non-disclosure’ of information. According to the rule an individual or a party considering to enter into a contract with another individual or party has no duty to disclose information the other. To be able to avoid a bad bargain is seen as in the interest of both parties, therefore it becomes their responsibility to ensure they receive the necessary information before entering a contract.

In the case Bell v. Lever Bros (1931), it was held that the mere failure to disclose facts material to the contract does not five the right to avoid the contract. An illustration to understand non-disclosure could be that A visits paintings shop, picks up a painting which is being sold as an ordinary 18th-century painting when it is actually a priceless masterpiece. A says nothing to the shop owner B and purchases the rare painting for a much lesser cost. The contract for the sale is valid.

In both common law and statutory exceptions to the general rule, contracts made uberrimae fidei, which means good such as insurance contracts, there is a duty to disclose information. Failure to do so in such contracts makes the contracts voidable.

­Types of Misrepresentation

  • Unwarranted Statement

Such misrepresentation takes place when a person who believes their information to be true and shares it without realizing the information coming from them is unwarranted in nature. In the case Oceanic Steam Navigation Co v. Soonderdas[3] the defendant chartered a ship from the plaintiff under the belief that the ship was registered below the tonnage of 2800. This turned out to be false information as the ship was actually registered to a greater tonnage and this was outside of the plaintiff’s knowledge. It was held that the defendant could avoid the contract due to the misrepresentation given to them.

  • Breach of Duty

Any kind of breach of duty which gives an advantage to the person committing the said breach is also a form of misrepresentation. In the case of Oriental Bank Corp v. John Fleming[4]  the plaintiff signed a deed without reading it. The deed contained a release in the favour of the respondent that the plaintiff was unaware of. It was held that the respondent had no obligation, legally or morally to communicate the contents of the deed.

The deed was signed by the plaintiff as she placed confidence in the respondent, making it his duty to state all essential information when it comes to the content of the deed. The court allowed the plaintiff to set the deed aside in the said case.

  • Inducing mistake about the subject-matter

Misrepresentation can even arise when the subject matter of the agreement which usually has some value is mistaken by either or both of the contracting parties. This can be done innocently as well, even then it will qualify as misrepresentation.

In the case of Farrand v. Lazarus [5]  a used car dealer attached a disclaimer to a car under sale. The disclaimer stated that the odometer was incorrect while being aware of the actual mileage of the car. In this case, it was held that the dealer was bound to disclose the material fact to the sale of the car. The disclaimer put on the car by the dealer seriously understated the fact at hand and was incredibly misleading to the potential buyer.

Fraud

“Fraud is the intentional misrepresentation of facts” (Singh).

Section 17 of the Indian Contract Act, 1872 states – Fraud’ means and includes any of the following acts 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 the contract:-

(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

(2) the active concealment of a fact by one having knowledge or belief of the fact;

(3) a promise made without any intention of performing it;

(4) any other act fitted to deceive;

(5) any such act or omission as the law specially declares to be fraudulent.”

English law

The term was coined in the case Derry v. Peak (1889) wherein a standard was created to test whether fraud has taken place or not. While delivering the judgement  Lord Herschell stated that in order to establish that fraud has taken place certain things need to be established such as-false representation has been made knowingly, without believing in its truth and made recklessly without caring to find out whether it is the truth or not.

The active concealment of information while forming a contract amounts to fraud. The same should be distinguished from passive concealment of facts material to the case. A simple case that will help us understand intentional misrepresentation of facts which in turn deceive the other contracting party is Ningawwa v. Byrappa Shiddappa Hireknrabar[6].

In this case, a husband asked his illiterate wife to sign some document saying it was to mortgage 2 pieces of land but in reality, he mortgaged 4 pieces of land that belonged to her.


References

[1] (1912) 16 IC 344

[2] (1888-90) 12 all 523

[3] (1890) 14 Bom 241

[4] (1879) 3 Bom 242

[5] (2002) 3 All ER 175

[6] AIR (1968) SC 956


  1. Void Agreements(Opens in a new browser tab)
  2. Contingent contract: Concept and Scope(Opens in a new browser tab)
Mridul Crystelle
Author: Mridul Crystelle

Mridul Crystelle Singh is a second-year BA LLB student at O.P Jindal Global University. Her writing experience varies from working for Reader’s Digest India to writing scripts for a school’s annual production. She is a part of her university’s moot court society and hopes to write research papers on various topics in law in the future.

What did I miss? Don't forget to leave your valuable feedback