Saturday, 8 September 2012

CONTRACT LAW - PART IV (FREE & GENUINE CONSENT)

FREE & GENUINE CONSENT

According to Section 14 of The Indian Contract Act, 1872, consent is said to be free when it is not caused by—
(1) Coercion, as defined in section 15, or
(2) Undue influence, as defined in section 16, or
(3) Fraud, as defined in section 17, or
(4) Misrepresentation, as defined in section 18, or
(5) Mistake, subject to the provisions of sections 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.

COERCION
Section 15 of The Indian Contract Act, 1872 defines 'Coercion' as the committing, or threatening to commit, any act forbidden by the Indian Penal Code (45 of 1860) 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.

·      Even threat to commit suicide amounts to coercion. [Chikkam Ammiraju And Ors. vs Chikkam Seshamma And Anr. (1917)]

·      The threat need not proceed from the party to the contract, it may proceed from a third person also.

·      A threat to file a civil or criminal suit is not forbidden by the Indian Penal Code.

Burden of Proof: That the consent was obtained by coercion shall lie upon the aggrieved party who wants to set aside the contract.

Effect of Coercion:
The contract is voidable at the option of the party whose consent was so obtained. When the aggrieved party decides to set aside the contract, it must give back any benefit received from the other party under the contract. Moreover, the other party need not perform his part of the contract. If the aggrieved party does not opt to set aside the contract, it works as a valid contract.

UNDUE INFLUENCE
Undue Influence is:
Where 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. [Williams v Bailey (1866)]

When is a person in a position to dominate the will of the other:
·      Real or apparent authority.
·      Fiduciary relation.
·      Persons with affected mental capacity.
·      When a transaction appears to be unconscionable, it is presumed that the stronger party has exercised undue influence over the weaker party. [Re Craig (deceased) (1971) & Re Brocklehurst (deceased) (1978)]
Note
·      A person who is not a party to the contract may exert undue influence.
·      Lack of foresight is not a ground for establishing a case of undue influence.
·      The law presumes undue influence in a contract with a ‘pardanashin woman’, and the courts throw the burden on the other party to prove that undue influence was not exercised. (A pardanashin woman is one who, by the custom of the country or the usage of the particular community to which she belongs, is obliged to observe complete seclusion (Parda). "A woman will not be a pardanashin woman if she goes to the court and gives evidence, settles rents with tenants and collects rents, communicates in matters of business with men other than the members of her family.")

Burden of proof: is on the party who is in a position to dominate the will of the other.

Effect of undue influence:
The contract is voidable at the option of the party whose consent was so obtained. The court may direct the aggrieved party to refund the benefit whether in whole or in part or set aside the contract without any direction for refund of benefit. If the aggrieved party does not opt to set aside the contract, it works as any other valid contract.

FRAUD
‘Fraud’ means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent1, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:
a.     The suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
b.     The active concealment of a fact by one having knowledge or belief of the fact;
c.      A promise made without any intention of performing it;
d.     Any other act fitted to deceive;
e.     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. 
Illustrations
a.     A sells, by auction, to B, a horse that A knows to be unsound. A says nothing to B about the horse's unsoundness. This is not fraud in A.
b.     B is A's daughter and has just come of age. Here, the relation between the parties would make it A's duty to tell B if the horse, is unsound.
c.      B says to A--"If you do not deny it, I shall assume that the horse is sound." A says nothing. Here, A's silence is equivalent to speech.
d.     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.

To summarise, the following acts constitute a fraud:
·      Suggestion that a fact is true, by one, who does not believe it to be true.
·      An active concealment of fact, by one, having knowledge of the act.
·      A promise made without any intention of performing it.
·      Any such acts or omission which law specifically declares to be fraudulent.
[Refer Derry v Peek (1889)]
Note
Mere silence is not fraud, except;
·      When silence itself is equivalent to speech.
·      When it is the duty of the person keeping silence to speak.
·      When it is the duty of the seller to disclose latent or hidden defect.
Fraud cannot be committed by a stranger to the contract.
Fraud must have been committed upon the other party.

Effect of fraud:
The contract is voidable at the option of the defrauded party. The defrauded party is entitled to compensation for any damage he has sustained. The defrauded party may insist that the contract shall be performed and that he should be put in the position in which he would have been if the representation made was true.

MISREPRESENTATION
Misrepresentation” means and includes—"
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 any one claiming under him, by misleading another to his prejudice, or to the prejudice of any one 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.
Note
Misrepresentation is a misstatement of a material fact made innocently with an honest belief as to its truth or non-disclosure of a material fact, without any intent to deceive the other party.
Effect
The effect of misrepresentation is that the agreement is voidable by the party whose consent is obtained by misrepresentation.

MISTAKE
According to section 20 of the Indian Contract Act, 1872, an agreement is void where both parties are under mistake as to matter of fact.
“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.”
Explanation An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement, is not to be deemed a mistake as to a matter of fact.
Illustrations
a.     A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Bombay. It turns out that, before the day of the bargain the ship conveying the cargo had been cast away and the goods lost. Neither party was aware of these facts. The agreement is void. (a) A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Bombay. It turns out that, before the day of the bargain the ship conveying the cargo had been cast away and the goods lost. Neither party was aware of these facts. The agreement is void."
b.     A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void. (b) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void."
c.      A, being entitled to an estate for the life of B, agrees to sell it to C, B was dead at the time of agreement, but both parties were ignorant of the fact. The agreement is void. (c) A, being entitled to an estate for the life of B, agrees to sell it to C, B was dead at the time of agreement, but both parties were ignorant of the fact. The agreement is void."
Note
·      Mistake is erroneous belief about something.
·      It may be mistake of law or mistake of fact.
·      Mistake of law does not result in a voidable contract.

Bilateral mistake of fact renders a contract void. (Lack of consensus ad idem).
The mistake must relate to fact, not opinion. The fact must be essential to the agreement & the fact must be existing at the time of contract.
Instances of Bilateral Mistake:
Mistake as to:
·      The existence of the subject matter. [Couterier v Hastie (1856)]
·      The identity of the subject matter. [Raffles v Wichelhaus ( 1864)]
·      Title or rights. [Cooper v Phibbs (1867)]
·      The quantity of subject matter.
·      The quality of subject matter. [Smith v Hughes (1871)]
·      Assumptions.

Unilateral mistake does not affect the validity of an agreement. However, if it can be proved that the mistake was caused by fraud or misrepresentation it can be avoided.

Instances of Unilateral Mistake:
Mistake as to:
1.     Identity of the contracting party. [Said v Butt(1920), Cundy v Lindsay (1878),  Philips v Brooks (1919), Ingram v Little (1961) & Lewis v Averay (1971)]
2.     The character of document. [Bala Devi vs Santi Mazumdar (1956)]

Cases
1.    Chikkam Ammiraju And Ors. vs Chikkam Seshamma And Anr. (1917)
Section 15 speaks of ‘ an act forbidden by the Indian Penal Code ’ and not of an offence punishable under the Indian Penal Code. Suicide is an act forbidden as the attempt or abetment thereof is an offence punishable under the Indian Penal Code. Prejudice need not he in respect of property alone; section 15 provides for an exception where freedom of consent is absent and any circumstance which influences the mind of a party to a contract and destroys the freedom of volition would constitute coercion. The loss of the husband to the wife or of a father to the son is sufficient prejudice in law.
Summary
Chikkam Seshammas husband and Ammiraju were brothers. Chikkam Ammiraju executed a mortgage deed in favour of his brother and obtained a certain amount of money, later he failed to pay the amount to his brother. Due to love and affection Chikkam Seshamma’s husband wanted to release the mortgage in favour of his brother. Seshamma and her son did not accept this. Chikkam Seshamma’s husband threatened to commit suicide if they did not listen to him. Due to such threat they executed the release mortgage in favour of the brother. Later they claimed the said properties as their own.

2.    Williams v Bailey (1866)
The security given for the debt of the son by the father under below mentioned circumstances, was not the security of a man who acted with that freedom and power of deliberation that must be considered as necessary to validate a contract to give security for the debt of another.
Summary
A son forged his father's signature on promissory notes and gave them to their bankers. At a meeting of all the parties at the bank, one of the bankers said to the father: "If the bills are yours we are all right; if they are not, we have only one course to pursue; we cannot be parties to compounding a felony." The bank's solicitor said it was a serious matter and the father's own solicitor added, "a case of transportation for life." After further discussion as to the son's financial liability the bank's solicitor said that they could only look to the father. The father then agreed to make an equitable mortgage to the bank in consideration of the return of the promissory notes. The father succeeded in an action for cancellation of the agreement.

3.    Re Craig (deceased) [1971]
C, an old man of 84 years whose wife had died, employed Mrs. M as secretary/companion. From the beginning she occupied a position of trust, and in addition to running the house she took a confidential part in running C's affairs. From the time of Mrs. M's employment and C's death (January 1959 - August 1964) he gave her gifts worth £28,000 from his total assets of £40,000.
It was held that (1) All the gifts complained of were such as to satisfy the requirements to raise the presumption of undue influence, namely, that they could not be accounted for on the ground of the ordinary motives on which ordinary men act, and secondly, that the relationship between C and Mrs. M involved such confidence by C in Mrs. M as to place her in a position to exercise undue influence over him. (2) Mrs. M failed to discharge the onus on her of establishing that the gifts were only made after 'full, free and informed discussion' so as to rebut the presumption of undue influence. The gifts would, therefore, be set aside.

4.    Re Brocklehurst (deceased) [1978]
Brocklehurst was a strong-minded, autocratic and eccentric old man who was used to commanding others and had served in the army in positions of command. He was impulsively generous. When he was in his eighties he lived alone and became friendly with the owner of a local garage. They had a common interest in shooting and B permitted the defendant to shoot rabbits on the estate. B wrote to the defendant saying that he wished to give him the shooting rights over his estate and pressed the defendant to instruct a solicitor to draw up a lease. B executed the lease. After B died, his executors brought an action against the defendant to have the lease set aside on the ground of undue influence. The Court of Appeal upheld the lease.

The Court of Appeal held that the nature of the relationship between the deceased and the defendant was not one of confidence and trust such as would give rise to a presumption of undue influence on the part of the defendant, for the evidence established that the relationship was one of friendship and did not indicate that it was such that the defendant had been under a duty to advise the deceased or had been in a position of dominance over him; on the contrary, it was the deceased who had tended to dominate the defendant.
But even if the relationship had been one that gave rise to a presumption of undue influence, the defendant had rebutted the presumption for in the circumstances the presumption was rebuttable not only by proof that the deceased had been independently advised about the leases but also by proof that the gift of the leases had been the spontaneous and independent act of the deceased.

5.     Derry v Peek (1889)
Derry v Peek established a 3-part test for fraudulent misrepresentation, whereby the defendant is fraudulent if he:
Knows the statement to be false, or
Does not believe in the statement, or
Is reckless as to its truth.
Summary
The Plymouth, the Devonport and District Tramways Company issued a prospectus stating that the company had permission to use steam trams, which would replace their horse-powered trams. In fact, the company had no such permission because the right to use steam power was subject to the Board of Trade's consent. The company applied, honestly believing that they would get permission because it was a mere formality. In reality, after the prospectus was issued, permission was refused and the company ended up in liquidation.
Led by Sir Henry Peek, shareholders who had purchased their stakes in the company on the faith of the statement sued the directors in fraud.
Held
The House of Lords held that the shareholders' action failed because it was not proved that the director lacked honest belief in what they had said.

6.    Couterier v Hastie (1856)
It is an English contract law case, concerning common mistake between two contracting parties about the possibility of performance of an agreement.
Summary
Couturier agreed with Hastie to deliver some corn. They thought it was in transit between Salonica (now Thessaloniki) and the UK. But the corn had already decayed. The shipmaster had sold it. Couturier argued that Hastie was liable for the corn because Hastie had already bought an ‘interest in the adventure’, or rights under the shipping documents.
Held
The House of Lords held that because the corn effectively did not exist at the time of the contract, there was a total failure of consideration and the buyers were not liable to pay the price

7.    Raffles v Wichelhaus (1864)
Often called "The Peerless" case, is a leading case on mutual mistake in English contract law. The case established that when both parties to a contract are mistaken as to an essential element of the contract, the Court will attempt to find a reasonable interpretation from the context of the agreement before it will void it. (The case's fame is bolstered by the ironic coincidence contained within: each party had in mind a particular ship, with no knowledge of the other's existence, yet each ship was named Peerless.)
Summary
The claimant entered into a contract to sell "125 bales of Surat cotton, guarantied middling fair merchant's Dhollorah" to the defendant at the rate of ​17 1⁄4 d. per pound. The contract specified that the cotton would be arriving in Liverpool on the ship Peerless from Bombay ("to arrive ex Peerless from Bombay"). It so happened that there were two British ships named Peerless arriving in Liverpool from Bombay, one departing in October and another departing in December. The defendant, according to statements presented in court, thought the contract was for cotton on the October ship while the claimant thought the contract was for the cotton on the December ship. When the December Peerless arrived, the claimant tried to deliver it, however the defendant repudiated the agreement, saying that their contract was for the cotton on the October Peerless.
The claimant sued for breach of contract, arguing that the date of the ship was not relevant and the only purpose of specifying the name of the ship is that in the contingency that the ship sink en route, the contract could be voided.
Issue
The issue before the Court was whether the defendant should be bound by the agreement to buy the cotton of the claimant's Peerless.
Held
It was held that the contract between the complainant and defendant was not enforceable. When the contract was being discussed, there was ambiguity in the Peerless and what ship was being referred to, as well as no agreement on the terms on the sale. There had been no consensus ad idem or meeting of the minds between the parties to form a binding contract. The objective test made it clear that a reasonable person would not have been able to identify with certainty what ship had been agreed on.

8.    Cooper v Phibbs (1867)
It is an English contract law case, concerning the doctrine of mistake.
Summary
The complainant, Mr. Cooper, was the nephew of the owner of the salmon fishery near Ballysadare, Ireland. He leased this salmon fishery from his Uncle. When his uncle died and the lease came up for the time of renewal, the complainant renewed the lease for the salmon fishery with his Aunt. However, it was later found out that in the Uncle’s will, Mr. Cooper as his nephew, had been given life tenancy of the salmon fishery. This meant that there was no need for the lease that existed between him and the Aunt and the dispute arose when the next rental payment was due.
Held
It was held that the contract and lease that existed between the complainant and the defendant was voidable, rather than void. This was due to the claim being in equity, as Mr. Cooper had beneficial ownership of the salmon fishery and not legal ownership. This case concerned ‘res sua’ (one’s own property) and it was a mistake as to the title of the property; Mr. Cooper was already the beneficial owner of the salmon fishery and there could not be a lease. It was held that such an agreement would be set aside due to a common mistake by both parties as to ownership.

9.    Smith v Hughes (1871)
Summary
The complainant, Mr Smith, was a farmer and the defendant, Mr Hughes, was a racehorse trainer. Mr Smith brought Mr Hughes a sample of his oats and as a consequence of what he had seen, Mr Hughes ordered 40-50 quarters of oats from Mr Smith, at a price of 34 shillings per quarter. To begin with, 16 quarters of oats were sent to Mr Hughes. When they arrived, he said that the oats were not what he had thought they were. As he was a racehorse trainer and he needed old oats, as this was what the horses had for their diet. The oats that were sent to Mr Hughes were green oats, the same type as the initial sample. Mr Hughes refused to pay Mr Smith for the delivery and remaining order.
Issues
Mr Smith argued that Mr Hughes had breached the contract as he had not paid for the delivery and future oats to be delivered. The issue in this case was whether the contract could be avoided by Mr Hughes, as Mr Smith had not delivered the type of oats he had expected.
Held
It was held that there was a contract between Mr Smith and Mr Hughes and that it would not be avoided. There had been no discussion between the parties regarding the delivery of old oats. An objective test revealed that a reasonable person would expect the sale of good quality oats in a similar contract, since there was no express discussion of old oats. The sample gave him the chance to inspect the oats and this was an example of caveat emptor (buyer beware).

10. Said v Butt(1920)
Summary
The plaintiff wanted to go to a play’s first night. He had fallen out with the management of the theatre, and knew that he would not get a ticket in his own name. He got a friend to go to the theatre and buy a ticket for him without disclosing the fact. When he turned up for the performance he was refused admission.
Held
His claim was dismissed. A first night is a special event with characteristics of its own, and tickets are only given or sold to persons whom the management selects and wishes to favour. The purchaser’s identity was a material element in the formation of the contract and that the failure to disclose the fact that the ticket was bought on his behalf prevented the plaintiff from asserting that he was the undisclosed principal.

11. Cundy v Lindsay (1878)
 It is an English contract law case on the subject of mistake, introducing the concept that contracts could be automatically void for mistake to identity, where it is of crucial importance.
Summary
The claimant received an order for sale of handkerchiefs from a person named Blenkarn, who signed in his name in a manner resembling "Blenkiron & Co."- a reputed firm located at "123, Wood Street". The purchaser further mentioned his address to be at "37, Wood Street, Cheapside", to which the claimant sent the goods. Although no payment was made by Blenkarn, he sold the goods to a third person- the defendants.
Later, the claimants alleged that, as they sold the goods to Blenkarn under the mistaken assumption that they were selling it to Blenkiron & Co., there was no real consent to the contract of sale. Consequently, there was no valid transfer of title, which remained with the claimants, and accordingly, they sued the defendants for conversion of goods.
Held
As the claimant did not intend to sell the handkerchiefs to Blenkarn but to Blenkiron & Co., there was no consent of the claimant to the contract with the former. Accordingly, as no contract was concluded between the claimant and Blenkarn so as to constitute a valid transfer of title which the latter could rightfully convey to the defendants, the title remained with the claimant. Hence, the defendants, being in possession without a good title over such goods, were held liable for conversion.

12. Philips v Brooks (1919)
It is an English contract law case concerning mistake. It held that a person is deemed to contract with the person in front of them unless they can substantially prove that they instead intended to deal with someone else.
Summary
A rogue purchased some items from the claimant's jewellers shop claiming to be Sir George Bullogh. He paid by cheque and persuaded the jewellers to allow him to take a ring immediately as he claimed it was his wive's birthday the following day. He gave the address of Sir George Bullogh and the jewellers checked the name matched the address in a directory. The rogue then pawned the ring at the defendant pawn brokers in the name of Mr. Firth and received £350. He then disappeared without a trace. The claimant brought an action based on unilateral mistake as to identity.
Held
The contract was not void for mistake. Where the parties transact face to face the law presumes they intend to deal with the person in front of them not the person they claim to be. The jewellers were unable to demonstrate that they would only have sold the ring to Sir George Bullogh.

13. Ingram v Little (1961)
Summary
Two sisters Hilda and Elsie Ingram sold their car to a rogue calling himself Mr. Hutchinson. They agreed a price for cash, but when the rogue offered a cheque Elsie said the deal was off. She wanted cash or no sale. The rogue then gave them his full name and address and Hilda went to the post office, which was two minutes down the road, to check the details out. When she returned she informed Elsie that the details checked out and the sisters agreed to let Mr. Hutchinson take the car. The cheque was dishonoured and the car was sold on to Mr. Little. The sisters brought an action to recover the car.

Held:
The contract was void for mistake. The Court of Appeal held that the sisters only intended to deal with Mr. Hutchinson at the address given because they were not willing to offer a sale for payment by cheque from anyone else. This case has received widespread criticism and has not been followed since.

14.  Lewis v Averay (1971)
The complainant, Mr. Lewis, was a postgraduate that wanted to sell his car. He met with somebody interested in buying the car, who was actually a rogue that was impersonating a famous actor, Richard Greene. They agreed on the price of £450 for the car and the rogue wanted to pay by cheque. Mr. Lewis asked for identification before he agreed to accepting the cheque, with the rogue presenting a pass for Pinewood Studios and his name and photograph. Once the rogue had the car, he sold it onto the defendant, Mr. Averay, for £200. The cheque he had given to Mr. Lewis bounced, but the rogue had disappeared and could not be found.
Held:
It was held that the mistake to the real identity of the rogue did not prevent a valid contract being created between him and Mr. Lewis. There was a face to face interaction, where the law presumes contract. However, this was fraud and impersonation by the rogue, which would render a contract voidable and it could be set aside. Yet, this must be done before a third party acquires the rights. In this case, the contract was not set aside before Mr. Averay, in good faith, purchased the car.
.
15. Bala Devi vs Santi Mazumdar (1956)
An old illiterate woman executed a deed under the impression that she was executing a power of attorney authorising her nephew to manage her estate, while in fact it was a deed of gift in favour of her nephew.

The evidence showed that the woman never intended to execute such a deed of gift nor was the deed read or explained to her. The document was held to be void, as her mind did not go with her signature.

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