This Free Consent – CA Foundation Law Study Material is designed strictly as per the latest syllabus and exam pattern.
Free Consent – CA Foundation Business Law Study Material
Define Fraud. What are the essential elements of Fraud?
According to Section 17 of the Indian Contract Act, 1872, Fraud means and includes any of the following acts, committed by a party to contract, or with his connivance or by his agent, with intent to deceive another party or his agent, to induce him to enter into the contract:
- the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
- the active concealment of a fact by one having knowledge or belief of the fact;
- a promise made without the intention of performing it;
- any other act fitted to deceive;
- any such act or omission as the law specifically declares to be fraudulent.
The following are the essential elements of the fraud:
- There must be a representation or assertion and it must be false. Active concealment may also amount to fraud.
- The representation must be regarding a material fact of a contract.
- The representation must be made before the conclusion of the contract.
- The representation or assertion or concealment must be done with the positive knowledge of falsehood or recklessly not caring whether it is true or false.
- The misrepresentation or concealment of fact must be done with the intention to deceive the other part}’ and to cause him to enter into a contract.
- The other party must have relied on the misrepresentation or assertion.
- The other party relying on the misrepresentation must have suffered loss consequently.
“Mere silence as to facts is no fraud”. What are the exceptions to this statement?
Define fraud. Whether “mere silence will amount to fraud” as per the Indian Contract Act, 1872?
As a general rule silence as to material facts regarding the contract does not amount to fraud, since, the contracting party is under no obligation to give full disclosure to the other party on account of the Rule of Caveat Emptor. However, he must refrain from active concealment of the facts relating to the contract. Thus mere silence is no fraud.
There are however 2 statutory exceptions to the above rule:
(1) When the party is under a duty to speak: Where the circumstances of the case are such that it is the obligation of the contracting party to speak and give full disclosure irrespective of whether or not it had been demanded by the other party. Examples of such contracts are:
- In case of contracts made between parties in a fiduciary relationship with each other the parties are under a duty to speak on account of utmost good faith present between them
- In the case of contracts of insurance, the insured is under an obligation to give full disclosure of all material facts to the insurer
- In the case of contracts of marriage, the parties are under a duty to speak and give disclosure of all the material facts
- In the case of contracts of family settlements also full disclosure is required to be made by the parties at the time of formation of the contract
- In the case of a contract of partnership, since the relation is founded on mutual trust the partners are under a duty to speak
- In case of a contract of guarantee, the creditor is under a duty to disclose all the material facts which are likely to affect the decision of the surety to extend the guarantee
- In case of change in material facts after the formation of contracts but before the conclusion of the contract, the party is under a duty to speak
- In case of any latent defect present in the goods being offered for sale, the seller is under a duty to speak
- In case of allotment of shares by a company, its officers are under a duty to disclose all the material facts within in their knowledge, by way of statements in the prospectus, when the public is being invited to subscribe to the shares of the company.
(2) When silence is equivalent to speech: For example where A says to B “if you do not deny it I will assume that the horse is sound and fit for purchase.” A says nothing. Here his silence shall amount to speech and hence it shall amount to fraud.
Discuss the law relating to the effect of mistakes on contracts.
A contract is said to be created under a mistake when the party/parties to the contract are under an erroneous belief, misconception, or misimpression as to the laws applicable or the facts essential, to the contract.
The mistake can either be:
1) Mistake of Law: If a contract is created under a mistake of Law of the Land, the contract shall be treated as valid and enforceable since ignorance of the law of own country cannot be excusable to any party (ignorant Juris nonexcusat).
However, if the mistake relates to the law of a foreign country, then the same shall be treated as excusable and the agreement shall be treated as void.
(2) Mistake of fact: It can be of two types:
(a) Bilateral Mistake: When both the contracting parties are under a mistake as to the facts essential to the contract such as regarding the quality, existence, quantity, price, etc. of the subject matter or regarding the possibility of performance of the contract, then the agreement is said to be void due to bilateral mistake.
(b) Unilateral Mistake: When only one of the contracting parties is under a mistake as to the facts of a contract, the contract is said to be created under a unilateral mistake. Generally, a contract created under unilateral mistake is said to be valid. However, if the unilateral mistake is regarding the-
- identity of the contracting party
- the nature of the contract
- the quality of promise, then the same shall be regarded as void.
- Define Coercion. What are its elements?
- What are the effects of coercion on the validity of a contract?
(1) According to section 15 of the Indian Contract Act, 1872, “Coercion is the committing or threatening to committing or threatening to commit any act forbidden by the Indian Penal Code, or unlawful detention 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.”
The following are the elements of coercion:
- Committing or threatening to commit any act forbidden by the Indian Penal Code
- Unlawful Detention of any property or threatening to detain any property
- Any of the above acts are done with the intention of causing that person to enter into an agreement
- Coercion may proceed either from the party or from a stranger
- Coercion may be directed against a party or stranger to contract
- Threat to commit suicide may also amount to coercion
- The place of coercion is immaterial
(2) Effects of coercion are as follows:
- A contract created by coercion is voidable at the option of the aggrieved party.
- When the aggrieved party exercises its option to rescind the contract, restitution of the benefits shall be done by the party who has received any benefit under the contract to the party who had provided the same.
- Further, in the event of any damage having been sustained by the aggrieved party, he shall be entitled to claim compensation from the defaulting party
What are the instances when a contract created by fraud is not treated as voidable?
In the following instances a contract created by fraud is not treated as voidable:
- If the aggrieved party had means available of discovering the truth, with ordinary diligence, then the contract shall not be voidable at his option.
- A fraud, which does not cause the consent of the party to enter into a contract, does not render the contract voidable.
- When the aggrieved party after becoming aware of the fraud, affirms or ratifies the contract, then he loses his right to subsequently rescind or avoid the contract.
- The right of rescission can be claimed by the aggrieved party within a reasonable time of discovery of fraud. Thus on the lapse of a reasonable time after the discovery of fraud the contract shall not be treated as avoidable.
- The right of rescission of contract is lost, when a third party acquires rights in the subject matter of the contract created by fraud, in good faith, and for value, provided such acquisition of rights by the third party takes place before the aggrieved party rescinds the contract created by fraud.
- When the contracting parties cannot be restored to the same position in which they were before the formation of the contract, then the contract created by fraud, shall not be treated as avoidable.
When is a party said to be in a position to influence the will of the other so as to cause him to enter into a contract?
Section 16(2) provides that a person is deemed to be in a position to dominate the will of another where.
1. Where he holds a real or apparent authority over the other (For ex-master & servant, ITO & Assessee)
2. Where he stands in a fiduciary relationship to the other. A fiduciary relationship means a relationship of mutual trust and confidence. Such a relationship is supposed to exist in the following cases – father and son; guardian and ward; solicitor and client; doctor and patient; preceptor and disciple; trustee and beneficiary, etc.
3. Where a party makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress.
Discuss the essentials of undue influence as per the Indian Contract Act, 1872.
The following are the essential elements of under influence, under section 16 of the Indian Contract Act, 1872-
1. The relation between the parties – Undue influence can be exerted only where a prior relationship is subsisting between the parties at the time of formation of the contract.
2. Position of dominating the will – The relation subsisting between the parties must be such that one of the parties is in a superior position i.e. in a position to dominate the will of the other party. A party is deemed to be in a dominant position where –
- he holds real/ apparent authority or
- he stands in a fiduciary relationship with the other party or
- he makes a contract with a person whose mental capacity is affected by reason of age or mental/bodily stress.
3. Use of dominant position to obtain unfair advantage – Consent is said to be caused by undue influence only when the dominant party uses his position to influence the free will of the weaker party, with a view to obtaining an unfair advantage over the other (weaker party) in the contract. Thus 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 in a contract.
(a) Coercion & Undue Influence
(b) Misrepresentation & Fraud
|Type of force: Coercion involves the use of physical force.||Undue influence involves the use of mental pressure.|
|Relationship: In case of coercion, there is no relationship between the parties to the contract.||Whereas in case of undue influence some sort of relationship generally exists between the two parties.|
|Third-Party: Coercion mas’ be employed either against the party to the contract or against any third person who is not a party to the contract.||Undue influence is exercised against a person who is a party to the contract. No third party is involved in creating undue influence.|
|Presumption: The Court cannot draw the presumption of coercion.||The Court may draw the presumption of undue influence if the circumstances SC) warrant it.|
|Voidable: The contract is voidable at the option of one of the parties of the contract.||The contract is either voidable or the Court may enforce it in a modified form.|
|Points of Difference||Misrepresentation||Fraud|
|Different intention||In misrepresentation there is Fraud implies an intention to intention to deceive.||Fraud implies an intention to deceive.|
|Different Belief||The person making misrepresentation believes it to be true.||The party making the false statement believes that it is not true.|
|Different Rights||In case of misrepresentation, the only remedy is rescission. There can be no suit for damages.||In case of fraud, the aggrieved party can rescind the contract. He can also sue for damages.|
|Different Defence||The aggrieved party cannot avoid the contract if he had the means to discover the truth with ordinary diligence.||But in case of fraud excepting fraud by silence, the contract is voidable even though the party defrauded had the means of discovering the truth with ordinary diligence.|
|Section||Fraud is defined under section 17 of the Indian Contract Act, 1872.||Misrepresentation is defined under section 18 of the Indian Contract Act, 1872.|
In Shrikrishan v. Kurukshetra University, Shrikrishan, a candidate for the LL.B. Part I exam, who was short of 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:
(a) There was fraud by the candidate
(b) There was no fraud by the candidate
(c) There was misrepresentation by the candidate
(d) There was a mistake on the part of the candidate
Hint: There was no fraud since the head of the department failed to conduct reasonable scrutiny. Thus since means were available for discovering the truth, the contract cannot be treated as voidable on the grounds of fraud, since it is a case of fraudulent silence.
‘A’ is in dire need of ₹ 1,00,000 but was unable to get any loan from banks as he had to security to offer. ‘A’ approached his friend ‘B’ who knowing the helpless position of ‘A’ lent money at a very high rate of interest, saying that he had himself borrowed money from ‘C’. The contract is:
(a) Vitiated by the undue influence that ‘B’ had exercised over ‘A’ due to his
(b) Void as the rate of interest being very high was unconscionable
(c) Not valid as ‘B’ had wrongly misled ‘A’ that he had borrowed money from ‘C’
(d) Valid as a friend could not be supposed to have wielded undue influence only because the money lent carried a higher rate of interest
Hint: The contract is valid; no undue influence; since B was not in a dominant position so as to influence the will of A, to cause him to enter into a contract at terms of high rates of interest.
A student was induced by his teacher to sell his brand new car to the latter at less than the purchase price to secure more marks in the examination. Accordingly, the car was sold. However, the father of the student persuaded him to sue his teacher. State on what grounds can the student sue the teacher?
Hint: The contract can be avoided by the aggrieved party ie. the student, on the grounds of undue influence, since the teacher stood in a dominant position and used the same to obtain an unfair advantage over the student in a contract; teacher stands in a fiduciary relationship with the student and is in a position to influence him.
A threatened his wife and son to commit suicide if they did not agree to transfer A’s house to his brother. Thereupon his wife and son agreed to transfer the house. Subsequently, his wife and son filed a suit to set aside the transfer. Will they succeed? Hint: Yes, the Threat to commit suicide amounts to coercion.
Hint: The contract is voidable by the wife and son on the grounds of coercion; threat to suicide amounts to coercion.
Coffers to sell a painting to D, which C knows is a master copy of the original painting. D thinking that the painting is the original immediately accepts the offer. Comment on the validity of the contract.
Hint: The contract is valid even though it is created under a unilateral mistake of fact. D has the erroneous belief that the painting is an original one; C is under no duty to speak.
A advances money to his son B during his minority. Upon B’s coming of age, A obtains by parental influence, a bond from his son B for an amount higher than the sum due in respect of the money advanced. Is B bound by the bond?
Hint: The contract is voidable on the grounds of undue influence and therefore B is not bound by the bond.
A, honestly believing that his watch is made in Switzerland agreed to sell it to B by representing that the watch is made in Switzerland. Subsequently, it is discovered that the watch is made in India. What is the remedy of B? Will your answer be different had A known that his watch was made in India.
Hint: The contract is voidable on the grounds of misrepresentation since an untrue statement was made by A, in honest ignorance of its falsehood and therefore the only remedy available to B is to rescind the contract; no damages shall be granted. However, if A, knew’ that the watch was actually made in India, it will amount to fraud and the contract shall be not only voidable at the option of B but damages shall also be awarded to him for his loss.
A agreed to sell rice to B. Both A and B believed that the rice is old basmati and a very high price is settled. Subsequently, it is discovered that rice is the new one. Can B get back his price? Will your answer be different if B alone purchased the rice thinking it to be old basmati?
Hint: The contract is void on the grounds of a bilateral mistake as to the quality of the subject matter; B is entitled to get back his price. However, if B is alone mistaken as to the quality of subject matter, it amounts to unilateral mistake, and the contract shall be treated as valid and enforceable.