Contracts Basics Part 2

MODULE 2 - VOIDABLE CONTRACTS

This article tries to explain the general concepts and principles of contracts for basic comprehension of the working knowledge of contracts. There are exceptions to these general principles which are not covered in detail in this article. This particular module tries to explain voidability aspect of an agreement caused due to the lack of free consent and ways in which such non free consent could be caused.

Secondary Formula Of An Agreement

LEGAL AGREEMENTS/CONTRACTS = AGREEMENT (OFFER + ACCEPTANCE + LAWFUL CONSIDERATION) + CAPACITY + CONSENSUS + FREE CONSENT + LAWFUL OBJECT. (S.10 ICA)

Elements – explained

1. Agreement – this element has been addressed in the previous module.
2. Capacity – All the parties to the agreement are expected to have attained the age of majority( 18 or above) and to be of sound mind to understand the contract and its consequences. (S.11)
3. Consensus – Consensus between the parties with respect to the consideration exchanged and conditions in the agreement is essential.
4. Free consent – The consent to agreement should have been wilful and free of illegal external pressures.
5. Lawful object – the objective behind the agreement should be one which is not forbidden by law or against the public policy.

The secondary formula by including additional elements to the primary formula narrows down the scope of agreement to a subset of agreements that are lawful in nature. Such lawful/legal agreements are called contracts/valid agreements. This way, we could say all contracts are agreements, but not all agreements are contracts. In other words the fulfilment of these elements/conditions qualify an agreement as a valid agreement that’s legally enforceable in the courts in case of a breach by one party.

FREE CONSENT AND VOIDABILITY OF A CONTRACT

In case of a breach, the non fulfilment of any of these elements in the agreement, depending upon the respective non fulfilled element, shall have two types effects on the enforceability of the agreement in a court. Such effect could be understood as negative enforceability or voidability (ways to avoid the contract). To elaborate, non fulfilment of a condition by one party will help the other party to avoid providing compensation in case of breach by nullifying enforceability of the said agreement. The 2 types of effects on enforceability are -

1. Void
2. Voidable

The primary difference between void and voidable agreements is that the latter can be legally avoided at the choice of the party who fulfilled all the conditions from his/her side. Whereas if it is a case of void agreements, the agreement cannot be legally executed or enforced upon breach at any cost. Out of the 6 elements (Lack of) Free consent is the only element that can cause voidability to an otherwise valid agreement. Whereas the absence of any other element in an agreement will cause it to become a void. Independent to these basic elements, an agreement could become void for various reasons which will be covered in the next module. Free consent could be vitiated in 4 ways -

1. Coercion
2. Undue influence
3. Fraudulent Misrepresentation
4. Non Fraudulent Misrepresentation

Coercion

Coercion is when the consent of one party(victim) is acquired by the other party by committing or threatening to commit an unlawful act (under IPC).

Elements – S.15

1. Committing or threat to commit a Forbidden act under IPC/ Unlawful detention of person or property
2. To the prejudice (legally recognised injury) of a party
3. Consent to the contract caused due to it

Criminal acts done in the progress of coercion in ICA can used to avoid the contract. But apart from civil remedies, criminal charges under IPC can also be pressed. Examples of coercion in a contract could be a person being demanded to sign a contract (prejudice) at knife/gun point (forbidden act under IPC) Or demanding to sell a particular land (prejudice) to a person by kidnapping other party’s son (unlawful detention of person).

Threats need not always be illegitimate. There could be legitimate rights of parties that they use immorally to pressurise the other to consent an unfair contract. For example, Right not to work and to form unions in workplace are legitimate but using them to pressurise the industries to sign an unfair bargain is immoral though not unlawful under IPC.

To tackle such situations Indian courts through precedence have partially inculcated the doctrine of duress into the scope of Coercion. This doctrine from common law is very similar to coercion but in addition also delegitimises immoral or unconscionable but lawful threats that could cause forced consent. Pollock and Mulla on contracts say, here the victim is threatened by being put in a position to choose between 2 evils (choices with undesirable consequences), the least harsh choice being consenting to an unfair contract. Such situations happen not in absence of consent but happens on a coerced consent arising from the realisation that there is no better option of choice than to consent to such unfair contract. The term immoral rises ambiguity in the definition of duress, therefore the meaning of the term would be based on the facts of the case. Usually, such legitimate but unconscionable threats are economic in nature thus here can be called as ‘Economic Duress’.

Undue Influence

Undue Influence is when the dominant party in a subsisting relationship, by using his/her dominant position induces consent of the subservient party to an unfair bargain in a contract.

Elements – S.16

1. Subsisting Hierarchical Relationship – the relationship should be one where one party is in a position to dominate the will of the other either through explicit pressure or implicit influence. The section covers this under few classifications, namely
1. Real and Apparent Authority – Includes any relationship in which the possibility of an apparent dominance by one over the other can be shown. This classification is intentionally worded on general tone to increase the scope of hierarchical relationships that could cause a forced consent.
2. Fiduciary Relationship – any relationship based on trust where one party is put in a position to blindly trust the other usually due to lack of knowledge or experience in a particular field. The implicit rule being because of trusting and helpless position of one party the other is put in a dominant position enabling the former to exploit latter with an unfair bargain. Eg -Doctor-patient, advocate-client, agent-principal relationships.
3. Dominance caused due to Mental or Physical Infirmity – eg -relationship between son-father, caretaker-old person etc.
2. Using such a relationship to take an unfair advantage or unconscionable bargain.

Unlike usual civil disputes where the The Burden of Proof (BOP) is on the accused dominant party to either prove that he/she isn’t in a position to dominate or to disprove the unconscionable use of such superior position to squeeze an unfair bargain.

Non-Fraudulent Misrepresentation

Any misrepresentation within the scope of a contract/ in form of an act or omission by one party/ without the intention to deceive/ causing to deceive a party to consent to the said contract/ that is to the prejudice of the latter(mispresentee) and to the gain of former (misrepresenter).

In other words, the misrepresenter here, either truly believes misrepresentation to be true, or negligently makes a non warranted statement based on mere hearsay, knowing that it could be acted upon. An exception to the rule is the Doctrine of Caveat Emptor (buyers beware) which says the prejudiced party cannot avoid the contract if the misrepresentation could have been identified to be untrue with ordinary diligence.

Elements – S.18

1. Duty to represent (original facts) – its an implied duty of every party to represent true facts in a contract.
2. Untrue representation as to the terms or subject of the agreement is made negligently or innocently.
3. Leads to gain and prejudice of the representer and represented respectively.

Due to the 3rd element an attempted misrepresentation has no effect on executability of a contract.

Fraudulent Misrepresentation

Any misrepresentation is said to be fraudulent, when it is with the intention to deceive a party which ultimately deceives him/her.

Elements -

1. Duty to represent
2. Untrue facts made with the intention to deceive, through any of the following ways -
1. A positive assertion
2. Silence where there was a duty to explicitly explain the true facts
3. Acts or omission specially declared to be fraudulent
3. The consent to the contract caused due to such fraudulent misrepresentation.

Silence without a duty is not unlawful or fraudulent per say and any untrue assumption that leads to the prejudice of the person assuming would fall under the Doctrine of Caveat Emptor. But The Doctrine cannot be used as a defence when the consent to the agreement roots from a positive statement assuring an untrue fact is made by a party who is under a duty to represent true facts. This way a reasonable person will not be inclined to verify an assured fact thus rejecting caveat emptor as a defence.

Contracts - Overview