The Law of Contract

Free Consent
 Definition of Free Consent
• An agreement is said to be valid only when it is the
result of the “Free Consent” of all the parties to it.
• In order that a valid contract may be made, an
agreement should reflect the real intention of the
parties.
• But in many cases the apparent agreement may not,
in fact, be the real agreement between the parties.

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 Definition of Free Consent

Example…..
Thus, if A accepts the offer of B to sell a horse
which he warrants as sound, when as a matter
of fact is not, A can reject the contract on the
ground that he would not have agreed to
purchase the horse at all if he knew that it was
not sound.
Result: There was, therefore, no real
agreement between A and B.
• Hence it is essential that every agreement must
be a true expression of the intention of the
parties.
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 Definition of Free Consent
• Section 13 of Indian Company Act defines Free
Consent as “Two or more persons are said to
consent when they agree upon the same thing
in the same sense.” An agreement is valid only
when it is the result of the free consent of all
the parties to it.

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 Free Consent
• Section 14 of Indian Company Act lays down
that consent is not free if it is caused by –
1. Coercion
2. Undue Influence
3. Fraud
4. Mistake
5. Misrepresentation

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 Coercion
• Coercion is the committing or threatening to
commit, any act forbidden by the Indian Penal
Code, or 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.~
Section 15

• Coercion can be explained as committing or

threatening to commit an act forbidden by the
Indian Penal Code or the unlawful detaining or
threatening to detain any property.
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 Coercion
• Coercion consists in actual or threatened violence or
imprisonment. Where the consent of a party to a
contract can be shown to have been obtained by
coercion, it is voidable at the option of the party
whose consent was so obtained.

• The violence or the threat of violence must be to the

person and not his goods. It is not necessary that the
violence or threat of violence should be held out to
the contracting party himself. The contract is no less
voidable if the violence or threat of violence was held
out to the near relative of the contracting party, e.g.,
wife, children, brother etc.

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 Coercion
Effects of Coercion
• An agreement corrupted by Coercion is
voidable at the option of the party coerced.
But if he finds it profitable to uphold the
contract, he can enforce specific performance
of it. The party employing Coercion has
however no right under the contract.

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 Coercion
Special Cases
• Prosecution
–A threat to prosecute a man or to file a suit
against him does not constitute coercion
because the Indian Penal Code does not forbid
it. Compulsion of law is not coercion, undue
influence, fraud, misrepresentation or mistake

• High prices and high interest rates

–It is not coercion to charge high prices or high interest
rates because the Indian Penal Code does not forbid
such acts.

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 Coercion
Special Cases
• A threat to commit suicide
– Consent to an agreement may be obtained to
commit suicide e.g., by a fast death. Suicide is not
a punishable by the Indian Penal Code; only the
attempt to commit suicide is punishable.
Therefore, suicide is not a crime and the threat to
commit suicide is not coercion.

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 Coercion
Special Cases
• Example…..
P threatens to shoot Q if he does not let out his
house to P, and Q agrees to do so. The agreement
has been brought about by Coercion.

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 Undue Influence
• Undue influence is a suitable and improper pressure
brought to bear upon a person to induce him to
enter into a contract, which, in the absence of the
said pressure, he would not do.
• Its distinct with coercion is that in coercion the
method of obtaining the consent of a party to a
contract is rather evident
• But in undue influence the method employed for the
same purpose is not so evident.

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 Undue Influence

• There is no threat or violence; yet the party with

whom a contract is made is not a free agent.
• He is under some improper influence that makes it
difficult, if not impossible, for him to negotiate on
equal terms.
• “To be undue influence in the eye of the law there
must be – to sum it up in a word – coercion.
• It is only when the will of the person is coerced into
doing that which he or she does not desire to do, that
is undue influence.

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 Undue Influence
• A contract is said to be induced by undue influence
where –

– One of the parties is in a position to dominate the

will of the other.

– One uses the position to obtain an unfair

advantage over the other.

section 16 (1)

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 Undue Influence

• A person is deemed to be in a position to

dominate the will of another.”
– Where he holds a real or apparent authority
over the other, or where he stands in a
fiduciary relationship to the other.
– 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.
section 16 (2)

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 Undue Influence
Effects of Undue Influence
• An agreement corrupted by Undue influence
is voidable at the option of the party whose
consent was so caused. Such an agreement
may be set aside absolutely or, if the party
who was entitled to avoid it has received any
benefit thereunder, the court can set it aside
upon such terms and conditions as may seem
just.

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 Undue Influence
Effects of Undue Influence
• Undue influence by a person, who is not a party to
the contract, may make the contract voidable.
Madras High Court,

Example…..
F having advanced money to his son B during his
minority, upon B’s coming of age obtains by misuse
of parental influence, a bond from B for a greater
amount than the sum advanced. F employs undue
influence.

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 Fraud
• The term Fraud includes all acts committed by a
person with a view to deceive another person.

• “To deceive” means to “induce a man to believe that

a thing is true which is false.”

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 Fraud
• “Fraud” means and includes any of the acts like –

1. Fraudulent act or Omission

2. Active Statement
3. Intentional non-performance
4. False Statement

Section 17

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 Fraud

1. Fraudulent act • The suggestion as to a fact, of that

or Omission
2. Active which is not true by one who does
Statement not believe it to be true.
3. Intentional
non-
performance
4. False • A false statement intentionally
Statement made is fraud.

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 Fraud

1. Fraudulent act • The active concealment of a fact by

or Omission
2. Active one having knowledge or belief of
Statement the fact.
3. Intentional
non-
performance
4. False • Mere non-disclosure is not fraud
Statement where the party is not under any
duty to disclose all facts. But active
concealment is fraud.

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 Fraud

1. Fraudulent act • Example…..

or Omission
2. Active B, having discovered a vein of ore
Statement
3. Intentional
on the estate of A, adopts means
non- to control, and does conceal, the
performance
4. False
existence of the ore from A.
Statement Though A’s ignorance B is enabled
buy the estate at an undervalue.
The contract is voidable at the
option of A.

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 Fraud

1. Fraudulent act • A promise made without any

or Omission
2. Active intention of performing it.”
Statement
3. Intentional non-
performance Example…..
4. False Statement
Purchase of goods without any
intention of paying for them.

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 Fraud

1. Fraudulent • Any such act or omission as the law

act or
Omission specially declares to be fraudulent.
2. Active
Statement
3. Intentional • This clause refers to provisions in
non- certain Acts that make it obligatory
performance
to disclose relevant facts.
4. False
Statement

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 Fraud

1. Fraudulent • Thus, under Section 55 of the

act or
Omission Transfer of Property Act, the seller
2. Active of immovable property is bound to
Statement disclose to the buyer all material
3. Intentional
non-
defects.
performance
4. False
Statement • Failure to do so amounts to fraud.

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 Fraud
Effects of Fraud
• A party who has been induced to enter into an
agreement by fraud has the remedies open to him
like –
– He can avoid the performance of the contract.
– He can insist that the contract shall be performed
and that he shall be put in the position in which
he would have been if the representation made
had been true.

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 Fraud
Effects of Fraud
Example…..
A fraudulently informs B that A’s estate is free from
difficulty. B thereupon buys the estate. The estate is
subject to a mortgage. B may avoid the contract or
may insist on its being carried out and the mortgage
debt repaid by A.

– The aggrieved party can sue for damages. Fraud is

a civil wrong or Tort; hence compensation is
payable.

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 Misrepresentation
• Representation is a statement or assertion, made by
one party to another, before or at the time of the
contract, regarding some fact relating to it.

• Misrepresentation arises when the representation

made is inaccurate but the inaccuracy is not due to
any desire to defraud the other party.

• There is no intention to deceive.

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 Misrepresentation
• Contract Act classifies cases of misrepresentation
into three groups-

1. Unwarranted Assertion

2. Breach of Duty

3. Innocent Mistake

Section 18

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 Misrepresentation

1. Unwarranted
Assertion
• The positive assertion, in a manner
2. Breach of Duty not warranted by the information of
3. Innocent Mistake the person making it, of that which
is not true, though he believes it to
be true.”

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 Misrepresentation

1. Unwarranted
Assertion
Example…..
2. Breach of Duty A says to B who intends to
3. Innocent Mistake purchase A’s land: “My land
produce 12 maunds of rice per
bigha,” A believes the statement to
be true although he did not have
sufficient grounds for the belief.
Later on it transpires that the land
does not produce 12 maunds of
rice. This is misrepresentation.

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 Misrepresentation

1. Unwarranted
Assertion
• Any breach of duty which, without an
2. Breach of intent to deceive gains an advantage
Duty to the persons committing it, or
3. Innocent
Mistake anyone claiming under him, by
misleading another to his prejudice
or to the prejudice of anyone
claiming under him.

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 Misrepresentation

1. Unwarranted
Assertion
• Under this heading would fall cases
2. Breach of where a party is under a duty to
Duty disclose certain facts and does not do
3. Innocent
Mistake so and thereby misleads the other
party.

• In English law such cases are known

as cases of “Constructive Fraud.”

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 Misrepresentation

1. Unwarranted
Assertion
• Causing innocently a party to an
2. Breach of agreement to make a mistake as to
Duty the substance of thing which is the
3. Innocent
Mistake subject of the agreement

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 Misrepresentation
Consequences of Misrepresentation
• In cases of misrepresentation the aggrieved party
can:
1. Avoid the agreement
2. Insist that the contract be performed and that shall
be put in the position in which he would have been if
he representation made had been true.

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 Misrepresentation
Consequences of Misrepresentation

• But if the party whose consent was caused by

misrepresentation had the means of dissolving the
truth with ordinary diligence, he has no remedy. –
Section 19

• Ordinary diligence means such diligence, as a

reasonably prudent man would consider necessary,
having regard to the nature of the transaction.

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 Misrepresentation
Consequences of Misrepresentation
Example…..
A by a misrepresentation leads B erroneously to
believe that five hundred maunds of indigo are made
annually at A’s factory. B examines the accounts of
the factory, which show that only four hundred
maunds of indigo have been made. After this B buys
the factory. The contract is not avoided by A’s
misrepresentation.

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 Mistake
• An erroneous belief concerning something.
• Consent cannot be said to be “Free” when an
agreement is entered into under a mistake.
• An agreement is valid as a contract only when the
parties agree upon the same thing in the same
sense.
• Mistakes may be –
1. Mistake of Law
2. Mistake of Fact

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 Mistake

1. Mistake of • Mistake on a point of Indian law does not

Law
2. Mistake of affect the contract. Mistake on a point of
Fact law in force in a foreign country is to be
treated as mistake of fact.

Example…..
A and B make a contract grounded on the
erroneous belief that the Indian Law of
limitation bars a particular debt. This is a
valid contract.

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 Mistake
1. Mistake of
Law • The reason is that every man is
2. Mistake of
Fact
presumed to know the law of his
own country and if he does not he
must suffer the consequences of
such lack of knowledge.
• But if in the above case, the
mistake is related to the law of
limitation of a foreign country, the
agreement could have been
avoided.
Section 21

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 Mistake

1. Mistake of
Law
• An agreement induced by a mistake
2. Mistake of of fact is void provided the
Fact following conditions are fulfilled –

– Both the parties to the

agreement are mistaken.

– The mistake is as to a fact

essential to the agreement.

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 Mistake

1. Mistake of
Law
Example…..
2. Mistake of P agrees to sell to Q a specific cargo
Fact
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 has
been cast away and goods lost.
Neither party was aware of the
fact. The agreement is void.

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 Difference between Coercion
and Undue Influence
Coercion Undue Influence

Coercion is the committing or threatening to Undue influence is a suitable and

commit, any act forbidden by the Indian improper pressure brought to bear
Penal Code, or unlawful detaining, or upon a person to induce him to enter
threatening to detain, any property, to the into a contract, which, in the absence
prejudice of any person whatever with the of the said pressure, he would not do.
intention of causing any person to enter into
an agreement.
The influence arises from committing or The influence arises from the
threatening to commit an offence punishable domination of the will of one person
under the Indian Penal Code or detaining or over another.
threatening to detain property unlawfully.

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 Difference between Coercion
and Undue Influence
Coercion
Cases of coercion are mostly cases of In undue influence there is
the use of physical force.
Example…..
P threatens to shoot Q if he does not
let out his house to P, and Q agrees
to do so. The agreement has been
brought about by Coercion.
Undue Influence
mental pressure.
Example…..
F having advanced money to
his son B during his minority,
upon B’s coming of age
obtains by misuse of parental
influence, a bond from B for a
greater amount than the sum
advanced. F employs undue
influence. 44
 Silence is fraudulent
• “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 a person keeping silence to
speak, or unless his silence is, in itself
equivalent to speech.”

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 Silence is fraudulent

• From this we can deduce the following rules:

1. The general rule is that mere silence is not
fraud.
Example…..
A and B being traders enter upon a contract. A
has private information of a change in price
that would affect B’s willingness to proceed
with the contract. A is not bound to inform B.

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 Silence is fraudulent
2. Silence is fraudulent, if the circumstances of the
case are regard being had to them, it is the duty of
the person keeping silence to speak. The duty to
speak, i.e., disclose all facts, exists where there is a
fiduciary relationship between the parties. The duty
to disclose may also be an obligation imposed by
statute. There is also a duty of making full
disclosure in contracts of insurance, whenever
there is a duty to disclose, failure to do so amounts
to fraud.

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 Silence is fraudulent
3. Silence is fraudulent where the circumstances are
such that, “Silence is in itself equivalent to speech.”

Example…..
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. If the horse is
unsound A’s silence is fraudulent.

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 Difference between Fraud and
Misrepresentation
Fraud Misrepresentation

Fraud includes all acts Misrepresentation arises when

committed by a person the representation made is
with a view to deceive inaccurate but the inaccuracy is
another person. not due to any desire to
defraud the other party.
Fraud implies an intention In Misrepresentation there is
to deceive. no intention to deceive.
If the statement is If the statement is honest,
dishonest, then it is a case though it was wrong, then it is
of Fraud. a case of Misrepresentation.
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 Difference between Fraud and
Misrepresentation
Fraud
In case of Fraud the party
aggrieved can rescind the
contract. He can also sue
for damages.
In case of Fraud if there
were independent sources
of discovering the truth,
which were not availed of,
the aggrieved party can
rescind the contract and/or
file a suit for damages.
Misrepresentation
In case of Misrepresentation
the only remedy is rescission.
There can be no suit for
damages.
In case of Misrepresentation if
the circumstances were such
that the aggrieved party might
have discovered the truth with
ordinary diligence, the
contract cannot be avoided.
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 Difference between Fraud and
Misrepresentation
Fraud
Example…..
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
because A is under no duty to
disclose the fact to B. But if
between B and A there is a fiduciary
relationship there arises the duty to
disclose and non-disclosure
amounts to fraud.
Misrepresentation
Example…..
A by a misrepresentation leads B
erroneously to believe that five
hundred maunds of indigo are
made annually at A’s factory. B
examines the accounts of the
factory, which show that only
four hundred maunds of indigo
have been made. After this B
buys the factory. The contract is
not avoided by A’s
misrepresentation.
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The Law of Contract
Termination of a Contract
 Termination

• When the obligations created by a contract

come to an end, the contract is said to be
discharged or terminated.

53
 Methods of Termination
• A contract may be discharged or terminated in any of
the following ways-
1. Termination by Performance
2. Termination by Mutual Agreement
3. Subsequent or Supervening Impossibility
4. Termination by operation of law
5. Lapse of Time
6. Termination by Material Alteration
7. Termination by Breach of Contract
8. By Quasi Contract
9. By Contingental Contract

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 Methods of Termination
1. Termination by
Performance
• Performance by all the parties of
2. Termination by the respective obligation puts an
Mutual Agreement
3. Subsequent or
end to the contract completely.
Supervening This is the normal and natural
Impossibility
4. Termination by
mode of discharging a contract.
operation of law
5. Lapse of Time
6. Termination by • If a party offers something, but
Material Alteration
7. Termination by other party did not accept, it has
Breach of Contract the same effect. This is called offer
8. By Quasi Contract
9. By Contingental
of performance.
Contract

55
 Methods of Termination
1. Termination by • By agreement of all parties, a contract
Performance
2. Termination by Mutual
may be cancelled or its terms altered
Agreement or a new agreement substituted for it.
3. Subsequent or Whenever any of the things happen,
Supervening the old contract is terminated.
Impossibility
4. Termination by • Sec 62,
operation of law
5. Lapse of Time
• Termination by mutual agreement may
6. Termination by occur in any one of the following ways-
Material Alteration – Novation  Alteration
7. Termination by Breach
of Contract – Remission  Rescission
8. By Quasi Contract – Waiver  Merger
9. By Contingental
Contract – Accord and satisfaction

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 Methods of Termination
1. Termination by • If the contract cannot be performed by the
Performance promisee without his fault, the contract comes
2. Termination by to an end.
Mutual Agreement • sec 56
3. Subsequent or •
Supervening There are two ways of impossibility –
Impossibility 1. Pre-contractual impossibility- a contract,
4. Termination by which at the time it entered into, was
operation of law impossible to perform. Is void from the
5. Lapse of Time beginning and create no rights and obligation
6. Termination by 2. Post-contractual impossibility- a contract,
Material Alteration which at the time it was entered into, was
7. Termination by capable of being performed may subsequently
Breach of Contract become impossible to perform or unlawful. In
8. By Quasi Contract such cases the contract becomes void. This is
9. By Contingental also called Supervening impossibility.
Contract

57
 Methods of Termination
1. Termination by • Supervening impossibility may occur in the
Performance
2. Termination by Mutual following ways-
Agreement
3. Subsequent or 1. Destruction of an object - If the object upon
Supervening which the contract depend on, is damaged
Impossibility
4. Termination by without any fault of any of the coherent
operation of law
parties, the contract becomes void.
5. Lapse of Time
6. Termination by
Material Alteration
7. Termination by Breach 2. Changer of law - The performance of a
of Contract contract may become unlawful by a
8. By Quasi Contract
9. By Contingental subsequent change of law. In such cases the
Contract original contracts becomes void.

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 Methods of Termination
1. Termination by 1. Failure of the pre condition/ contract/
Performance
agreement - When a contract is entered
2. Termination by
Mutual Agreement into the basis of the continued existence
3. Subsequent or of a certain state of things/ contract/
Supervening condition, the contract is discharged if
Impossibility the condition of the thing/ contract/
4. Termination by condition changed.
operation of law
5. Lapse of Time
6. Termination by 2. Death or incapability for the personal
Material Alteration services - Where the personal
7. Termination by qualification of a party is the basis of the
Breach of Contract
8. By Quasi Contract
contract, the contract is discharged in
9. By Contingental
cases of death or personal incapability.
Contract

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 Methods of Termination
1. Termination by
Performance
• A contract terminates by law in
2. Termination by case of death, insolvency and
Mutual Agreement
3. Subsequent or
merger.
Supervening
Impossibility
4. Termination by
operation of law
• Sometimes if the promise is not
5. Lapse of Time performed within the time it
6. Termination by
Material Alteration
becomes void.
7. Termination by
Breach of Contract
8. By Quasi Contract
9. By Contingental
Contract

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 Methods of Termination
1. Termination by
Performance
• If the document containing the
2. Termination by terms of a contract is material
Mutual Agreement
3. Subsequent or
alter by a part to the contract,
Supervening without the consent of the other
Impossibility
4. Termination by
parties, the contract is discharged
operation of law and cannot be enforced anymore.
5. Lapse of Time
6. Termination by
Material Alteration
7. Termination by Breach
of Contract
8. By Quasi Contract
9. By Contingental
Contract

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 Methods of Termination
1. Termination by
Performance
• When one party breaks a
2. Termination by contract, the other party or
Mutual Agreement parties are freed from the
3. Subsequent or obligation to perform the
Supervening
Impossibility contract. They can also take the
4. Termination by remedial measures to which they
operation of law are entitled.
5. Lapse of Time
6. Termination by
Material Alteration
7. Termination by
• Breach of contract may arise in
Breach of Contract two ways-
8. By Quasi Contract – Anticipatory breach of contract.
9. By Contingental – Actual breach of contract
Contract

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 Methods of Termination
1. Termination by
Performance
• The promisee can free from the
2. Termination by Mutual promisor from the full charge or a
Agreement
3. Subsequent or
partial charge of the contract or he
Supervening can also enhance the time to
Impossibility
4. Termination by
perform the contract.
operation of law
5. Lapse of Time
6. Termination by
Material Alteration
7. Termination by Breach
of Contract
8. By Quasi Contract
9. By Contingental
Contract

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 Methods of Termination
1. Termination by
Performance
• A contingent contract is a contract
2. Termination by to do or not to do something, if
Mutual Agreement some event, collateral to such
3. Subsequent or
Supervening
contract does or does not happen.
Impossibility
4. Termination by
operation of law • Exception of subsequent or
5. Lapse of Time supervening impossibility-
6. Termination by – Difficulty of performance
Material Alteration – Commercial impossibility
7. Termination by
Breach of Contract – Strikes, lock out, civil-disturbance, riots or
8. By Quasi Contract natural calamity
9. By Contingental – Failure of one of the object.
Contract

64
 Effects of Supervening
Impossibility
• when the contract becomes impossible to perform it becomes void.
• sec 56
• When a contract becomes void, any person who has received any
advantage under it, must restore or make compensation to the
person, who suffered the disadvantage.
• sec 65
• If a person promised something, but the promisee did not know it
to be impossible or unlawful, such promise must make
compensation to such promisee sustain through the non-
performance of the promise.

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 Remedies of Breach of Contract
• Remedies of breach of contract are as
follows:

1. Rescission of the contract

2. Claim of damages
3. Suit for quantum meruit

66
 Remedies of Breach of Contract
1. Rescission of • The aggrieved party is freed from his
the contract
entire obligation under the contract.
2. Claim of
damages

3. Suit for
quantum
meruit

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 Remedies of Breach of Contract
1. Rescission of • The aggrieved party is entitled to
the contract
receive compensation for any loss or
2. Claim of
damage by the breach of contract and
damages can file a suit for getting a decree for
the damage allowed by the courts may
3. Suit for be different type as follows –
quantum
meruit
1. Compensatory Damage
2. Nominal Damages
3. Exemplary, punitive Damage
4. Liquidated Damages

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 Remedies of Breach of Contract
1. Rescission of • Compensatory Damage: Compensate
the contract
damages are calculated in such a way to
2. Claim of
compensate the loss of the party.
damages
• Nominal Damages:
3. Suit for
quantum Where the court finds that the party has
meruit not actually suffered much damage, the
court allows a paltry sum for damages
to the plaintiff.

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 Remedies of Breach of contract
1. Rescission of • Exemplary, punitive Damage:
the contract
The court may allow damages exceeding
2. Claim of the actual loss suffered by way of
damages punishment.
• Liquidated Damages:
3. Suit for
quantum Here the party has to give the actual
meruit amount of the damaged goods or the
good in that certain condition to the
sufferer.

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 Remedies of Breach of Contract
1. Rescission of • When a contract has been partly
the contract
performed the aggrieved party can,
2. Claim of
under certain circumstances; file a suit
damages for the price of the service performed
before the breach of contract. The
3. Suit for phase quantum meruit means, “as much
quantum
meruit
as merited.”

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 Remedies of Breach of Contract
1. Rescission of • Specific performance of the contract:
the contract
In the certain special cases the court can
2. Claim of direct a party to perform the contract
damages according to the agreed terms. i.e. for
an order by the court upon the party
3. Suit for
quantum
guilty of breach of contract directed him
meruit to perform what he promised to do.

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 Remedies of Breach of Contract
1. Rescission of • Injunction:
the contract
Injunction means the order of the court. Under
2. Claim of certain circumstance the court can issue an
damages order upon a party whereby he is prohibited
from doing something which amount the
3. Suit for breach of contract. Injunctions are usually
quantum granted to enforce negative stipulation in cases
meruit
where damages are not adequate relief. It is
particularly appropriate in cases of anticipatory
breach of contract.

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 The Doctrine of Frustration
• When the common object of a contract can no longer
be carried out, the court may declare the contract to
be at an end. This is known as the doctrine of
frustration.

• “Most legal system make provision for the discharge of

a contract where, subsequent to its formation, a
change of circumstances renders the contract legally
impossible of performance.”
• Anson

74