Undue influence : (Sn. 16) :-
An agreement is said to be induced by undue influence, if the relation subsisting between the parties is such that, one of them at the time of the agreement.
a) was in a position to dominate the will of the other party, and
b) that he has used that position to obtain an unfair advantage for him.
There is a presumption of undue influence when : A person who stands in a fiduciary relation to the other, or a person who holds a real or apparent authority over the other or a person who contracts with another whose mind is enfeebled by age, illness, physical or mental distress.
In such circumstances if the transaction is unconscionable, the onus of proving that the contract was not under undue influence is on the dominating person. There is a presumption of undue influence in the following relationships parent and child, guardian and ward ; trustee and beneficiary, spiritual master and pupil, Doctor and patient etc. The section applies to every case where influence is acquired and abused and where confidence is reposed and betrayed.
Eg. i) A advances money to his son B during his minority. When B attains majority, A exercising his parental influence gets a bond for sums excessive than advanced. A has employed undue influence.
iii) D a doctor induces B his patient to pay a very heavy sum for his services. D has used undue influence. ) In Allcard Vs. Skinner. P. joined the sisterhood of a church andwas under the spiritual control of D, a lady superior. P had advanced a total of £ 7000 at various points of time, to D. 6 years after leaving sisterhood, she sued D to recover the amounts. Held that advances were made under pressure ; (undue influence) butthe suit was barred by time.
Legal consequences : The contract vitiated by undue influence is voidable and the party affected may sue to get the declaration that the contract is void. A forges B's signature. B, threatening to prosecute A, gets a bond from A for Rs.2000/- The bond is voidable, at the option of A.
Section 17 contract act deals with fraud with reference to contracts. In fraud : 1) There must be an intention to deceive
2) The act may be by the party to the contract or with his connivance
3) There must be suggestion falsi. or
4. Active concealment of fact (suppressio vari). or
5) A false promise or
6) Any act or omission which may amount to a fraud according to law. If a party has entered into a contract in which any one of the above elements can be shown, then it is a contract which becomes voidable due to fraud.
Leading case is Derry Vs. Peek.
In this case, the defendants issued a prospectus stating that the company had the right to use steam power instead of horse, on their tram way. The directors had believed that the Board's permission was a mere formality, but the Board refused to give permission to the company to use steam power. The company was wound up. The plaintiff sued for "deceit". It
was held that there was no fraud as there was no intention to mislead. It was an honest mistake on the part of the company. This is no longer good law today. Today according to the Companies Act, the directors are liable for negligent misstatements. Mere silence will not amount to fraud unless keeping silence itself amounts to fraud under the circumstances.
Eg. 1. A sells by auction to B a horse which A knows to be unsound, B buys the horse and A says nothing about it. This is not a fraud.
2. B says to A if you do not deny, I presume that the horse is sound. A says nothing. Mere silence amounts to speech.
3. A and B are traders. A enters into a contract with B ; B agrees to sell at a particular price. But, the market price had gone up which A knew. B did not know it. There is no fraud. Mere non-disclosure is not fraud.
Section 18. contract act defines misrepresentation. It means and includes : i) An unwarranted positive assertion of that, as not true, even though he believes it to be true.
ii) Committing breach of duty to mislead another person.
iii) Causing a party to the contract to make a mistake as to the subject matter of the agreement.
Eg : A induces B to believe that C's factory is manufacturing 500 metric tonnes of Indigo annually thereby he induces B to buy the factory. This is misrepresentation and if B buys, he may avoid the contract as it is voidable.
Mis-representation may be of two kinds :
1. it is innocent misrepresentation when there is an honest mistake on the part of the person making representation.
2. Wilful representation (Fraud). Here there is a willful falsehood with an intention to deceive. This amounts to fraud (Section 17)
Breach'of duty : There must be some relationship between the parties e.g. buyer and seller, landlord and tenant, banker and client etc. The misrepresentation must be material. Bannarman V. White : A agreed to sell to B, hops which had been grown by A. B's condition was that no sulphur should have been used while growing hops. A had agreed. But, out of 300 acres, in 5 acres sulphur had been used. Held this was a misrepresentation and B may avoid the contract.
Coercion : Sn. 15
Coercion is the committing or threatening to commit, any act forbidden by the Indian PenalCode, 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. Contract made under coercion is voidable at the option of the party whose consent was so obtained. The reason is that the consent is not free as defined in Sn. 14. According to this, if consent is caused by coercion, undue influence, fraud, or misrepresentation then the contract is voidable at theoption of the party whose consent is so obtained.
The essentials of coercion are :
1) There must be a commission of (or threatening to commit) an offence under I.P.C.
2) There must also be the unlawful detaining (or threatening to detain) any property.
Examples : A obtains B's consent at gun point;
A threatens to cause grievous hurt and obtains B 's consent for an agreement;
A threatens to burn down, valuable documents of B, and obtains B's consent.
InAmmiraju Vs. Seshamma, H, the husband by creating a threat to commit suicide, induced his wife W and son to give their properties by a release deed to B, the brother of H. it was held that threat to commit suicide amounted to coercion, and hence the contract was voidable. In Ashley Vs. Reynolds P pledged his plate with B and took a loan of 20 pounds. When P went to B to take back his plate B demanded 10 pounds interest as otherwise he would not deliver. P paid 20 pounds and also 10 pounds, and took delivery. P sued d. Held, D was liable as he had extracted extra money.
Mistake of fact or law in a contract:
One essential condition of a contract is that there must be free consent. Consensus ad idem i.e., parties agreeing the same thing in the same sense. This free consent is affected in case of coercion, fraud, misrepresentation and hence, the contract becomes voidable. In respect of "mistake" the Contract Act has made some provisions (Sns. 20, 21 & 22).
i) Mistake by both the parties : (Sn.20) When there is a mistake of fact essential to the agreement, the agreement is void. This happens when there is a mistake as to the existence or identification of the subject matter. A and B agreed for the sale and purchase of India Corn, on board a ship which was bound for England. Unknown to A and B, the corn had been damaged and discharged, even before the agreement. Held : contract "void", as there was mistake of fact as to the existence of corn. A agreed to sell and B agreed to buy 125 bales of cotton, which was to arrive by a ship called "Peerless". Infact, there were two vessels of the same name of sail from Bombay : One in October and another in December. Held, there was no consent and hence no contract.
ii) Mistake by one party : When there is a mistake of fact by one of the parties, the contract is valid. It is neither invalid nor voidable. Hence, the party under a mistake notion cannot escape the liability
There are some Exceptions :
1) If there is a unilateral mistake as to the nature of the contract, the contract is void
e.g. an old illiterate man was made to sign a bill of exchange, by falsely representing it was a guarantee. When he was sued, the court held that there was error in consent, and hence, the contract was void.
2) Mistake in the identify of persons : If A enters into a contract with B, believing him to be B, but it turns out that he was C, the contract is void.
Cundy V. Lindsay :
B, by imitating the signature of a reputed firm, induced X to supply goods on credit. B later sold the goods to D. X sued D to recover the goods. Held, X never intended to contract with B. Hence, the innocent buyer from B does not get a title. Hence, X could recover the goods from D.
iii) Mistake of Law : (Sn. 21) :
The general rule is 'Ignorantia juris non excusat' (Ignorance of law is no excuse). Hence, if a contract is made with a mistake as to the existence of a law, the contract is valid, (and so not voidable). In case of mistake of foreign law, it is treated as a mistake of fact. Hence, the rule in Sn. 20, applies.