Laws of

Business &
Taxation
Module 5
 Free Consent
► Meaning of “Consent” [Sec.13]
Consent means acquiescence or an act of
assenting to an offer.
“Two or more persons are said to
consent when they agree upon
the same thing in the same sense”.
 What is Free Consent ?
► Meaning of “Free Consent”[Sec.14]
► A consent is said to be free when it is not
caused by-
1.Coercion as defined in Sec15, or
2.Undue Influence in Sec.16 or
3.Fraud as defined in Sec.17,or
4.Misrepresentation as defined n Sec.18 or
5.Mistake, subject to the provisions of
Sec.20,21 or Sec.22].
 Coercion [Sec.15]
► When a person is compelled to enter in to a
contract by the use of force by the other party or
under a threat, “coercion” is said to be employed.
► Coercion is the committing or threatening to
commit, any act forbidden by the Pakistan Penal
Code or unlawful detaining, or threatening to
detain, any property, to the prejudice of any
person whatever, with the intention of any person
to enter in to an agreement.(Sec.15).Examples
are…….
 Examples of Coercion
a. A threatens to shoot B if he (B) does not release him (A)
from a debt which A owes to B. B releases A under the
threat. The release has been brought about by Coercion.
b .A threatens to kill B if he does not lend Rs.1,000 to C. B
agrees to lend the amount to C. The agreement entered in
to under coercion.
Consent is said to be caused by coercion when it is obtained
by:
(1) Committing or threatening to commit any act forbidden
by the Indian Penal Code,1860. Example…
A threatens to shoot B if he (B) does not lend
Rs 500.B lends the amount. The threat amounts to coercion.
 Examples of Coercion
► 2. Unlawful detaining or threatening to detain any
property.
► An agent refused to hand over the account
books of a business to the new agent unless
the principal released him from all liabilities.
The principal had to give a release deed as
demanded. Held, the release deed was
voidable at the option of the principal.
[Muthia vs.Muthu Karuppa,(1927)Madras High Court]
 Examples of Coercion
►3. Threat to or by Third Party
► Coercion can be used against someone /
some thing not party to the contract
► Similarly, it can also be used by a person not
directly involved in a contract

► Example 1 – C threatens to kidnap B’s son, if

A & B does not settle a contract
► Example 1 – D threatens to shoot B, if B and
A does not settle a contract
 Effect of Coercion
► Without free consent, the agreement is a
contract voidable at the option of the
party whose consent was so caused(Sec.19).
► a person to whom money has been paid, or
anything delivered by mistake or under coercion,
must repay or return it
► When aggrieved party decides to cancel the
contract, he must return all benefits received from
other party
► If aggrieved party does not decide to cancel, it
remains a valid contract
Threat to commit suicide-Does it amount to coercion?
Chikham Amiraju vs.Seshamma(1917)Madras HC.

► In this case, a person held out a threat of

committing suicide to his wife and son if they did
not execute a release in favor of his brother in
respect of certain properties. The wife and son
executed the release deed under the threat.
► Held, “ the threat of suicide amounted to coercion
within Sec 15 and the release deed was, therefore,
voidable”.
Threat to commit suicide-Does it amount to coercion?
[Purabi Mukherjee vs. Basudev
Mukherjee(1969)Calcutta]
► It was observed that, “one committing suicide places
himself or herself beyond the reach of the law, and
necessarily beyond the reach of any punishment too.

► But it does not follow that suicide is not forbidden by the

Penal Code. Sec.306 of the Penal Code punishes abetment
of suicide. Sec.309 punishes an attempt to commit suicide.

► Thus suicide as such is no crime, as indeed, it cannot be.

But its attempt is: its abetment too is. So, it may
very well be said that the Penal Code does forbid
suicide.” As such a threat to commit to suicide amounts
to coercion.
 Duress
► In the English Law, the near equivalent of the
term “coercion” is “duress”. Duress involves
actual or threatened violence over the person
of another (or his wife, parent, or child) with a
view to obtaining his consent to the
agreement.
► If the threat is with regard to the goods or
property of the other party, it is not duress.”
 UNDUE INFLUENCE
Section 16(1)

► Definition:
“A contract is said to be induced by ‘undue
influence’
(a) where the relations subsisting between
the parties are such that one of the parties
is in a position to dominate the will of other
(b) and uses that position to obtain an
unfair advantage over the other.”
A person is deemed to be in a position to dominate
the will of another.
Sec 16(2)
(a) Where he holds real or apparent authority over the
other.E.g.,the relationship between master and servant,
doctor and patient.
(b) Where he stands in a fiduciary relation.[Relation of trust
and confidence] to the other. E.g., father and son, solicitor
and client, trustee and beneficiary, and promoter and
company.
(c) Where he makes a contract with person whose mental
capacity is temporarily or permanently affected by reason
of age, illness or bodily distress. E.g., Between a medical
attendant and his patient.
 Difference Between
Coercion and Undue Influence
► 1.The consent is given under ► 1.The consent is given by a
the threat of an offence person who is so situated in
(Forbidden by Indian Penal relation to another that the
Code) other person is in a position to
dominate the will of the other.

► 2.Coercion is mainly of physical ► 2.Undue influence is of moral

character. (Violent force) character. (Mental pressure)
► 3.It involves criminal act. ► 3.No criminal act is involved.

4.There must be an intention of ► 4.Uses to obtain an unfair

causing any person to enter in advantage over the other.
to contract.
 Examples of UNDUE INFLUENCE

► 1.A spiritual guru induced his devotee

to gift him the whole of his property in
return of a promise of salvation of the
devotee.
Held, the consent of the devotee was
given under undue influence
[Mannu Singh vs.Umadat Pandey (1890)]
 Examples of UNDUE INFLUENCE

►2.An illiterate elderly woman made a

deed of gift of practically the whole of
her property to her nephew who
managed her affairs. Held, the gift
should be set aside on the ground of
undue influence. [Inche Noriah vs.Shaikh Allie
Bin Omar(1929)]
 EFFECT OF UNDUE
INFLUENCE
When a consent to an agreement is caused by
undue influence, the agreement is a contract
voidable at the option of the party whose consent
was so caused.

Discretion of Court: Any such contract may be set

aside either absolutely or if the party who was
entitled to avoid it has received any benefit
thereunder, upon such terms and conditions as
the court may seem just and equitable.
 Continued……..
► Ex 1: A’s son forged B’s name to a promissory
note. B under threat of prosecuting A’s son
obtains a bond from A, for the amount of the
forged note. If B sues on this bond, the Court may
set the bond aside.
► Ex 2: A, a money-lender, advances Rs.100 to B,
an agriculturist, and by undue influence induces B
to execute a bond for Rs.200 with interest at 6 per
cent per month. The Court may set aside,
ordering B to repay Rs.100 with such interest as
may seem to it just.
 RELATIONSHIP WHICH RAISE
PRESUMPTION OF UNDUE INFLUENCE
► Parent and child
► Guardian and ward
► Trustee and beneficiary
► Religious adviser and disciple
► Doctor and patient
► Solicitor and client
The presumption of undue influence applies
whenever the relationship between the parties is
such that one of them is , by reason of confidence
reposed in him by the other, able to take unfair
advantage over the other.
 NO PRESUMPTION OF UNDUE
INFLUENCE IN THE RELATIONSHIP
► Landlord and tenant
► Creditor and debtor
► Husband and wife
In the above cases undue influence will
have to be proved if any.
 BURDEN OF PROOF
► When a contract is avoided on the ground of
undue influence, the liabilities of dominant party
and weaker party has to be proved.
The weaker party has to prove
(a) That the other party was in a position to
dominate the will
(b) That the other party actually used his influence
to obtain an unfair advantage
(c) That the transaction is unconscionable
(unreasonable)
 Continued……
► In case of unconscionable transaction, the
dominant party has to prove that such
contract was not induced by undue
influence.
► Note: A transaction is said to be
unconscionable if the dominant party makes
an exorbitant profit of the other’ s distress.
 Example of unconscionable
transaction
X was in great need of money. The market rate of
interest prevailing at that time was 15% to 24%.
A lender agreed to grant the loan at 30% because
of stringency in the money market. This cannot be
called as unconscionable transaction because of
an unusual high rate of interest.
However, if the lender agreed to grant the loan at a
rate which is so high (say 75% or 100%) then the
Court considers it unconscionable, and the
transaction will be called unconscionable
 CONTRACTS WITH PARDANASHIN
WOMAN
► A woman who observes complete seclusion ( i.e., who
does not come in contact with people other than her family
members) is called pardanashin woman.
► Legal Presumption: A contract with a pardanashin woman
is presumed to have been induced by undue influence.
► Burden of Proof: The other party who enters into a
contract with a pardanashin woman must prove —(a) that
he made full disclosure of all the facts to her.
► (b) that she understood the contracts and the implications
of the contract.
► (c) that she was in receipt of competent independent
advice before entering into the contract.
 Misrepresentation
►A statement of fact which one party makes in the
course of negotiations with a view to inducing the
other party to enter in to a contract is known as a
representation.
► It may be expressed by words spoken or written
or implied from the acts and conduct of the
parties.
► A representation when wrongly made, either
innocently or intentionally, is a
misrepresentation.
 MISREPRESENTATION & FRAUD

► Misrepresentation may be-

(I) An innocent or unintentional
misrepresentation, or
(II) An intentional, deliberate or willful
misrepresentation with an intent to
deceive or defraud the other party.
The former is called “MISREPRESENTATION” and the
latter “FRAUD”
 MISREPRESENTATION

►“Misrepresentation” is a
misstatement of a material fact
made innocently with an honest
belief as to it’s truth or non-
disclosure of a material fact,
without any intent to deceive
the other party.
 Examples of Misrepresentation
► 1.A while selling his mare to B, tells him
that the mare is thoroughly sound. A
genuinely believes the mare to be sound
although he has no sufficient ground for the
belief. Later on B finds the mare to be
unsound. The representation made by A is
a misrepresentation.
 Examples of Misrepresentation
► 2.A company’s prospectus contained a
representation that it had statutory powers to run
it’s tramways by steam provided the consent of a
Government authority was obtained. The directors
issued a prospectus stating there in that the
permission for the use of steam power would be
granted. The permission was refused .The
company was then wound up. Held, the directors
were guilty of misrepresentation and not of fraud.
[Derry vs.Peek(1889)]
 Requirements of MISREPRESENTATION
► 1.It must be a representation of material fact. Mere
expression of opinion does not amount to
misrepresentation even if it turns out to be wrong.
► 2.It must be made before the conclusion of the
contract with a view to inducing the other party to enter
in to contract.
► 3.It must be made with the intention that it should
be acted upon by the person to whom it is addressed.
► 4.It must actually have been acted upon and must
have induced the contract.
► 5.It must be wrong but the person who made it
honestly believed it to be true.
Requirements of MISREPRESENTATION
► 6.It must be made without any intention to deceive
the other party.
► 7.It need not be made directly to the plaintiff. A wrong
statement of facts made to a third party with the
intention of communicating it to the plaintiff, also
amounts to misrepresentation.
E.g., A told his wife within the hearing of their daughter
that the bridegroom proposed for her was a young man.
The bridegroom, however, was a over sixty years. The
daughter gave her consent to marry him believing the
statement by her father. Held, the consent was vitiated by
misrepresentation and fraud.
[Babul vs.Singh(1968)Patiala High Court]
 FRAUD
► “Fraud” exists when it is shown that,
(1) a false representation has been made
(i) knowingly, or
(ii) with out belief in it’s truth, or
(iii) recklessly, not caring whether it is true
or false, and
(iv) the maker intended the other party to
act upon it.
(2) there is a concealment of material fact.
 ………..FRAUD

►The intention of the party

making fraudulent
misrepresentation must be to
deceive the other party to the
contract or to induce him to enter
in to a contract.
 ………..FRAUD
► According to Sec.17. “fraud” means and includes any of
the following acts committed by a party to a contract:
1.The suggestion that a fact is true when it is not true and
the person making the suggestion does not believe it to be
true;
2.The active concealment of a fact by a person
having knowledge or belief of the fact;
3.A promise made without any intention of performing it;
4.Any other act fitted to deceive;
5.Any such act or omission as the law specially declares to
be fraudulent.
 ESSENTIAL ELEMENTS OF FRAUD
► 1.There must be a representation and it must be
false:
E.g., The prospectus of a company did not refer to the
existence of a document disclosing liabilities. This
gave the impression that the company was prosperous. If
the existence of the document had been disclosed the
impression would have been different. Held, non disclosure
of information amounted to fraud and any one who
purchased shares on the faith of this prospectus could
avoid the contract.[Peek vs.Gurney(1873)]
 …………ESSENTIAL ELEMENTS OF FRAUD
► 2.The representation must relate to a material fact
which exists now or existed in the past.
(i) A sells some spoons to B and makes the following
statements. The spoons are as good as that of X.
[This is a statement of opinion].
(ii) The spoons have as much silver in them as that of X
[This is a statement of fact]
(iii) The spoons are the best available in the market for the
price. [This is a puffing statement].
 …………ESSENTIAL ELEMENTS OF FRAUD
► 3.The representation must have been
made before the conclusion of the contract
with the intention of inducing the other
party to act upon it.
► 4.The representation must have been
made with a knowledge of it’s falsity or
without belief in it’s truth or recklessly, not
caring whether it is true or false.
 …………ESSENTIAL ELEMENTS OF FRAUD
► 5.The other party must have been induced to act
upon the representation or assertion.A mere
falsehood is not enough to give a right of action.
Eg., A bought shares in a company on the faith of a
prospectus which contained an untrue statement that one
B was a director of the company. A had never heard of B
and, therefore, the statement was immaterial from his
point of view .A’s claim for damages in this was dismissed
because the untrue statement had not induced A to buy
the shares.
[Smith vs.Chadwick(1884)]
 …………ESSENTIAL ELEMENTS OF FRAUD

► 6.The other party must have relied upon the

representation and must have been deceived.If
representation does not come to the notice of a
party, it cannot be said to have misled that party
because it does not lead that party at all.
► 7.The other party, acting on the representation or
assertion, must have subsequently suffered some
loss.
 Contracts not necessarily voidable
-Exceptions.
► When consent to an agreement is caused by coercion,
fraud or misrepresentation, the agreement is a contract
voidable at the option of the party whose consent was so
caused. But in the following cases, the contract is not
voidable:
► Where the consent of a party to a contract was caused by
misrepresentation or fraud and that party could discover
the truth by ordinary diligence.
E.g., A by misrepresentation, leads B erroneously to believe
that five hundred tons of indigo are made annually at his
factory. B examines the accounts of the factory, which
show that only four hundred tones of indigo have been
made. After this B buys the factory. The contract is not
voidable on account of A’s misrepresentation.
 MISTAKE
► Mistake is erroneous belief about something.
It may be a (1) Mistake of law, or (2) Mistake of fact.
► (1)Mistake of law: It may be….
(a) Mistake of law of the country
(b) Mistake of law of foreign country
► (2) Mistake of fact: Mistake of fact may be,
(a) Bilateral Mistake, or
(b) Unilateral Mistake.
 MISTAKE OF LAW
Example of (1) Mistake of law of the country

► A party cannot be allowed to get any relief on the ground

that it had done a particular act in ignorance of law.A
mistake of law is, therefore, no excuse, and the contract
cannot be avoided.
► E.g., A and B enter in to contract on the erroneous belief
that a particular debt is barred by Indian Law of Limitation.
This contract is not voidable.
► But, if a person enters in to a contract by making a mistake
of law through the inducement of another, whether
innocent or otherwise ,the contract may be avoided.
 MISTAKE OF LAW
(2) Mistake of law of a foreign country

►Such a mistake is treated as

mistake of fact and the
agreement in such a case is
void (Sec.21).
 …………….MISTAKE
► Bilateral Mistake: 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
[Sec.20].It may be Bilateral or Unilateral Mistake
► Bilateral Mistake: It may relate to ……
(a)Subject mater,or (b) Possibility of performance
(a) Subject matter may relate to ………………..
(i)Existence (ii)Price (iii)Quantity (iv) Quality
(v) Identity or (vi) Title.
(b) Possibility of performance :It may relate to,
(i) Physical, or Legal impossibility.
 Bilateral Mistake
► The following two conditions have to be fulfilled.
1.The mistake must be mutual:
E.g., A agreed to purchase B’s motor car which was lying down in B’s
garage. Unknown to either party, the car and garage were completely
destroyed by fire a day earlier. The agreement is void.
2.The mistake must relate to a matter of fact essential to the
agreement:
E.g., A man and woman entered in to a separation agreement under
which a man agreed to pay a weekly allowance to the woman,
mistakenly believing themselves lawfully married. Held, the agreement
was void as there was mutual mistake on a point of fact which was
material to the existence of the agreement.
[Galloway vs Galloway(19141)].
 Bilateral Mistake

► The various cases whish fall under Bilateral

mistake are as follows.
1.Mistake as to the Subject matter:
(a)MISTAKE AS TO THE EXISTENCE OF THE SUBJECT MATTER.
E.g., A agrees to buy a horse from B a certain horse. It turns out that the horse
was dead at the time of the bargain, though the neither party was aware of
the fact. The agreement is void.
(b) MISTAKE AS TO THE IDENTITY OF THE SUBJECT MATTER:
E.g., W agreed to buy from R a cargo of cotton “to arrive ex-peerless from
Bombay”.There were two ships of that name sailing from Bombay.One sailing
in October and the other in December.W meant the former ship and R, the
latter.Held, there was a mutual or bilateral mistake and there was no
contract.[Rafles vs.Wichelhaus(1864)]
 ….Bilateral Mistake

► …………………………………………………1.BILATERAL MISTAKE:
(c) MISTAKE AS TO THE QUALITY OF THE SUBJECT MATER:
E.g., Table Napkins were sold at an auction by y description “with the
crest of Charles 1 and the authentic property of that monarch”. In fact
the napkins were Georgian. Held the agreement was void as there was
a mistake as to the quality of the subject matter.
[Nicholson &Venn vs.Smith Mariott(1947)]
(d) MISTAKE AS TO THE QUANTITY OF THE SUBJECT MATTER:
E.g., A silver bar was sold under a mistake as to it’s weight. There was a
difference in value between the weight as it was and as it was
supposed to be. Held, the agreement was void. [Cox
vs.Prentice(1815)]
 ….Bilateral Mistake

► …………………………………………………1. BILATERAL MISTAKE:

(e) MISTAKE AS TO THE TITLE OF THE SUBJECT MATTER:
E.g., A person took a lease of a fishery which, unknown to either party, already
belonged to him. Held, the lease was void.
[Cooper vs.Phibbs (1815)]

(f)MISTAKE AS TO THE PRICE OF THE SUBJECT MATTER.

E.g., C wrote to W offering to sell certain property for 1,250 pounds. He had
earlier declined an offer from W to buy the same property for 2000 pounds. W
Who knew that this offer of 1,250 pounds was a mistake for 2,250 pounds,
immediately accepted the offer. Held, W knew perfectly well that that the offer
was made by mistake and hence the contract could not be enforced. [Webster
vs.Cecil(1861)]
 …………….MISTAKE
► Unilateral Mistake: Where only one of the parties is
under a mistake as to a matter of fact, the contract is not
voidable(Sec.22).
► E.g., A offers to sell his house for Rs.44,000.By mistake he
makes an offer in writing for Rs..40,000.He cannot plead
mistake as a defense.
► There are however, two exceptions.
Regarding the (i) identity of the person contracted with.
(ii) Nature of contract.
 …………….MISTAKE
► (I )Mistake at to the identity of the person contracted with:
E.g. ,If A intends to enter in to a contract with B, C cannot give himself
any right in respect of the contract by accepting the offer.
In such a case the contract is void.
► (ii) Mistake as to the nature of the contract:
Where a person is made to enter in to a contract through the
inducement of another but through no fault.
E.g., M, an old man of poor sight, endorsed a bill of exchange thinking
that it was a guarantee. Held, there was no contract on the ground
that the mind of the signer did not accompany the signature [Foster
vs. Mackinson (1869)]
 Legality of Object
►An agreement is a contract if it is made
for a lawful consideration and with a
lawful object (Sec.10)
►Every agreement of which the object
or consideration is unlawful is void.
 Continued……..
► The consideration or object of an agreement is
unlawful if-
(a) It is forbidden by law; or
(b) If it is of such a nature that, if permitted it
would defeat the provisions of any law.
Ex: X borrowed Rs.1,00,000 from Y and agreed
not to raise any objection as to the limitation and
that Y may recover the amount even after the
expiry of limitation period. This agreement is void
as it defeats the provisions of the Law of
Limitation Act; or
 Continued….
(c) It is fraudulent; or
(d) It involves or implies injury to the person or
property of another; or
(e)The Court regards it as immoral, or opposed to
public policy.
► No action is allowed on an illegal agreement.