1. The Law of Contract Free Consent

2. 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. 2

3. 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. 3

4. 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. 4

5. 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 5

6. 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. 6

7. 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. 7

8. 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. 8

9. 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. 9

10. 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. 10

11. 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. 11

12. 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. 12

13. 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. 13

14. 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) 14

15. 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) 15

16. 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. 16

17. 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. 17

18. 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.” 18

19. 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 19

20. Fraud 1.Fraudulent act or Omission 2.Active Statement 3.Intentional non- performance 4.False Statement The suggestion as to a fact, of that which is not true by one who does not believe it to be true. A false statement intentionally made is fraud. 20

21. Fraud 1.Fraudulent act or Omission 2.Active Statement 3.Intentional non- performance 4.False Statement The active concealment of a fact by one having knowledge or belief of the fact. Mere non-disclosure is not fraud where the party is not under any duty to disclose all facts. But active concealment is fraud. 21

22. Fraud 1.Fraudulent act or Omission 2.Active Statement 3.Intentional non- performance 4.False Statement Example….. B, having discovered a vein of ore on the estate of A, adopts means to control, and does conceal, the existence of the ore from A. Though A’s ignorance B is enabled buy the estate at an undervalue. The contract is voidable at the option of A. 22

23. Fraud 1.Fraudulent act or Omission 2.Active Statement 3.Intentional non- performance 4.False Statement A promise made without any intention of performing it.” Example….. Purchase of goods without any intention of paying for them. 23

24. Fraud 1.Fraudulent act or Omission 2.Active Statement 3.Intentional non- performance 4.False Statement Any such act or omission as the law specially declares to be fraudulent. This clause refers to provisions in certain Acts that make it obligatory to disclose relevant facts. 24

25. Fraud 1.Fraudulent act or Omission 2.Active Statement 3.Intentional non- performance 4.False Statement Thus, under Section 55 of the Transfer of Property Act, the seller of immovable property is bound to disclose to the buyer all material defects. Failure to do so amounts to fraud. 25

26. 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. 26

27. 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. 27

28. 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. 28

29. Misrepresentation Contract Act classifies cases of misrepresentation into three groups- 1.Unwarranted Assertion 2.Breach of Duty 3.Innocent Mistake Section 18 29

30. Misrepresentation 1.Unwarranted Assertion 2.Breach of Duty 3.Innocent Mistake The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true.” 30

31. Misrepresentation 1.Unwarranted Assertion 2.Breach of Duty 3.Innocent Mistake Example….. A says to B who intends to 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. 31

32. Misrepresentation 1.Unwarranted Assertion 2.Breach of Duty 3.Innocent Mistake Any breach of duty which, without an intent to deceive gains an advantage to the persons committing it, or anyone claiming under him, by misleading another to his prejudice or to the prejudice of anyone claiming under him. 32

33. Misrepresentation 1.Unwarranted Assertion 2.Breach of Duty 3.Innocent Mistake Under this heading would fall cases where a party is under a duty to disclose certain facts and does not do so and thereby misleads the other party. In English law such cases are known as cases of “Constructive Fraud.” 33

34. Misrepresentation 1.Unwarranted Assertion 2.Breach of Duty 3.Innocent Mistake Causing innocently a party to an agreement to make a mistake as to the substance of thing which is the subject of the agreement 34

35. 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. 35

36. 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. 36

37. 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. 37

38. 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 38

39. Mistake 1.Mistake of Law 2.Mistake of Fact Mistake on a point of Indian law does not affect the contract. Mistake on a point of 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. 39

40. Mistake 1.Mistake of Law 2.Mistake of Fact The reason is that every man is 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 40

41. Mistake 1.Mistake of Law 2.Mistake of Fact An agreement induced by a mistake of fact is void provided the following conditions are fulfilled – – Both the parties to the agreement are mistaken. – The mistake is as to a fact essential to the agreement. 41

42. Mistake 1.Mistake of Law 2.Mistake of Fact Example….. P agrees to sell to Q a specific cargo 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. 42

43. Difference between Coercion and Undue Influence Coercion Undue Influence 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. 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. The influence arises from committing or threatening to commit an offence punishable under the Indian Penal Code or detaining or threatening to detain property unlawfully. The influence arises from the domination of the will of one person over another. 43

44. Difference between Coercion and Undue Influence Coercion Undue Influence Cases of coercion are mostly cases of the use of physical force. In undue influence there is mental pressure. 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. 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

45. 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.” 45

46. 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. 46

47. 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. 47

48. 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. 48

49. Difference between Fraud and Misrepresentation FraudMisrepresentation Fraud includes all acts committed by a person with a view to deceive another person. Misrepresentation arises when the representation made is inaccurate but the inaccuracy is not due to any desire to defraud the other party. Fraud implies an intention to deceive. In Misrepresentation there is no intention to deceive. If the statement is dishonest, then it is a case of Fraud. If the statement is honest, though it was wrong, then it is a case of Misrepresentation. 49

50. Difference between Fraud and Misrepresentation FraudMisrepresentation In case of Fraud the party aggrieved can rescind the contract. He can also sue for damages. In case of Misrepresentation the only remedy is rescission. There can be no suit 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. 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. 50

51. Difference between Fraud and Misrepresentation FraudMisrepresentation 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. 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. 51

52. The Law of Contract Termination of a Contract

53. 53 Termination When the obligations created by a contract come to an end, the contract is said to be discharged or terminated.

54. 54 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

55. 55 Methods of Termination 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 Performance by all the parties of the respective obligation puts an end to the contract completely. This is the normal and natural mode of discharging a contract. If a party offers something, but other party did not accept, it has the same effect. This is called offer of performance.

56. 56 Methods of Termination 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 By agreement of all parties, a contract may be cancelled or its terms altered or a new agreement substituted for it. Whenever any of the things happen, the old contract is terminated. Sec 62, Termination by mutual agreement may occur in any one of the following ways- – Novation Alteration – Remission Rescission – Waiver Merger – Accord and satisfaction

57. 57 Methods of Termination 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 If the contract cannot be performed by the promisee without his fault, the contract comes to an end. sec 56 There are two ways of impossibility – 1.Pre-contractual impossibility- a contract, which at the time it entered into, was impossible to perform. Is void from the beginning and create no rights and obligation 2.Post-contractual impossibility- a contract, which at the time it was entered into, was capable of being performed may subsequently become impossible to perform or unlawful. In such cases the contract becomes void. This is also called Supervening impossibility.

58. 58 Methods of Termination 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 Supervening impossibility may occur in the following ways- 1.Destruction of an object - If the object upon which the contract depend on, is damaged without any fault of any of the coherent parties, the contract becomes void. 2.Changer of law - The performance of a contract may become unlawful by a subsequent change of law. In such cases the original contracts becomes void.

59. 59 Methods of Termination 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 1.Failure of the pre condition/ contract/ agreement - When a contract is entered into the basis of the continued existence of a certain state of things/ contract/ condition, the contract is discharged if the condition of the thing/ contract/ condition changed. 2.Death or incapability for the personal services - Where the personal qualification of a party is the basis of the contract, the contract is discharged in cases of death or personal incapability.

60. 60 Methods of Termination 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 A contract terminates by law in case of death, insolvency and merger. Sometimes if the promise is not performed within the time it becomes void.

61. 61 Methods of Termination 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 If the document containing the terms of a contract is material alter by a part to the contract, without the consent of the other parties, the contract is discharged and cannot be enforced anymore.

62. 62 Methods of Termination 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 When one party breaks a contract, the other party or parties are freed from the obligation to perform the contract. They can also take the remedial measures to which they are entitled. Breach of contract may arise in two ways- – Anticipatory breach of contract. – Actual breach of contract

63. 63 Methods of Termination 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 The promisee can free from the promisor from the full charge or a partial charge of the contract or he can also enhance the time to perform the contract.

64. 64 Methods of Termination 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 A contingent contract is a contract to do or not to do something, if some event, collateral to such contract does or does not happen. Exception of subsequent or supervening impossibility- – Difficulty of performance – Commercial impossibility – Strikes, lock out, civil-disturbance, riots or natural calamity – Failure of one of the object.

65. 65 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.

66. 66 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

67. 67 Remedies of Breach of Contract 1.Rescission of the contract 2.Claim of damages 3.Suit for quantum meruit The aggrieved party is freed from his entire obligation under the contract.

68. 68 Remedies of Breach of Contract 1.Rescission of the contract 2.Claim of damages 3.Suit for quantum meruit The aggrieved party is entitled to receive compensation for any loss or damage by the breach of contract and can file a suit for getting a decree for the damage allowed by the courts may be different type as follows – 1.Compensatory Damage 2.Nominal Damages 3.Exemplary, punitive Damage 4.Liquidated Damages

69. 69 Remedies of Breach of Contract 1.Rescission of the contract 2.Claim of damages 3.Suit for quantum meruit Compensatory Damage: Compensate damages are calculated in such a way to compensate the loss of the party. Nominal Damages: Where the court finds that the party has not actually suffered much damage, the court allows a paltry sum for damages to the plaintiff.

70. 70 Remedies of Breach of contract 1.Rescission of the contract 2.Claim of damages 3.Suit for quantum meruit Exemplary, punitive Damage: The court may allow damages exceeding the actual loss suffered by way of punishment. Liquidated Damages: Here the party has to give the actual amount of the damaged goods or the good in that certain condition to the sufferer.

71. 71 Remedies of Breach of Contract 1.Rescission of the contract 2.Claim of damages 3.Suit for quantum meruit When a contract has been partly performed the aggrieved party can, under certain circumstances; file a suit for the price of the service performed before the breach of contract. The phase quantum meruit means, “as much as merited.”

72. 72 Remedies of Breach of Contract 1.Rescission of the contract 2.Claim of damages 3.Suit for quantum meruit Specific performance of the contract: In the certain special cases the court can direct a party to perform the contract according to the agreed terms. i.e. for an order by the court upon the party guilty of breach of contract directed him to perform what he promised to do.

73. 73 Remedies of Breach of Contract 1.Rescission of the contract 2.Claim of damages 3.Suit for quantum meruit Injunction: Injunction means the order of the court. Under certain circumstance the court can issue an order upon a party whereby he is prohibited from doing something which amount the breach of contract. Injunctions are usually granted to enforce negative stipulation in cases where damages are not adequate relief. It is particularly appropriate in cases of anticipatory breach of contract.

74. 74 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