Contract Act: Capacity, Consent & Validity — Practice

Question 1

State who is competent to contract under the Indian Contract Act, 1872, and explain why a minor's agreement is void ab initio rather than voidable at the minor's option.

Accepted Answer

Provision. Section 11 provides that every person is competent to contract who is of the age of majority according to the law to which he is subject, who is of sound mind, and who is not disqualified from contracting by any law to which he is subject. All three requirements must be satisfied.

The age of majority is eighteen years, or twenty-one where a guardian of the minor's person or property has been appointed by a court.

Why a minor's agreement is void and not voidable.

The Act itself says only that a minor is not competent to contract; it does not state the consequence. For some years it was arguable that such an agreement was voidable at the minor's option, which would have allowed a minor to enforce it while remaining free to escape it.

The Privy Council settled the question in Mohori Bibee v Dharmodas Ghose, holding that an agreement with a minor is void ab initio — void from the beginning, never having had legal existence at all.

The reasoning rests on what section 10 requires. A contract requires the free consent of parties competent to contract. A minor is not competent, so there can be no agreement of the kind the Act recognises. There is nothing to make voidable, because a voidable contract is a contract, and this never was one.

The consequences all follow from that single proposition. A minor cannot ratify the agreement on attaining majority, because a void agreement cannot be given life by later approval. There is no estoppel against a minor who misrepresented his age, since estoppel cannot defeat a statutory protection. Specific performance is unavailable, because there is no contract to enforce. And money paid to a minor is not recoverable unless the property is still traceable in his hands.

The policy behind the rule is protective. Minority is a disability the law imposes for the minor's benefit, and a rule that allowed the incapacity to be circumvented would leave the protection worthless precisely in the cases where it is most needed.

Question 2

A, aged 17, borrows ₹2,00,000 from B by representing that he is 20. He spends ₹50,000 on food and school fees and the balance on entertainment. On attaining majority, A promises in writing to repay the whole amount. Advise B on his remedies.

Accepted Answer

Provision. A minor's agreement is void ab initio (Mohori Bibee v Dharmodas Ghose). There is no estoppel against a minor who misrepresents his age, because estoppel cannot be used to defeat a statutory protection. A minor cannot ratify an agreement on attaining majority, since a void agreement cannot be given life by subsequent approval; but a fresh agreement made after majority, supported by fresh consideration, is valid. Under section 68 of the Indian Contract Act, 1872, where a person incapable of contracting is supplied by another with necessaries suited to his condition in life, the person who furnished them is entitled to be reimbursed from the property of that incapable person.

Application.

The loan itself. A was 17 at the time of borrowing and was therefore not competent to contract. The loan agreement is void ab initio, and B cannot sue on it.

The misrepresentation of age. B may argue that A represented himself as 20 and should be estopped from pleading minority. This argument fails: there is no estoppel against a minor. If it were otherwise, the protection would be defeated by the very misrepresentation a minor is most likely to make, and B is expected to satisfy himself as to the age of the person he deals with.

The written promise after majority. This is a purported ratification of a void agreement and is ineffective. There is nothing to ratify. Nor is it a fresh agreement, because no fresh consideration moved from B after A attained majority — the money was advanced during minority under an agreement that never existed in law. Note the contrast: had B advanced further money after A's majority in return for the promise, that new agreement would bind.

The ₹50,000 spent on necessaries. Food and school fees are necessaries suited to a person's condition in life. Section 68 accordingly entitles B to reimbursement of ₹50,000 — but only from A's property, and not from A personally. The liability is quasi-contractual, arising from the supply rather than from any contract. If A has no property, B recovers nothing.

The ₹1,50,000 spent on entertainment. Entertainment is not a necessary. No part of this sum is recoverable, and since it has been spent it is no longer traceable, so no restitution can be ordered.

Conclusion. B cannot enforce the loan agreement, cannot rely on estoppel, and cannot rely on the written promise made after majority. His only remedy is a claim under section 68 for ₹50,000 as necessaries, enforceable against A's property alone.

Question 3

Distinguish coercion from undue influence on at least five named bases, and state the effect of each on the contract.

Accepted Answer

Meaning. Coercion, under section 15, is committing or threatening to commit any act forbidden by the Indian Penal Code, or unlawfully 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, under section 16, arises where the relations subsisting between the parties are such that one is in a position to dominate the will of the other, and he uses that position to obtain an unfair advantage.

Nature of the pressure. Coercion is physical or criminal pressure — a threat of violence, or the unlawful detention of goods. Undue influence is moral or mental pressure arising out of a relationship between the parties.

Relationship between the parties. Coercion requires no relationship at all; it may be exercised between complete strangers. Undue influence requires a relationship in which one party is in a position to dominate the will of the other, whether by real or apparent authority, by a fiduciary relation, or because the other's mental capacity is temporarily or permanently affected by age, illness or distress.

Who may exercise it and against whom. Coercion may be exercised by any person, not necessarily a party to the contract, and may be directed against any person whatever, not necessarily a party — a threat against a stranger's life to compel a contract is coercion. Undue influence operates only between the parties to the relationship.

Burden of proof. In coercion, the burden lies on the party alleging it, following the ordinary rule that he who asserts must prove. In undue influence, once it is shown that one party was in a position to dominate the will of the other and that the transaction appears unconscionable, the burden of proving that the contract was not induced by undue influence shifts to the party in the dominant position. This reversal is what makes the doctrine effective in practice, since a dominated party is rarely able to prove what passed between them.

Presumption. There is no presumption of coercion in any relationship. Dominance is presumed in certain relationships for undue influence — parent and child, guardian and ward, doctor and patient, solicitor and client, spiritual adviser and devotee — while it is not presumed in others such as husband and wife, landlord and tenant, or creditor and debtor, though it may still be proved on the facts.

Effect on the contract. In both cases the contract is voidable at the option of the party whose consent was so caused, under section 19 for coercion and section 19A for undue influence. There is a difference in the relief: where consent was caused by undue influence, the court may set the contract aside absolutely or, if the party entitled to avoid it has received any benefit, upon such terms and conditions as it thinks just. A person to whom money has been paid under coercion must repay it.

Question 4

A spiritual adviser induced his devotee to gift him the whole of his property, telling him it would secure salvation. The devotee's family challenges the gift. Advise, explaining where the burden of proof lies and why.

Accepted Answer

Provision. Under section 16 of the Indian Contract Act, 1872, a contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of them is in a position to dominate the will of the other, and he 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 where he holds a real or apparent authority over the other, or stands in a fiduciary relation to the other, or makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress.

Sub-section (3) provides that where a person who is in a position to dominate the will of another enters into a contract with him, and the transaction appears on the face of it or on the evidence adduced to be unconscionable, the burden of proving that such contract was not induced by undue influence lies upon the person in the position to dominate the will of the other.

Section 19A provides that a contract caused by undue influence is voidable at the option of the party whose consent was so caused, and the court may set it aside absolutely or upon such terms as it thinks just.

Application.

The relationship of spiritual adviser and devotee is one of the recognised categories in which dominance is presumed. It is a fiduciary relation, and the adviser holds an apparent authority over the devotee in matters the devotee regards as of the highest importance. The first limb is therefore satisfied without further proof.

The transaction is a gift of the whole of the devotee's property to the adviser, made in return for an assurance of salvation. A transfer of a person's entire property, leaving nothing for himself or his family, for no material consideration, is unconscionable on its face. The second limb is satisfied.

Both conditions of sub-section (3) being met, the burden shifts. It is not for the devotee's family to prove that undue influence was exercised; it is for the spiritual adviser to prove that it was not — that the devotee acted on free and informed judgement, typically by showing that the devotee understood the transaction fully and had the benefit of independent advice.

Why the burden shifts. The ordinary rule is that he who alleges must prove. It is displaced here because the party in a position of dominance is, by the nature of the relationship, the party with knowledge of what passed between them, while the dominated party is characteristically unable to produce evidence of pressure that was never overt. Requiring the weaker party to prove undue influence would make the doctrine unenforceable precisely in the cases it exists to address.

Conclusion. The gift is voidable at the option of the devotee or, after his death, his legal representatives. Unless the spiritual adviser discharges the burden of proving that the devotee's consent was free, the court will set the transaction aside.

Question 5

Distinguish fraud from misrepresentation, and explain the two respects in which the consequences differ. Illustrate each with a short example.

Accepted Answer

Meaning. Fraud, under section 17, means the suggestion as a fact of that which is not true by one who does not believe it to be true; the active concealment of a fact by one having knowledge or belief of it; a promise made without any intention of performing it; any other act fitted to deceive; or any act or omission the law specially declares to be fraudulent — committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive or to induce the other to enter into the contract.

Misrepresentation, under section 18, is a 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; or any breach of duty which, without intent to deceive, gains an advantage to the person committing it; or causing, however innocently, a party to make a mistake as to the substance of the thing which is the subject of the agreement.

The essential difference. It is intention and belief. In fraud the maker knows the statement is untrue, or does not believe it to be true, and intends to deceive. In misrepresentation the maker honestly believes the statement to be true but had no reasonable ground for the belief. The words spoken may be identical; what differs is the speaker's state of mind.

First difference in consequence — damages. Fraud makes the contract voidable at the option of the deceived party and additionally gives a right to claim damages, because a wrong has been committed. Misrepresentation makes the contract voidable but gives no right to damages; the remedies are rescission and restitution, restoring the parties to their former position.

Second difference in consequence — the ordinary-diligence defence. The exception to section 19 provides that where consent was caused by misrepresentation, or by silence amounting to fraud, the contract is not voidable if the party whose consent was so caused had the means of discovering the truth with ordinary diligence. This defence is available against misrepresentation. It is not available against active fraud: a person who makes a positive false statement knowing it to be false cannot escape by saying the victim ought to have checked.

Examples.

Misrepresentation: a seller of a factory tells the buyer that its annual output is 10,000 units, honestly believing this from an outdated report he has not verified. The true figure is 6,000. The buyer may rescind, but cannot claim damages, and if the true figures were available in records the buyer was invited to inspect, even rescission may be barred.

Fraud: a seller of a car knows the engine has been replaced after an accident and states that the car has never been damaged. The buyer may rescind and claim damages, and the seller cannot argue that a mechanic's inspection would have revealed the truth.

Question 6

State the rule on silence as fraud and the circumstances in which silence amounts to fraud. Advise whether there is fraud where (a) a seller of a horse knows it is unsound and says nothing; (b) the same seller says nothing after the buyer states 'if you do not deny it, I shall assume the horse is sound'; (c) an applicant for life insurance does not disclose a serious illness.

Accepted Answer

Provision. The explanation to section 17 provides that 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 it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.

The general rule is therefore caveat emptor: a party is not obliged to disclose facts within his knowledge, and the other party must make his own enquiries.

The circumstances in which silence does amount to fraud are four.

Where there is a duty to speak. This arises in contracts uberrimae fidei — of utmost good faith — such as insurance, and where the parties stand in a fiduciary relation, such as principal and agent, partner and partner, or guardian and ward. In such relationships the party with knowledge must disclose material facts.

Where silence is equivalent to speech. Where the circumstances are such that the other party is entitled to treat silence as an assertion, silence operates as a false statement.

Where circumstances change. A statement true when made becomes false before the contract is concluded, and the maker knows this. The failure to correct it is fraud.

Where a half-truth is told. A statement literally true but rendered misleading by what is left out is a false statement, and the omission is fraudulent.

Application.

(a) The seller who knows the horse is unsound and says nothing. This is mere silence. The parties are at arm's length, the contract is not one of utmost good faith, and there is no fiduciary relation. The buyer could have had the horse examined. There is no fraud, and the sale stands, subject to any implied condition of merchantable quality under the Sale of Goods Act.

(b) The same seller, after the buyer says 'if you do not deny it, I shall assume the horse is sound'. Here the buyer has expressly framed the silence as an assertion, and the seller, knowing the horse to be unsound, allows him to proceed on that footing. The silence is in itself equivalent to speech, and it falls squarely within the second limb of the explanation. This is fraud, and the contract is voidable at the buyer's option with a right to damages.

(c) The insurance applicant concealing a serious illness. A contract of insurance is a contract uberrimae fidei, in which the insurer must rely on the applicant's disclosure because the facts are peculiarly within the applicant's knowledge. There is accordingly a duty to speak, and non-disclosure of a material fact such as a serious illness is fraud. The insurer may avoid the policy.

Note that in case (c) the insurer could not defend a claim of non-disclosure by arguing that a medical examination would have revealed the illness — where there is a duty to speak, the party owed the duty is entitled to rely on it.

Question 7

Explain the effect of mistake on an agreement, distinguishing bilateral from unilateral mistake and mistake of fact from mistake of law. Advise in each case: (i) A agrees to buy B's cargo, both being unaware that the ship had already sunk; (ii) C signs a contract believing the goods to be of a higher grade, D saying nothing; (iii) E enters a contract under a mistaken view of the Indian law of limitation; (iv) F contracts under a mistaken view of a Singaporean statute.

Accepted Answer

Provisions. Section 20 provides that where both parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. Section 21 provides that a contract is not voidable because it was caused by a mistake as to any law in force in India, but that a mistake as to a law not in force in India has the same effect as a mistake of fact. Section 22 provides that a contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact.

Note that mistake makes an agreement void, not voidable. The reason is that under section 13 consent means agreeing upon the same thing in the same sense, and where an essential mistake is shared there was never any consensus ad idem — so there is no contract to affirm or avoid.

(i) Both parties unaware that the ship had sunk. This is a bilateral mistake of fact, and the fact — the existence of the subject matter — is essential to the agreement. Section 20 applies and the agreement is void. Neither party can enforce it, and any money paid is recoverable. This is the classic case of res extincta, where the subject matter had perished before the agreement without the knowledge of either party.

(ii) C mistaken about the grade of the goods, D silent. This is a unilateral mistake of fact. Section 22 provides that a contract is not voidable merely because one party was under a mistake as to a matter of fact, so the general rule is that the contract stands. D's silence does not assist C unless it falls within one of the exceptions to the rule on silence — a duty to speak, silence equivalent to speech, a change of circumstances, or a half-truth. On the facts as stated none applies, so the contract binds C.

The recognised exceptions to the general rule on unilateral mistake are narrow: a mistake as to the identity of the person contracted with, where identity was material, and a mistake as to the nature of the document signed where the signatory was misled about its character.

(iii) E mistaken about the Indian law of limitation. Section 21 applies: a contract is not voidable because it was caused by a mistake as to a law in force in India. Ignorance of the law of one's own country is no excuse, since permitting it would make every contract vulnerable to a plea of ignorance and would reward the failure to take advice. The contract stands.

(iv) F mistaken about a Singaporean statute. A mistake as to a law not in force in India has the same effect as a mistake of fact. Foreign law is treated as a matter of fact because no person is expected to know the law of another country. If the mistake was bilateral and essential to the agreement, the agreement is void under section 20; if unilateral, section 22 applies and the contract stands. The question of which rule applies therefore depends on whether the other party shared the mistake.

Question 8

State when the consideration or object of an agreement is unlawful under section 23, and give three examples of agreements opposed to public policy.

Accepted Answer

Provision. Section 23 of the Indian Contract Act, 1872 provides that the consideration or object of an agreement is lawful unless it falls within one of five heads.

It is forbidden by law. The act contemplated is prohibited by a statute or by rules having the force of law.

It is of such a nature that, if permitted, it would defeat the provisions of any law. The act is not itself forbidden, but enforcing the agreement would frustrate the purpose of a statute — as with an agreement structured to evade a statutory restriction.

It is fraudulent. The object is to defraud a third person, as with an agreement between two persons to divide the proceeds of a fraud on creditors.

It involves or implies injury to the person or property of another.

The court regards it as immoral or opposed to public policy.

In each of these cases the consideration or object is unlawful, and every agreement of which the object or consideration is unlawful is void.

Three examples of agreements opposed to public policy.

An agreement for the sale of a public office or of a public title. Such agreements are void because public offices are to be filled on merit and in the public interest, and permitting their sale would corrupt the administration.

An agreement to stifle the prosecution of a non-compoundable offence. A promise not to prosecute in return for payment is void, because the law reserves to the state the decision whether serious offences are prosecuted, and allowing a private bargain would let offenders buy immunity.

An agreement interfering with the course of justice, such as one to induce a judicial officer to act in a particular way, or an agreement in improper forms of maintenance and champerty where litigation is funded for an improper motive.

Other recognised heads include trading with an enemy, agreements to commit an offence, agreements tending to create a monopoly, agreements in restraint of parental rights, and agreements in restraint of personal liberty.

Question 9

State the rule in section 27 and its exceptions. Advise on the validity of (a) a covenant by the seller of a bakery not to open a similar business in the same city for three years; (b) a covenant by an employee not to work for a competitor for two years after leaving; (c) a covenant by an employee not to work elsewhere during his employment.

Accepted Answer

Provision. Section 27 of the Indian Contract Act, 1872 provides that every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind is, to that extent, void.

Indian law here is markedly stricter than English law. In England a restraint is valid if it is reasonable as between the parties and in the public interest. Section 27 contains no general reasonableness test; a restraint is void unless it falls within a recognised exception.

The exceptions.

Sale of goodwill. The exception to section 27 permits one who sells the goodwill of a business to agree with the buyer to refrain from carrying on a similar business within specified local limits, so long as the buyer or a person deriving title to the goodwill carries on a like business there, provided the limits appear to the court reasonable regard being had to the nature of the business.

Exceptions under the Indian Partnership Act, 1932. Restraints on an outgoing partner from carrying on a similar business within specified periods or local limits; restraints agreed among partners that a partner will not carry on any business other than that of the firm during the continuance of the firm; restraints on a partner upon or in anticipation of dissolution. Each is valid if the restrictions are reasonable.

Trade combinations which regulate business rather than restrain it, and service agreements restraining an employee during the subsistence of employment.

(a) Seller of a bakery, not to open a similar business in the same city for three years. Valid, provided the local limits are reasonable having regard to the nature of the business. This falls squarely within the sale of goodwill exception. The buyer has paid for the goodwill — the custom and connection of the business — and that payment would be worthless if the seller could immediately reopen next door and take the custom back. Whether a whole city and three years is reasonable depends on the geographic reach of a bakery's trade, and a court would consider that; the exception requires reasonableness of the limits, not merely their existence.

(b) Employee not to work for a competitor for two years after leaving. Void. A restraint operating after the employment has ended restrains the person from exercising a lawful profession or trade, and no exception covers it. The employer's legitimate concern is protected by other means — an obligation of confidentiality in respect of trade secrets and customer information survives employment and is enforceable, because it restrains the misuse of information rather than the exercise of a trade.

(c) Employee not to work elsewhere during his employment. Valid. A restraint operating during the subsistence of the employment is not a restraint of trade at all in the relevant sense: the employee has agreed to serve one employer exclusively for the term, which is the substance of the bargain rather than a restriction on his freedom to earn a living. Such negative covenants are regularly enforced.

Question 10

State the essentials of a wagering agreement, its effect, and the transactions expressly excluded from it. Explain why a contract of insurance is not a wager.

Accepted Answer

Provision. Section 30 of the Indian Contract Act, 1872 provides that agreements by way of wager are void, and that no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain event on which any wager is made.

Essentials of a wagering agreement.

A promise to pay money or money's worth, dependent on the determination of an uncertain event.

Mutual chances of gain and loss — each party must stand to win under one contingency and to lose under the other. An agreement in which one party can only win is not a wager.

Neither party has any interest in the event other than the sum or stake he stands to win or lose. This is the defining element.

Neither party has control over the happening of the event.

The event may be a future one or a past one whose outcome is unknown to the parties.

Effect. A wagering agreement is void, and nothing won upon it can be recovered by suit. Importantly, it is void but not illegal in most of India, so collateral transactions are not tainted: money lent to a person to enable him to enter a wagering transaction is generally recoverable, since the loan is a separate and lawful agreement. In Gujarat and Maharashtra, wagers have been rendered illegal by state legislation, and there collateral transactions are affected.

Transactions expressly excluded.

A subscription or contribution, or an agreement to subscribe or contribute, of a prize or sum of five hundred rupees or upwards to be awarded to the winner of a horse race, is expressly excepted by section 30.

Share and commodity transactions intended to result in actual delivery are genuine contracts of sale, not wagers. A transaction intended from the outset to be settled only by payment of the difference in price, with no intention of delivery, is a wager.

Skill-based competitions, such as crossword or athletic competitions where the outcome depends substantially on skill rather than chance, are not wagers.

Why insurance is not a wager. The distinguishing element of a wager is that neither party has any interest in the event other than the stake. A person who insures his house against fire has a direct interest in the house quite apart from the policy: he suffers a real loss if it burns, and the policy indemnifies that loss rather than creating a gain.

The requirement of insurable interest is what enforces this distinction. Without it, a policy taken on a stranger's property or life would indeed be a wager on that person's misfortune, and would be void. With it, the contract is one of indemnity — or, for life insurance, of assurance of a fixed sum — and is a contingent contract, in which the uncertain event is collateral to the contract rather than the whole substance of it.

Question 11

Define a contingent contract and state the rules on its enforcement. Distinguish it from a wagering agreement on named bases, and advise in each case: (i) A promises to pay B ₹1,00,000 if B's house is destroyed by fire; (ii) A promises to pay B ₹50,000 if it rains in Delhi on 1 July, B promising to pay A the same if it does not; (iii) A promises to pay B ₹2,00,000 if C, who is alive, marries D; C marries E.

Accepted Answer

Definition. Section 31 of the Indian Contract Act, 1872 defines a contingent contract as a contract to do or not to do something if some event, collateral to such contract, does or does not happen.

Its essentials are that performance depends upon a future uncertain event, and that the event is collateral to the contract — that is, it is not part of the consideration itself and does not form the reciprocal promise, but is a condition upon which performance turns.

Rules on enforcement, in sections 32 to 36.

Contingent on an event happening — enforceable when and only when that event has happened, and void if the event becomes impossible.

Contingent on an event not happening — enforceable when the happening of that event becomes impossible, and not before; void if the event happens.

Contingent on the future conduct of a living person — the event is considered to have become impossible when that person does anything which renders it impossible that he should so act within any definite time, or otherwise than under further contingencies.

Contingent on an event happening within a fixed time — void if the time expires without the event happening, or if before the time expires the event becomes impossible.

Contingent on an event not happening within a fixed time — enforceable when the time expires without the event happening, or when before the time expires it becomes certain that the event will not happen.

Contingent on an impossible event — void, whether the impossibility was known to the parties at the time of the agreement or not.

Distinction from a wagering agreement.

Nature of the event: in a contingent contract the event is collateral to the contract; in a wager the uncertain event is the sole determining factor and the whole substance of the agreement.

Interest of the parties: in a contingent contract the parties have a real interest in the subject matter beyond the outcome of the event; in a wager neither has any interest other than the stake.

Reciprocal promises: a wager involves mutual chances of gain and loss on the same event, each party standing to win under one contingency and lose under the other; a contingent contract need not, and usually does not, have this structure.

Validity: a contingent contract is valid and enforceable subject to sections 32 to 36; a wagering agreement is void under section 30.

Enforceability of the underlying transaction: a contingent contract may be a contract of insurance, indemnity or guarantee, all of which the law encourages; a wager creates no enforceable claim at all.

Application.

(i) A promises to pay B ₹1,00,000 if B's house is destroyed by fire. This is a contingent contract, being in substance a contract of insurance. B has an insurable interest in his own house — he suffers a real loss if it burns — so the event is collateral and the parties are not merely staking money on an outcome indifferent to them. It is valid and enforceable when the event happens.

(ii) A and B on the rainfall in Delhi. This is a wagering agreement. There are mutual chances of gain and loss on the same uncertain event, neither party has any interest in the rainfall beyond the stake, and neither controls it. The agreement is void under section 30, and neither party can sue on it.

(iii) A promises ₹2,00,000 if C marries D, and C marries E. This is a contingent contract dependent on the future conduct of a living person. Section 34 provides that such an event is considered to have become impossible when the person does anything which renders it impossible that he should so act. By marrying E, C has rendered his marriage to D impossible. The contract is therefore void and B cannot claim the ₹2,00,000, notwithstanding that C could in theory marry D at some future date if his marriage to E ended — the section fixes impossibility at the moment of the act.

Question 12

Explain why coercion, undue influence, fraud and misrepresentation make a contract voidable while mistake makes an agreement void, and set out the practical consequences of that difference for the parties and for third parties who have acquired rights.

Accepted Answer

The conceptual reason.

Section 13 defines consent as two or more persons agreeing upon the same thing in the same sense — consensus ad idem. Section 14 provides that consent is free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake.

In the first four cases, consent existed. The parties did agree upon the same thing in the same sense; what was defective was the process by which one party's agreement was obtained. A person threatened into a sale, or induced by a lie, has genuinely assented to the terms — he simply assented for the wrong reasons.

Because consent exists, there is an agreement, and because there is an agreement the law can leave the choice to the injured party. That party may prefer to keep the bargain: a buyer defrauded about a car's history may still want the car, at least if damages compensate him. The Act therefore makes the contract voidable at his option under sections 19 and 19A.

In the case of an operative mistake, consent did not exist in the required sense at all. Under section 20, where both parties are under a mistake as to a matter of fact essential to the agreement, they were not agreeing upon the same thing in the same sense. There is nothing to affirm, because there was never a meeting of minds, and the agreement is void.

Practical consequences between the parties.

A voidable contract is valid and binding until avoided. The aggrieved party must elect: he may affirm it, expressly or by conduct such as continuing to take benefits after discovering the truth, in which case he loses the right to rescind. If he rescinds, he must do so within a reasonable time and must restore any benefit received.

A void agreement was never binding at all, so no election arises and no affirmation is possible. Anything received under it is returnable under section 65, which provides that a person who has received advantage under an agreement discovered to be void must restore it or make compensation.

On damages, fraud stands apart. Fraud makes the contract voidable and additionally gives a right to damages, because a wrong has been committed. Misrepresentation gives only rescission and restitution. Coercion and undue influence give avoidance, with the court empowered under section 19A to set aside a contract induced by undue influence on such terms as it thinks just where the aggrieved party has received a benefit.

Consequences for third parties.

This is where the distinction has its sharpest practical effect.

A voidable contract transfers a good but defeasible title. If goods are obtained by fraud and sold to an innocent third party who buys in good faith and for value before the original seller has rescinded, that third party gets good title. The original seller's remedy is against the fraudster personally. This is why the timing of rescission matters so much: the right to avoid is lost once third-party rights intervene.

A void agreement transfers no title at all. Nothing passed, so a third party can acquire nothing, however innocent and however much he paid. He must return the goods to the true owner and pursue his own seller.

A further consequence for the parties. A voidable contract can be affirmed and thereafter enforced by either side; a void agreement can never be enforced by anyone, and lapse of time or subsequent conduct cannot cure it.

The practical instruction for an answer is therefore to state the consequence precisely — void or voidable — because the marking scheme's conclusion component turns on it, and because everything about the parties' remedies and third-party rights follows from that single word.

Question 13

A doctor treating an elderly patient in severe pain persuades her to sell him her land at half its market value, telling her truthfully that he cannot guarantee her recovery. The patient later seeks to set the sale aside. Advise, considering every ground that might be available and identifying which succeeds.

Accepted Answer

Several grounds must be considered, and the answer turns on identifying which of them the facts actually engage.

Coercion. Section 15 requires the commission or threat of an act forbidden by the Indian Penal Code, or the unlawful detention or threat of detention of property, with the intention of causing a person to enter into an agreement. Nothing of that kind occurred. The doctor made no threat and detained no property, and his statement about the uncertainty of recovery was true. Coercion does not apply.

Fraud. Section 17 requires a false statement made without belief in its truth, active concealment, a promise made without intention of performance, or another act fitted to deceive, with intent to deceive. The doctor's statement that he could not guarantee recovery was true, and there is nothing to suggest concealment. On the facts stated there is no fraud. Note also that mere silence about the market value would not be fraud in an arm's length sale — though the relationship here is not at arm's length, which matters for the ground that does succeed.

Misrepresentation. Section 18 requires a positive assertion not warranted by the maker's information, of something untrue though believed true, or a breach of duty gaining an advantage without intent to deceive, or innocently causing a mistake as to the substance of the subject matter. The doctor asserted nothing untrue. Misrepresentation does not apply on the facts as stated, though the second limb — breach of duty gaining an advantage — is worth noting as adjacent to the ground that does succeed.

Mistake. There is no suggestion that either party was mistaken about the land, its identity or its existence. The patient knew what she was selling. Inadequacy of price is not a mistake of fact essential to the agreement. Section 20 does not apply.

Inadequacy of consideration alone. The explanation to section 25 provides that an agreement is not void merely because the consideration is inadequate; parties are free to make bad bargains. But the same explanation adds that inadequacy may be taken into account by the court in determining whether the consent of the promisor was freely given. Inadequacy is therefore evidence, not a ground in itself.

Undue influence — the ground that succeeds.

Section 16 provides that a contract is induced by undue influence where the relations subsisting between the parties are such that one is in a position to dominate the will of the other, and he uses that position to obtain an unfair advantage.

Two of the deemed categories apply here, and either would suffice. The doctor stands in a fiduciary relation to his patient. And the patient is a person whose mental capacity is temporarily affected by reason of age and bodily distress — she is elderly and in severe pain. The doctor was therefore in a position to dominate her will.

The transaction is a sale at half market value by a person in that condition to the person treating her. It appears unconscionable on its face.

Both conditions of section 16(3) being satisfied, the burden of proving that the contract was not induced by undue influence lies on the doctor. He would have to show that the patient's consent was free and informed — in practice, that she understood the transaction and had the benefit of independent advice. Merely showing that his statements were true is not enough, because the vice is not deception but the exploitation of a position of dominance.

Conclusion. The sale is voidable at the patient's option under section 19A. Unless the doctor discharges the burden of showing the absence of undue influence, the court will set the transaction aside, and may do so on such terms as it thinks just, which would ordinarily require the patient to return the price received.

The wider point is that the facts were constructed so that the obvious grounds — fraud, misrepresentation, coercion — all fail on close reading, precisely because nothing untrue was said. Undue influence succeeds because it does not require any falsehood at all.

Question 14

Explain how section 19's exception on ordinary diligence operates, why it applies to misrepresentation and to silence amounting to fraud but not to active fraud, and what this reveals about the policy of the Act.

Accepted Answer

The provision. Section 19 provides that 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.

The exception to the section then provides that if such consent was caused by misrepresentation, or by silence fraudulent within the meaning of section 17, the contract is nevertheless not voidable if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.

How it operates. Where a party has been misled, but the true position was reasonably available to him — in records he was invited to inspect, in documents supplied to him, in an inspection he was free to make — he cannot avoid the contract. He is treated as having relied on his own judgement rather than on the statement.

The means must be real and available with ordinary diligence, not merely theoretically obtainable. A buyer handed a file of accounts and told to examine them has the means; a buyer told a figure and given nothing does not become disentitled merely because the information existed somewhere.

Why it covers misrepresentation. A misrepresentation is made honestly. The maker believes what he says, though without reasonable grounds. Neither party has behaved dishonestly, and the loss falls to be allocated between two innocent parties. In that situation it is reasonable to ask which of them could more easily have avoided the mistake, and where the misled party had the means of checking and did not use them, the law leaves the loss where it falls.

Why it covers silence amounting to fraud. Silence becomes fraudulent only because of the circumstances — a duty to speak, or silence equivalent to speech. The party keeping silent has made no positive false statement. The wrong is one of omission, and the exception recognises that a party who could readily have discovered the fact for himself is not entitled to complain of another's failure to volunteer it.

Why it does not cover active fraud. Where a party has made a positive false statement knowing it to be untrue, with intent to deceive, the position is entirely different. He cannot be heard to say that his victim should have been more careful. To allow that defence would be to reward deceit in proportion to the victim's trust, and it would make the protection least available to the parties most likely to need it — those who take a statement at face value because they have no reason to doubt the person making it.

There is also a practical objection. A person who lies has, by lying, made checking seem unnecessary. It is incoherent to induce another to forgo enquiry and then complain that enquiry was not made.

What this reveals about the policy of the Act.

The Act distinguishes throughout between honest error and dishonesty, and it allocates loss differently in each case.

Where both parties are honest, the law asks who was better placed to avoid the harm, and it expects commercial parties to exercise ordinary care for their own interests. This is the same policy that produces the general rule of caveat emptor and the rule that mere silence is not fraud.

Where one party has been dishonest, that inquiry stops. The dishonest party bears the loss regardless of the other's carelessness, and additionally pays damages, which misrepresentation does not attract. The Act declines to weigh the victim's negligence against the wrongdoer's deceit.

The same policy appears elsewhere — in the refusal to estop a minor who lied about his age, and in the rule that an illegal agreement taints collateral transactions while a merely void one does not. The Act is willing to leave honest parties to their own vigilance, and unwilling to lend any assistance to a party who has acted dishonestly.

Question 15

A manufacturer employs an engineer under a contract providing that (i) he will not work for anyone else during his employment, (ii) he will not disclose the company's processes at any time, and (iii) he will not join any competitor for three years after leaving. He resigns and joins a competitor. Advise the manufacturer on the enforceability of each clause and on what protection remains.

Accepted Answer

Provision. Section 27 of the Indian Contract Act, 1872 provides that every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind is, to that extent, void. The only statutory exception in the Act itself concerns the sale of goodwill, and further exceptions appear in the Indian Partnership Act, 1932.

Indian law is markedly stricter than English law, which upholds restraints that are reasonable between the parties and in the public interest. Section 27 admits no general reasonableness test, so a restraint is void unless it falls within a recognised exception — with the important qualification that a restraint operating during the subsistence of employment is not treated as a restraint of trade within the section at all.

Clause (i) — not to work for anyone else during employment.

Enforceable. A covenant restraining an employee from serving anyone else during the term of his employment is not a restraint on his exercising a trade or profession in the relevant sense. It is the substance of the bargain: the employer has contracted for the employee's exclusive service for the term, and the employee has agreed to give it in exchange for his salary. Such negative covenants are regularly enforced by injunction during the currency of the employment.

Clause (ii) — not to disclose the company's processes at any time.

Enforceable, including after the employment ends. This clause does not restrain the engineer from exercising his trade; it restrains him from misusing confidential information belonging to the employer. He remains free to work anywhere in his profession, using his own skill, knowledge and experience — he simply may not disclose or exploit his former employer's trade secrets.

The distinction the courts draw is between the employer's confidential information, which the law will protect indefinitely, and the employee's general skill and experience, which he acquires in the course of working and is entitled to take with him. A clause drawn so widely that it would prevent the employee from using his general professional competence would fail; one confined to identified processes and confidential information will be upheld.

Clause (iii) — not to join any competitor for three years after leaving.

Void. This is a restraint operating after the employment has ended, and it restrains the engineer from exercising his lawful profession. No exception in section 27 covers post-employment restraints in a contract of service. The duration of three years and the breadth of 'any competitor' are beside the point: the section admits no reasonableness inquiry, so even a narrower and shorter clause would fail.

What protection remains.

The manufacturer cannot prevent the engineer from working for the competitor. But clause (ii) survives and is the substantial protection available. If the engineer discloses or uses the company's confidential processes in his new employment, the manufacturer may obtain an injunction restraining that use and may claim damages for the breach.

The manufacturer may also have remedies in respect of specific categories of information independent of contract — under the law relating to breach of confidence, and where the processes are patented, under the Patents Act.

The practical lesson for drafting is that Indian employers protect themselves through confidentiality obligations, non-solicitation of customers and employees where it can be framed as protection of a proprietary interest rather than restraint of trade, and through garden-leave arrangements that operate during the notice period and therefore during the subsistence of employment. Attempting to achieve the same result through a post-employment non-compete does not work under section 27.

Practice — Contract Act: Capacity, Consent & Validity

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