Voidable Contracts - An Analysis
Author: LawSphereX
Category: General Law
Published:
Updated:
VOIDABLE CONTRACTS: AN
ANALYSIS
Aditya Goswami, Institute of Integrated Learning in Management (IILM) Greater Noida Introduction In today’s world contracts are an integral part of our daily lives. Even simple luxuries like having food in a restaurant, using cabs, and many more involve contracts. From the business point of view contracts are important in determining the commitments of the parties thereby establishing a legal relationship between them. This helps to mitigate risks and resolve disputes in the future. Contracts maintain compliance of the company with its shareholders and customers. These agreements between the parties help generate revenue and profit increasing efficiency and brand value. Therefore, it becomes important to understand the difference between void and voidable contracts. As per Section 2(g) of the Indian Contract Act, 1872 defines a void agreement as an agreement not enforceable by law.
In the case of Marbury v. Madison1 the Chief Justice Marshall laid the theory of Void Ab Initio (void from the start). On the other hand, in the leading case of Mohiri Bibi v. Dharmodar das Ghose2, the court laid the concept of voidable contract. Therefore, a contract as per Section 2(h) Indian Contract Act,
18723 is an agreement enforceable by law. Moreover, a contract can be broadly classified into
void contracts that are void since the beginning and voidable contracts that later become a void contract. With the advent of Globalization and Artificial Intelligence (AI), the concept of contracts has become very crucial to understand. Even though AI has improved efficiency in business and reduced the possibility of errors, however, such technology can also be used to do bad more than good of the people. Hence it becomes important for not only law students, scholars and practitioners but also the layman to understand the situations when they can approach the court to get a contract to be declared void and claim some compensation. There are many ways in which a party becomes a part of a contract, some ways include coercion, fraud, misrepresentation, undue influence and mistake. A contract can he made void by one party on the above grounds.
On the other hand, contracts that involve a minor, person of unsound mind or a person who is disqualified by law because of either being a criminal in jail or being subject to an actionable claim.
1 Marbury v. Madison 5 U.S. 137 (1803)
2 Mohiri Bibi v. Dharmodar Das Ghose UKPC 12, (1903) LR 30 IA 114
3 Section 2(h) Indian Contract Act, 1872
Voidable Contracts According to Section 2(i) Indian Contract Act, 18724 a contract enforceable by one or more parties but not at the option of the other or others is a voidable contract. Therefore, a voidable contract is one where the power to enforce the contract is in the hands of one party and others but not in the hands of the other party and others. For better understanding, if person A sells an antique chair to person B, this is a valid contract, however, if the facts are changed and B is held a minor, then the agreement is void. Further, if B coerced A to enter into the contract then the contract is voidable at the option of A. Section 10 Indian Contract Act, 18725 says that all agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.
Therefore, for a valid contract there must be two competent parties, contracting for a lawful consideration with a lawful object and the contract must not be expressly declared void by the law. Section 13 Indian Contract Act, 18726 defines consent as two or more persons agreeing upon the same thing in the same sense. According to Section14 Indian Contract Act, 18727 consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake. Coercion According to Section 15 Indian Contract Act, 18728 coercion is the committing or threatening to commit, any act forbidden by the Indian Penal Code (45 of 1860) or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.
Coercion originates from England and was first recognized by the Coercion Act of 1817. Kenneth Eimar Himma later provided his thesis on coercion suggesting there must be coercive enforcement mechanisms. After this on the basis of principles of natural justice and equity, the concept of economic duress was laid. This principle was also recognized by the Bombay High Court in the case of Dai-ichi. In this case, the claimant was required to execute a bank guarantee under circumstances where the Corporation would have cancelled large orders from the claimant if the claimant
4 Section 2(i) Indian Contract Act, 1872
5 Section 10 Indian Contract Act, 1872
6 Section 13 Indian Contract Act, 1872
7 Section 14 Indian Contract Act, 1872
8 Section 15 Indian Contract Act, 1872
refused. The claimant argued that it executed the bank guarantee under economic duress9. A person can employ criminal acts such as blackmail, extorsion, threat of violence and coerce an individual to give his consent to a contract, therefore, it becomes inherently important to enact laws preventing such acts, and restore any benefit accrued. A leading case in the above context is Ranganayakamma v. Alwar Setti wherein the court identified that the consent of the plaintiff was not free and out of coercion. In this case, the widow was coerced to enter into a contract of adoption in order to be able to remove the corpse of her husband. The court ruled that, the widow’s consent was not free and out of coercion and therefore the contract is voidable10. Undue influence The concept of Undue influence originates from a doctrine in English common law in 1617.
According to Section 16 Indian Contract Act, 187211 a contract is said to be induced by undue influence where the relations subsisting between the parties is such that one party is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. In the case of Ladli Prasad v. Kamal Distillery12 the court held that not only should a party have a dominant position but they must also use it to obtain an unfair advantage, The section also deems a person to be in a position to dominate the will of another if the person holds a real or apparent authority over the other or where he stands in a fiduciary relationship with the other, or 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.
As undue influence and duress are both ways by which a person’s consent is compromised, it is important to understand the difference between the two. Duress involves direct threats of physical violence or blackmail to obtain the consent of another regarding a contract of property. For example, person A is at the gun point of person B and is forced to sell his property. On the other hand, undue influence involves subtle manipulation and pressure tactics to obtain consent. For example, a rich community manipulates slum dwellers to evacuate their slum and obtain some advantage with the help of their dominancy over the slum dwellers. Further, it is important to understand what is meant by a real or apparent authority and a fiduciary relationship.
A real authority refers to an authority where the person is in dominant position to dominate the will of the other, an office hierarchy is the most common example of this. An authority is said to be apparent where real authority doesn’t exist but the person can approach the other with a show
9 Dai-Ichi Karkaria Pvt. Ltd. V. Union of India 1995 (80) ELT24 (BOM)
10 Ranganayakamma v. Alwar Setti (1890) ILR13MAD214
11 Section 16 Indian Contract Act, 1872
12 Ladli Prasad v. Kamal Distillery 1963 AIR 1279
of authority, just like a parent child relationship. A fiduciary relationship is one where there is a relation of trust, like the relation between a lawyer and his client. Moreover, mental capacity has two essentials, the party must have a position to dominate and the transaction is unconscionable. Such a transaction was highlighted in the leading case of Philip Lukka v. Franciscan Association of Vazhapally13 where the plaintiff blindly transferred all his property to a religious Guru out of a relationship of trust. In this case, the court held that the Guru was having a fiduciary relationship with his followers and he used that position to obtain an unfair advantage. The court further held that whenever a gift is made to a spiritual organization, the court expects a higher degree of proof as to the genuine nature of the transaction.
Fraud Fraud is any activity that relies on deception to achieve a gain from the other party. As per Blacks law dictionary, fraud becomes a crime when it is “knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment14. In the leading case of Derry v. Peek, the court defined fraud as a false statement made knowingly without belief in its truth, or recklessly, whether it be true or false15.
According to Section 17 Indian Contract Act, 187216, ‘Fraud’ means or includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract – (1) the suggestion, as act, of that which is not true, by one who does not believe it to be true; (2) the active concealment of a fact by one 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 that the law specially declares to be fraudulent.
In simple words the Indian Contract Act, 1872 defines Fraud as any act intending to deceive another party and obtain their consent either by the concealment of a fact know by the deceiving party, or making a promise without the intention to fulfil it, or any other act intending to deceive or expressly declared fraudulent by the law. Therefore, the essentials for constituting fraud include, a false assertion that is a deliberate statement of a fact that is not true, and the person making such a statement knows that the statement isn’t true, this is based on the Latin maxim Suggestio Falsi (statement of falsehood). Then comes the essential of active concealment, which is a deliberate nondisclosure with a pre-meditated intention to deceive the other party. Finally, the act must be
13 Philip Lukka v. Franciscan Association of Vazhapally AIR 1987 KER 204
14 Art. 1S47 of Black’s law dictionary
15 Derry v. Peek 1889 UKHL 1
16 Section 17 Indian Contract Act, 1872
deceptive, or declared fraudulent by law like embezzlement that is the stealing of property which has been entrusted to someone’s care, forgery or altering documents, deceit, concealment of facts, false promise, etc. it is important to understand that ‘Fraud is not fraud if it doesn’t defraud’. This means that if a fraudulent act of one party doesn’t affect the consent of the other then it will not be considered a fraud even though there is an intentional false assertion that was made with the intention to deceive. For example, if a person buys a car solely on the basis of online reviews and the looks of the car and not on the basis of its specifications, then even if the automobile company falsely asserted the specifications of the car with the intent to deceive, it will not amount to fraud, as their deceptive act did not affect the buyers consent and decision.
It is a general rule that mere silence does not amount to fraud, however, silence may amount to fraud where there is a duty to speak or that silence is equal to speech. There is a duty to speak in contracts involving a fiduciary relationship like that of a lawyer and his client or a doctor and his patient. There will be duty to speak in cases of utmost good faith and trust like in contracts of insurance that is Uberrimae Fidei (contract of utmost good faith). The concept of silence equal to speech can be understood by the leading case of Felthouse v. Bindley in which the plaintiff told the respondent that if he would remain silent then he would deem the offer to be accepted. Clearly, here silence is equivalent to speech17. For better understanding, it is important to undertand the concepts of active and passive concealment.
Active concealment refers to the intentional hiding of an important fact which cannot be understood by the other party simply with his naked eye and so effects his consent. On the other hand, passive concealment is simply remaining silent when the other party can easily obtain the information through inspection and his naked eye. A seller keeping quiet about the problem of brakes in a car in order to sell it is actively concealing the fact. Whereas, the silence of the seller of a horse on the question of the sanity or health of a particular horse is passive concealment as the buyer can easily understand whether the horse is sane or not with his naked eyes. It is only in active concealment that it would amount to fraud as the buyer has no means to obtain information simply with ordinary diligence. This is the principle of ‘Buyers beware’. In the case of Shri Krishan v.
Kurukshetra University, a student knowing that he did not have enough attendance to qualify to sit for the university exam, kept quiet and gave the exam. Here, the court held that there is no fraud as the act of the plaintiff is that of passive concealment rather than active concealment18.
17 Felthouse v. Bindley (1862) EWHC CP J35
18 Shri Krishan v. Kurukshetra University 1976 AIR 376
Misrepresentation In law, misrepresentation is a unintentional false statement or omission of fact that deceives a person and affects his consent. It can occur in a variety of ways, as we know, an intentional misrepresentation is considered fraud, on the other hand, someone can make an innocent misrepresentation that is making a statement that is false thinking it to be true or negligent misrepresentation, wherein, a statement is made without reasonable grounds to consider it true. As a result, the aggrieved party can either get damages or rescind the contract. Black’s law dictionary defines it as an act of making a false or misleading assertion about something, usually with the intent to deceive.
Section 18 Indian Contract Act, 1872 says that misrepresentation means and includes – (1) 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; (2) any breach of duty which, without an intent to deceive, gains an advantage of the person committing it, or any one claiming under him, by misleading another to his prejudice, or to the prejudice of any one claiming under him; (3) causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement. In simpler words, misrepresentation is a false statement of fact made innocently or without knowledge of its falsehood, which induces a party to enter into a contract.
It is important to understand that when a party intentionally makes a false statement with the intent of deceiving the other, it amounts to fraud. However, in misrepresentation there is no intention to deceive the other party and the statement of fact is made without knowledge of its falsehood. It is important to note that as per Section 19 exception Indian Contract Act, 187219, if the aggrieved party had the means of discovering the truth, then he must comply with the terms of the contract. A prominent case law supporting this is Attwood v. Small wherein, the seller made false claims of the capabilities of his mines, which could be verified by the buyer through his agents and so the court ruled that there was no misrepresentation20. Moreover, in fraud the aggrieved can get damages as well as compensation but in misrepresentation the aggrieved is only entitled to damages.
Mistake A mistake is an error or misconception that can occur in different ways like a wrong judgment, a misunderstanding, a wrong action or statement or an error in opinion. In contract law, a mistake is an erroneous belief, at contracting, that certain facts are true. A mistake can be of
19 Section 19 exception Indian Contract Act, 1872
20 Attwood v. Small (1838) UKHL J60
two types, a mistake of fact or a mistake of law. The Indian Contract Act, 1872 does not provide a clear definition of mistake as it is quiet an ambiguous and vast concept moreover being either mutual or individual that is either unilateral or bilateral. An interesting case in mistake of fact is State of Orissa v. Khora Ghasi wherein the accused killed a person under the belief that the victim was a witch practising black magic, the sessions court and the hight court acquitted the accused stating that he acted under a bona fide mistake of fact. However, the supreme court in an appeal reversed the order of acquittal and convicted the accused under Section 302 Indian Penal Code, 1860 for murder and sentenced him to imprisonment for life21. A leading case in mistake of law is State of Maharashtra v.
Mayer Hans George wherein the court held that mistake of law in the form of ignorance of customs regulations is not an excuse to do something forbidden by law that was to carry gold into India in this case22. So, it is evident that a mistake of law is considered bad in law and therefore, it cannot be used as a defence. A mistake of fact can be classified into a bilateral mistake or a unilateral mistake. Section 20 Indian Contract Act, 1872 states that where both the parties are under a mistake as to a matter of fact essential to the agreement, that agreement is void23. So, if A plans to buy B’s golden watch but B thinks that A wants his silver watch, then this agreement will be void. On the other hand, as per Section
22 Indian Contract Act, 1872 a contract cannot be voidable merely because it was caused by
one of the parties to it under a mistake of fact24. So, if A asks a construction company to inspect a sit of construction that is far of and the company doesn’t inspect it and directly gives a quotation, then there is a unilateral mistake of fact, and so the contract is valid, the construction company would have to fulfil the terms of the contract. Similar facts were seen in the case of State of Karnataka v. Stellar Construction Company where the court held that there was a unilateral mistake of fact as the company didn’t perform the inspection voluntarily and so they could be held liable to perform the contract25. On the other hand, a mistake of law can be classified as a mistake in foreign countries or a mistake in India. These can further be classified into unilateral and bilateral. A unilateral mistake of law with regard to foreign law or Indian law both are considered valid.
On the other hand, a bilateral mistake of law with regard to foreign law is void whereas, a bilateral mistake of law with regard to Indian law is valid. The effect of a mistake in contract law depends on whether the mistake makes the contract void or voidable. In law, a mistake can have two effects, one is nullifying of consent which means
21 State of Orissa v. Khora Ghasi 1978 CRILJ 1305
22 State of Maharashtra v. Mayer Hans George 1965 AIR 722
23 Section 20 Indian Contract Act, 1872
24 Section 22 Indian Contract Act, 1872
25 State of Karnataka v. Stellar Construction Company AIR 2003 KANT 6
causing something to have no value or effect, this means the contract becomes “null and void” that means that it was never valid and has no legal effect. The other effect is negativating of consent inn which we assume that the agreement never happened. Nullifying of consent is also called common mistake and negativating of consent is also known as mutual mistake. Types of voidability Statutorily voidable A contract is statutorily voidable when it is expressly declared voidable by a statute. For example, Section 8 (3) Hindu Minority and Guardianship Act, 1956 states that a natural guardian’s disposal of immovable property is voidable if it violates sub sections (1) or (2). The minor or anyone claiming under them can request the disposal be voided26.
Further, Section 53 Transfer of Property Act, 1882 states that every transfer of immovable property made with intent to defeat or delay the creditors of the transferor shall be voidable at the option of any creditor so defeated or delayed27. Initially voidable Section 19 Indian Contract Act, 187228 talks about the voidability of agreements without free consent. It says that if the agreement is caused by coercion, fraud and misrepresentation then the contract can be declared void at the option of the party whose consent was so obtained. That party can also, if he thinks fit, insist the contract to be performed, and that they shall be put in a position that they would have been if the representation made had been true.
Section 19A Indian Contract Act, 187229 talks about setting aside a contract induced by undue influence which is voidable at the option of the party whose consent was so caused. This section is read with Section 64 Indian Contract Act, 187230 which talks about the consequences of rescission of a voidable contract wherein if a party at whose option the contract is voidable, rescinds the contract, the other party thereto need not perform the contract wherein he is the promisor and the party rescinding shall restore any benefit so accrued. Section 19 and 19A is also read with Section 65 Indian Contract Act, 187231 which talks about the obligation of a person who received advantage under a void agreement or a contract that becomes void. It says that when
26 Section 8 (3) Hindu Minority and Guardianship Act, 1956
27 Section 53 Transfer of Property Act, 1882
28 Section 19 Indian Contract Act, 1872
29 Section 19A Indian Contract Act, 1872
30 Section 64 Indian Contract Act, 1872
31 Section 65 Indian Contract Act, 1872
a contract is discovered to be void or becomes void then any person who received any benefit under such an agreement or contract must restore it. Subsequent voidability The kind of contract that starts as a valid contract but later turns into a voidable contract is known as subsequently voidable. The reasons could be that one of the parties is not performing their end of the contract, has broken a promise, or has not performed a task within the period specified in the contract. Sections 39, 53, 55, 75 of the Indian Contract Act, 1872 talk about subsequent voidability. Section 39 Indian Contract Act, 187232 talks about the effect of refusal of party to perform the promise wholly.
It says that when a party to a contract has refused to perform or disabled himself from performing his promise in its entirety then the promisee can set aside the contract unless he has signified his acquiescence that is silent assent to the continuation of the contract. Section 53 Indian Contract Act, 187233 talks about the liability of the party preventing an event on which the contract is to take effect. It says that when a contract has reciprocal promises and one party prevents the other from performing his part of the promise then the contract becomes voidable at the option of the party so prevented and that party is entitled to compensation.
Section 55 Indian Contract Act, 187234 talks about three things, one is the effect of failure to perform in a fixed time in a contract wherein time is essential, that is when a party promises to do something in a specific period of time or certain things before a specified period of time but fails to do so, then the contract becomes voidable. The second is the effect of such failure when time is not essential, it says that if it was not the intention of the parties that time should be essential to the contract then the contract does not become voidable by the failure to perform but the promisee is entitled to some compensation.
Lastly, the section talks about the effect of acceptance of performance at a time other than the time agreed upon, in such a situation the promisee is not entitled to any compensation unless at the time of such acceptance he gives notice to the promissor about his intention to do so. Section 75 Indian Contract Act, 187235 talks about a party rightfully rescinding a contract and being entitled to compensation to any damage sustained through non fulfilment of the contract. Under subsequent voidability there can be two types of breaches one is anticipatory breach under section 39 Indian Contract Act, 1872 which means that a party to a contract indicates that he will not fulfil their future obligations for example a vendor missing deadlines or openly
32 Section 39 Indian Contract Act, 1872
33 Section 53 Indian Contract Act, 1872
34 Section 55 Indian Contract Act, 1872
35 Section 75 Indian Contract Act, 1872
declaring that they cannot deliver a promised. The other is an actual breach wherein a party fails to fulfil their obligations to the contract or didn’t perform them within the specified time period. This is given under Section 73 Indian Contract Act, 187236 which talks about compensation for loss or damage caused by a party who breached the contract. Conclusion Even though in the modern day the Indian Contract Act, 1872 outlines all the principles for contracts. Contract law in itself has its origin deeply rooted in history. Contract law was influenced by the thought of the ancient civilizations of Greek and Roman. The Roman law of contracts was documented by the 6th century Byzantine emperor Justinian. Charles Fried argued in his book that the primary purpose of contract law is to enforce promises.
During the Hindu period, Manusmriti was a Dharmashastra that outlined the principles of contract law. Therefore, it is evident that the concept of contracts isn’t a relatively new one and its importance has been understood since ancient times. The concept of voidable contracts help us understand the concept of mutual mistake and the incompetence of a party to agree to a contract. It helps in understanding the rights, liabilities and obligations of parties entering into a contract. By defining fraud, coercion, misrepresentation, undue influence and mistake, the Indian Contract Act, 1872 has outlined the grounds available to the aggrieved party to make the contract voidable and get compensation for the loss or damage occurred.
This helps in understanding the types of voidability and encompass all kinds of situations that can arise from a contract that is made without the free consent of the promisee or has been breached by a party. The law provides remedy in case of any defect that arises in a contract giving the aggrieved party the right to reject the agreement and get compensation. The Doctrine of unconscionable contracts protects people from unfair or one-sided contracts. Similarly, voidable contracts help the court to determine if a contract was formed fairly or not.
36 Section 73 Indian Contract Act, 1872