Business Law Notes for BBS TU/Free Consent

Vitiating elements of free consent and their effect on the validity of contact (Part-I)

Introduction to Free Consent

Among different most important elements of a valid contract, free consent is one which plays a fundamental role in the formation of the legitimate contractual relationship between any two parties. So, it is considered as the fundamental factor of contract. It is the fusion of two words- free and consent. 

Where there is no consent, there is no contract at all, and the contract is void, and an agreement on the ground of free consent generally becomes voidable at the option of the party whose consent was not free. So free consent of the parties is considered as the potent subject of a valid contract.

Meaning of Consent and Free Consent

Consent in simple words is the permission or state of mind which leads the parties to contract. It is a willingness or pure decision of the parties intending to make a contract after being aware of the terms and conditions of the contract. It is a judgment to place oneself as a contracting party made by another concerned party. 

Section 13 of the Indian Contract Act, defines the term ‘consent’ as, “Two or more persons are said to consent when they agreed upon the same thing in the same sense.” 

However, in case of Nepalese law, there is no definition of term ‘consent’ in the Civil Code.

Therefore, when the intension of the offeror and offeree meet upon the same thing in the same the sense is known as true consent or consensus-ad-idem.

For example, K and T enter into an agreement to sell and purchase a piece of the land where K wants to sell his land in terms of ‘Kattha’ but T wants to purchase that land in terms of ‘Ropani’. There is no binding contract between K and T as there is no consent at all because they agreed upon the same thing(land) but not in the same sense.

Thus, consent is a very important and vital element for a valid contract. However, bare/naked consent is not sufficient. A consent to be valid, it must be free from all the possible defects.

As mentioned in Section 10 of the Indian Contract Act, “All agreements are contracts if they are made with the free consent of parties.” So, for the validity of a contract the presence of the consent of the parties is necessary and that should be freed from any defects that could hamper the validity.  

So, in this sense, the free and autonomous decision to form a contract by the parties is known as free consent.

When an agreement is made without free consent, is not enforceable by law and whose consent is not free he has got the right to avoid the contract by filing the case before the court.

The posts on topic free consent cover answers to the following questions:

Free consent can be defined in two ways. Any consent is called free consent when it is made knowingly and voluntarily. It is the first way to define the term and alternatively, we also can define the term as; the consent is said to be free when it is not attained by coercion, undue influence, misrepresentation, fraud, or mistake.  

Section 14 of the Indian Contract Act defines, “Consent is said to be free when it is not caused by

• Coercion,
• Undue Influence,
• Fraud,
• Misrepresentation,
• Mistake.

For example, A threatens to kill B if he does not sign a promissory note. B agrees to sign the promissory note. In such a case, B’s consent is not free and hence it cannot be regarded to be valid. B can avoid it. 

Importance of Free Consent

Free consent as one of the most essential elements of the contract plays the following roles in the contractual relationship between two parties;

• It binds the parties morally to their promises,
• It helps to reduce the anarchy and injustice in the society,
• It assures the knowledge of the parties regarding the subject  matters of contract,
• It provides proof of the deliberate intention of the parties. 
• It helps to respect the contractual independence of the parties.
• It is essential to promote reasonable transactions between the parties.
• Free consent helps response to the intention of the parties towards any particular matter.
• It is necessary in order to protect the parties of the contract in case they are compelled to enter into a contract under fraud, coercion, undue influence, or misrepresentation.
• Free consent is prerequisite for ensuring enforceability of the contract between the parties.
• Free consent accepts the choice of the parties to be independent to determine the consideration under the contract he or she is planning to enter and it helps to make a conducive environment to determine the consideration.
• Free consent generates the lawful duties for parties. And in case of the breach, it locks the remedy for the aggrieved party.
• Finally, free consent helps to create a favorable legal environment to grow and to develop the business community, etc. 

Consent works as the bridge and links two different parties in an agreement for a certain purpose. An agreement only becomes legal and enforceable if it has formed with the free consent of the parties. 

A person should be liable for his won act and where an act is not done by a person it is unfair and unjust to make him responsible for such an act. 

So, such is ensured by the free consent of the parties and an act is treated as his own act if that is done by him with his free will and knowledge of the matter. 

Any contract formed without the free consent of the parties, the law has to recognize it and prevent a party from making responsible for his unwilling act or consent. 

Similarly, the law must protect the freedom and choice of people. If the law enforces such agreement without free consent, the liberty and choice of the people can not work and the basic objective of law can not be fulfilled. 

If the contracts formed without free consent are considered to be valid then everyone may be suffered by the unpleasant act of others who are physically, socially, and economically in a strong position.    

Thus, the term free consent deals with one of the fundamental and essential matters of the contract. For the formation of the contract between at least two parties, they must agree to each other on the same matter in the same sense. 

If they agreed in the same matter but in a different sense then the contract is not created. So, free consent gives autonomy to the parties to determine their view and use their insight of intellectual ability in understanding terms and conditions of the contract and then go forward for their best benefits. 

Once parties are agreed to a particular matter then they must be obligate and accountable towards their duty to perform the contract. So, this all depends on their own understanding and capability to be agreed or not to agreed in any matter underlying Infront of them. 

If they are agreed freely or without any types of pressure from other then they are said agreed with free consent and they will have to perform their part of duty without any condition’s correspondent to their agreed terms.  

In these all free consent in there as the legitimate element of the contract to make parties contract more liable, accountable and in case of any fraudulent and breach from either party, free consent shows the way of legal remedies as well.

Vitiating Elements and Their Effect or Circumstances that do not make a consent free and their effect in the contract

• Coercion
• Undue influences
• Misrepresentation
• Fraud
• Mistake

COERCION

Coercion is a term which denotes a situation under which a person is compelled to do or not to do something as against his or her willingness or judgment on any matter. 

It means coercion is using force to compel a person to enter into a contract. Coercion consists of power(force) or fears(threats) to get the consent of the party. 

Under English law, it is known as ‘duress’. Fundamentally the meaning of term duress is limited as a comparison to the meaning of coercion bur the English law has confirmed duress as a vitiating factor of voluntary consent.  

Section 15 of the Indian Contract Act describes coercion as;

• Committing or threatening to commit any act forbidden by the law in the IPC,
• Unlawfully detaining or threatening to detain any property with the intention of causing any person to enter into a contract

For example, X hovers to hurt Y if he is not going to sell his land to X for Rs. 18 lakhs. Here if Y agreed and sells the land to X, it won’t be a valid contract because the consent of Y was not obtained freely as he agreed to sell his land due to the threat or X that is coercion of X.

Similarly, in the case of Nepal, Section 518 2(a) of Civil Code, 2074 defines, If a contract made by coercion, the person whose consent is so caused avoid the contract. 

It reads thus: Coercion is deemed as an unlawful detaining or threatening to detain any property, or committing or threatening to commit any harm against the life or dignity of others or any act is forbidden by law-in-force with an intention causing to enter into a contract against one’s will.

Therefore, coercion is:

• Committing or threatening to commit any harm against the life or dignity or property of one either the contracting party or his persons or other persons.
• Detaining or threatening to detain any property.
• The committing or threatening to commit any act forbidden by law-in-force.
• Such must be done with the intention of causing the others to enter into a contract.

From above definitions, the coercion is to do the following activities with an intention of compelling a person to enter into a contract against his will;

• The withholding of any property,
• The threatening to withhold any property,
• The threatening to injured life, body or reputation, etc.
• Taking any action in contravention of the law in force.

For Example: M threats to destroy the car of N’s daughter in law if he does not sell his land to him for Rs. 47 lakh rupees. Here N sells the house to M, it will not be a valid contract because the consent to sell the hose from N was not free or obtained by M with coercion.

Consequences of Coercion/Effect of Coercion

The contract which is formed without free consent or with coercion will become voidable. It means that coercion makes the contract voidable. So, the contract is voidable at the option of the party whose consent was not free called the aggrieved party. Here the aggrieved will have to decide whether to perform the contract or to void the contract.

In the previous example, the contract of N was obtained with coercion so party N is aggrieved party and he can either terminate the contract by providing the pieces of evidence of obtaining his consent with coercion or if he still wishes to perform then the contract can go ahead and become a valid contract.

If any amount of sum or goods/property has been obtained under coercion should be repaid or returned if the contract declared void by the court at the request of the aggrieved party. 

The burden of proofing coercion will lie on the hand of the party who wants to avoid the contract or burden of proof to prove consent was not obtained freely lies on the hand of the aggrieved party. Hence the aggrieved party has to prove the coercion.

Special Cases of Non-Coercion

A threat to prosecute

The mere threat by one person to another to file a case- whether criminal or civil, is not coercion. But the threat to file a false case is coercion.

A threat to commit suicide

If any person who obtains consent by threatening to commit suicide, from another person is not coercion. The only threaten of suicide is not a crime or punishable according to law, thus it is not coercion.

High-interest rate

Charging high-interest rate is also not coercion. A person may be compelled to borrow a loan from the person charging a high-interest rate due to his own circumstances of life but it is not considered as coercion. But if someone is compelled to anybody to tale loan only from him then this can be called coercion.

High price

Sometimes, on account of necessity, it needs to charge high pricing to the value of goods, in such case, a mere reason for paying a high price is not coercion but one cannot fix anyone to purchase his own goods.

 UNDUE INFLUENCE

The term ‘undue influence’ is moral coercion. Undue influence means dominating the will of another with a view to obtaining an unfair advantage over the other.

Thus, an influence exercised by a contracting party in the dominant position for obtaining an unfair advantage over the other party and the influence is misused is called undue influence.

Section 16 of the Indian Contract Act contains the definition of undue influence. Accordingly, when the relations between the two parties are such that one party is in a position to dominate the other party, and practices such influence to get an unjust or unfair benefit of the other party it will be undue influence.

The definition identified following two elements of undue influence;

• The relations existing between the parties are such that one of the parties can dominate the will of others.
• Use of dominant position to obtain consent by the party who is in such a position.

Thus, contract with undue influence is also voidable at the option of the influenced party at the time of making a contract. The aggrieved party will decide whether to perform the contract or to void the contract and the burden of proof, particularly the element of domination and presence of an unfair advantage obtained by the party having in such a dominant position.

Section 518 2(b) of Civil Code, 2074 has defined the term undue influence as “Undue influence means influence exercised by a person upon another person who is under his influence for personal advantage or interest with an intention to have an unfair benefit.”

The section also mentions that the following persons shall be deemed to be under the influence of any person and controlled to his/her will;

• An individual living with his/her guardianship, protection or custody;
• An individual who is being unable to take care of their interest temporarily or permanently by reason of old age, sickness, or physical or mental illness;
• An individual who is in or in the possibility to live subjected to under one’s economic or ranking influences.

From this, it follows that with a view to getting unfair advantage if a person who is in the dominant position uses his influence upon another person, it is known as undue influence and a contract concluded in this way is called a contract by undue influence.

Section 16(2) of the Indian Contract Act, mentions the person dominating the will of another:

• Where he holds a real or apparent authority over the other or (master and servant, income tax officer and taxpayer, professor and student etc.)
• Where he stands in a fiduciary relation to the other (doctor and patient, professor and students, lawyer and client, etc.
• If he forms a contract with the person whose mental capacity is temporarily or permanently affected by reason of age, or mental or body distress. 

For example, B sold his iPhone 11 only for Rs 500/- to his teacher C afterward his teacher assured him good scores. Here the consent of B (adult) is not freely given, because he was in the dominant position by the teacher.

Types of Undue Influence

The types or categories of undue influence explains the conditions of techniques in which undue influences may emerge.

Real or apparent authority

The person holding authority over the other he can dominate other’s will due to authority or post or economic soundness.  It includes a relationship like minister and servant, principal and temporary teacher, parents and child, etc.

Fiduciary (involving trust) relation

It is the relationship based on trust and confidence and such confidence maybe the base for innumerable transactions between people. It includes a relationship like a doctor and patient, teacher and student, guardian and children, creditor and debtor, etc. 

Mental or physical distress

A man is said to be in distress when his mental capacity is temporarily or permanently affected because of different reasons like old age, mental or bodily illness or any causes. Such a person is easily persuading to give consent to contract.

Presumptions of Undue Influence

There are certain circumstances under which if a contract is concluded that may be formed under the undue influence. A contract can be assumed to form by undue influence in case of;

• If the consideration is inadequate,
• If there exist fiduciary types of relationship between the parties or
• If there is inequality between parties in terms of social status, position, post, age, etc. of the parties
• A greater sum demanded than the actual sum must be obtained, or
• There is the absence of independent advisor of weaker party.

However, no presumption of undue influence is assumed to occur in the following cases:

• Husband and wife
• Mother and daughter
• Grandson and Grandfather
• Landlord and tenant
• Creditor and Debtor.

Consequences or effect of Undue Influence

The agreement caused by undue influence is voidable at the option of the party whose consent has been so obtained. As mentioned in the contract law, the aggrieved party is entitled to avoid the contract by undue influence. 

Such a party has to go to the court within the prescribed time limit to avoid the contract or to make it void. However, the guilty party cannot claim this right. Also, such a contract remains valid unless and until it is set aside.

In case of contract caused by undue influence, the burden of proof lies on the aggrieved party only to the extent of presenting his unfair position.  The main burden of proof about the nonuse of undue influence lies in the dominant party regarding the non-use of undue influence.

According to the contract law, the person who was in a position to dominate the will did not exercise his position to obtain an unfair advantage, has to prove that the contract was not induced by undue influence, that is to say when the contract is to avoid or made void on the ground of undue influence, the plaintiff has to proof following two points;

• He has to show in the first place that the other party was in a position to dominate his will and,
• He actually used his domination to obtain plaintiffs' consent to the contract.

 

MISREPRESENTATION

A representation is a statement of the fact required for a contract. In another words, representation deals with a report of fact made by one party to the other, either before or at the time of contract, relating to some matter essential to the creation of the contract with the objective to persuade the other party to enter into a contract.

A representation should be true and factual, but the opposite of which is misrepresentation and the contract caused by misrepresentation is normally voidable one.

Thus, the term misrepresentation means a misstatement or a false statement of fact made by a party to another party in a contract. A representation when wrongly made, but innocently or unintentionally is termed as a misrepresentation. Misrepresentation is also called innocent representation or non-fraudulent misrepresentation or misconception.

Misrepresentation is among reasons which hinder the contracting party’s free consent. Misrepresentation is a representation when wrongly made by a party to the contract innocently or without any intention to deceive the other party. Thus, it is incorrect to report made by an individual inoffensively deprived of any the intention of deceiving (misleading) the other party.

For Example; A, while selling his Car to B, tells him that the car is in good condition. A strongly believes the car is to be sound although he has no sufficient ground for the belief. Afterward, B finds the car is not in good condition and here the representation made by A is a misrepresentation. 

Section 518 2(d) of Civil Code,2074 has defined the term ‘misrepresentation’ as

• Submission of false particulars on any matters without reasonable basis for doing so,
• Misleading any party so as to aggrieve him/her,
• Causing a mistake on the matter of a contract,
• Making assurance to have concluded a contract in one subject and but causing to enter it into another subject.

Requirements of Misrepresentation

A misrepresentation is relevant if it fulfills the following requirements;

By a party to a contract

Valid misrepresentation requires that it must be made by only a party to the contract or his agent.

Wrong representation

It must be wrong or false but the person making it must honestly believe it to be true. 

Relation of representation with the fact

The representation must be related to the fact, not to the law and expression of opinion. Thus, a statement of expression or intention is not regarded as a misrepresentation of facts even if it turns out to be wrong or false in certain cases.

 

Object

A representation needs to be made with an objective to include the other party to enter into the contract but not an intention to deceive the other party.

Actually acted

It is necessary that the party to whom the representation is made must have acted relying on such statements in good faith. If such a party does not believe in the statement made, there is no question of misrepresentation.

It may be indirect

When a wrong representation may be made to the third party other than a contract with an objective of inducing him to make the other party enter into the contract is called indirect misrepresentation. 

  

 Consequences of Misrepresentation

Contract caused by misrepresentation is not valid. All the contracts so as to create from misrepresentation are voidable at the desire of the party whose consent was obtained by misrepresentation. 

As specified in the Civil Code, the aggrieved party entitled to avoid such a contract must go to the court within the time limit prescribed by law.

If the contract is declared void, the aggrieved party is discharged from the liability under the contract. However, the contract remains valid unless and until it is set aside. There are several consequences of a contract that formed through misrepresentation;

• The aggrieved party can avoid the contract but he is not entitled to compensation. The rationale is that the wrong statement was not made intentionally to deceive the other party or it is an unknown mistake or it is an unknown mistake of any party. The aggrieved party can insist/emphasize performance if he thinks fit.
• Although a false statement is made believing it as true, subsequently, it comes to be false before the contract is made, the information about it must be given to the other party. If such a party is not notified, this amounts to fraud. In this case the victim party is entitled to avoid the contract and can claim the damages for the loss suffered. 

In certain cases, the aggrieved party neither avoid the contract nor claim compensation for any loss caused to him if such a party remains silence or do not take any legal action against the other party within the time limitation.

 

The following are the special circumstances in which the aggrieved the party loses the right to avoid the contract formed through misrepresentation;

• If such a party after being aware of the misrepresentation takes a benefit under the contract.
• If such a party cannot be restored in his original position. e.g. in case, the subject matter of the contract has been consumed or destroyed.
• If any innocent third party has acquired certain rights from the subject matter consists of the contract so formed.

For the second part of the note, please click HERE

References

Mishra B.P. (2014), Mercantile Law, Kathmandu: Asia Books Distributers

Upreti Shreepraksh(2018), Business Law, Kathmandu: Samjhana Publication Pvt Ltd

Kuchhal M.C. (1978), Mercantile Law, New Delhi: Vikas Publishing House Pvt Ltd