Free Consent/Business Law Complete Notes for BBS TU

Vitiating elements of free consent and their effect in the validity of contact (Part-II)

Fraud

Fraud includes all acts committed by a person with an intention to deceive another person to induce a man to believe that a thing is true which is false. It is a willful misrepresentation made by a party with an intention to deceive another party. 

Thus, fraud is misrepresentation with bad intention or a false statement of fact made intentionally or knowingly by one party to another party.

For example, A sells a ring to B stating that it is made of pure gold though he knows that it is not true. B purchases the ring believing A’s statement to be true. It is fraud by A.

Section 518 2(c) of Civil Code, 2074 defines the term fraud as, “When, with an intent to deceive the other party to the contractor his agent, a party or his agent induce him to believe a thing as true, which is not true, conceals(hide or prevent to know) actively any subject matter of the contract and does some such act as Nepalese current laws especially declare fraudulent, that is said to be a fraud.”

Thus, fraud includes anyone of the following situation if committed by any party of the contract or his agent with a view to deceiving another party or his agent:

• Persuading another party to trust that an untrue act is as a true one.
• Concealing actively about any truth in relation to contract.
• Doing an act that carries another party to believe false as true, and
• Doing some such acts that are declared to be fraudulent by the current Nepalese law.

Essentials of Fraud

• Only the party to contract or his agent or his convenience needs to commit fraud.  Except for them, the third party cannot commit the fraud.
• There must be a false representation and it must be made with the knowledge of falsehood by the party.
• The misrepresentation must be related to a matter of contract.
• To constitute fraud, the misrepresentation must be actually acted. Only intention or attempt to deceive does not regard as a fraud.
• Aggrieved parties must be suffered some damage as there is a common principle that ‘there is no fraud without damage’.

Consequences of Fraud

Contract caused by fraud is voidable at the option of the party whose consent was obtained by fraud.

By Section 19 of the Indian Contract Act, the party whose consent has been obtained by such means is entitled to avoid the contract. For this propose, he must go to the court within the time limit stipulated in the law. If he makes such a contract void, he remains no longer under such a contract.  

However, such a party may continue such a contract without being avoided. But the guilty party cannot avoid such a contract. In case he fails to avoid the contract within time, a contract comes into existence and he cannot escape from the obligation under the contract. If the contract is avoided the benefit obtained under the contract must be returned.

If the party claims fraud, he has to prove the existence of fraud by providing the evidence to the court of law. Thus, the burden of proof lies upon the party claiming fraud by the other party. 

But the court itself has to identify the contract whether it is induced by fraud or not. To avoid or not to avoid the contract by fraud depends upon the decision of the aggrieved party. The contract made by fraud has the following consequences;

Action to Avoid contract

The party who is aggrieved by fraud can take action against the other party to avoid the contract.    

Acceptance and demand

There is a double option to the aggrieved party that if such a party thinks better, it can accept such a contract instead of taking legal action against it and demand to treat him in the same footing that the contract is not made through the fraud. Under this, he can demand the recovery of compensation from the other party.

Claim of damages

The aggrieved party has the right to claim damages of the loss caused by the fraud from the party who commit fraud at the time of obtaining consent.

Not Voidable/exceptions of fraud

In any of the following cases, a contract induced by fraud is not voidable or these circumstances are known as exceptions of fraud

• In case of fraudulent silence if the party suffered by the fraud had the means of discovering the truth with ordinary dialogues,
• If such a party cannot be restored his original position, i.e. if the subject matter of the contract is consumed or destroyed.
• If such a party after becoming aware of the fraud takes the benefit under the contract
• If any innocent third party has acquired certain rights from the subject matter consist of the contract so formed with good faith and for value. For example; A purchases goods from B by fraud and pledge them with C. B cannot avoid the contract on learning of fraud so as to be able to recover goods from C.
• If such party does not go to the court within the time limitation.

Silence regarding fraud

During the course of business transactions, some of the facts must be disclosed and some need not be disclosed. However, if a party keeps silent in respect to the fact of material to the contract, it may be harmful to the other party. 

So, in case of a contract, it is an important issue whether silence is fraud or not. In this regard, silence has a double status in the case of fraud. Thus, there are two rules of silence in case of fraud;

Mere Silence is not fraud

It is the first and general rule that generally mere silence without any legal duty to speak does not constitute fraud in the course of forming a contract. The general rule is that a person before entering into a contract is not bound to disclose to another person the material facts. 

At the time when the contract is entered into another person, a party is entitled to keep silent. There is no such duty under the law to him to make a disclosure to the other party about those fact materials to the contract which he knows.

Although a person keeps silence by speaking nothing about such facts, it is not considered to be a fraud. This means mere silence is not a fraud. In another word, mere silence is not a representation, and therefore, it does not amount to fraud. As in the contract of sale of goods, the buyer has to be careful. The doctrine of Convent Emptor, i.e.   ‘buyer beware’ applies in the contract.

The Nepalese Contract law has not specified any provision in respect of silence as to facts. But explanation to Section 17of Indian Contract Act provides that mere silence as to the facts likely to enter into a contract is not a fraud.  

For example; A sold a cow to B for Rs. 5000. A knew that the cow was sick. But A never made any representation to B to the effect that his cow was sick. The concealment of his cow’s sickness will give B no ground to treat the contract as void because A had no duty to have verified facts himself. This is based on the principle of Caveat Emptor. 

Silence is fraud

This is the second rule or also known as an exception to the general rule ‘mere silence is not a fraud.’ Under certain circumstances, no party to the contract has the right to keep silent about the subject matters or terms and conditions of the contract or facts material to it.

The party is under a duty to open all such matters, which he has knowledge about, otherwise, this silence amounts to fraud. The main intention behind this rule is that a party must disclose to the other party, the material facts whatever he knows. 

Failure of disclosure amounts fraud.  It means, where a party is under the obligation to disclose all the facts related to the contract, he cannot conceal them at the time of contract if he does conceal them, it is proved fraud.

The duty to disclose arises only in certain cases; 

The statutory obligation to disclose

Section 55 of Indian Transfer of Property Act, 1882 requires a seller of real property to disclose all defects as to his title or property to the buyer. In such a case, the non-disclosures will be a fraud.

Changes in circumstances

After forming a contract, if any changes are made about the fact or subject matter of the contract, its holder has to communicate the changes to the other party. When he remains silent and does not inform, fraud arises.

Silence equivalent to fraud

If sometimes silence is equivalent to speech then remaining silence is a fraud. For example, A offers to B to buy his house and said that he believes that the house is in fitted condition. Here B remains silence and agreed to sell the house to A. Later on if the house would find unfit then the silence by B is called fraud.

When a seller fails to inform the buyer as to a latent defect (defects that normally cannot be found) which is known to him but cannot be found by ordinary inspection, his silence amounts to fraud.

While entering into the contract, if a trustee is not able to expose all of the truths to the receivers or beneficiaries as to the property of which he is a trustee, then his silence as to any material facts regards as fraud. 

Mistake

The mistake is another factor that hampers free consent. To make a valid contract, the parties must agree upon the same thing in the same sense. 

Where the contract is entered into under mistake, consent cannot be said to be free and agreement so created may not amount to a contract. However, contract by mistake may be either void or voidable or valid.

Simply mistake is a wrong opinion about something. An erroneous/incorrect belief concerning a particular thing is known as a mistake. When an offer is accepted in another sense that the offer was made, it is said to be assented by mistake. A contract created in this way is called a contract by mistake.

Section 20 of the Indian Contract Act has recognized mistake as a vitiating factor of free consent. But Nepalese law has not clearly defined the term mistake. 

However, by reading the provision of misrepresentation, the mistake is the part of misrepresentation, and hence a contract made by mistake can be said to be contracted by misrepresentation.

In the law of contract, the doctrine of mistake is a serious matter. Sometimes even in the same subject matter and circumstances, a contract is declared void on the ground of mistake, and sometimes, it is done so maybe recognized as a valid one.

However, such type of contract is void if there exists a fundamental error. The fundamental error is the result of erroneous belief or misunderstanding about the subject matter of the contract.

For example; B makes an offer to A, intent to buy his black car. A accepts B’s offer with intent to sell a red car. Here, the intention of B and A are different and both are mistaken on the color of the car. This error is a fundamental error and the agreement is void. So, mistake affects meeting of mind of contracting parties.

Types of Mistake

There are two types of mistake;

1. Mistake of Law
2. Mistake of Fact

Mistake of Law

The mistake regarding legal provision is called a mistake of law. A contract by mistake of law is void. The mistake of law may be divided into the following types;

Mistake as to the law of a country

When a party commits the mistake of the law of his own country, he gets no freedom from the contractual obligation under the contract. Everyone is supposed to know the law of his country and thus a contract by committing the mistake of the law of the country cannot be executed. 

This rule is known as ignorance of the law is no excused. A mistake of law or ignorance of the law is, therefore not excusable, and this principle is equally applicable in the realm/kingdom of contract.

Mistake as to foreign law

All the laws of foreign countries are known as foreign law and it is not compulsory that everyone has to know foreign laws. The mistake of foreign law is equivalent to the mistake of fact or it is excusable to that extent as the mistake of fact.

Therefore, a contract entered into by making a mistake of foreign law can be avoided, that is, such a mistake makes the contract void. If both the party's mistake as to the foreign law the contract is regarded as void and a mistake is a unilateral contract, it may remain valid as a unilateral mistake of fact.

Mistake of Fact

The type of mistake which is concerned with the matter and the core issue of the contract is called a mistake of fact. Due to such a mistake or any contract based on such nature of mistake becomes void. 

The contract formed on the basis of mistake as to fact, such a contract may be valid or void that depends on circumstances or degree of mistake. The mistake of fact can be further classified into two types as a bilateral and unilateral mistake.

Bilateral mistake

When both parties of the contract commit the same mistake as to the subject matter of the contract is known as a bilateral mistake and it is also termed as an identical or common mistake. And when both parties commit different mistake it is called a non-identical mistake. 

Thus, when both parties to a contract are mistaken as regards a fact essential to the contract, it is called a bilateral mistake and the contract in such a case is void and there is no contract at all.

Nepalese law has not clearly made any provision in respect of contract by bilateral mistake. 

According to Section 20 of Indian Contract Act, “where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, there is a bilateral mistake and the agreement is void”. So, the required conditions for a bilateral mistake are;

• All the parties must be under a mistake,
• The mistake should be related to some facts,

For example, A agreed to purchase B’s car lying on B’s garage. Unknown to either party, the car and garage were destroyed by fire a day earlier. The agreement is void.

In general, bilateral mistake includes the following sorts of mistakes;

Mistake as to the subject matter

If both the parties to an agreement are working under a mistake relating to the subject matter of the contract i.e., they assume that a certain state of things exists which in fact does not exist, the agreement is void. Mistake as to subject matter also includes the following cases;

Mistake as to the existence of the subject matter, identity of the subject matter, the quantity of the subject matter, the quality of the subject matter, the price of the subject matter, and to the title of the subject matter.

Mistake as to the possibility of performance

A contract is treated as void if the parties to a contract believe, at the time of contract, the contract is being capable of performing but in fact, it is not so. The impossibility may be; Physical as well as Legal

Unilateral mistake

If a mistake is committed by anyone party to the contract, it is said to be a unilateral mistake. Thus, if one of the parties to the contract is mistaken about the subject matter of the contract or understanding the terms and conditions or the legal effect of the agreement, the mistake is known as a unilateral mistake. This type of mistake may not affect the validity of the contract.

It means a unilateral mistake does not make a contract void. As stated in Section 22 of the Indian Contract Act, a contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to the matter of fact.

Therefore, the unilateral mistake is not taken as the ground to avoid the contract. For example, A, by mistake of price, sells goods to B for Rs. 4000, which is if actual worth Rs. 5000. In this case, the contract is not subject to avoid by A. 

The unilateral mistake may have occurred in the case of mistake due to the carelessness of the party.

However, a unilateral mistake does not render a right to a party to avoid the contract does not apply in all cases. There are certain cases or exceptions in which avoidance is also possible. If it can be said that the mistake was caused by fraud or misrepresentation etc. then the contract may become voidable.

Consequences of Mistake

According to Nepalese law, a contract by mistake is also voidable at the option of the aggrieved party. For making such a contract void, the party must go to the court within a time stipulated by law. 

The aggrieved party can also continue such a contract if he desires to do so. As per the law, any benefit obtained must also be returned to the party from whom it was obtained. Thus, the following are the consequences of a contract made by mistake;

• If the mistake is bilateral as to a fact essential to the contract, then the agreement is void.
• If it is a unilateral mistake as to the identity of the person contracted with, for instance, C intends to contract only with A but enters into a contract with B, thinking him to be A, then the agreement is void.
• If it is a mistake as to the other matter like the mistake of the law of the country then the agreement is not void.
• If the aggrieved party has received any benefit or advantages from the other party, he is bound to restore it to him. A person to whom cash is been paid, or anything transported to him by mistake, then he has to repay or he is bound to repay or return it.
• For example, if A and B jointly owe Rs. 5000 to C. A alone pays the amount to C and B without knowledge of this fact pays the same again to C. In such case C has a duty to repay the received amount to B.
• The contract gets valid if the aggrieved party does not go to the court within the time limit and the burden of proof rests upon the party claiming the contract by mistake.

 For the Part-I of the note, please click HERE 

Difference Series from Free Consent

1. What are the differences between Coercion and Duress?

The term duress is similar to the term coercion. However, duress involves actual or threatened violence over the person or another with the intention of obtaining the consent of the party to the contract. Hence, these terms are similar in very rare respects but not in all respects. So, the differences between these terms are shown as below:

Basis	Coercion	Duress
Scope	It is wider than duress.	It is limited than coercion
Detaining of goods	Threat may be directed against any person or property of a man.	Threat under this is directed against the life or liberty of a man and not against his property.
Stranger	This may proceed from or may be directed against any third person related to party.	No other people except a contracting party, his wife or child can be the subject of it and this cannot proceed from any other person except the party to the contract or his agent.
Bodily violence	This may not cause bodily violence or imprisonment.	This must be such as to cause bodily violence or imprisonment with an intention to obtaining consent from the other party to the contract.

 

2. What are the differences between Coercion and Undue Influence?

Generally, both the contract caused by either coercion or undue influence is voidable. In both of the cases, the consent of one of the parties is not free, his freedom of will is impaired and he is under the influence of another. So, in some respect both are similar. However, coercion is different than undue influences in the following grounds;

Basis	Coercion	Undue influence
Position of Party	The domination position of a party over the will of another is not required.	The domination position of a party over the will of another is required.
Nature of Pressure	It is mainly of physical nature. It involves mostly the use of physical or violent pressures.	It is of moral pressure. It involves the use of moral or mental pressure. Hence it is known as a type of moral coercion.
Relation	The parties may or may not be related to each other.	The parties must have a relation with each other.
Third party	Any third party can do coercive acts for others.	No third party but the stronger or dominating position-holder must exercise his influence on the dominant party.
Place	An act of coercion may be committed inside or outside the country.	It must be excused inside the country.
Act	In includes a criminal act.	No, a criminal act is involved.
Consent	In this consent is obtained by the threat of an offense.	In this consent is obtained by dominating the will of the giver.
Burden of proof	The aggrieved party has to prove the consent was not freely obtained.	The aggrieved party has to prove his inferior position only. And except in some cases, when he proves the position, it lies on the stronger party to prove that the influence was not used to obtain consent.

 

3. What are the differences between fraud and misrepresentation?

The contracts formed by the means of fraud and misrepresentation are voidable at the interest of the party whose consent was so caused. However, fraud is different than consent in following grounds:

Basis	Fraud	Misrepresentation
Intention	This induces an intention to deceive the other party. It is willful or deliberate.	This includes no intention to deceive the other party. It is an innocent one, that is, there may not be deceit or intention to gain an advantage.
Belief	Under this, the person making the false statement does not believe it to be true.	Under this, the person making the false statement believes it to be true.
Damages	In this the aggrieved party can claim damages for any loss caused to him and avoid contact.	In this, the aggrieved party cannot claim damages but can avoid the contract.
Means of discovering truth	In this case, the contract is voidable even though the party aggrieved had the means of discovering truth or could have done so with ordinary diligence.	In this case, the aggrieved party cannot avoid the contract if he had the means of discovering the truth with ordinary diligence.

 

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