In India, The Indian Contracts Act of 1872 (“the Act”) governs the essential elements of a contract, and dictates that parties entering into a contract should do so with free consent (aka free will). Parties entering into a contract are said to consent when they agree upon the same thing in the same sense.
Section 14 of the Act defines “free consent” as consent free from coercion, undue influence, fraud, misrepresentation, and mistake. This article explains the meaning of the following terms that, if found, will vitiate consent in a contract.
A party cannot persuade another party to enter into a contract through the use of threat or force. Section 15 of the Act defines “Coercion” as “committing, or threatening to commit, any act forbidden by Section 45 of The Indian Penal Code 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.”
It is important to note that any threatening action or act of threatening can vitiate the contract, not just those actions forbidden by the Indian Penal Code. The party alleged to have committed coercion bears the onus of proving such act was not committed.
- Undue Influence
When a party uses its position of dominance to obtain an unfair advantage over the other party and enter into a contract, the contract is vitiated by undue influence.
Section 16 of the Act defines “undue influence” where , “relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.”
The section further stipulates that the party accused of using its undue influence to enter into a contract bears the onus of proving otherwise.
When a party maliciously intends to defraud another party to enter into a contract, the contract is considered vitiated by fraud.
Section 17 of the Act defines “Fraud” as including 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 of his agent, or to induce him to enter into the contract:— (1) the suggestion, as a fact, 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 as the law specially declares to be fraudulent.”
Suggesting untrue facts, concealing facts, and making promises without fulfilling them are all considered fraud. The party alleged to have committed fraud bears the onus of proving no such fraud nor malicious intent existed at the time of making the contract.
Litigation arising out of contracts cannot be foreseen, but dispute resolution should be to be kept in mind during drafting a contract. Essential elements to ascertain that parties are entering into a contract are without coercion, fraud or undue influence and are through free will should be incorporated in the contract, so as to aid dispute resolution. Apart from the rudimentary clause(s) of date, time and place of entering the contract, including the clear intention and objectives of the parties helps in establishing that consent was through free will. Even though coercion, undue influence and fraud have to be proved through circumstantial evidence, a clause on the clarity of intent and circumstance of entering into the contract certainly helps in establishing free consent. An efficiently drafted contract should ensure that it provides a roadmap for enforcement, which effectively helps in the establishment free consent. Essentially, all words of the contract should have a meaning and they should all be framed to show that the parties are entering at their own free will. Any inadvertent inconsistency might make the contract redundant if they fail to establish free consent.
A party cannot enter into a contract with another party on the basis of false or misleading facts and promises. Section 18 of the Act defines “Misrepresentation” as including “(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 to 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.”
The difference between misrepresentation and fraud is the lack of malicious intent to induce a party into entering a contract.
Herein it becomes essential that during the drafting of a contract, it should become clear from the language of the contract that either parties have understood the intention of the contract, and are entering into the contract based on clear terms and conditions as laid out. This specifically applies to addendums or amendments incorporated into contracts, wherein it is usually seen that contentions of misrepresentation are usually raised. It is usually contended that addendums or amendments are based on misrepresentations and thus the contract is void of free consent. It should be clearly established in the contract that the interaction between the parties was crystal clear and based on such interaction the parties entered into the contract, thus aiding the counsel in negating contentions of misrepresentation. Lastly, what best safeguards against any ambiguity and aids in establishing free consent is also eliminating ambiguities through definitions that can be both specific and detailed.
In sum, if coercion, undue influence, fraud, or misrepresentation is used to induce another party to enter into a contract, the victim party could seek a decree of rectification or cancellation of the contract from the court, rendering the contract or agreement voidable. When drafting a contract, it is essential the contract drafter ensures the agreement is based on free will and consent, and should take precaution to customize the clauses of the contract in such way that it does not prejudice the contract.