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What is a contract?

A contract is an agreement between parties reduced in writing giving effect to the purpose of the parties. Section 2(h) of the Indian Contract Act, 1872, as follows ‘’ An agreement enforceable by law is a contract’’. Two essentials for a contract- (1) an agreement, and (2) the agreement should comply with the law.

According to Anson,the law of contract is that branch of law which determine the circumstances in which a promise shall be legally binding on the person making it”.

Types of Contract

  1. Express and Implied Contract: Express contracts are contracts which have terms and conditions stated explicitly. These agreements have the intention of the parties mentioned in a detailed and comprehensive manner. The possibility of the subject matter of the contract getting interpreted according to the parties’ whim or imagination is minimum. 

As compared to this Implied contract is a contract which depends more on contexts, circumstances, behaviour for the interpretation of the mutual intent of the parties. There is more room for interpreting according to the customary practices which are prevalent in that particular field to which the contract is concerned. For example, when you Board a bus, it is implied that you will have to purchase a ticket from the conductor. This is what has been done since the bus services were established.

  1. Unilateral and Bilateral Contract: Unilateral contracts are contracts which can only be accepted by performance. For example, A reward to the person who finds the owner’s dog. This is a unilateral offer and can only be accepted when the dog is found by someone i.e by performance of the contract.
  2. Bilateral Contract: This is the most common type of contract where both parties agree to do or not to do something. Maybe exchanging items or services of value.
  3. Unconscionable contract: These contracts are considered unjust by being skewed in favour of one party. For example, A limit on the damages a party may receive a breach of contract.
  4. Adhesion Contracts: This contract is usually drafted by a party which has more bargaining power than the other party. The other party is weak and not in a position to bargain which can be explained by this statement:’’ Take it or Leave it’’. There is not much scope for negotiation here since the other party is precariously placed.
  5. Aleatory Contracts: Contracts belonging to this category depend on an external event to come into force. Insurance contracts are examples of this since they depend on some outside event which is of an unpredictable nature. An example would be a fire to break out for an insurer to claim fire insurance. In such contracts, both sides assume risks: the insured that they are paying for a service they will never receive, and the insurer that they must pay out potentially more than they receive from the insured.
  6. Fixed Price Contracts: Buyers and Sellers agree on a fixed price to be paid for the project. Also, known as lump sum contracts.

Basics of Contract law

The basic constituents of contract law are the following:

  1. Offer: A proposal and its acceptance is the universally acknowledged process for the making of an agreement. This is the starting point.  Section 2(a) defines ‘’proposal’. It is the manifestation of the offeror’s mind with respect to the agreement. It can be both positive and negative i.e to do or not to do something. This particular manifestation is towards a specific party with a view to obtaining the assent of the specific party, to the particular act or not to do an act(abstinence).
  2. Acceptance: Section 2(b): Assent should be signified or expressed by an act or omission by which the party accepting intends to communicate his assent or which has the effect of communicating it.
  3. Consideration is one of the essential constituents of the contract and is the fundamental reason for the party entering into the contract. A consideration is something of value but is not restricted only to money. Consideration is exchanged between the parties. In the words of Pollock, ‘’Consideration is the price for which the promise of the other party is bought, and the promise thus given for value is enforceable’’.
  4. Capacity to contract: Section 10 of the Contract Act states that the parties must be competent to contract. The requirement for the party to enter into contract is mentioned in Section 11. According to Section 11 following persons are not competent to contract- Minors, persons of unsound mind and persons are ineligible under the law to form a contract.
  5. Consent should be free: Consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation and Mistake subject to the provision. 

           The aforementioned are vitiating factors which vitiate the agreement.

  • Legality of Object:( Section 23)An agreement the object of which is illegal and contrary to the law of the land is void This Section covers the illegality of both the object of the contract and the consideration for it.

Example: A, B and C enter into an agreement to kill D. They agree to do this on consideration that E will pay them on completion of the job  The agreement is void, as its object is unlawful.

To illustrate: A agrees to sell his car to B for a certain sum of money. Here, the consideration for A will be the money which he will receive from B, whereas for B it will be the car that will be sold to him. This also substantiates our point where A has abstained from selling his car to anybody but B. The consideration is exchanged between A and B. The assent or manifestation of B’s intention would be the price which he is willing to pay. Here the object of the contract which is the purchase of a car is lawful.

  • Intention: In India, unlike in England there is no requirement that parties entering into the agreement should intend to create legal obligations. In England, the parties should be prepared to face legal action for breach of contract.

Offer and Invitation to treat

An offer is different from an Invitation to receive offers. An offer is the final expression of willingness by the offeror to be bound by his offer, should the other party choose to accept it. The offeror should manifest readiness to enter into an agreement to such a degree that the only thing to be waited for is the assent of the other party. Where a party without such manifestation, proposes certain terms on which he is willing to negotiate, he does not make an offer, but only invites the other party to make an offer on those terms. This is perhaps the basic and vital difference between ‘’offer’’ and ‘’Invitation’’ to receive offers.

In Harvey v Facey Privy council has explained the distinction: The plaintiffs were interested in buying Bumper ball pen. They asked the defendants to telegram the lowest cash price and also if they would sell the thing. The defendant answered the first question stating the lowest price but nothing about the willingness to sell. The plaintiffs contended that by quoting their minimum price in response to the enquiry the defendants had made an offer to sell at that price. 

This argument was not accepted by the House of Lords. It was stated that the plaintiffs had asked two questions and the defendants had answered the second question only. The first question relating to the willingness to sell was never answered by the defendants. The last telegram of the plaintiffs was an offer to buy, but it was never accepted by the defendants.’

Catalogues and Display of goods

A shopkeeper’s catalogue of prices is not an offer; it is only an invitation to the intending customers to offer; it is only an invitation to the intending customers to offer to buy at the indicated prices.

Announcement to hold auction

An auctioneer’s declaration that particular goods will be up for auction on a fixed day is not an offer to hold the auction and he will not be liable to persons travelling to the place if he changes his mind and does not hold the auction. Even when an auction is held, the bid is not an acceptance so as to qualify the highest buyer as the owner of the good auctioned. The highest bid is nothing more than an offer to buy and it requires to be accepted by the auctioneer.

2.  Free Consent

Consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation and Mistake.

Consent is an essential element of a valid contract. In its absence, the contract becomes void or voidable depending on the circumstance. Consent means providing the party with an opportunity to exercise his/her volition with respect to the contract. For a valid acceptance to the proposal, the assent must be voluntary and genuine. As discussed earlier assent is required to form a valid agreement. Assent here refers to the opportunity to exercise one’s volition. Where consent to an agreement is not free i.e. has any of these factors- coercion, undue influence, fraud or misrepresentation, the agreement is a contract voidable if the other party so chooses whose consent was obtained on the basis of vitiating factors. If, for example, a person is induced to sign an agreement by fraud, he may, on discovering the truth, either uphold the contract or reject it.

Where consent is caused by mistake, the agreement is void. A void agreement cannot be affected by the party [Section 2(g)]  An agreement which is void doesn’t give rise to legal consequences and is void ab initio  These agreements are not enforced by the court or we can call this agreement as ‘’ An agreement not enforceable by law’.

Difference between Consent and Free Consent

Section 13 defines consent

An agreement where both parties share common intention relating to the terms of the contract is known as true consent or consensus ad idem and is at the root of every contract.

Free consent is defined under the act as consent which is not caused by coercion, undue influence, fraud, misrepresentation and mistake.

 Every free consent is consent but every consent is not a free consent.

Void Agreement and Void Contract

Void agreement is an agreement not enforceable by law. A contract which is not recognised by law. There can be no action instituted in a court of law to claim rights against parties.

Void agreement is void right from the day the agreement is constructed while a void contract becomes void at a later stage. In a void contract, the voidness creeps because of some incident or change in circumstance which is not through the fault of the parties.

Void agreements have been specifically stated in chapter 2 of the act under Sections 11,20, 23 to 30 and 56. No such specific mention has been made for a void contract under any chapter of the Act.

Coercion

It is defined under Section 15. Coercion is using force or creating circumstances wherein the other parties’ consent is not free. It might be through taking some property, doing something which is an offence under IPC, the purpose of these things should be to get the other parties’ consent. 

Techniques of causing coercion

Consent is said to be caused by coercion when it is obtained by some act which compels the other party 

  1. Threatening or doing something which is a crime under IPC; or
  2. Seizing or confining someone

An illustration under the First category would be Consent given at the point of a knife, or by threatening to injure someone, or by intimidation or by threatening to destroy a man’s property. 

An example of the second type will be a case where the plaintiff had pledged his plate with the defendant for $20. When he went to redeem it the pledge insisted that an additional $10 interest was also owed. The plaintiff paid this to redeem his plate and then sued to recover it back. The court allowed it and the defendant had taken advantage of the situation and extracted an amount which was not lawful.

Undue Influence

This is defined under Section 16.  It is using one’s position to influence the decision of the other person to his prejudice. There is a subtle difference between fraud and undue influence. The party is able to persuade because of the relation they share or he enjoys a certain degree of confidence of the other person

What amounts to apply undue influence on someone?

Sometimes the parties to an agreement are so related to each other that one of them is able to apply undue influence to the expression of choice, willingness and consent of the other. 

The person who is in commanding position may use his position and the trust that the other person repose on him to his advantage. By ‘’advantage’’ we mean to cause the other person to express his assent to the proposal. 

It is the nature of the relationship that is a Sine qua non in these type of cases, which enables one party to be at a superior position.

For Example A spiritual adviser( guru), for example, in a case induced the plaintiff, his devotee, to gift to him the whole of his property to secure benefits to his soul in the next world. Such consent is said to be obtained by undue influence. The test is to examine this from a prudent man’s point of view. Whether in the absence of the nature of the relationship a prudent man would have done the same?

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Subtle species of fraud

The court describes this in Mahboob Khan v Hakim Abdul Rahim.   Undue influence is a kind of fraud wherein the parties’ mind is hacked in a pernicious way. It can be through various means such as coercion, fear or other methods which is directed to impair the reasoning of the person. The result is the person thinks he is using his volition but in reality, his free will is affected by other parties’ scheme,

Undue Influence and Coercion

Coercion( duress) in the execution of a contract or deed involves some kind of physical or bodily threat. The threat is not restricted to the party but to any person, the party is interested in.

When compared to Undue influence, the difference is that undue influence may exist without violence or threats of violence against the victim. Undue influence exists because of the relationship the parties share. It is usually without violence or threats against the victim. The confidence which the other party reposes in the other is used to one’s advantage.

A person is said to be in a position to dominate the will of another in the following cases-

  1. Where he holds a position of dominance or authority or some kind of trust is reposed in him
  2. Where the victim doesn’t have the mental capacity to understand the consequences of his actions.

Fiduciary Relation

Trust and confidence are essential elements of Fiduciary relation. Confidence is involved in many of our interactions in everyday life. This category is, therefore, a very wide one. It includes the relationship of solicitor and client, spiritual adviser and his devotee, doctor and patient, woman and her confidential managing agent, parent or guardian and child, and creditor and debtor.

Presumption of Undue Influence

In certain cases, the presumption of undue influence is raised. The effect of presumption is once it is prima facie established that the defendant has overpowered the will of the other, it will be assumed he has used his position to influence the outcome. The defendant has to establish the contrary.

The presumption is raised at least in the following cases:

  • Unconscionable bargains, inequality of bargaining power or economic duress

Unconscionableness: Where one of the parties to a contract is in a position to use undue influence on the other and the contract is apparently skewed in one parties’ favour, the law presumes that consent must have been obtained by undue influence. The burden is shifted to the stronger party to prove that he did nothing to dominate the will of the other.

This case illustrates the above point wherein An old and illiterate woman, incapable of any business, conferred on her confidential managing agent, without any valuable consideration, an important pecuniary benefit under the guise of trust. The onus is on the grantee to show conclusively that the transaction is honest, bona fide, well-understood, the subject of independent advice and free from undue influence’’.

Position of dominance necessary for presumption to arise

For this presumption to be successful, one of the parties’ have to be in a superior position or in a dominating position. Where the parties are on equal footing the mere unconscionableness of the bargain does not create a presumption of undue influence. The mere fact that the bargain is a hard one is no guard in itself for granting relief.

In Raghunath Prasad Sahu v Sarju Prasad Sahu The defendant and his father were equal owners of a vast joint family property over which they had quarrelled. Consequently, the father had instituted criminal proceedings against the son. The defendant, in order to defend himself, mortgaged his properties to the plaintiff and borrowed from him about ten thousand on 24% compound interest. In eleven years this rate of interest had magnified the sum covered by the mortgage more than elevenfold, viz., Rs1,12,885. 

The defendant had contended that the lender had, by exacting a high rate of interest, taken unconscionable advantage of his mental distress and, therefore, there should be a presumption of undue influence.

Their lordships, however, held that there should be no such presumption in the circumstances of the case. 

Sub-Section (3) of Section 16, deals with three matters. There is a particular order which should be followed while determining whether a party has dominated the will of the other.

In the first place, the relation is of a kind where the party can overpower the volition of the other.

Then comes the second stage where it will be examined whether the contract has been induced by undue influence.  

This leads to the third stage, where onus probandi emerges. The burden of proving that plaintiff consent is not vitiated by any of the factors shifts on defendant.

This order should be maintained lest error is avoided Unconscionableness of the bargain cannot be the first thing to be considered. We have to start from the relation that the parties share with respect to each other.

  1. Contracts with Paradansahin woman

A contract with Paradanashin woman is presumed to have been induced by undue influence. She can avoid the contract unless the other party can show that it was her ‘’intelligent and voluntary act’’. 

According to Bombay High Court, a woman does not become paradansahin simply because ‘’she lives in some degree of seclusion’’. The concept probably means a woman who is totally ‘’secluded from ordinary social intercourse’’.

Once it is shown that a contract is made with a pardanashin woman, the law presumes undue influence. In Moonshe Buzloor Raheem v Shumsoonisa Begum, A window remarried. Subsequently, she endorsed and delivered to her new husband certain valuable Government papers. In an action to recover them back from him, she proved that she lived in seclusion and that she had given over the papers to him for collection of interest. He contended that he had given her full consideration for the notes. It was held that the mere fact of endorsement and the allegation of consideration were not sufficient to lift the presumption of undue influence. He should prove that the transaction was bona fide sale and that he gave full consideration for the paper which he received from his wife.

Misrepresentation

A contract the consent to which is caused by misrepresentation is voidable at the option of the deceived party.  Misrepresentation means the action of giving a false or misleading account of the nature of something. This inaccurate information might make the difference with respect to a party deciding to enter into an agreement or not entering the agreement. Misrepresentation means misstatement of a fact material to the contract. Section 18 defines

This Section includes the following types of misrepresentation:

  • Unwarranted statements: When someone declares a statement which is relevant to the contract and that statement doesn’t have information which justifies those facts even though he believes to be true is misrepresentation.

In a Bombay case, for example, The defendant chartered a ship from the plaintiffs, who stated that the ship was certainly not more than 2800 tonnage register. As a matter of fact, the ship had never been in Bombay and was wholly unknown to the plaintiffs. She turned out to be of the registered tonnage of more than 3000 tonnes.

It was held that the defendants were entitled to avoid the charter party. ’’The reason was that defendants asserted regarding the size of the ship-an assertion not supported/justified by any information the plaintiff had at the time, and which was not true’’

A statement is said to be warranted by the information of the person making it when he receives the information from a reliable source. It should not be mere hearsay.

Where a representation acquires the status of being a term of the contract, and it turns out to be false, the disadvantaged party may, not only avoid the contract but also sue for damages for breach.

Where the seller of a car stated that the car had done only 20,000 miles, the representation being untrue, the buyer was allowed to recover compensation for the misrepresentation.

  • Breach of Duty

Any breach of duty which is beneficial to the person committing it by confusing the party to his harm is a misrepresentation. This clause covers all cases which are called as cases of ‘constructive fraud’, in which there is no intention to deceive, but where the circumstances are such as to make the party who derives a benefit from the transaction equally answerable in effect as if he had been actuated by motives of fraud or deceit’’.

  • Inducing mistake about subject-matter

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 is also misrepresentation(Section 18 (3)). The subject-matter is the core of the agreement. This has to be of the quality or value which the parties expected at the time of constructing the agreement. If one of the parties leads the other, however innocently, to make a mistake as to the nature or quality of the subject-matter, there is a misrepresentation.

Example: The government auctioned certain forest coupes. A part of the land was occupied by tenants. The forest department knew this fact but did not disclose it to the purchaser. The contract was held to be vitiated by misrepresentation. The purchaser was allowed to recover damages for loss. 

Suppression of Vital facts

Misrepresentation may also arise from the suppression of vital facts. Cases of concealment or suppression will fall either under sub-Section (2) when it amounts to a breach of duty or under sub-Section(3) when it leads the other party to make a mistake about the subject-matter of the agreement.

In R. v Kylsant, the prospectus of a company stated that the company had regularly paid dividends, which created the impression that the company was making profits, whereas the truth was that the company had been running into losses for the last several years and dividends could only be paid out of wartime accumulated profits. This was held as a Misrepresentation.

Expression of opinion

A mere expression of opinion cannot be regarded as a misrepresentation of facts even if the opinion turns out to be wrong. In some cases, a statement of opinion may also amount to misrepresentation. 

It is a mistake to assume that a statement of opinion cannot involve a statement of fact. When knowledge of the parties is not on the same footing then a statement of opinion by the person who is more knowledgeable, his statement has a material fact for he tacitly claims information which justifies his opinion.

Of material Facts

A fact is said to be material if it would affect the judgment of a reasonable person in deciding whether to enter into the contract and, if so, on what terms. Misrepresentation of the age of a car, showing it to be five years younger, was held to be material because it affected the price which a willing purchaser would have liked to pay for it.

Inducement 

 The misrepresentation must be the cause of the consent, in the sense that but for the misrepresentation the consent would not have been given. It must have played a substantial role in the plaintiff’s decision to enter or not to enter into the contract.

 The representation must be made with the intention that it shall be acted upon by the other party.

There would be no misrepresentation, even if the advertisement was false if the buyer had inspected the goods before buying them unless he was the victim of some concealed defect which could not be known by external examination.

Means of discovering the truth

A party cannot complain of misrepresentation if ‘’ he had the means of discovering the truth with ordinary diligence’’.

A person who bought a quantity of rice was precluded from alleging misrepresentation about its quality because he lived very near the place where the goods were lying and, therefore, might have discovered the truth with ordinary diligence.

Fraud

According to Merriam-Webster fraud is defined as ‘’An intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right. The distortion of facts intentionally which are directed towards the other party, in order to receive their assent to the proposal. Section 17 defines fraud.

Assertion of Facts without Belief in the truth

In English law ‘’fraud’’ was defined in the well-known decision of the House of Lords in Derry v Peek. The judges had observed in this case that- ‘’Fraud is proved when it is shown that a false representation has been made,-

  1. Knowingly, or
  2. Without belief in its truth, or
  3. Recklessly careless whether it be true or false’’.

In this case: 

A company’s prospectus contained a representation that the company had been authorised by a special Act of Parliament to run trams by steam or mechanical power. The authority to use steam was, in the Board refused consent and consequently, the company was wound up. The plaintiff, having bought some shares, sued the directors for fraud. They were held not liable because they honestly believed that once the Parliament had authorised the use of steam, the consent of the Board was something that was bound to happen. It follows, therefore, that the person making a false representation is not guilty of fraud if he honestly believes in its truth. Thus, intentional misrepresentation is of the essence of fraud.

Active concealment

‘’Active concealment’’ is different from ‘’passive concealment’’. Passive concealment means mere silence as to material facts. Active concealment of a material fact is a fraud; mere silence, except the few cases noted below, does not amount to fraud. Active concealment involves some kind of action, behaviour or scheme to trick the other party into giving his consent to the proposal. The intention is to commit fraud. For example, a husband persuaded his illiterate wife to sign certain documents telling her that by them he was going to mortgage her two lands to secure his indebtedness and in fact mortgaged four lands belonging to her. This was an act done with the intention of deceiving her. 

Mere Silence is no fraud

False impression is ordinarily conveyed by deliberate misstatement of facts. Misstatement of facts is just one of the ways by which fraud can be caused. A false impression may be caused by trick or device or ambiguous language, active concealment of material facts or other methods. Ordinarily, mere silence is no fraud, even if its result is to conceal ‘’facts likely to affect the willingness of a person to enter into contract’’. 

A contracting party is under no obligation to disclose the whole truth to the other party or to give him the whole information in his possession affecting the subject-matter of the contract. It is under this principle that a trader may keep silent about a change in prices.  A seller who puts forth an unsound horse for sale, but says nothing about its quality, commits no fraud. 

When silence is fraud

  1. Duty to speak (contracts uberrima fides):  Duty to speak arises where one contracting party reposes trust and confidence in the other. A father, for example, selling a horse to his son must tell him if the horse is unsound, as the son is likely to rely upon his father.

Duty to disclose the truth will arise in all cases where one party reposes, and the other accepts confidence. 

This duty to speak is also expected from the party when the other party has no means to discover the truth and has to depend on other parties’ judgment or assessment

A perfect example of this would be a contract of insurance wherein an insurance company knows nothing about life or situation of the assured. It is, therefore, the duty of the assured to put the insurer in possession of all the material facts affecting the risk covered. 

A contract of insurance is, for this reason, called a contract of absolute good faith, uberrima fides.

This case where the plaintiff spent a sum of money to mark the engagement of his son. He then discovered that the girl suffered from epileptic fits and so broke off the engagement. He sued the other party to recover from them compensation for the loss which he had suffered on account of their deliberate suppression of a vital fact which amounted to fraud. 

The court concluded that a mere passive non-disclosure of the truth, however misleading in fact, does not amount to fraud, unless there is a duty to speak. It was observed that the law imposes no general duty on anyone to broadcast the blemishes of his female relations; not even to those who are contemplating matrimony with them. 

There was no fiduciary connection between the parties. The engagement was, however, held to be voidable by reason of the misrepresentation, but the plaintiff was not entitled to recover any compensation under Section 75 of the Contract Act.

  1. Where silence is deceptive:  Silence is sometimes itself equivalent to speech. A person who keeps silent, knowing that his silence is going to be deceptive, is no less guilty of fraud. Where, for example, the buyer knows more about the value of the property, which is the subject of sale, but prefers to keep the information from the seller, the latter may void the sale.
  2. Change of circumstances: Sometimes a change in circumstances might take place in the intervening period, between the representation of facts and when the contract is entered into. When this happens it is the duty of the person who made the representation to communicate the change of circumstances. 

A medical practitioner represented to the plaintiff that ‘his practice was worth $2000 a year’. The representation was true. Five months later when the plaintiff actually bought the practice, it had considerably gone down on account of the defendant’s serious illness. It was held that the change of circumstances ought to have been communicated.

  1. Half-truths : Even when a person is under no duty to disclose a fact, he may become guilty of fraud by non-disclosure if he voluntarily discloses something and then stops halfway. A person may be silent, but if he speaks, a duty arises to disclose the whole truth. ‘’ Everybody knows that sometimes half a truth is no better than a downright falsehood’’

Difference between Fraud and misrepresentation

  1. Fraud is intentional wrong, whereas misrepresentation may be quiet innocent. 
  2. Fraud in addition to making the contract voidable is a cause of action in tort for damages. Misrepresentation is not a tort but under Section 75 of the Contract Act. ‘’ A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through non-fulfilment of the contract’’.
  3. A person complaining of misrepresentation can be countered with that he had the opportunity of discovering the truth with ordinary effort’, but excepting, fraud by silence, it does not lie in the mouth of the person committing fraud to say that his victim was too easily deceived or had the means of discovering the truth.

Mistake

Mistake may operate upon a contract in two ways. It may defeat the consent altogether that the parties are supposed to have given, that is to say, the consent is unreal. Two or more persons are said to consent when they agree upon the same thing in the same sense.

Definition of ‘’Mistake’’

Mistake happens when one of the parties have some misconceptions about the facts stated in the contract. Section 20 defines

Illustration:. Two persons contract that one of them will buy their house but none of them is aware that the house was burnt when they were negotiating the contract. The agreement is void.

Section 20 will come into play:

  1. When both the parties to an agreement are mistaken,
  2. Their mistake is as a matter of fact, and
  3. The fact about which they are mistaken is essential to the agreement.

Contract caused by mistake of one party as to matter of fact-  A contract will not become voidable when one of the parties’ is under a mistake relating to some fact involved.

Certain facts are essential to every agreement. They are:

  1. The identity of the parties;
  2. The identity and nature of the subject-matter of the contract;
  3. Nature and content of the promise itself.

Mistake as to identity

Mistake as to identity occurs where one of the parties represents himself to be some person other than he really is. 

We can state the particular case here, Jaggan Nath v Secy of State for India: A person, called S, a brother of the plaintiff represented himself as plaintiff, and thereby induced a Government agent to contract with him.

The court found that the Government’s agent was deceived by the conduct of the plaintiff and his brother as to the person with whom he was dealing, held that there was no valid contract. The defendant’s agent intended to contract only with S’s brother and not with S and S knew this. Real consent was prevented. It means that an offer which is meant for one person cannot be accepted by another.

Mistake of Identity caused by fraud

The following case where the plaintiffs received orders in writing from a fraudulent man, called Blenkarn. The order papers had a printed heading: ‘Blenkarn & Co, 37 Wood street’. There was a well-known and respectable firm, named ‘Blenkiron & Co in the same street. The plaintiff’s believing that the orders had come from this firm, sent a large number of handkerchiefs. Blenkarn received the goods and disposed them off to the defendants, who acted in good faith. The plaintiffs sued the defendants. It was held that there was no contract between the plaintiffs and Blenkarn and, therefore, he had no right to sell the goods. The plaintiffs intended to contract with Blenkiron & Co and consequently, no contract could have arisen between them and Blenkarn. Hence, the defendants, being in possession without a good title over such goods, were held liable for conversion.

Distinction between identity and attributes

A mistake about the attribute has been held not to avoid the agreement. There can be a mistake of identity only when a person bearing a particular identity exists within the knowledge of the plaintiff, and the plaintiff intends to deal with him only. If the name assumed by the fraudster is fictitious, there will be no mistake of identity.

A man named Wallis adopted the name of ‘Hallam & Co’, a non-existent firm, and by letters placed the order for some goods with the plaintiffs who complied with the order by sending the goods. Wallis sold the goods to the defendants, who acted in good faith. The plaintiffs sued the defendants for the value of the goods. The plaintiffs intended to enter into a contract with the writer of letters. If it could have been shown that there was a separate entity called Hallam & Co and another entity called Wallis then case might have come within the decision in the previous case discussed above. He had not fraudulently taken on another identity when selling the goods to Edridge. Although the contract was voidable, the possessory title was held to pass from a fraudster to an innocent person, therefore, only voidable for fraud and it could not be disaffirmed after the defendants had acquired the property in good faith.

In Ingram v Little where three ladies, the joint owners of a car, advertised it for sale. A person who wanted to buy the car offered to pay by cheque. The ladies objected to this as the payment had to be in cash. The buyer in order to convince them impersonated Hutchinson, a leading businessman, and quoted an address and a telephone number. After verification, the ladies accepted the cheque. He resold the car to the defendant and absconded. The cheque proved worthless and the plaintiffs sued the defendant for the car or its value.

The defendant was held liable because the plaintiffs intended to enter into a contract with real Hutchinson and not the impersonator. There was no offer made to him, therefore there was no contract with him.

An important question arose in the light of the above conflicting judgments as to Why should the title of the innocent buyer be made to depend on the state of a contract between third parties? This discourse was taken by the court of appeal in Lewis v Averay: Lewis, the plaintiff, had a car to sell. A man, described in the judgment as ‘rogue’, came along and introduced himself as Richard Green, a famous film actor. He offered a cheque and the plaintiff asked him to wait until cheque was cleared. The rogue talked the plaintiff into allowing him to take the car before the cheque clearance. He was able to persuade the plaintiff because he produced a special pass of admission to a film studio which showed his photograph and the official stamp when asked for identity proof. The rogue sold the car to an innocent buyer, the defendant.

The court of appeal held that the car was delivered under a contract voidable by reason of the fraud and the contract not having been avoided before the car passed into the hands of an innocent buyer, he acquired a good title. 

When the parties are present face to face, the presumption is that the contract is made with the person actually present, even though there is a fraudulent impersonation by the buyer representing himself as a different man than he is.

Mistake as to the quality of subject-matter as distinguished from substance

A mistake as to the quality of the subject-matter as distinguished from its substance may not render the agreement void. Smith v Hughes is well-known for this distinction between quality and substance.

The defendant wanted to buy old oats for his horses. The plaintiff showed him the sample of the oats he had, but nothing about their age. The defendant kept the sample for twenty- four hours and then placed an order for the oats. After a portion of them was delivered to him, he found that they were new and, therefore, rejected them on the ground that he was mistaken about their quality. 

The court didn’t accept the defendant’s argument. It was observed by the court that the two minds were not ad idem as to the age of oats; they certainly were ad idem as to the sale and purchase of them.

Mistake as to the Nature of Promise

This principle is well established by authorities that when a deed of one character is executed under the mistaken impression that it is of a different character, then it is wholly void and inoperative. Thus, where a gift deed is signed under the impression that it is only a power of attorney, the deed is inoperative.

Documents mistakenly signed or non est factum

The defence of non est factum enables a person who has signed a contract to say that it is not his document because he signed it under some mistake. It was evolved by the courts to relieve illiterate or blind people from the effect of a contract which they could not read and which was not properly explained to them. 

In a particular case, a person was asked to sign the back of the paper, the face of which was not shown to him, and he was told that it was an ordinary guarantee the like of which he had signed 

before and under which no liability came to him, when, in fact, the paper was a bill of exchange and he was sued by a holder in due course as an indorser.

 

The court held that ‘’The defendant never intended to sign that contract or any such contract. He never intended to put his name to any instrument that later became negotiable. He was deceived not merely as to the legal effect, but as to the actual contents of the document.

Limitations

Mistake operates to avoid an agreement subject to the following limitations:

  1. Mistake of both parties:  An agreement is void by reason of mistake under Section 20 when both parties are mistaken as to a matter of fact essential to the agreement. This is further supplemented by the declaration in Section 22   ‘’ A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to matter of fact’’. For example, where the government sold by auction the right of fishery and the plaintiff offered the highest bid under the impression that the right was sold for three years, when in fact it was for one year only, he could not avoid the agreement because it was his unilateral mistake.

It should be pointed out that even in cases where there is a mistake of one party but has the effect of nullifying consent as defined under Section 13, no contract will arise. When there is an absence of real consent i.e agreement upon the same thing in the same sense.  For an agreement to be avoided on the basis of unilateral mistake, it must be shown:

  1. That one party erroneously believed that the document sought to be rectified contained a particular term or provision, or possibly did not contain a particular term or provision which, mistakenly, it did not contain;
  2. That the other party was aware of the omission or the inclusion and that it was due to a mistake on the part of one party;
  3. That the party who was aware of the mistake omitted to draw the mistake to the notice of the other party and
  4. The mistake must be calculated to benefit one party

The facts of the case in Thomas Bates & Son Ltd v Wyndham (Lingerie) Ltd the court came to the conclusion that where a lease deed contained arbitration clause but the new deed which was prepared by the landlord did not contain that provision without the knowledge of the Landlord and though the lessee was aware of the omission he did not draw it to the attention of the landlord, the landlord was entitled to seek rectification of the document for inserting arbitration clause.

  1. Erroneous opinion about the value of subject matter: In a case where a property which was subject to a subsisting lease was sold. The lessee had the right to receive the value of the improvements, but the agreement of sale was silent about this. The buyer wanted to have the agreement set aside on the ground of mistake about this right.  The court held that there was no mistake and that even if there was a mistake it was not as to the matter of fact essential to the agreement for sale.
  2. Mistake of fact and not of law:  It should be a mistake of fact and not of any law in force in India.

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