UNIT II 

1. Capacity to contract 
Introduction  
The rule of law, therefore, which requires the assent of the parties to a contract, assumes 
“that such assenting parties shall be competent to contract; and accordingly, in order to there 
being a valid contract, a capacity to contract is absolutely necessary”. In India, the law
regarding  contracts is majorly the Indian Contract Act of 1872. Therein, capacity is dealt
with in Section 11  of the Act. Section 11 says: 
Who are competent to contract? 
Every person is competent to contract who is of the age of majority according to the law to 
which he is subject, and who is of sound mind and is not disqualified from contracting by
any  law to which he is subject. 
Under Section 11 of the Indian Contract Act, any person is competent to contract are as follows. • A
person who attained the age of majority and is not a minor. 
•A person of sound mind. 
• A person who has not been disqualified by law or declared as insolvent/bankrupt
Persons not eligible for contract 
If a person falls in any of the following categories, he/she will be declared as an incompetent 
party to a contract. 
• Minors 

• Persons of unsound mind 

• Persons disqualified by law

2. MINOR’S AGREEMENT 
Who is a minor? 
A person who has not attained the age of majority is a minor. S.3 of the Indian Majority
Act,  1875 provides about the age of majority. It states that a person is deemed to have
attained the age  of majority when he completes that age of 18 years, except in case of a
person of whose person  or property a guardian has been appointed by the court, in which
case the age of majority is 21  years. 
Nature of a minor’s agreement 
As stated above a minor is not competent to contract. The question that arises in case of
an  agreement by a minor is, whether the agreement is void or voidable? S. 10 mandate that
the  agreement shall be between parties competent to contract. Section 11 indicates that the
 minor is  incapable of entering into contract. But neither section provides as to the effect of
agreement  entered into by a minor. This led to a controversy  
Cases 
1. Mohoribibi v. Dharmadas Ghose 
• Facts: A minor mortgaged his properties in favour of plaintiff, a money lender to secure the 
loan of Rs. 20,000/-, after some money was advanced plaintiff. came to know about infancy 
of the that. He filed a suit to repudiate the contract and recover the money advanced  • Held:
Minor not liable because Minor’s agreement is void ab initio. 
• Reasons:  
i. The question whether a contract is void or voidable presupposes the existence of a  contract
within the meaning of the Act, and cannot arise in the case of an infant (minor).  
ii. General presumption that every man is the best judge of his own interests is suspended in  the
case of minor.  
Position under English Law 
The general rule at common law, the contract made by an infant was voidable at his 
option. The rule was modified by the Infants Relief Act, 1874, which declares the following 
three types of contracts as absolutely void:
1. Contracts for the repayment of money lent or to be lent. 
2. Contracts for the supply of goods.(other than necessaries)  
3. Contracts for accounts stated. 
Effects of Minor’s Agreement 
No estoppel against minor  
When a minor by misrepresenting his age induces another to contract with him no
estoppel is  available against him – there cannot be estoppel against statute – policy of law is
to protect  minor from contractual liability – doctrine of estoppel cannot be applied to defeat
the policy - An  infant is not estopped from setting up the defense of minority. Estoppel
means when person  makes statement and any other person acted on such statement. Then
such statement can not be  denied or contradicted. In case of Mohiri Bibee v. Dharmodas
Ghose when a minor  misrepresented his age while taking loan, but the fact that the person
taking the loan is a minor  was known to the money lender. The Privy Council did not
consider it necessary to decide  whether law of estoppels was applicable to the case, because
the money lender was not misled by  the false statement by the minor and he was aware of
the age of the borrower and that the law of  estoppel does not apply against a minor. 
 No liability for tort based in contract 
An agreement by the minor is void and, therefore, if a minor makes a breach of an 
agreement, he cannot be made liable for the same. On the other hand, when a minor commits
a  tort, he is liable for that in the same way and to the same extent as an adult person.
Sometimes an  act done by minor may be both a breach of contract as well as the commission
of a tort. In the  case of Johnson v. Pye, a minor falsely stated that he was of the age of
majority and obtained a  loan of $300. It was held that the minor cannot be asked to repay the
loan by bringing an action  for deceit against him. Minor’s agreement is devoid of all
consequences in law. A contract  cannot be converted into a tort to sue an infant .Minor is not
liable for tort connected with  contract, but he is not absolved from liability for independent
tort.  
Doctrine of equitable restitution
When an infant obtained property or goods by misrepresenting his age, he can be
compelled  to restore it, but only so long as the same is traceable in his possession. If the
minor has resold  those goods he cannot be made to repay the value of goods and it is not
applicable when the  minor has received money instead of goods. In the case of Leslie v.
Sheill A minor  misrepresenting his age obtained loan from the plaintiff, who sued to recover
on the grounds that  the minor is liable for damages for fraud and the minor shall be
compelled in equity to restore the  money. The money was paid over in order to be used as
defendant’s own and he has so used it.  There is no question of tracing it, no possibility of
restoring the very same thing got by fraud.  Compulsion to repay an equivalent sum out of his
present and future resources would amount to  enforcing a void contract. 
• Indian Law: Compensation by a minor 
The question which has arisen in India is how far a minor can be asked to restore back
the  benefit wrongly obtained by him under a void agreement? Can a minor be asked to pay 
compensation to the other party? 
The following two kinds of provisions have arisen before the courts: 
1. Whether a minor can be asked to pay compensation under S.64 and 65, Indian contract act  for
the benefit obtained by him under a void agreement? 
2. Whether a minor can be asked to pay compensation in view of the provisions contained in 
S.39 and 41, Specific Relief Act? 
In Mohori Bibee v. Dharmodas Ghose, the question whether a minor can be asked to pay 
compensation to the other party, under S.64 and 65 had arisen in this case. The privy council 
held that the question of compensation under S.64 and 65, Indian Contract Act, arises where
the  parties are competent to contract, and these provisions does not apply to the case of a
minor’s  agreement. In this case the minor had applied for the cancellation of the mortgage
deed,  executed by him, under S.39, Specific Relief Act and the Privy Council considered the
question  of compensation to be paid by him under S.41 of that act. It was held that since in
this case the  loan had been advanced to the minor with the full knowledge of his minority,
the question of  payment of compensation to such a money lender did not arise. 
Liability to restore benefits
Where a minor seeks the help of court for the cancellation of his contract, the court may
grant  the relief subject to the condition that he shall restore all benefits obtained by him
under the  contract, the court may grant relief subject to the condition that he shall restore all
benefits  obtained by him under the contract or make suitable compensation to the other
party. In the case  of Khangul v. Lakhasingh, the defendant fraudulently concealing his age
agreed to sell a plot of  land, received Rs.17,500/-, refused to perform his promise and hence
the plaintiff sued for  possession or refund of consideration. The court held that the agreement
was void and hence  denied possession of the land but ordered payment of consideration back
to the plaintiff. The  reasons for the judgment were given by Shadilal CJ as follows: “There is
no real difference  between restoring the property and refunding money except that property
can be identified but  cash cannot be traced. It must be remembered that while in India all
contracts made by infants  are void, there is no such general rule in England. Therefore, there
should be a greater scope in  India than in England for the application of the doctrine of
equitable restitution.”  
• Section 33 of Specific Relief Act, 1963 
Where a defendant successfully resists any suit on the ground that the agreement sought
to be  enforced against him in the suit is void by reason of his not having been competent to
contract  under section 11 of the Indian Contract Act, 1872, the court may, if the defendant
has received  any benefit under the agreement from the other party, require him to restore, so
far as may be,  such benefit to that party, to the extent to which he or his estate has benefited
thereby.  
Beneficial contracts are enforceable by minor  
Law laid down in Moharibibi has been generally followed and growingly limited to cases 
where minor is charged with obligations and the other contracting party seeks to enforce
those  obligations against the minor. The principle “minor’s agreement is void” means law
will not  enforce any contractual obligation of a minor, i.e., a minor is allowed to enforce an
agreement  which is of some benefit to him and under which he is required to bear no
obligation. For  example, mortgage executed in favour of minor, minor’s suit for recovery of
possession of  property on sale, enforcement of promise by the other after minor performs his
promise.  
• Contracts of service 
Contract of service entered into by a minor is void. 
Contracts of marriage 
In the case of Khimji Kuverji v. Lalji Karamsi, the question that was laid down before
the  Bombay High Court was, whether the contract of marriage of a minor girl entered into by
her  mother on her behalf with a major boy could be enforced and she could sue for the
breach of  contract.  
• Contracts of immovable property by the minor’s guardian  
In the case of Mir Sarwarjan v. Fakhruddin, the guardian of a minor entered into a
contract  on behalf of the minor for the purchase of land. The minor sued for the specific
performance of  the contract. Even though the contract was to the advantage of the minor, the
minor’s suit was  dismissed. 
No Ratification 
A person cannot on attaining majority ratify an agreement made by him during his
minority.  Ratification relates back to the date of making the contract and therefore a contract
which was  then void cannot be made valid by subsequent ratification. As a minor’s
agreement is void he  cannot validate it by ratification on attaining majority. For instance, a
minor borrows money and  executes a promissory note. On attaining majority, he executes a
fresh promissory note in  substitution of the one executed as a minor. The second promissory
note is also void being  without consideration. In the case of Suraj Narain v. Sukhu Aheer, a
minor executed a  promissory note in favour of a money lender while he took a loan of Rs.
11,000 from him. After  attaining the age of majority, he executed a secondary note in favour
of the same person. The  question before the court was whether the consideration received by
a person during his minority  can be good consideration fresh promise by him after attaining
majority. It was held that the  consideration received by a person during his minority could
not be called consideration in its  strict term within the meaning of S.2 (d), and there was no
question of that consideration being  considered valid for a fresh promise. The promisor,
therefore, could not be made liable in respect  of such a promise. 
• Ratification of acts done on minor’s behalf 
 A minor’s agreement being void ab initio, neither he can himself enter into contract nor 
authorize an agent to do so on his behalf. Since after the ratification of an act done on behalf
of a 
person, the act gets the validity of a previously authorized act, it is necessary that the act to
be  ratifsied must be such as could have been legally authorized. 
Liability for Necessaries 
Section 68 deals with the claim for necessaries supplied to person incapable of
contracting,  or on his account. It states that if a person, incapable of entering into a contract,
or any one  whom he is legally bound to support, is supplied by another, person with
necessaries suited to his  condition in life, the person who has furnished such supplies is
entitled to be reimbursed from  the property of such incapable person. Illustrations A supplies
B, a lunatic, with necessaries  suitable to his condition in life. A is entitled to be reimbursed
from B’s property. In the Indian  Contract Act, section 68 provides that a minor falls within
the class of persons referred to in the  section, a statutory claim is created thereby against his
property. But though the property of the  minor may be liable for the necessaries under
section 68 of the Contract Act, the minor himself is  not personally liable as in English Law. 
There is, however, no definition of the term “necessaries” in the Contract Act. It is,
therefore,  necessary to turn to judicial decisions to determine its precise import. Now, it was
ruled by  Baron Parke in Peters v. Fleming, that from the earliest times down to the present,
the word  ‘necessaries’ is not confined in its strict sense to such articles as were necessary to
support life,  but extended to articles fit to maintain the particular person in the state, degree
and station in life  in which he is; and therefore we must not take the word “necessaries” in its
unqualified sense but  with qualification as above pointed out. To put the matter concisely,
“necessaries” means goods  suitable to the condition in life of the defendant and to his actual
requirements at the time of the  sale and delivery, and whether an article supplied to an infant
is necessary or not, depends upon  its general character and upon its suitability to the
particular infant’s means and station in life. 
Articles therefore that to one person might be mere conveniences or matters of taste, may
in  the case of another be considered necessaries, For instance, articles purchased by an infant
for  his wedding may be deemed necessary, while under ordinary circumstances the same
articles  might not be so considered. The word “necessaries,” therefore, includes money
urgently needed  for the requirements of a minor and cannot be restricted to what is necessary
for the elementary  requirements of the minor such as food and clothing. Thus cash lent to
him to effect necessary  repairs in his house, and payment of Government revenue are
necessaries of the minor 
proprietor. In the case of a minor Muslim girl, marriage is a “necessity” the person incurring
expenditure for marriage is entitled to relief under section 68. Expenses incurred for minor’s
education, marriage of his sister, expenses incurred in funeral of minor’s parents, expenses
incurred for necessary litigation etc. have been held to be necessaries. Expenses incurred for
minor’s marriage have also been held to be ‘necessaries’. In the case of Nash v. Inman, a
minor,  who was already having sufficient supply of clothing suitable to his position, was
supplied  further clothing by a tailor. It was held that the price of the clothes so supplied
could not be  recovered. 

3. AGREEMENTS BY PERSONS OF UNSOUND MIND  

Who is a Person of Sound Mind? 
A person while making a contract should be of a sound mind otherwise the contract will have
no  validity in the eyes of law. The definition of a person of sound mind has been amply
clarified by  Section 12 of the Indian Contract Act which reads a person is said to be of sound
mind for the  purpose of making a contract, if at the time when he makes it, he is capable of
understanding it  and of forming a rational judgment as to its effect upon his interests. Thus
soundness of mind of  a person depends on two facts: 
i) his capacity to understand the terms of the contract, and  
ii) his ability to form a rational judgment as to its effect upon his interests. 
If a person is incapable of both, he suffers from unsoundness of mind. Idiots, lunatics and 
drunken persons are examples of those having an unsound mind General Law of Contract 1 
Section 12 further states that a person who is usually of unsound mind, but occasionally of
sound  mind, may undertake a contract when he is of sound mind. A person, who is usually of
sound  mind, but occasionally of unsound mind, may not make a contract when he is of
unsound mind.  
Position of Agreements by Persons of Unsound Mind 
Lunatics: 
A lunatic is a person who is mentally deranged due to some mental strain or other.persona1 
experience. However, he has some intervals of sound mind. He is not liable for contracts 
entered into while he is of unsound mind. However, as regards contracts entered into during 
lucid intervals, he is bound. His position in this regard is identical with that of a minor. 
Idiots 
 An idiot is a person who is permanently of unsound mind. Idiocy is a congenital defect. Such 
a person has no lucid intervals. He cannot make a valid contract.  
Drunken Persons 
Drunkenness is on the same footing as lunacy. A contract by drunken person is altogether 
void.  
Exceptions 
A contract with a person of unsound mind is subject to the same exceptions as the contract
with a  minor is. Thus a person of unsound mind  
(i) May enforce a contract for his benefit, and  
(ii) His properties, if any, shall be attachable for realization of money due against him for  supply of
necessaries to him or to any of his dependents. 

4. Persons disqualified by law  

Alien enemies  
All persons other than Indian citizens are aliens. When the sovereign or the state of that alien
is  at peace with India, he is an alien friend. Contrary to it, he will be an alien enemy. In case
of  outbreak of war between India and the alien country, the following rules apply for the 
performance of agreements:- 
i. No contract can be made with an alien enemy during the subsistence of war, except  with the prior
approval of the Government of India. 
ii. Performance of the contracts made before the outbreak of war will be suspended  during the
course of war. They can be performed only when the war is over. Even 
then, the government can put restrictions on the performance of such contracts, if it  considers
them necessary for national interest. 
Insolvents  
In simple words, the insolvent is disqualified from entering into a contract until he is
discharged  by the court of law. 
Conclusion 
From the above discussion, it can be concluded that the capacity to contract is the legal
competence to contract. A person declared as incompetent to contract is the one who is
incapable  of entering into a contract, and a contract with such a person is unenforceable by
law. Further,  such persons are also divided into categories such as minor, unsound mind and
persons  disqualified by law. Any person if falls in any of these categories will be declared as
an  incompetent person to contract, making his contract void or voidable in certain
circumstances.  But the court of law also provides relief to certain people, making them
incapable of contracting  for only a specific period of time such as convicts and insolvents.
Thus, the capacity to contract  is an essential element to ful the requirements of a valid
contract. 

Consent 
According to Section 10, free consent is one of the elements of a valid contract. The
consent  of the parties means that they understand the same thing in the same sense. There
must be no  misunderstanding between the parties about the subject matter of the contract.
Section 13 of the  Indian Contract Act defines the term 'Consent' as two or more persons are
said to consent when  they agree upon the same thing in the same sense. Thus, consent
involves identity of minds in  respect of the subject matter of the contract. In English Law,
this is called 'consensus-ad-idem'.  For example, A has two horses, one is black and another
one is red. B made agreement with A to  purchase one horse, B thought that A would sell
black horse and A thought that B would  purchase red horse. This is not consent because both
parties have understood in different sense. 
Concept of Free Consent 
For a contract to be valid it is not enough that the parties have given their consent. The  
consent should also be free i.e., it has been given by the free will of the parties involving no 
pressure or use of force. Section 10 of the Contract Act specifically provides that all
agreements  are contracts if they are made by the free consent of the parties. Section 14 of the
Act states that  Consent is said to be free when it is not caused by 
(i) coercion, or  
(ii) undue influence, or 
(iii) fraud, or  
(iv) misrepresentation, or  
(v) mistake. 
When the consent of any party is not free, the contract is treated as voidable at the option of
the  party whose consent was not free. If, however, the consent has been caused by mistake
on the  part of both the parties, the contract is considered void. 

UNDUE INFLUENCE 
When one party is in a position to dominate the will of others and actually misuses the 
power, then it is a case of undue influence, and the contract becomes voidable. When all the 
 following three conditions are fulfilled then only the situation is considered as an undue 
influence: 
i. One person is in a position to dominate the will of others. 
ii. He misuses his position. 
iii. He obtains an unfair advantage. 
The word ‘undue’ means unnecessary, unwarranted, or more than required. ‘Influence’
means  convincing the mind of another through changing his mind or changing his will, but
this  influence must be undue i.e it is not required. Undue influence applies to a relationship
which  may be blood relation or some other kind of relation i.e fiduciary or relation based on
trust. It  may also arise where the parties are in a relation of confidence or dependence which
puts one of  them in a position to exercise over the other an influence which may be perfectly
natural and 
proper in itself, but is capable of being unfairly used.  
Ability to dominate the will of other 
The dominant position is not defined in the Indian Contract Act but Section 16(2)
provides  certain conditions when a person is in a position to dominate the will of another.
Cases, where a  person is in a position to dominate the will of others, are as follows: 
There must be a relation between the parties: 
a) Real or apparent authority/relation in which one party can be dominated by the other
party.  b) Fiduciary relation is the relation which is made upon the belief and trust between
the parties.  Example of real or apparent authority: 
1. A Father exerts undue influence upon his son to do something on the will of his father. 
Otherwise, he will part his relation with a son. 
2. A factory owner exerts undue influence upon his employee to make a certain agreement  with
him. If not he (employee) will be drawn from his job. 
Example of fiduciary relation: an advocate asks his client to give him extra money to fight
the  case from his side. Doctor and patient relationship 
2. Mental or bodily distress means the mental capacity of a person is affected. It can be
either  permanently or temporarily affected. The reason behind such health condition can be
age, illness,  mental or bodily distress. Consent under pressure means when consent is
obtained forcefully. In  this manner, consent is not lawful, so it had no binding effect. 
Relations which involves domination 
 All cases where there is an active trust and confidence between the parties and both
parties  are not on equal footing. The principle of undue influence applies to all the cases
where  influence is acquired and abused. It applies to all relations where domination can be
exercised by  one party over another. The existence of a dominating position along with its
use is mandatory to  invoke an action. Merely a dominant position does not lead to undue
influence. It arises only  when this position is used for gaining an undue advantage. Undue
advantage means any kind of  advantage which is not warranted by circumstances in which
the contract was entered.  
Real or Apparent authority 
Section 16(2) of the Indian Contract Act states that Undue Influence can arise wherever the 
donee stands in a fiduciary relationship to the donor or holds a real or apparent authority. In
this  type of influence, there is a real authority like a police officer or an employer who uses
his  dominance for his enrichment. Apparent authority is pretending as a real authority
without its  existence. 
Mental distress 
An only mental distress state of mind does not amount to undue influence until the
defendant  has used this opportunity to take unfair advantage from another party. Similarly,
instigating a  person to enter into a contract who has just attained majority amounts to undue
influence under  this category due to a lack of the plaintiff ‘s experience. A case of undue
influence is established  more easily when there is evidence to establish to show that the
person influenced was of feeble  mental capacity or in a weak state of health. 
Burden of proof 
Generally, the party bringing a claim has the burden to prove the truth of the facts on
which  he or she is relying. The burden of proof is on the claimant to show that undue
influence was  exerted by a stronger party over the weaker party, and the latter could not
exercise free choice  when entering the agreement. However, this burden can be shifted to the
defendant in an undue  influence case if the plaintiff can demonstrate that a confidential
relationship existed between the  testator and defendant, and that suspicious circumstance
surrounded the preparation and  execution of the will. When this occurs, the burden shifts
totally on the defendant to prove that  undue influence did not occur. When a person is found
to be in a position by which he can  dominate the will of the other or a transaction appears to
be affected due to dominance, the  burden of proof that no undue influence was exercised in
the transaction lies on the party who is  in a position to dominate the will of others.  
 Presumption of undue influence 
There are some cases in which the Honourable Courts of India presume the existence of
undue  influence between the parties: 
1. Where one of the parties to a contract is in a position to dominate the will of the other and 
contract is prima facie unconscionable i.e unfair, the court presumes the existence of  undue
influence in such cases.
2. Where one of the parties to a contract is a Pardanashin Woman, the contract is presumed  to be
induced by undue influence. In relation to Pardanashin Woman, Bombay High  Court made
an opinion that a woman becomes Pardanashin because she is totally exempted from ordinary
social intercourse not because she is the seclusion of some  degree. 

3. COERCION 
If a person commits or threatens to commit an act forbidden by the Indian Penal Code 
with a view to obtaining the consent of the other person to an agreement, the consent in such 
case is obtained by coercion. In simple words coercion means "making a person to give his 
consent by force or threat." 
Essential Ingredients of Coercion: 
a) Committing or threatening to commit any act forbidden by Indian Penal Code or, 
b) The unlawful detaining or threatening to detain any property to the prejudice of any person
whatever. 
c) With the intention of causing any person to enter into an agreement. 
Chikkam Ammiraju V. Chickam Seshamma, in this case, the husband by a threat of
suicide,  induced his wife and son to execute a release deed in favor of his brother in respect
of a certain  proprieties claimed as their own by the wife and son. Court held that to commit
suicide  amounted to coercion within the meaning of Section 15 of the Indian Contract Act
and therefore  release deed was voidable. 
Committing or threatening to commit any act forbidden by IPC Act forbidden
by IPC- The word act forbidden by Indian Penal Code make it necessary for  the court to
decide in a civil action, whether the alleged act of coercion is such as to amount to  an
offence. A threat of bringing a false charm with the object of making another do a thing 
amount, to blackmail or coercion. In the case of Ranganayakamma v Alwar Setti, where the
widow was obstructed from removing the corpse of her husband until she consented for the 
adoption. The court held that her consent was not free and it was coerced. It is clear that 
coercion is committing or threatening to commit any act which is contrary tolaw. 
 Unlawful Detaining of Property: 
A consent can be said to be caused by coercion, if it is caused because of unlawful 
confining or detaining of a property, or a risk to do as such. 
Coercion and Duress 
Under the English law, actual or threatened violence to the victim’s person has long been 
recognized to amount to duress. Duress is a term applied under English Contract Law &
Coercion is a term applied under Indian Contract Law. In coercion even third party can
perform the act but in duress only the party to contract should perform the act. In Duress, it is
only  applied for person and cannot detain property. Also coercion can be seen as the practice
of  putting someone under duress (i.e almost like stress.) Coercion is the act of forcing, while 
duress is more the consequence (or stressful feeling} that happens as a result of coercion. In 
this way the extent of coercion is more extensive than duress. 
FRAUD 
According to Section 17 of the Indian Contract Act, 1872 “FRAUD” means and includes
any  of the following acts committed by a party to a contract, or by his agent, with intent to
deceive  another party thereto or his agent, or to induce him to enter into the contract: 
• The suggestion, as a fact, of that which is not true, by one who does not believe it to be  true. 
• The active concealment of a fact – is known as suppresio veri or suppression of a fact. • A
promise made without any intention of performing it 
• Any other act fitted to deceive. 
• Any such act or omission as the law specially declares to be fraudulent. 
Explanation – Mere silence as to facts likely to affect the willingness of a person to enter into
a  contract is not fraud, unless the circumstances of the case are such that, regard being had to
them,  it is the duty of the person keeping silence to speak, or unless his silence is, in itself,
equivalent  to speech.
Essentials of Fraud: 
▪ There should be a false statement of fact by a person who himself does not believe the 
statement to be true. 
▪ The statement should be made with a wrongful intention of deceiving another party  thereto
and  
• inducing him to enter into the contract on that basis. 
False statement of fact  
 In order to constitute fraud, it is necessary that there should be a statement of fact which
is  not true. Mere expression of opinion is not enough to constitute fraud. For example – A
person,  who is aged over 60 years and thus beyond insurable age, deliberately makes a false
statement  that his age is 48 years in order to take out an insurance policy, it amounts to
fraud, and the  insurer is entitled to avoid the policy. In Edington vs. Fitzmaurice, a company
was in great  financial difficulties and needed funds to pay some pressing liabilities. The
company raised the  amount by the issue of debentures. While raising the loan, the directors
stated that the amount  was needed by the company for its development, purchasing assets
and completing buildings. It  was held that the directors had committed a fraud. 
Mere silence is no fraud 
It has been noted above that to constitute fraud; there should be a representation as to be 
certain untrue facts. Mere silence is no fraud, unless there is duty to speak, or his silence is,
in  itself, equivalent to speech. In Keates v Lord Cadogan, A let his house to B which he
knew was  in ruinous condition. He also knew that the house is going to be occupied by B
immediately. A  didn’t disclose the condition of the house to B. It was held that he had
committed no fraud. In  Shri Krishan v. Kurukshetra University, Shri Krishan, a candidate
for the L.L.B. exam, who  was short of attendance, did not mention that fact himself in the
admission form for the  examination. Neither the head of the law department nor the
university authorities made proper  scrutiny to discover the truth. It was held by SC that there
was no fraud by the candidate and the  university had no power to withdraw the candidate on
that account. 
Exceptions
▪ When there is a duty to speak, keeping silence is fraud. 
▪ When silence is, in itself, equivalent to speech, such silence is a fraud. Duty to speak
(Contracts of uberrimae fide) 
When the circumstances of the case are such that, regard being had to them, it is the duty
of  the person keeping silence to speak, keeping silence in such a case amounts to fraud.
When there  is a duty to disclose facts, one should do so rather than to remain silent. There
are certain  contracts which are contracts of uberrimae fide meaning contracts of utmost good
faith. In such a  type of contract it is supposed that the party in whom good faith is reposed,
would make full  disclosure of it and not keep silent. One instance of contract of uberrimae
fedi is contract of  insurance. In such a contract, there may be certain facts which are in full
knowledge of the  insured or policy holder. He must make full disclosure of such facts to the
insurer or insurance  company. In case of Srinivasa Pillai v LIC of India, it was held in this
case by the Supreme  Court that contract of insurance being one of uberrimae fede, it is
normal to expect in such a  contract utmost good faith on the part of the insured. The insured
is expected to answer certain  questions by the insurer and it is his responsibility to give true
and faithful answers. If the  insured has knowledge of certain facts which others cannot
ordinarily have, then he should not  indulge himself in suggestio falsi or suppressio veri.
When in the case of contract of insurance,  where there exists a duty to disclose , then non
disclosure of facts that are non-material to and  having no bearing on the risk undertaken by
the insured, it does not render the contract voidable. 
Silence being equivalent to speech 
Sometimes keeping silent as to certain facts may be capable of creating an impression as
to  the existence of a certain situation. In such a case, silence amounts to fraud. Means of 
discovering the truth “If such consent was caused by misrepresentation or by silence
fraudulent  within the meaning of Section 17, the contract, nevertheless, is not voidable, if the
party whose  consent was so caused had the means of discovering the truth with ordinary
diligence” Illustration A says to B “If you do not deny it I shall accrue that the horse is
sound”. B says  nothing. Here B’s silence is equal to speech that the horse is sound. Later if
the horse turns out to  be unsound, B will be guilty of fraud.
Active Concealment [Section 17(2)] 
When there is an active concealment of a fact by one having knowledge or belief of the
fact,  that can also be considered to be equivalent to a statement of fact, that can also be
considered to  be equivalent to a statement of fact and amount to fraud. By active
concealment of certain facts,  there is an effort to see that the other party is not able to know
the truth and he is made to believe  as true which is in fact not so. Active concealment of a
fact has also been considered as  amounting to fraud because in that case there is a positive
effort to conceal the truth from the  other party. He is made to believe as true that fact which
false. This is what is known as  suppresio veri –But if he merely keeps silence it will not
constitute fraud subject to certain  exceptions. In case of sale of goods, the rule which is
applicable is caveat emptor – or the  doctrine of let the buyer beware. It means that it is the
duty of the buyer to be careful while  purchasing the goods as there is no implied condition or
warranty as to quality or fitness of  goods. 
Promise Made Without Any Intention to Perform It [Section 17(3)] 
When a person makes a promise, there is deemed to be an undertaking by him to perform
it.  If there is no such intention when the contract is being made, it amounts to fraud. Thus, if
a man  takes a loan without any intention to repay, or when he is insolvent, or purchases
goods on credit  without any intention to pay for them, there is fraud. If, there is no such bad
intention at the time  of making contract, but the promise doesn’t perform the contract, it
doesn’t amount to fraud. 
Any act or omission which any other act fitted to deceive’[Section 17(4)] 
Clause (4) provides that ‘any other act fitted to deceive’ will also amount to fraud. This
clause is  general and is intended to include such cases of fraud which would otherwise not
come within  the purview of the earlier three clauses.  
Any act or omission which the law declares as fraudulent [Section 17(5)] 
According to this Section 17(5), fraud also includes any such act or omission as the law
specially  declares to be fraudulent. In such cases, the law requires certain duties to be
performed, failure to 
do which is expressly declared as a fraud. In Akhtar Jahan Begam v Hazarilal, A sold some 
property to B stating in the sale deed that he won’t be liable to B if he suffered any loss
owing to  A’s defective title. A had, earlier to this transaction, sold this property to somebody
else, but  didn’t inform B about it. It was held that A had committed fraud and the contract
was voidable at  the option of B. 
Statement should be meant for the party misled 
It is necessary that the misleading statement should be meant for the party who is misled.
If a  person is purchasing the shares of the company in the open market on the basis of any
prospectus  then he can’t sue the company later on because the prospectus is meant for an
original allottee of  the shares by the company, not for the person like the present appellant
who buys the shares from  the original allottee and therefore, the promoters were not liable
for fraud. 
Damages for Fraud 
Where a contract is induced by fraud, the representee is entitled to claim rescission or 
damages or both. He would have a remedy by way of such suit, even if restutio in integrum is
not  possible. The defendant is bound to make reparation for all the damage directly flowing
from the transaction. In assessing such damage, the plaintiff is entitled to recover by the way
of damages  the full price paid by him, but he must give credit for any benefit which he has
received as a  result of the transaction. As a general rule, the benefits received by him include
the market value  of the property acquired but such general rule is not applicable where to do
so would prevent him  obtaining for the wrong suffered. In addition, the plaintiff is entitled to
recover consequential  losses caused by the transaction. The plaintiff must take all reasonable
steps to mitigate the loss  once he has discovered the fraud. 

4. MISREPRESENTATION  
The word representation means a statement of fact made by one party to the other, either 
before or at the time of making the contract, with regard to some matter essential for the
contract,  with an intention to induce the other party to enter into contract. A representation,
when wrongly  made, either innocently or intentionally, is called 'misrepresentation'. When
the wrong  representation is made willfully with the intention to deceive the other party, it is
called fraud. 
But, when it is made innocently i.e., without any intention to deceive the other party, it is
termed  as 'misrepresentation'. In such a situation, the party making the wrong representation
honestly  believes it to be true. For example, A while selling his car to B, informs him that the
car runs 18  kilometers per litre of petrol. A himself believes this. Later on, B finds that the
car runs only 15 kilometers pr litre. This is a misrepresentation by A. Section 18 of the
contract Act classifies  acts of misrepresentation into the following three groups: 
Positive assertion:  
When a person makes a positive statement of material facts honestly believing it to be true 
though it is false, such act amounts to misrepresentation. 
Breach of Duty:  
Section 18(2) says that any breach of duty which, without an intent to deceive, gives an 
advantage to the person committing it, or anyone under him, by misleading another to his 
prejudice or to the prejudice of anyone claiming under him, amounts to misrepresentation. In 
such a case, there is no intention to deceive, but party representing commits a breach of duty 
which he owes to the other party. A breach of duty would also exist where a party bound to 
disclose certain information does not do so. Such non-disclosure would also amount to 
misrepresentation. For example, in a life policy, the assured does not disclose the fact that he 
had previously suffered from some serious ailments. The non-disclosure, however, innocent
it  may be, would entitle the insurer to avoid the contract on the ground of misrepresentation
of  facts. Such a duty exists between banker and customer, landlord and tenant and all
contracts of  utmost good faith. Such cases can also be termed as 'constructive fraud'. 
Inducing mistake about subject-matter:  
 The subject matter of every agreement must clearly be understood by the concerned
parties.  If one of the parties, leads the other, even innocently, to commit a mistake regarding
the nature  or quality of the subject-matter, it is considered misrepresentation.  
Essentials of Misrepresentation 
1. The representation should be made innocently, honestly believing it to be true and  without the
intention of deceiving the other party.
2. Misrepresentation should be of facts material to the contract. A mere expression of one's 
opinion is not a statement of facts. 
3. The representation must be untrue, but the person making it should honestly believe it to  be
true.  
4. The representation must be made with a view to inducing the other party to enter into   contract
and the other party must have acted on the faith of the! representation. A party  cannot
complain of misrepresentation if he had the means of discovering the truth with  ordinary
diligence. 
5. The false representation must have been made by one party to the contract to the other   who is
misled. If it is not addressed to the party who is misled, then it is not  misrepresentation..  
Effect of Misrepresentation 
Section 19 of Contract Act provides that when consent to an agreement is caused by 
misrepresentation, the agreement is voidable at the option of the party whose consent was so 
caused. Thus, the aggrieved party has the following two rights: 
a) He can rescind the contract. This right is available only in such cases where he was not in
a  position to discover the truth with ordinary diligence.  
b) If the aggrieved party thinks it proper, he may accept the contract and insist upon its 
performance. He may compel the other party to pay damages. 
You have seen that the party whose consent was caused by misrepresentation can avoid or 
rescind the contract. However, this right is lost in the following cases: 
i) If he could discover the truth with ordinary diligence.  
ii) If his consent is not induced by misrepresentation. 
iii) If he, after coming to know about the misrepresentation, expressly affirms the contract or
acts  in such a manner which shows that he has accepted it. 
iv) If, before the contract is rescinded, the third party acquires some right in the subject-
matter in  good faith and for some consideration. 
v) If the parties cannot be restored to their original position.
5. MISTAKE 
Mistake may be defined as the erroneous belief concerning something. Whenever an 
agreement is made under a mistake, there is no consent, and the agreement is not valid.
Broadly  speaking, Mistake may be of two types-mistake of law and mistake of fact. Mistake
of law can  be further classified into (a) mistake of Indian law, and (b) mistake of foreign law.
Similarly,  mistake of fact can be (a) bilateral mistake or (b) unilateral mistake. 
Mistake of Law (Section 21) 
Mistake of law can be further classified into (a) mistake of Indian law, and (b) mistake of
foreign  law. 
Mistake of Indian Law 
The general rule is that mistake of law of the land is no excuse. Section 21 lays down that a 
contract is not voidable because it was caused by a mistake as to any law in force in India. It
is  because everyone is supposed to know the law of the country and if a person does not
know the  law of his country, then he must suffer the consequences,  
Mistake of Foreign Law 
A person is supposed to know the laws of his country but he cannot be expected to know the  
laws of other countries. Therefore, the rule that 'ignorance of law is no excuse' cannot be
applied  to foreign law. A mistake of foreign law is treated as a mistake of fact.  
Mistake of Fact (Section 20) 
Mistake of fact may be classified into two groups.viz., (a) Bilateral mistake, and (b)
Unilateral  mistake.  
Bilateral Mistake 
When both the parties to an agreement are under a mistake of fact essential to the
agreement,  the mistake is known as bilateral mistake of fact. In such a situation, there is no
agreement at all  because there is complete absence of consent. Section 20 of the Act
provides where both the  parties to an agreement are under a mistake as to a matter of fact
essential to the agreement, the  agreement is void. Thus, for declaring an agreement void
under this Section, the following three  conditions must be satisfied. 
Both the parties must be under a mistake:  
The mistake must be mutual. For example, A, having two cars, one Fiat and another Maruti, 
offers to sell his Fiat car to B and B not knowing that A has two cars, thinks of the Maruti
 car  and - agrees to buy it. In this case, there is no consent whatsoever. Therefore, the
agreement shall  be void. 
Mistake must be of fact and not of law: 
a. Mistake must relate to as essential fact: The mistake must relate to a matter of fact  which is
essential to the agreement. In other words, only such mistake of fact that goes  to the root of
the agreement, renders the agreement void. For example, A agrees to buy  from B a certain
horse. It turns out that the horse was dead at the time of the bargain,  though neither party was
aware of the fact. The agreement is void, because the mistake  relates to something i.e., the
horse, which is essential to the contract.  
A bilateral mistake may be  
(a) Mistake as to the subject-matter, or  
(b) Mistake as to the possibility of performance.  
Mistake as to the subject-matter of the contract: 
Where both the parties to an agreement are under a mistake relating to the subject-matter
of  the contract, the agreement is void. A mistake as to the subject-matter may take following
forms.  a. Mistake as to an existence of the subject-matter:  
When both the parties are under a mistake regarding the existence of the subject-matter, the 
agreement is void. For example; A agrees to sell to B a specific cargo of goods  supposed to
be on its way from England to Bombay. It turns out that, before the day of  the bargain, the
ship carrying the cargo had been cast away and the goods lost. Neither  the party was aware
of these facts. The agreement is void. 
b. Mistake as to the identity of subject-matter:  
Where the parties to a contract have different subject-matter in their minds i.e., one party  had
one thing in mind and the other party had another, the agreement is void because  there is no
consensus-ad-idem. For example, A offers to sell his old Delhi house to B. A 
had another house in South Delhi. B thinks he is buying the South Delhi's house. There  is no
agreement between A and B. 
c. Mistake as to the title of the subject-matter: 
Sometimes the buyer already owns the property which a person wants to sell to him, but the 
concerned parties are not aware of this fact. In such a case, the agreement is void as  there is a
mistake about the title of the subject-matter . 
d. Mistake as to the quantity of the subject-matter:  
 Where both the seller and the buyer make a mistake regarding the quantity of the subject matter,
the agreement is void. In the case of Henked v. Pape, P inquired about the price  of rifles
from H suggesting that he might buy fifty rifles. On receiving the quotation, P  telegraphed
"send three rifles". But. because of the mistake of the telegraph authorities,  the message
transmitted was "send the rifles" H despatched fifty rifles. P accepted three  rifles and
returned the remaining forty seven rifles. It was held that there was no  contract. However, P
was liable to pay for three rifles on the basis of an implied  contract. 
e. Mistake as to the quality of the subject-matter: 
If the subject-matter is something essentially different from what the parties thought it to  be, the
agreement is void. For example, A contracts to sell a particular horse to B. A  and B believe it
to be ,a race horse. But, it turns to be a cart horse. The agreement is  void. 
f. Mistake as to the price of the subject-matter: 
Where there is a mutual mistake as to the price of the subject-matter, the agreement is void.  For
example, where a seller of certain goods mientioned in his letter the price as Rs.  1,250 when
he really intended to w:ite Rs. 2,250, the agreement is void. An erroneous  opinion as to the
value of the thing which forms the subject-matter of the agreement is  not treated as a mistake
of fact. 
Mistake as to tire possibility of performance 
If the parties to an agreement believe that the contract is capable of performance, while in
fact it  is not so, the agreement is treated as void or the ground of impossibility. It may be a
physical  impossibility or a legal impossibility. 
a. Physical impossibility: 
A contract for the hiring of a room for witnessing the coronation procession of Edward VII  was
held to be void because unknown to the parties the procession had already keen  cancelled
and there is no question of witnessing it. (Grifdth v Esymsr) 
b. Legal impossibility: An agreement is void if it provides that something shall be done  which
cannot legally be done.  
Unilateral Mistake 
The term 'unilateral mistake' means where only one party to the agreement is under a 
mistake. Generally, a unilateral mistake does not make the agreement void. According to
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 a matter of fact. If a man due to his own negligence or lack of
reasonable care  does not ascertain what he is contracting about, he must bear the
consequences. For example, A  sold oats to B by sample and thinking that they were old oats,
purchased them. In fact, the oats  were new. It was held that B was bound by the contract,
(Smith v. Hughes). In some cases,  however, a unilateral mistake may be fundamental and
may affect the character of the contract.  In such a situation, the agreement is void. In the
following cases, even though the mistake is  unilateral, the agreement is void. 
Mistake as to the identity of the person contracted with: 
Mistake as to the identity of the person violates a contract. For example, where A intends
to  contract only with B, but enters into a contract with C believing him to be B, the contract
is void.  It should be noted that a mistake about the identity of the contracting party will
render the  contract void only if 
(a) the identity of the party is of material importance to the agreement, and (b) the other party
knows that he is not intended to be a party to the agreement. The following cases illustrate
this point. In the case of Cindy v Lindsay, one Blenkiron, knowing  that Blenkiron & Co.,
were the reputed customers of Lindsay & Co placed an order with Lindsay  & Co. by
imitating the signature of Blenkiron. The goods were then sold to Cindy, an innocent  buyer.
In a suit by Lindsay & Co. against Cindy for recovery of goods, it was held that as  Lindsay
never intended to contract with Blenkiron, there was no contract between them and as 
such even an innocent buyer (Cindy) did not get a good title. Hence, Cindy must return the
goods  or make payments of price. In the case of Lake v. Sirnmons, a woman by falsely
misrepresenting  her to be the wife of a well known Baron (a millionaire) obtained two pearl
necklaces from a  firm of jewelers on the pretext of showing them to her husband before
buying. She pledged them  with a broker, who in good faith paid her some amount. It was
held that there was no contract  between the jeweler and the woman and an innocent buyer or
a broker did not get a good title.  The broker must return the necklaces to the jeweler. 
Mistake as to the nature of the contract 
A contract is void when one of the party, without any fault of his own, makes a mistake as
to  the very nature of the contract. Thus, when a person is induced to sign a written document 
containing a contract fundamentally different in nature from what he thinks he is signing, the 
contract shall be void. In the case of Foster v. Mackinnon, an old illiterate man was induced
to  sign a bill of exchange, by means of a false representation that it was a mere guarantee.
Held, he  is not liable for the bill as he never intended to sign a bill of exchange. 
Effect of Mistake 
While discussing various types of mistakes, the effect of each type of mistake has been
clearly  stated. It can now be summarized as follows: 
1) Where both the parties to an agreement are under a mistake as to a matter of fact essential
to  the agreement, the agreement is void. 
2) In most cases of unilateral mistake, the contract is not void. But, where unilateral mistake 
defeats the true consent of the parties, the agreement is treated as void. 
3) Any person who has received any advantage under such agreement, he is bound to restore
it,  or to make compensation for it, to the person from whom he had received it. 4) A person
to whom money has been paid or anything delivered by mistake must repay or return  it.