BUSINESS LAWS

Prof S.SELVAM.,M.Com.,M.Phil.,

Business Law
Topic-1 Contract Act
The Indian Contract Act, 1872 defines the term “Contract” under its section 2 (h) as “An agreement enforceable by
law”. In other words, we can say that a contract is anything that is an agreement and enforceable by the law of the
land.

Agreement
The Indian Contract Act, 1872 defines what we mean by “Agreement”. In its section 2 (e), the Act defines the term
agreement as “every promise and every set of promises, forming the consideration for each other”. Now that we
know how the Act defines the term “agreement”, there may be some ambiguity in the definition of the term
promise.

Promise
This ambiguity is removed by the Act itself in its section 2(b) which defines the term “promise” here as: “when the
person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Proposal when
accepted, becomes a promise”.
Agreement = Offer + Acceptance.
An agreement to change into a Contract as per the Act, it must give rise to or lead to legal obligations or in other
words must be within the scope of the law. Thus we can summarize it as
Contract = Accepted Proposal (Agreement) + Enforceable by law (defined within the law)

Essential Elements of a Contract

Essential Elements of a Contract as defined in Section 10 of the Indian Contract Act 1872
1. Agreement - Offer and Acceptance
2. Legal purpose
3. Lawful Consideration
4. Capacity to contract
5. Consent to contract
6. Lawful object
7. Certainty
8. Possibility of Performance
9. Not expressly declared void
10. Legal formalities like Writing, Registration etc.

1. Agreement - Offer and Acceptance

The parties to the contract should have a mutual understand regarding the subject-matter of the contract. There
must be a "lawful offer" and "lawful acceptance" thus resulting in an agreement. The parties must have agreed to
the subject-matter in the same sense.

2. Legal purpose
There must be an intention among the parties that the agreement should be attended to by legal consequences and
create legal obligation. Agreements of social or domestic nature do not contemplate legal relations

3. Lawful Consideration
Consideration means 'something in return'. In every legal contract, there must be something in return. An
agreement is legally capable to be enforced only when each of the parties to it gives something and gets something.
The consideration should not be unlawful, illegal, immoral or opposed to public policy.

4. Capacity to contract
Every person who enters into a contract must be competent. In other words, the person should be of the age of
majority, should have a sound mind, and must not be disqualified from any law to which they subject.
Minors, lunatics, unsound and intoxicated persons are incompetent to enter into a contract. However, there are
exceptions as defined in Section 68. In case of an exception the minor or lunatic is not personally liable.
Prof S.SELVAM.,M.Com.,M.Phil.,
5. Consent to contract
All the parties must have agreed upon the subject matter of the agreement in the same sense. Section 14 says that if
the agreement is induced by coercion, fraud misinterpretation or mistake, it is said to be "no free consent" and such
a contract is voidable and cannot be enforceable by law.

6. Lawful object
If the object in the agreement is unlawful, the agreement is void.
Eg: The landlord cannot recover rent through court of law when he knowingly lets his house to carry on
prostitution.

7. Certainty
Every agreement of the contract must be certain. If the agreement is not certain or incapable of being made certain,
it is void.

8. Possibility of Performance
Every contract must be capable of performance. Otherwise, the agreement is void. An agreement to do an
impossible act whether physically or legally, is void.

9. Not expressly declared void

The agreement must not have been expressly declared to be void under the Act. Examples of such agreements are
restrainment of trade, marriage, legal proceedings and wagering agreements. Such agreements are not enforceable
by law.

10. Legal formalities like Writing, Registration etc.

A contract may be oral or in writing according to the Indian Contract Act. In certain special cases the agreement
must be in written. In some cases like contracts by companies, selling or buying of shares etc., the contract must be
registered.

Types of Contract as per Indian Contract Act, 1872

A). On the basis of the validity
1. Valid Contract: Section 2(h) of the Indian Contract Act, 1872 as-“an agreement enforceable by law”.
• It contains all the essential elements of a valid contract. Valid Contract Intention to create legal relationship
Lawful consideration Capacity of parties Legal formalities Not declared to be void possibility of performance
certainty of meaning lawful object free consent offer and acceptance

2. Void Contract • Section 2 (j) states as follows: “A contract which ceases to be enforceable by law becomes
void when it ceases to be enforceable”. Thus a void contract is one which cannot be enforced by a court of law.
Example: Mr. X agrees to write a book with a publisher. After few days, X dies in an accident. Here the contract
becomes void due to the impossibility of performance of the contract. •

3. Voidable Contract • Section 2(i) defines that “an agreement which is enforceable by law at the option of one or
more parties thereto, but not at the option of the other or others is a voidable contract”.
• E.g., Absence of free consent, agreement by coercion, undue influence, fraud or misrepresentation etc. • Evidence
is essential. • Court can cancel the contract.

4. illegal Contract : • It is a contract which the law forbids to be made. The court will not enforce such a contract
but also the connected contracts. All illegal agreements are void but all void agreements are not necessarily illegal

B. On the basis of the formation of contract

1. Express Contracts: • A contract would be an express contract if the terms are expressed by words or in writing.
• Example: A tells B on telephone that he offers to sell his house for Rs. 2 lacs and B in reply informs A that he
accepts the offer, this is an express contract

2. Implied Contracts: • Implied contracts come into existence by implication. Most often the implication is by law
and or by action.
• Example: Where a coolie in uniform picks up the luggage of A to be carried out of the railway station without
being asked by A and A allows him to do so, it is an implied contract and A must pay for the services of the coolie
detailed by him
Prof S.SELVAM.,M.Com.,M.Phil.,

Tacit Contracts • The word Tacit means silent. Tacit contracts are those that are inferred through the conduct of
parties without any words spoken or written.
• A classic example of tacit contract would be when cash is withdrawn by a customer of a bank from the automatic
teller machine [ATM

3. Quasi-Contract: • A quasi-contract is not an actual contract but it resembles a contract. It is created by law
under certain circumstances. The law creates and enforces legal rights and obligations when no real contract exists.
Such obligations are known as quasi-contracts.
• Example: Obligation of finder of lost goods to return them to the true owner or liability of person to whom
money is paid under mistake to repay it back

C. On the basis of the performance of the contract

1. Executed Contract: • A contract which has already been performed. • Example: When a grocer sells a sugar on
cash payment it is an executed contract because both the parties have done what they were to do under the contract.

2. Executory Contract: • A contract which has to be performed in future.

• Example: Where G agrees to take the tuition of H, a pre- engineering student, from the next month and H in
consideration promises to pay G Rs. 1,000 per month, the contract is executory because it is yet to be carried out. •
Unilateral or Bilateral are kinds of Executory Contracts and are not separate kinds
(a) Unilateral Contract: • Unilateral contract is a one sided contract in which one party has performed his duty or
obligation and the other party’s obligation is outstanding. (performance is due from one party.)
• Example: M advertises payment of reward of Rs. 5000 to any one who finds his missing boy and brings him. As
soon as B traces the boy, there comes into existence an executed contract because B has performed his share of
obligation and it remains for M to pay the amount of reward to B

(b) Bilateral Contract: • A Bilateral contract is one where the obligation or promise is outstanding on the part of
both the parties (performance is due from both parties).
• Example: A promises to sell his plot to B for Rs.1 lacs cash down, but B pays only Rs. 25,000 as earnest money
and promises to pay the balance on next Sunday. On the other hand A gives the possession of plot to B and
promises to execute a sale deed on the receipt of the whole amount. The contract between the A and B is executory
because there remains something to be done on both sides. • Executory contracts are also known as Bilateral
contracts

Topic-2 Quasi Contract

Can there be a contact without offer, acceptance, consideration etc? Well, yes there can be such a contract
based on social responsibility. We call such contracts quasi contract.
There are cases where the law implies a promise and imposes obligations on one party while conferring
rights to the other even when the basic elements of a contract are not present. These promises are not legal
contracts, but the Court recognizes them as relations resembling a contract and enforces them like a
contract. These promises/ relations are Quasi contracts.
Sections 68 – 72 of the Indian Contract Act, 1872 detail five circumstances under which a Quasi contract comes to
exist. Remember, there is no real contract between the parties and the law imposes the contractual liability due to
the peculiar circumstances.

Section 68 – Necessaries Supplied to Persons Incapable of Contracting

Imagine a person incapable of entering into a contract like a lunatic or a minor. If a person supplies
necessaries suited to the condition in life of such a person, then he can get reimbursement from the
property of the incapable person.
A is a lunatic. B supplies John with certain necessaries suited to his condition in life. However, John does
not have the money or sanity and fails to pay B. This is termed as a Quasi contract and Peter is entitled to
reimbursement from A’s property.

Section 69 – Payment by an Interested Person

If a person pays the money on someone else’s behalf which the other person is bound by law to pay, then
he is entitled to reimbursement by the other person.
Ram is a zamindar. He has leased his land to Shyam, a farmer. However, Ram fails to pay the revenue due
to the government. After sending notices and not receiving the payment, the government releases an
Prof S.SELVAM.,M.Com.,M.Phil.,
advertisement for sale of the land (which is leased to Shyam). According to the Revenue law, once the land
is sold, Shyam’s lease agreement is annulled.
Shyam does not want to let go of the land since he has worked hard on the land and it has started yielding
good produce. In order to prevent the sale, Shyam pays the government the amount due from Ram. In this
scenario, Ram is obligated to repay the said amount to Shyam.

Section 70 – Obligation of Person enjoying the benefits of a Non-Gratuitous Act

Imagine a person lawfully doing something or delivering something to someone without the intention of
doing so gratuitously and the other person enjoying the benefits of the act done or goods delivered. In such
a case, the other person is liable to pay compensation to the former for the act, or goods received. This
compensation can be in money or the other person can, if possible, restore the thing done or delivered.
However, the plaintiff must prove that:
The act that is done or thing delivered was lawful
He did not do so gratuitously
The other person enjoyed the benefits

Section 71 – Responsibility of Finder of Goods

If a person finds goods that belong to someone else and takes them into his custody, then he has to adhere
to the following responsibilities:
Take care of the goods as a person of regular prudence
No right to appropriate the goods
Restore the goods to the owner (if found)
Peter owns a flower shop. Olivia visits him to buy a bouquet but forgets her purse in the shop.
Unfortunately, there are no documents in the purse to help ascertain her identity. Peter leaves the purse on
the checkout counter assuming that she would return to take it.

Section 72 – Money paid by Mistake or Under Coercion

If a person receives money or goods by mistake or under coercion, then he is liable to repay or return it.
Let us see an example. Peter misunderstands the terms of the lease and pays municipal tax erroneously.
After he realizes his mistake, he approached the municipal authorities for a reimbursement. He is entitled to
be reimbursed since he had paid the money by mistake.
Similarly, money paid by coercion which includes oppression, extortion or any such means, is recoverable.

Topic-3 CAPACITY OF PARTIES

Section 10 of the Contract Act requires that an agreement to be enforceable by law must be made by the
parties competent to contract.
Section 11 of the contract Act provides that “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 disqualified
from contracting by any law to which he is subject.”
This Section deals with personal capacity in three distinct branches:
 (a) Disqualification by infancy, i.e. minors.
 (b) Disqualification by insanity, i.e. lunaties.
 (c) Other special disqualifications by personal laws, such as insolvancy, conviction etc.

Disqualification by Infancy
Age of Majority: A valid agreement requires that both the parties to the contract should understand the
legal implications of their conduct. They must have mature mind. They should be major in age.
According to Indian Majority Act, 1875, every person domiciled in India shall be deemed to have
attained his majority when he shall have completed his age of eighteen years and not before. In case,
guardian has been appointed to the minor or where the minor is under the guardianship of the court of
wards, the person shall become major on the completion of the age of 21 years.

Law Relating to Minor’s Agreement

The Act makes it essential that all contracting parties should be competent to contract, and if a person is
incompetent to contract by reason of infancy, he cannot make a contract within the meaning of the Act.
Therefore, an agreement with a minor is void and a minor can neither sue nor be sued upon it. The
Contract is also not capable of ratification in any manner. The parents of a minor are not legally
responsible for his contracts unless he acts as their agent.
Following important provisions govern agreements made with a minor.
Prof S.SELVAM.,M.Com.,M.Phil.,

(i) Agreement is absolutely void: An agreement by or with a minor is void-ab-initio. It is considered to

be a nullity and non-existing from the very beginning. Thus, if a party who has parted with goods, can trace
them with the minor then he can recover damages for the breach of contract or recover their price. Nor can
money lent to such a minor be recovered because if that were to be allowed it would tentamount of
enforcing the contract

Leading case: Mohiri Bibi V. Dharmodus Ghosh.

In this case a minor executed a mortgage for Rs. 20,000 and received Rs.8,000 from the mortgagee.

3. Mino’s liability for necessities: All contracts relating to the necessities supplied to a minor according
to this status in life are valid. But only the minor’s property is liable for necessities, and no personal
liability is incurred by him.
Necessities must be things which the minor actually needs; therefore it is not enough that they be of a kind
which a person of his condition may reasonably want for ordinary use, they will not be necessities if he is
already sufficiently supplied with things of that kind, and it is immaterial whether the other party knows
this or not. Objects of mere luxury cannot be necessities nor can objects which, though of real use, are
excessively costly. The fact that buttons are normal part of any kinds of clothing, but it will not make pearl
or diamond buttons necessities.

2. No ratification: Since the contract is void ab initio it cannot be ratifed by the minor on attaining the
age of majority. However, a minor who, on attaining majority, takes up and carries on transaction
commenced while he was under disability, will bind himself for the whole transaction.
Example :
A, a minor, takes a loan of Rs. 1,000 from B during his minority. After attaining age of majority, A applies
for a fresh loan of Rs. 1,000 B gives the loan and obtain from A a combined promissory note of Rs.2,000.
This will be taken as a new contract and will therefore, be enforceable.

3. No restitution: When a contract becomes void, it is not to be performed by either party. But if any
party has received any benefit under such a contract from the other party he must restore it or make
compensation for it to the other party. This is called restitution.
A minor is not liable to repay any money or compensation for any benefit that he might have received
under a void contract. Court, may however, in certain cases, while ordering for the cancellation of an
instrument at the instance of the minor, require him to pay compensation to the other party to the
instrument under Sec. 33 of the Specific Relief Act.

4. No Estoppel: A minor is not bound by his mis-representations. If a minor procures a loan or enters
into any other agreement by representing that he he is of full age. He cannot be prevented from pleading his
minority in his defence. He will not be held liable under the contract. It was held in Sadiq Ali Khan V. Jai
Kishore (1928) that a deed executed by a minor is a nullity there can be no estoppel against a statue, Thus
the rule of estoppel as per S.115 of the Evidence Act, 1872 is not applied against a minor.
But this does not mean that the minors are allowed to cheat and to enjoy the fruits of their fraud. According
to S.33 of the Sepcific Relief Act, 1963 Court will order, on equitable considerations for restitution if the
minor is still in possession of the money or things purchased out of it. The minor shall have no liability if
the money or things cannot be traced out in his hands.

Examples:
(a) A minor borrowed Rs. 1000 on a fraudulent representation that he was a major, and he spent the whole
of the money in a picnic tour of Kashmir. In this case the creditor cannot sue for the realisation of the
money so advanced by him.
(b) A minor fraudulently over states his age and takes delivery of a motor car after executing a promissory
note in favour of the trader for its price, though the minor cannot be compelled to pay on the promissory
note; but the court on equitable grounds may order the minor to return the car to the trader, if it is still with
the minor.
(c)A grocer supplies monthly rations for 6 months to B who is aged 17 years. On B’ failure to pay, he sues
him for the realisation of his dues. In this case B’s property is liable for the payment of credit rations
consumed by B during the period of his minority.
Costs incurred in successfully defending a suit on behalf of a minor in which his property was in jeopardy
are “necessities”.
Prof S.SELVAM.,M.Com.,M.Phil.,
6. Minor as a beneficiary: All such contracts under which the minor is to receive some benefit or which
are beneficial to him are valid. These contracts include agreements which provide for the teaching,
instruction or employment of a minor. It is to be noted that only his property is liable for liabilities arising
out of such contracts. In no case he will be personally liable.
English law has expressly made a contract for the minor’s benefit enforceable. But in India all contracts
made by minors are void. Still majority of the contracts for the benefit of minor have been held to be
enforceable on the ground that it will be unjust in the circumstances to deprive a minor of a benefit which
he may be entitled to get under a contract.

7. Minor as Agent: A minor can be appointed as an agent. He can represent his principal in dealings
with other parties. Since minor does not incur any personal liability, he cannot be held responsible for his
any act of negligence or fault. Therefore the principal will be responsible to the third parties for the acts of
his minor agent. He cannot hold the minor agent personally liable for any wrongful acts. Thus the principal
runs a great risk.

8. Minor as a partner: A minor cannot be a partner of a firm. An agreement of partnership making a

minor a full-fledged partner is invalid between all partners. However, he may be admitted to the benefits of
an already existing partnership firm with the unanimous express consent of all the existing partners. Such
an agreement may be entered into by his guardian on his behalf with the partners.
A minor admitted to the benefits of partnership, has a right to share the property and profits of the firm in
the proportion agreed upon by him with the other partners. Further, he has a right to have access to and
inspect and copy any of the accounts of the firm but not the books of accounts of the firm. He liability
is limited to the extent of his share in the firm.

9. Minor as a member of a company: A minor cannot be a member of a company since he is

incompetent to enter into a contract. A minor may be allotted shares. His name may remain on a company’s
register of members, but during minority he incurs no liability. On attaining majority and becoming aware
of the presence of his name in the register of members, the major has the option to repudiate his shares
within a reaonsable time. Where he does not do so he may safely be taken to have accepted his position.
His liability as a share-holder then commences.
However, it a minor has been allotted shares through ignorance and his name has been entered in the
Register of members both the compoany and the minor, can repudiate the allotment of shares during his
minority.

10. Surety for a minor: A person who stands as a surety for a loan taken by the minor will be liable to the
creditor for payment of the loan, even though minor was not liable.

11. Mortages and sales in favour of minors : A sale or mortgages of his property by a minor is void. But
a duly executed transfer by way of sale or mortgage in favour of a minor who has paid the consideration
money is not void and it is enforceable by him or any other person on his behalf. A minor, therefore, in
whose favour a deed of sale is executed is competent to sue for the possession of the property conveyed
thereby.
12. A minor can not be declared as an insolvent even for his necessities of life. Only his property is
liable even for necessities of life and he, personally, is not liable for the same.

Thus, the contract made with the minors can be under three heads.
(i) Valid Contracts: They include (a) contracts for necessities which include goods as well as services.
(b) Contracts for loans taken to purchase “necessities”.
(ii) Voidable Contracts: This category of voidable contracts is not recognised our country. This category
includes those contracts in which minor is a beneficiary. Only minor is entitled to enforce but not the other
party. They can be reasonably called as contract voidable at the option of the minor.
(iii) Void Contracts: All contracts by a minor other than those referred to above shall be void

Disqualificatioin by insanity
According to Sec.12 “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 judgement as to its effect
upon his interests.”
A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is
of sound mind.
Prof S.SELVAM.,M.Com.,M.Phil.,
A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when
he is of unsound mind.
Example:
(a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals.
(b) A sane man, who is delirious from fever, or who is so drunk that he can not understand the terms of a
contract or form a rational judgement as to its effect on his interests, can not contract during such delirium
or drunkness.
Thus, idiots, lunatics and drunkard are not considered to be persons of sound mind.
(i) Idiot : A person who is devoid of any faculties of thinking or rational judgement. All agreements,
other than those for necessaries of life, with idots are absolutely void.
(ii) Lunatic: A person whose mental powers are derange is called a lunatic. Lunatic is not a person who
is continuously in state of unsoundness of mind but he may have lucid intervals. period in which he is to
his senses. Agreement with lunatics are void except those made during lucid intervals and made for
necessities of life. However, for necessities of life, the property of such persons is liable. He does not have
personal liabilities.
(iii) Drunkards: A person under the influence of drink or drugs, stands on the same footing as lunatic.
Mere drunkenness affords no ground for resisting a suit to enforce a contract. But where the judgement of
one party was, to the knowledge of the other part, seriously affected by drink, equity will generally refuse
specific performance at the suit of the other. And, where the court is satisfied that a contract
disadvantageous to the party affectedhas been obtained by “drawing him into drink” or that three has been
real unfairness in taking advantage of his position, the contract may be set aside.

Persons disqualified by any other laws:

Certain types of people are specifically disqualified by special statues from entering into valid contracts
(I) Alien Enemies: A person who is not an Indian citizen is an alien. An alien may be either an alien friend or an
alien enemy. An alien friend is one, whose state or Sovereign is at peace with India. He has full contractual
capacity like an Indian Citizen subject to certain restrictions put by the Government of India, e.g., and alien can not
acquire any ownership interests in any Indian ship. On the declaration of war between India and alien’s country he
becomes an alien enemy. A contract with an enemy becomes unenforceable on the outbreak of war. With regard to
a contract with an alien enemy following rules will apply:
 (i) Since trading with an alien enemy is considered illegal, no contract can be made with an alien enemy
during the subsistence of war except with the prior approval from the Central Government.
 (ii) Contracts entered into before the outbreak of war will be suspended during the course of war. They
will be performed after the war is over.

(II) Foreign Sovreigns and Ambassadors: Foreign sovereigns and accredited representatives of foreign states,
i.e., Ambassadors. High Commissioners. enjoy a special priviledge in that they can not be used in Indian courts,
unless they voluntarily submit to the jurisdiction of Indian courts. Though they can enter into contracts through
agents residing in India. In such cases the agent becomes personally liable for the due performance of the contracts

(III) Corporations: A corporations is only an artificial person created by law, e.g. a company registered under the
Companies Act, public bodies created by statue such as Industrial Finance Corporation of India, A corporation
exists only in contemplation of law, it has no physical body or form. It can hold property, can sell or purchase
goods and can sue or be sued in relation to any of the contracts entered into by it. Being a mere creature of law it
cannot go beyond those objectives which have been laid down in the charter of its creation, i.e., Memorandum of
Association. Further, its capacity and powers to contract are also limited by its charter. Any contract beyond such
powers is ultra vires and void. Such ultravires contracts can not be ratified even by the unanimous vote of all its
members.

(IV) Convicts: While undergoing sentence a convict is incapable of entering into a contract. This inability comes
to an end on the expiration of the sentence or if he has been “pardoned”.

(V) Professional persons: In England barristers-at law, are prohibited by the etiquette of their profession from
suing for their fees. So also are the Fellow Members of the Royal College of Physicians. In our country no such
professional disqualification exists.
Prof S.SELVAM.,M.Com.,M.Phil.,
Topic-4 Free Consent
 Contracts are usually described as valid, void and voidable. Valid Contract is an agreement enforceable at
the law courts. Those agreements which are not enforceable at the law courts, i.e., for the enforcement of
which legal recourse cannot be taken, are known as Void Contracts. In between the valid and the void
contracts are the voidable contracts. Such contracts are the outcomes of Flaw in Consent. At an early stage
you have read that, “an agreement can be called a contract provided it is made with the Free Consent
of the parties, competent to contract for a lawful consideration and for a lawful object and is not
expressly declared to be void”. When we analyse this statement we come to know that to be a contract, an
agreement must be made with the Free Consent of the parties to the contract. Here is the importance of
“Free Consent” which is very much necessary for the validity of the contract.

 The genuineness of the consent implies that the parties to the contract must mean the some thing in the
same sense and not only that but they should mutually agree voluntarily. If their minds do not meet at the
same thing in the same sense voluntarily, then their consent shall not be called Free or Voluntary. The
consent in such case might have been obtained under Fraud or Misrepresentation or Coercion or undue
influence. In such a case the party giving his consent under any of these four elements shall have a right to
withdraw his consent. Such a contract where the consent of a party or parties to the contract is caused by
any of the elements stated above, i.e. Fraud Misrepresentation, Coercion or Undue Influence/shall be called
a Voidable Contract and shall be enforceable at the option of the aggrieved party or parties and not at the
option of the other or others.

Coercion (Section 15)

 Meaning: It is committing, or threatening to commit, any act forbidden by the Indian Penal Code (XLV of
1860), or the unlawful detaining or threatening to detain, any property to the prejudice of any person
whatever, with the intention of causing any person to enter into an agreement.

Characteristics:
 Coercion by threat need not necessity be directed by a party to the contract. It may or may not emanate
from a stranger to the contract. Similarly, it may be aimed at any person. either a party to the contract or a
strange to the contract. But the idea or intention of the party resorting to coercion should be to cause a
person to enter a contract.
Example :
 (a) A threatens to Kill C (B’s son), if B does not lend Rs. 10,000 to A. B agrees to lend the aforesaid
amount. The agreement is caused by Coercion.
 (b) A threatens to Kill B if B does not lend Rs. 10,000 C.B agrees to lend the amount to C. This
agreement is made under Coercion.

Effect of Coercion
 Coercion vitiates Free Consent. The party or parties whose consent is taken under the effect of Coercion
get a right to avoid the contract, if he so likes. However, if the aggrieved party has received any benefit
under the contract which he is avoiding on the basis of Coercion, he has to return that benefit to the other
party or parties (S.72). The point can be made clear by the following example:
 A enters into a contract with B to sell his horse for Rs. 5000 B takes A’s consent under Coercion. A at the
time of entering into an agreement receives Rs. 1000 as an advance from B. Later on, A avoids the sale of
the horse on the basis of Coercion. A has to return Rs. 1000 to B. He cannot retain the money received as
an advance from B.

 Burden of Proof: The party avoiding the contract has to prove that Coercion was exercised upon him and
his consent received is not voluntary or he has not exercised his consent freely.

 Threat to commit suicide : It is an important question whether threat to commit suicide amounts to
‘Coercion? The act of committing suicide is forbidden by the Indian Penal Code and on this basis Madras
High Court has decided in Amiraju vs Seshamma (1918, 41 Mad. 33) that threat to commit suicide
amounts to Coercion and the party affected is entitle to avoid the contract.

Coercion and Duress distinguished

 (a) Coercion is the term applied under the Indian law of Contracts while Duress is the term applied under
the English law of Contracts.
Prof S.SELVAM.,M.Com.,M.Phil.,
 (b) Coercion has a wide scope than Duress, Coercion includes threat to property also while Duress includes
actual act of violence over the person and not of property.
 (c) Coercion can be applied by even a stranger, while Duress must be applied by a party to the Contract
upon the other party or to his wife or patent or child.

Undue Influence (S.16)

Definition as per S.16:
 (1) A contract is said to be induced by “undue influence” where the relations subsisting between the
parties are such that one of the parties is in a position to dominate the will of the other and uses that
position to obtain an unfair advantage over the other.
 (2) In particular and without prejudice to the generality of the foregoing principle, a person is deemed to
be in a position to dominate the will of another.
(a) where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to
the other; or
(b) when he makes a contract with a person whose mental capacity is temporarily or permanently affected
by reason of age, illness, or mental or bodily distress.
 3) Where a person who is in a position to dominate the will of another, enters into a contract with him,
and the transaction appears, on the fact of it or on the evidence adduced, to be unconscionable, he burden
of proving that such contract was not induced by undue influence shall lie upon the person in a position to
dominate the will of the other.
 a) A, a man enfeebled by desease or age, is induced, by B’s influence over him as his medical attendant,
to agree to pay B an unreasonable sum for his profession services. B employs undue influence.

Salient Features
The above definition has got the following salient features:-
 (1) One of the two parties to the contract is in a position to dominate the will and mind of the other party.
This is presumed when the parties to the contract have a real or apparent authority over the other or one of
the parties has got a fiduciary relationship which puts him in a position to win over the mind of the other
party. Such position or relationship exists in the cases of minor and guardian; trustee and beneficiary;
son and father, wife and husband or vice-versa.
 The positon is also presumed where the party is disabled or infirm and has to depend upon the other party
to the contract. Mentally deficient and physically disabled people can take the plea of undue influence in
avoiding the contract.
 (2) The dominating party should have obtained an unfair advantage from the weaker party: and
 (3) The transaction between the contracting parties is unconscionable. The bargain is called
 ‘unconscionable’ where the two parties are not on equal footing and one of them is making an exhorbitant
profit of the other’s distress.

Effect of Undue Influence (S.19-A)

 A contract vitiated by undue influence is voidable at the option of weaker party. The court can set aside
such contract-
 (i) either wholly: or
 (ii) where the weaker party has enjoyed some benefit under the terms of the contract, then upon just and
equitable terms.

Burden of Proof
 The weaker party has a right to avoid the transaction on the plea of Undue Influence. It is the other party who is
to prove that he has not exercised any undue influence in getting the consent of the weaker party. If the other
party is unable to prove it, the court shall set aside the transaction.

Transaction with Parda-nishin women:

Who is a parada-nishin women? A woman who observes complete seclusion due to the prevailing custom in her
community is said to be parda-nishin. She does not act independently but has to depend upon someone else for
performing her outward duties. A woman going to the Court to give her evidence, settling gent with her tenant,
collecting rents from them, dealing with other parties in matters of business, falling to outsiders can not be regarded
as a Parda- nishin woman. The training, habit and surrounding circumstances are the main elements to be
considered to decide whether a woman is a Parda-nishin or not Wearing a Burga does no make a woman a Parda-
nishin
Prof S.SELVAM.,M.Com.,M.Phil.,
Distinction between Coercion and Undue Influence
 We can distinguish between Coercion and Undue Influence. The distinction can be made on the following
basis:
 (a) Definition, Coercion is an act punishable under the Indian Penal Code, while Influence is not a penal
act.
 (b) Nature of force used, Coercion requires physical force exercised by one of the parties to contract,
while undue influence requires moral force.
 (c) Parties Even a stranger’s act may account to coercion, but undue influence can be exercised only by
one of the parties to the contract. Stranger has no place in undue influence.
 (d) Effect. Coercion gives a right to the effected party to repudiate the contract in full but under undue
influence court may set aside the contract absolutely or modify the terms of the contract on such terms
which it feels just and equitable.

“Fraud” : (S.1)
 “Fraud” means and includes any of the following acts committed by a party to contract or with his
connivance, or by his agent, with intent to deceive another party thereto of his agent, or to induce him to
enter into the contract:
 (1) the suggestion, as to fact, of that which is not true, by one who does not to believe it to be true;
 (2) the active concealment of a fact by one having knowledge or belief of the fact;
 (3) a promise made without any intention of performing it;
 (4) any other act fited to deceive;
 (5) any such act or commission 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.
 1. Sir Samuel Romilly argued in Hurgamin Vs. Raseley (1807) Ves. 285;Mulla on the Indian Contract Act
10th Ed. P. 53.

Characteristics
 From the above definition we can state the following characteristics of Fraud:
 (1) The act done by the party is done with an intention to device.
 (2) The act may be done by the party himself or with his connivance by some one else or by his agent.
 (3) The act amounting to fraud may be a suggestion of fact (suggestion false) i.e., the statement being
made is without belief to its truth.
 (4) The act may amount to an active concealment of a fact (suppressio veri) i.e. the party has concealed a
fact which was duty bound to disclose.
 (5) The act amounting to fraud is in the form of a false promise.
 (6) The act or mission is declared fraudulent by the Court or regarded by the Court as a deceit.
 (7) The act committed must have deceived the other party and the party has suffered the damage

Is silence a Fraud?
 Explanation to S.17, states in clear terms that mere silence is not fraud. Where silence amounts to active
concealment, it shall amount to fraud. Thus generally silence does not amount to fraud. However where a
party chooses to speak, he must do so clearly and fully. He should not make a partial and fragmentary
statements of fact, so that the other party is misled. The court has decided in Bimla Bai vs Shankarlal (AIR
1959 M.P. 8) that a partial statement verbally accurate may be as false a statement as if it has been
misstated fully. A father called his illegitimate son, a ‘son’ at the time of fixing his marriage. It was held
that the statement was false and thereby fraudulent.

Effects of Fraud
 Fraud gives the following rights to the aggrieved party.
 (1) He can avoid the contract and file a suit on the other party for damages; or
 (2) He can revoke the contract, or
 (3) He can refuse to fulfill his part of the promise and defend the suit filed by the other party for the
breach of contract for damages or specific performance, or
 (4) He can treat the contract as a valid one and ask for the specific performance, or for damages in
addition to the substitution of the original contract.
Prof S.SELVAM.,M.Com.,M.Phil.,

Misrepresentation (S.18)
 Misrepresentation has been defined by the Act as follows: “Misrepresentation” means and
includes:-
 (a) the positive assertion, in a manner not warranted by the information of the person
making it, of that which is not true though he believes it to be true;
 (b) any breach of duty which without an intent to deceive, gains an advantage to the
person committing it, or any one claiming under him, by misleading another to his
prejudice or to the prejudice of anyone claiming under him.
 (c) 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.

Characteristics
 The ingreditients of a contract vitiated by misrepresentation are: (a) There must be a
misstatement of a material fact.
 (b) The statement must not be a mere opinion, or hearsay, or commendation, because
praise carries no obligation.
 (c) The mis-statement must be made with the intention that the other party shall act upon he
contract.
 (d) The other party must have been induced by the mis-statement.
 (e) The statment being made is a wrong one, although the party making it has not known it to
be false.
 (f) The statement has been made by the party to the contract or his agent and not by a
stranger.

Effect of Misrepresentation
 The party being affected by misrepresentation has got the following rights: (1) He can
avoid or revoke the contract; or
 (2) He can affirm the contract and insist on the misrepresentation to be made good, if it
is possible to do so; or
 (3) He can rely upon the misrepresentation as a defence to an action of the contract.

Basis Fraud Misrepresentation

Intention In Fraud the party’s intention is to deceive the other while in Misrepresentation the party
party and got the benefit from him does not have any intention to
deceive. It makes a careless
misstatement of facts of only.

Rights: Faurd gives two rights to the aggrieved party, a right to while misrepresentation give only
action for damages and also to avoid the contract, one right, i.e. to avoid the contract.
It does not allow any damages.

Plea Fraud does not allow the defendant to take the place but defendant is allowed to take
that the plaintiff had means to discover the truth this plea in case of
misrepresentation

Penalty : The party defrauding the other can be prosecuted for but such is not the case in
cheating under I.P.C also misrepresentation
Prof S.SELVAM.,M.Com.,M.Phil.,

Distinction between Fraud and Misrepresentation