BUSINESS LAWS

B.COM(H) 1st
Sem

FREE CONSENT
Meaning of Free Consent
◻ Section 13 of Contract Act defines the term
„consent‟ and lays down that “Two or more
persons are said to consent when they agree upon
the same thing in the same sense.”
◻ Consent is said to be „free‟ when it is not caused
by:
1. Coercion, Section 15
2. Undue Influence, Section 16
3. Misrepresentation. Section 18
4. Fraud, Section 17
5. Mistake, Sections 20,21& 22
COERCION
◻ “Coercion is the committing or threatening to
commit, any act forbidden by the Indian Penal
Code, 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.”
Ranganayakamma vs Alwar Setti

◻ Threat to file a law suit – Not coercion as it is not

forbidden by IPC. But a threat to file suit on false
charges charge constitutes coercion.

◻ Threat to commit suicide

Effect of Coercion-
◻ Voidable contract at the option of the
aggrieved party.
◻ Can rescind a variable contract or agree to it.
◻ If contract rescind – restore all benefits.
◻ The burden of proof lies on aggrieved party.
 UNDUE INFLUENCE
◻ A contract is said to be induced by undue influence where,
(i) 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 (ii) he uses the position to obtain an unfair
advantage over the other.
◻ 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,
e.g., the relationship between master and servant, police
officer and accused; or
b) Where he stands in a fiduciary relation to the other. Father
and son, guardian and ward, solicitor and client, doctor and
patient, Guru (spiritual advisor) and disciple, trustee and
beneficiary, etc.; or
c) Where 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, eg., old illiterate
persons.
Presumption of Undue
Influence
◻ There is, however, no presumption of undue
influence in the following cases:
1. Husband and wife (in case of persons
engaged to marry, presumption of undue
influence will arise).
2. Mother and daughter
3. Grandson and grandfather
4. Landlord and Tenant
5. Creditor and debtor.
 Burden of proof and rebutting the
presumption
◻ The burden of providing that the person who
was in a position to dominate the will of
another, did not use his position to obtain an
unfair advantage, will lie upon the person who
was in a position to dominate the will of the
other.
Effect of Undue Influence
◻ Voidable at the option of the aggrieved policy.
◻ Restoration of benefits- The court has the
discerning onto direct the aggrieved party for
refunding the benefits in whole or part or not at
all.
◻ Unconscionable transaction- High rate of
interest charged by money lender.
Contracts with Pardanashin
Women
◻ A women who remains completely secluded from
the outsiders (outside her family) because of the
custom of her community
◻ She can rescind the contract on the basis of
undue influence.
◻ For proving the absence of undue influence the
other party will have to prove that.
a) The terms of the contract were fully explained to
her
b) She understood their implications
c) She freely consented to the contract
Coercion Vs Undue Influence
Basis Coercion Undue Influence
Consent Given by threatening Given by dominating the
will
Character Physical Character Mental pressure or
moral pressure
Criminal Act Involves criminal Act No criminal act involved

Burden of Proof Aggrieved party Dominant Party

Restoration of Entire restoration Court may direct

Benefits restoration in whole or
part
Misrepresentation
◻ Statement of fact made by one party to the other either
before or at the time of contact, relating to some matter,
essential to the contract.
◻ According to Section 18 „Misrepresentation‟ means and
include:
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; or
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 any one claiming under him; or
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.
◻ Thus, as per Section 18, there is misrepresentation in the following
three cases:
a) Positive assertion of unwarranted statements of material facts
believing them to be true. If a person makes an explicit statement
of fact not warranted by his information( i.e., without any
reasonable ground), under an honest belief as to its truth though
it is not true, there is misrepresentation. Eg: A says to B who
intends to purchase his land, “ My land produces 10 quintals of
wheat per acre.” A, believes the statement to be true, although
he did not have sufficient grounds for the belief. Later on, it
transpires that the land produces only 7 quintals of wheat per
acre. This is a misrepresentation.
b) Breach of duty which brings an advantage to the person
committing it by misleading the other to his prejudice. This clause
covers those cases where a statement when made was true but
subsequently before it was acted upon, it became false to the
knowledge of the person making it. In such a case, the person
making the statement comes under an obligation to disclose the
change in circumstances to the other party, otherwise he will be
guilty of misrepresentation.
Effects of Misrepresentation
◻ In case of misrepresentation, the aggrieved
party has two alternative courses open to him-
i. He can rescind the contract, treating the
contract as voidable; or
ii. He may affirm the contract and insist that he
shall be put in the position in which he would
have been if the representation made had
been true (Sec 19).
Fraud
◻ According to Section 17,„ fraud means and
includes any of the following acts committed
by a party to a contract, or with his
connivance, or by his agent, with intent to
deceive or to induce another party thereto or
his agent, to enter into the contract:
1. The representation that a fact is true when it
is not true by one who does not believe it to
be true.
2. The active concealment of a fact by a person who has
knowledge or belief of the fact- Mere non-
disclosure is not fraud, where there is no duty to
disclose.
Caveat Emptor or „ Buyer Beware‟ is the principle in
all contracts of sale of goods. As a rule the seller is
not bound to disclose to the buyer the faults in the
goods he is selling.
Eg: A, a horse dealer, sells a mare to B. A knows that
the mare has a cracked hoof which he fills up in such
a way as to defy detection or on enquiry from B, A
affirms that the mare is sound. The defect is
subsequently discovered by B. There is „fraud‟ on the
part of A and the agreement can be avoided by B as
his consent has been obtained by fraud.
3. A promise made without any intention of
performing it- If a man while entering into a
contract has no intention to perform his
promise, there is a fraud on his part.
4. Any other act fitted to deceive-“ The fertility of
man‟s invention in devising new schemes of
fraud is so great that it would be difficult, if not
impossible to confine fraud within the limits of
any exhaustive definition.
Can Silence be Fraudulent?
◻ The explanation declares that “mere silence as
to facts likely to affect the willingness of a
person to enter into a contract is not fraud,
unless:
i. The circumstances of the case are such that,
regard being had to the, it is the duty of the
person keeping silence to speak, or
ii. Silence is, in itself, equivalent to speech”
◻ Silence is fraudulent, if the circumstances of the case
are such that „ it is the duty of the person keeping
silence to speak‟.
◻ When the parties stand in a fiduciary relation to each other,
the person in whom confidence is reposed is under a duty to
act with utmost good faith and to make a full disclosure of all
material facts concerning the transaction known to him.
Principle and agent, solicitor and client, guardian and ward,
and trustee and beneficiary.
◻ Contracts of insurance
◻ Contract of marriage engagement
◻ Contracts of family settlements.
◻ Share allotment contracts

◻ Silence is fraudulent where the circumstances are such

that “silence is, in itself equivalent to speech.”
Effect of Fraud
1. He can rescind the contract i.e., he can avoid
the performance of the contract; contract
being voidable at his option; or
2. He can ask for restitution and insist that the
contract shall be performed, and that he shall
be put in the position in which he would have
been, if the representation made had been
true.
3. The aggrieved party can also sue for
damages, if any. Fraud is a „civil wrong‟
hence compensation is payable.
Special points
◻ For giving rise to an action for deceit, the following
points deserve special attention:
• Fraudulent representation must have been
instrumental in inducing the other party to enter into
the contract i.e., but for this, this aggrieved party would
not have entered into the contract.
• The plaintiff must have been actually deceived by
fraudulent statement. A deceit which does not deceive
gives no ground for action.
• The plaintiff must be thereby damnified. Unless the
plaintiff has sustained a damage or injury, no action
will lie.
• In cases of fraudulent silence, the contract is not
voidable, if the party whose consent was so caused
had the means of discovering the truth with ordinary
diligence.
Loss of Right of Rescission
1. Affirmation
2. Restitution not possible
3. Lapse of time
4. Rights of third parties
Mistake
◻ Mistake may be defined as an erroneous belief
concerning something. It may be of two kinds:
1. Mistake of law
2. Mistake of fact
Mistake of Law
◻ Mistake of law may be of two types:
a) Mistake of law of the country or Mistake of law:
Every one is deemed to be conversant with the
law of his country, and hence the maxim
“ignorance of law is no excuse.” Mistake of law,
therefore, is no excuse and it does not give right
to the parties to avoid the contract.
b) Mistake of foreign law: Mistake of foreign law
stands on the same footing as the „mistake of
fact‟. Here the agreement is void in case of
„bilateral mistake‟ only, as explained under the
subsequent heading.
Mistake of Fact
1. Bilateral mistake- Where parties to an agreement
misunderstood each other and are at cross purposes,
there is a bilateral mistake. Here there is no real
correspondence of offer and acceptance, each party
obviously understanding the contract in a different
way. In case of bilateral mistake of essential fact, the
agreement is void-ab-initio.

Eg- Mistake as to existence of subject matter,

mistake as to identity of the subject matter,
mistake as to the title of subject matter,
mistake as to the quantity or
quality of subject matter.
2. Unilateral Mistake- A contract is not voidable
merely because it is caused by one of the
parties to it being under a mistake as to a
matter of fact. Accordingly, in case of unilateral
mistake a contract remains valid unless the
mistake is caused by misrepresentation or
fraud.
However, in the following cases, where the
consent is given by a party under a mistake
which is so fundamental as goes to the root of
the agreement and has the effect of nullifying
consent.
Agreement Void ab-initio
1. Mistake as to the identity of a person contracted with
where such identity is important. Said vs Butt.

1. Mistake as to the nature and character of the written

document
Eg- an old illiterate women executed a deed under the
impression that she was executing a power of
attorney authorising her nephew to manage her
estate, while in fact it was a deed of gift in favour of
her nephew. The evidence showed that women never
intended to execute such a deed of gift nor was the
deed read or explained to her. The document was
held void.(Bala devi vs Santi Mazumdar)
Thank
you
 INDEMNITY
AND
GUARANTEE

B.COM(H) 1 st Sem
Definition: SEC. 124-

A contract by which one party promises to save or

protect the other from loss, injury or financial burden
caused to him, it is called a “Contract of Indemnity”.

E. g. A lost his share certificate. He applied for a

duplicate certificate. The co. asked A to furnish an
„indemnity bond‟ in its favour to protect it against any
claim that may be made by any person on original
certificate.
 TWO parties- Indemnity holder & Indemnifier
The person who promises to make good the loss is indemnifier
(promisor) and the person whose loss is to be made good is called
indemnified or indemnity-holder (promisee).

 A contract of indemnity must have all essential elements of a valid

contract, it may be express or implied. For eg. When shares are
transferred the transferee is impliedly bound to indemnify the
transferor against future calls made before the registration of
transfer.

 All insurance contracts are contracts of indemnity except life

insurance.
 For instance a vendor contracts to indemnify the vendee against the costs of litigation
if title to the property is disturbed, and the vendee is sued by a rival owner, then the
vendee, i.e., the indemnity-holder has the following rights:

o To claim damages which he may be compelled to pay in respect of suit

o To claim costs in bringing or defending such suit
o Other payments made for compromise authorised by the
indemnifier
Definition: SEC. 126-

A “Contract of Guarantee” is a contract to perform the promise, or

discharge the liability, of a third person in case of his default.

E.g. Guarantee for credit sales

 Parties to guarantee

 Surety- Who gives Guarantee

 Principal Debtor- For whom guarantee is given
 Creditor- To whom guarantee is given

No of Contracts

 Between principal debtor & creditor

 Between creditor & surety
 Between surety & principal debtor
Basis Indemnity Guarantee
Meaning A contract by which one A “Contract of
party promises to save the Guarantee” is a contract
other from loss caused to to perform the promise,
him by the conduct of the or discharge the
promisor himself, or by liability, of a third
the conduct of any other person in case of his
person, is called a default.
“Contract of Indemnity”.

Section Sec 124 Sec 126

No. of Parties Two-Indemnifier & indemnity Three-creditor, principal
holder debtor & surety
No. of Contracts One-b/w Indemnifier & Three- b/w creditor &
indemnity holder principal debtor;
creditor & surety; surety
& principal debtor
 Basis Indemnity Guarantee

Nature of Liability Primary Secondary i.e. the surety

is liable only on
default of principal
debtor
Object Compensation of loss Surety of Debt

Existence of Debt or In most cases there is no Existence of debt is

duty existing debt or duty. necessary

Right to Sue The indemnifier cannot sue Surety, after discharging

the third party for loss the debt owing to the
caused in his own name. creditor can proceed
against the principal
debtor in his own right.
 Sec 128 provides “the liability of the surety is co-extensive with that of the
principal debtor, unless it is otherwise provided by the contract”. It can neither
more nor less, although by a special contract it may be made less than that of
principal debtor, but never greater.
1. The liability of the surety is secondary, i.e., the surety is liable only on default
of principal debtor.
2. The liability of surety arises immediately on default. If the contract is silent, the
creditor may file a suit against the surety directly without suing the principal
debtor.
3. The surety will not be liable where the creditor has obtained guarantee by
misrepresenting a material part of the transaction or by keeping silence.
4. There is no such thing that surety will be liable only if principal debtor is liable.
One may be liable while the other may not be.
 Ordinary or Specific guarantee is given for a specific
debt or transaction, it comes to an end as soon as the
liability under that transaction ends.

 Continuing guarantee extends to a series of distinct

and separable transactions. It is just like standing offer
which is accepted by the creditor every time a
subsequent transaction takes place.
Revocation of continuing guarantee
 Rights against the principal debtor

 Right of SUBROGATION (sec 140): Surety steps into

the shoes of creditor after discharge of a liability and is
entitled to all the remedies which the creditor could
have enforced against the principal debtor.

 Right to claim INDEMNITY (sec 145): there is an

implied promise in every contract of guarantee to
indemnify the surety by the principal debtor.
 Rights against the Creditor

 Right to benefit of creditor’s securities (Sec 141):

For instance mortgage of property of principal
debtor.

 Right to Claim set-off (if any) : counter claims

that principal debtor might possess against the
creditor.
 Right of contribution against Co- Sureties

 Where they are sureties for the same debt for similar
amount. (equality of burden and benefit)

 Where they are sureties for the same debt but for different
sums : Subject to the limit fixed by his guarantee, each
surety is to contribute equally & not proportionately to the
liability undertaken
 A:10000 B:20000 C: 40000 as a sureties of D
 Default of 30000: 10000 each
 Default of 40000: A-10000, B-15000, C-15000
 Default of 60000: A-10000, B-20000, C-30000
 By Revocation

 By notice

 By death of surety
 By conduct of creditor-principal debtor

 By variance in terms of the contract

 Release or discharge of debtor

 Arrangement by creditor with principal debtor without

surety‟s consent. (sec 135)

 By loss of security
 By Invalidation of Contract of Guarantee

 Guarantee obtained by misrepresentation

 By concealment

 Failure of Consideration