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An Analysis Of Voidable Contracts

When a person has assented to an offer given to him by another person, he is said to accept the offer and this accepted offer becomes a promise. When two parties who have accepted each other’s promise and have provided the adequate consideration the promise turns into an agreement.[1] This is given in section 2 (e) of the Indian Contracts Act, 1872. An agreement which is enforceable by law takes the form of contract. This is reiterated in section 2 (h) of the ICA, 1872.

Types of Contract:
  1. Valid contract
    Section 2 (h) of the ICA says that an agreement which is enforceable by law is considered as a valid contract.[2]
  2. Void contract
    Section 2 (g) of the ICA says that an agreement which is not enforceable by law is considered to be void. [3]
  3. Voidable contracts
    Section 2 (i) of the ICA says “An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of other or others, is a voidable contract.[4]

There are basically three type of voidable contracts:
  1. Initially voidable
  2. Subsequently voidable
  3. Voidable by law (contracts become voidable due to other laws in subsisting in the country e.g. section 8 of Hindu Minority Act)
     
Initially voidable contracts
These types of contracts are covered under section 19 and section 19 (A) of the ICA. Section 19 covers those type of agreements that are entered by the ways of coercion, fraud and misrepresentation. This section precisely says that an agreement which is entered into by the parties without the free consent of any one of the parties and the consent is taken through coercion, fraud or misrepresentation, the contract is said to be voidable at the option of the party whose consent has been taken with the help of these means. It says that if the party whose consent has been caused by fraud or misrepresentation wants the contract to go on then he shall be put in the position in which he would have been in if the misrepresentation made to him had been true.

There are two exceptions to this section:
  1. If the party whose consent has been caused by silence to a fact or by misrepresentation, which is said to come under the purview of fraudulent as per section 17 and the party has proper means of discovering the truth with ordinary scheme of things then the contract is not said to be voidable.
  2. If the consent given by the concerned party is not caused by the fraud or misrepresentation then it doesn’t make the contract voidable
    Under section 19, three elements are covered due to which the contract is rendered voidable i.e., coercion, fraud and misrepresentation. These terms are discussed in detail in section 15, section 17 and section 18 respectively.

Coercion
Coercion is defined in section 15 of the ICA. It is defined as:
“committing or threatening to commit an act which is forbidden by the Indian Penal Code (45 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.”[5]

The place at which coercion is done doesn’t necessarily require the IPC to be applicable at that place. When consent to a party is taken by coercion, it renders the contract voidable.

Since coercion is said to be applicable on cases which are forbidden by the Indian Penal Code, there have been a lot of discussion on commissions of acts which are naturally detrimental but are not forbidden by the Indian Penal code. An example being the case of suicide.

Suicide is not considered punishable under the IPC but the act in itself could be used to threaten someone to take consent. This was held in a famous case named Chikham Amiraju V. Chikham Seshamma[6], by the Madras High Court. The issue involved was whether threatening to do the act of committing suicide to take the consent of a party, can be considered as coercion.

The facts of the case were such that a Hindu male on account of committing suicide, threatened his wife and his son to deliver to a certain property to his brother. Madras High Court held in this case that the threat given by the man to commit suicide totally amounted to the coercion, given under article 15 of the ICA. There was a difference in the opinion relating to this issue. The dissention judges were of the view that though suicide is not punishable, attempt to suicide in punishable under the IPC. Notwithstanding this fact, the majority opinion was that the reason behind suicide not being punishable is that the one who commits suicide is not available to be punished.

Fraud
Fraud is explained in section 17 of the Indian Contract act. It can be defined as the intentional misrepresentation of facts done by a party in order to deceive the party or in order to induce him to enter into the contract.[7] Fraud renders the contract voidable.

The following acts can be put under the bracket of fraud:
  1. Suggesting a fact this is factually wrong and which the person suggesting knows to be so.
  2. Concealing an active fact, which he has the knowledge of beforehand.
  3. A promise made that is made with an intention of not actually performing it.
  4. Any other deceiving act.
  5. Any act or abstinence that the law specifies to be fraudulent.

Some of the landmark cases discussed on fraud are discussed below:
  1. Derry V. Peek (1889)[8]
    The main issue discussed in this case was that whether the false representation made by the respondent was done with the intention to deceive the party or not. The facts of the case were such that a company under the false impression that they have been allowed by the concerned authority to use steam for running the tram, put out a pamphlet that they are authorized to do so. Since they didn’t have the required permission to do, the company was wounded up. The shareholder of the company sued the company for fraud. The court held in this case that the company is not liable for fraud. The court gave the rationale that if the false representation is made believing that the statement to be true it would not amount to fraud.
     
  2. Ningawwa V. Byrappa Shiddappa Hireknarbar[9]
    In this case the expression “any other act fitted to deceive” mentioned in the section 17 was brought into light. The facts of this case were such that a husband, in order to gain advantage of the illiteracy of his wife made her to sign a document that he claimed had the documents of two lands but actually contained the documents of four lands. The court held that the act done with an intention to deceive and would subsequently come under the purview of fraud.

Misrepresentation:
When misrepresentation is involved in this agreement it renders the agreement voidable.[10] This is explained in section 18 of the Indian Contract Act and includes:
  1. A positive statement made by the person, which according to his facts is not true, believing it to be true asserts it.
  2. Any type of breach done by a party which gives unfair gain to one party by misguiding the other party.
  3. When the party makes a substance as to the mistake related to the substance of the thing, which is the subject matter of the said contract.

Some of the landmark cases discussed related to misrepresentation has been discussed below:
  1. Bisset V. Wilkinson[11]
    The main issue of this case was whether a statement of opinion can hold the contract voidable owing to the fact that it was done by misrepresentation. The contract given was for the sale of a land. The seller was aware of the fact that sale is done for sheep-farming. He was of the opinion that the land is suitable to occupy 2000 sheep. The land in turn came out to be not useful for this purpose. The purchaser pleaded misrepresentation and refused to pay the prize. The privy council held that buyer can’t back from the contract as misrepresentation can be done only if the representation done is related to a certain specific fact. In this case the respondent had only given his opinion related to the land.
     
  2. R. v. Kylsant[12]
    The facts of the case were such that a company in its prospectus stated that it had paid all its dividends, regularly. This made an impression in the mind of people that the company is running in profit. But actually, the company was running into losses. It was held that the non-disclosure of this fact was held to be misrepresentation.

Section 19 (A)

In an agreement when the consent of a party is taken on account of being under influence, the agreement becomes a contract that is voidable at the option of the option of the party whose consent was so taken. This is given in section 19(A) of the ICA, 1872. The contract can be set aside by the court in a way it seems to be correct if one of the parties has received undue benefit.

Undue Influence- It is said that undue influence is being exercised when the relationship existing between the parties is such that one person is able to dominate the will of another and also use that to gain undue advantage.[13]

A person is said to exercise under influence if:
  1. He holds apparat or real authority over the other party.
  2. When in a contract the mental capacity of one person is disturbed due to age, illness, bodily and mental distress.
The burden of proof that undue influence is not being exercised depends upon the party who is in the position to dominate the will of the other party.

Some of the landmark cases discussed on undue influence are listed below:
  1. William v. Bayley[14]
    The facts of the case were such that a son took the signature of his father in various of the promissory notes and paid it to the banks. When the bank came to know about the truth, it threated to take harsh prosecution against the sun if no satisfactory action to rectify this. Due to this reason the father mortgage a property to fill in for the promissory notes. He then moved to the court to make the agreement canceled on the ground it was under influence. The house of lord was of the opinion that the undue advantage was taken by the bank on account of the father fearing that his son would be prosecuted and consequently, the agreement is voidable at the option of the father.

    So, the cases in which the consent of parties or one of the parties is not free right from the starting, are considered to be initially voidable and are delt under section 19 and 19A.
     
  2. Subsequently Voidable Contract
    The contract which starts as a valid but at a later period of time theirs is an option for the one of the parties to rescind it or to go forward with it, theses type of contracts are called subsequently voidable. These contracts are covered in section 39, section 53, section 55 of the ICA.

    Section 39- This section says that if one of the parties to a contract has restrained himself entirely from performing the contract, the promise can end the contract unless he signifies implicitly or explicitly his willingness to continue.

If one of the parties is at the position of undue advantage as a consequence of the voidable contract being rescinded, the aggrieved party can file a suit for the breach. Restitution under section 39 is dealt by section 64 of the ICA.

Section 64 of the ICA says that When a party puts an end to a voidable contract, the other party need not perform and if the rescinding party has incurred any benefit from the contract, he shall restore the benefit he had received.

Muralidhar Chatterjee v. International Film Co Ltd.[15]
The defendants (a firm of film importers) agreed with the plaintiffs to supply three films in three months respectively. The plaintiffs were supposed to pay fixed money. Rs 2000 was paid against this and one film was delivered. But due to some technicalities the film was taken back. So, essentially the money was paid without the film being delivered. The plaintiffs were then of the opinion that there is a breach of contract on account of delay and breach of contract. They sued the firm for the refund of money. The privy council in its judgement said that the money is supposed to be refunded as per section 64 of the ICA. In the judgement Sir George Rankin said “The contract which may be ‘put an end to’ under section 39 is voidable.

Section 53- In a contract that has reciprocal promises, and one of the parties abstains the other from performing the promise, the contract is rendered voidable at the option of the party who was prevented from performing the contract and he also entitled for compensation from the party for any loss suffered.

The compensation aforementioned is dealt under section sec 73 of the ICA. Section 73 says that if the contract is broken, the party who suffers on account of the breach is entitled to receive compensation for any loss or damage done to him in the usual course of breach of contract.

Ramchandra Narayan Nayak v. Karnataka Nerravari Nigam Ltd[16]
The contract was for making a canal and the other department had to supply cement. The digging was commenced by the contractor and the material was not supplied and nor he was allowed to take the material from outside. The department considered this to be breach of contract. The security money was also forfeited. The payment for that done part of the work was all withheld. The court was of the opinion that the forfeited and the held money should be released due to the fact that the department had disabled the contractor from performing the contract.

Section 55- In a contract when a party promises to do a certain thing or things before a specified time and then he fails to do so before the specified time, the contract or the part of contract that hasn’t been performed, becomes voidable at the option of the promisee, if the intention of the parties is that time is the essence of the contract.
If time is not the essence of the parties then the contract doesn’t become voidable. But still the promisee is entitled for compensation.
If the promisee after the lapse of the specified time accepts the performance of the promisor, the promisee cannot claim compensation for the same. (section 62 and section 63)

Bhudra Chand v. Betts[17]
The plaintiff contracted with the defendant to engage his elephant for the purpose of kheda (to capture wild elephants). The contract had time as an essence. The elephant was supposed to be delivered on 1st October, 1910. The defendant applied for extension till 11th and still not delivered it. The plaintiff sued for breach and damages. The court held that the parties had the intention for time to be the essence citing the reason that the extension was asked considering time to be the essence.

So, the cases in which the contracts start normally, but at a later stage it becomes voidable due to one of the parties, are called subsequently voidable contracts and are delt under section 39, 53 and 55.

Agreements cannot be considered to be voidable due to the fact that that they haven’t even taken the form of contract. If the agreement in the process of becoming contract lapses at any stage, the agreement becomes a void straightaway. In a nutshell, the agreement in order to become a contract should fulfill the essentials of section 10 and f it fails to do so, the agreement becomes void.

End-Notes:
  1. India Contract Act, 1872, §, 2(e) No. 9, Acts of Parliament, 1872, (India)
  2. Id, §, 2(h)
  3. Id, §, 2(g)
  4. Id, §, 2(i)
  5. Id, §, 15
  6. ILR (1918) 41 Mad 33
  7. Id, §, 17
  8. LR 14 AC 337
  9. AIR 1968 SC 956: (1968) 2 SCR 797
  10. Id, §, 18
  11. 1927 AC 177(PC)
  12. (1932) 1 KB 442
  13. Id, §, 19(A)
  14. (1866) LR 1 HL 200
  15. AIR 1974 SC 1924
  16. 15 SCC 140: (2014) 5 SCC (Civ) 159
  17. 22 cal LJ 566: 33 IC 347

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