No Free Consent, No Contract: A Justification

- Md. Rafiqul Islam Hossaini

Contract_1707395

Published On - March 20, 2017 [Vol. 6, Jan - Jun, 2017]

1. Introduction:

The term “contract” was derived from the Latin word “contractum” which means drawn together.[i] Contract is such a device which is necessary for our day to day activities. History proves that, our society is created by “social contract” theory.[ii] Human being cannot think of a day without forming contract. From every small transaction to big business dealings are being possible because of contract. In short, contract is an inevitable part of our society,  without which a deadlock will be created.

2. Contract defined by scholars:

Salmond defined contract as “Agreement creating and defining obligations between the parties.” Where, contract is defined by Pollock as “Any agreement or promise enforceable at law.” Furthermore, Black Stone defined contract as “Agreement upon consideration basis to do or not to do a particular thing.”[iii]

3. Legal definition of contract:

Contract is defined simply as the legally enforceable agreements.[iv] In simple term, agreements that are enforceable by law can be defined as contract. Therefore, a conclusion can be drawn as, all agreements are not contract but all contracts are agreements. The conclusion drawn above has been confirmed and approved by the court in the case of Abdul Gani Sheikh V. Jagadish Chandra Mridha and Others.[v] Moreover, agreement is defined as, promise or set of promise forming the consideration for each other.[vi] Definition of agreement ensures that, the consensus or meeting of mind is prima facie requirement of an agreement. This view has been confirmed by the court in the case of Bangladesh Mutkijoddha Kalyan Trust V. Kamal Trading Agency and Others.[vii] Furthermore, a promise is constituted when a proposal is accepted.[viii] Additionally, proposal is the indication of one’s willingness to do or abstain from doing something with a view to obtaining the assent of the person to whom the proposal is made for such act or abstinence.[ix] On the other hand, acceptance means the assent for every terms and condition of the proposal of the person to whom the proposal is made.[x] In addition to that, consideration is complete “when at the desire of the promisor (who has made the promise) the promisee (to whom the promise is made) or any other person has done or abstained from doing or does or abstains from doing or promises to do or to abstain from doing something….”[xi]

4. Types of Contract:

Contract can be categorised on the basis of: 1. Formation; 2. Nature of consideration; 3. Execution and; 4. Validity. On the basis of formation, contract can be classified into tree types: 1. Express; 2. Implied and; 3. Quasi Contract. If the contract is made in words then it will be deemed as express contract but if the contract is made otherwise than in words then it will be deemed as implied contract. However, in quasi contract there is no contractual relationship between the parties and such contracts are created by virtue of law. However, on the basis of nature of consideration, contract can be classified into two types: 1. Bilateral contract and; 2. Unilateral contract. Contracts for which consideration from both the parties are required are called bilateral contracts and contracts for which consideration from one of the parties is required are called unilateral contracts. Moreover, on the basis of execution, contract can be classified into two types: 1. Executed contract and; 2. Executory contract. Contracts for which performance is done are called executed contracts and contracts for which performance needs to be done in the future are called executory contracts.[xii] Furthermore, on the basis of validity, contract can be classified into five types: 1. Valid; 2. Void; 3. Voidable; 4. Illegal and; 5. Unenforceable. An agreement enforceable by law is a valid contract and an agreement which ceases to be enforceable by law is a void contract. Voidable contracts are those contracts which can be validated at the option of one or more of the parties to an agreement. Moreover, illegal contracts are those which are not legal in the eye of law and unenforceable contracts are those which are not enforceable by the court of law for some technical reasons.[xiii]

5. Basic ingredients for a valid contract:

To become enforceable by law or to be a valid contact, an agreement has to fulfill the following conditions: 1. The parties of the agreement must have the competency to form the agreement; 2. The consent of the parties to form the agreement must be free; 3. There must be a lawful consideration for the agreement; 4. The object of the agreement must be lawful; 5. The law does not expressly declare the agreement as void.[xiv]

6. Free and voluntary consent:

Free and voluntary consent is an unavoidable element for a valid contract. To constitute a contract even a mere consent is not enough, it must be free and voluntary according to law.[xv] Consent is done when two or more persons agree upon the same thing in the same sense.[xvi] Therefore, a contract is not formed if the persons do not agree upon the same thing in the same sense. Free and voluntary consent is required because this is the indication that the parties have the intention to create legal relationship between them which is also essential for a contract. In commercial agreements it is generally presumed that, the parties have intention to create legal relationship unless they expressly state otherwise. This view has been confirmed by the UK House of Lords in the case of Rose & Frank Co v JR Crompton & Bros Ltd.[xvii] However, the concept of intention to create legal relationship has been ignored in domestic and social relationship by virtue of public policy. Balfour v Balfour[xviii] case is an example where the court refused to enforce the agreement between husband and wife. But the relationship between stranger couple is not covered by Balfour decision; in such situation the court reversed the above decision in the case of Merritt v Merritt. [xix] The best way to find out whether the parties have intention to create legal relationship between them is not to use the “subjective test” rather it is necessary to use the “objective test”; and the objective test had been used by the court in the case of Carlill v Carbolic Smoke Ball Company.[xx] Consent is considered as free and voluntary if it is not caused by: 1. Coercion; 2. Undue influence; 3. Fraud; 4. Misrepresentation and 5.Mistake.[xxi] As such, consent given in the agreement must not be considered as free and voluntary if it is affected by any of the five above mentioned ingredients. Additionally, if free and voluntary consent is affected, valid contract cannot be formed.[xxii]

6.1. Coercion:

First important element by which free and voluntary consent is affected is coercion. If the consent of the party to a contract is taken by way of coercion, contract is void because the consent given is not free and voluntary.[xxiii] Coercion is the combination of two types of elements: 1. Substantial and; 2. Psychological element. Substantial element is done if any of the following acts are committed: 1. Committing of threatening to commit any act forbidden by the Penal Code, 1860; 2. Unlawfully detaining or threatening to detain any property, to the prejudice of any person whatever. Psychological element of coercion is that, the person must have done any of the above mentioned acts with intention of achieving the consent of the other to enter into an agreement.[xxiv]This view has been confirmed by the English court in the case of Barton v Armstrong,[xxv]where contract was constituted under threat. In Barton v Armstrong[xxvi] the Privy Council held that, the burden of proof is on the defendant to prove that, the threats had made no contribution to the decision of signing the contract. However, in the case of Skeate v Beale[xxvii] the issue of coercion was rejected where the tenant alleged that he was in distress by the threat of his landlord as his landlord threats to sale his property immediately unless he sign an agreement to pay the due payment. Moreover, in the case of Maskell v Horner[xxviii] the court held that, a person can recover his paid money under the law of restitution, where he is not legally bound to pay the sum but has paid under pressure or compulsion or pressing necessity or seizure.

6.2. Undue influence:

It is considered that the contract has been induced by undue influence if the following two conditions are present: 1. Nature of relationship and 2. Use of relation.[xxix]Considering the first condition, the relationship between the parties is such that, one of the parties is in a superior position than the other and dominates the will of the other. And the second condition emphasizes that the relation must be used to take unfair advantage.[xxx] These two conditions have been confirmed by the court in the case of Bindu Mukhi V. Sm. Sarda Sundari.[xxxi] However, there are some situations where it is presumed that a person is in the position to dominate the will of the other: 1. Where the person holds a real authority or apparent authority over the other; 2. Where the person stands in a fiduciary relation to the other; 3. Where the person entered into a contract with other whose mental capacity is permanently or temporarily affected by some specified reasons.[xxxii] It was held in the case of Purnendu Kumar Das V. Hiran kumar Das[xxxiii]that, a case under section 406 of the Penal Code 1860[xxxiv] is sufficient to prove that coercion and undue influence was placed over the defendant. However, in respect of the presumed undue influence the burden of proof is reversed. Generally, the burden of proof is simple; he who claims something must prove it. As such, if someone claims that his consent was taken by undue influence then he has to prove it, but section 16 (3) of the Contract Act, 1872 provides an exception to this general rule. Therefore, according to section 16 (3) of the Contract Act, 1872 the burden of proof is shifted to the person with the superior authority over the other that, he has not entered into the contract by  using any undue influence. As such, in such circumstances undue influence is generally presumed by law.[xxxv]This sort of burden of proof is seen in the case of Abul Hossain V. Farooq and Others,[xxxvi] where the person with the dominant position failed to prove that the contract was not formed by using undue influence. In Bindu Mukhi V. Sm. Sarda Sundari case the court held that, undue influence is generally occurred where there is a fiduciary relationship between the parties. In a relationship between strangers undue influence may be placed by way of coercion, oppression, or compulsion. Undue influence cannot always be proved directly.[xxxvii]

6.3. Fraud

Free and voluntary consent can also be affected by fraud. Definition of fraud includes two significant elements: 1. Substantial and; 2. Psychological elements. Substantial element includes any of the following five acts: 1. Untrue suggestion as to fact without believing its truth; 2. Active concealment of fact, knowing the actual truth; 3. Making promise without having intention to perform; 4. Any other act done for  deception; 5. Any other act or  omission that the law declares as fraudulent.[xxxviii] The psychological element requires that any of the above mentioned acts must have to be done with the intention to deceive another party or his agent to induce him to enter into the contract.[xxxix] Explanation of section 17 of the Contract Act, 1872 provides that, mere silence as to the fact does not amount to fraud but there are two exceptions. This means silence would amount to fraud: 1. If the person remaining silent is in duty to speak and 2. The silence of the person is equivalent to speaking.[xl] Though “fraud” is a wide term, in Derry V. Peek[xli] the UK House of Lords provided three propositions for establishing fraud: 1. The crime of fraud must be proved; 2. The representation was made knowingly or without believing its truth or being reckless as to its truth; 3. Motive of the person is immaterial if he is guilty of fraud. Moreover, in the English case of Polhill V. Walter[xlii] the misrepresentor made the false statement for the benefit of his principal not for his own benefit, but he was held liable for the tort of deceit. Deceit is difficult to prove and it is not alleged until there is a good ground to believe that fraud has occurred.[xliii]

6.4. Misrepresentation

Free and voluntary consent for a contract can also be affected by misrepresentation.  According to section 18 of the Contract Act, 1872 misrepresentation can be committed by a person through three types of acts: 1. Making unwarranted false statement, believing its truth; 2. Breach of his duty without any intention to deceive, which misleads another to enter into an agreement; 3. Causing innocently a party to an agreement to make a mistake as to the subject matter of the agreement.[xliv] Traditional rule was that, misrepresentation must be an unambiguous false statement of fact. However, the case of Pankhania V. London Borough of Huckney[xlv] confirmed that, false statement of law can also be counted as an actionable misrepresentation. However, this case is not a general example.[xlvi]

6.5. Mistake

Mistake can also affect the free and voluntary consent for an agreement. Provisions concerning mistake have been discussed under sections 20-22 of the Contract Act, 1872.  Analyzing these sections mistake can be divided into two dimensions: 1. Mistake of fact and; 2. Mistake of law. If both the parties to an agreement make a mistake as to the matter of fact then the agreement would be regarded as void;[xlvii] but the agreement is voidable if one of the parties to an agreement makes a mistake as to the matter of fact.[xlviii] However, in respect of mistake of law, a contract is not voidable if mistake was caused as to the matter of law in force in Bangladesh; and same result for mistake of fact will occur if mistake is made as to the matter of law not in force in Bangladesh.[xlix]However, the case of Baka Gopal Basak V. Kafiluddin Chowdhury[l] approved that, the contract entered into between the parties as to the mistake of fact has no binding effect on the parties. However, a problem may arise for mistake as to identity of the subject matter. What will happen if both the parties make a mistake as to the identity of the subject matter? This means both the parties dealing with one thing but in fact they are dealing in another thing. There is no clear-cut English law decision in this field rather having a Canadian case of Diamond V. British Columbia Thoroughbred Breedder’s Society.[li]

7. Effect of Coercion, Misrepresentation, Fraud, Undue influence and Mistake

If the consent of a party to an agreement is taken by coercion, misrepresentation or fraud, the contract is voidable at the option of the party whose consent was taken by using coercion, misrepresentation or fraud.[lii] However, there is a variation in section 19 in respect of consent taken by misrepresentation or fraud. In this regard section 19 of the Contract Act, 1872 provides that, if consent is taken by using misrepresentation or fraud, the party to the contract whose consent was so caused may insist the contract to be performed but he has to be put in the position where he would have been if the representation made had been true.[liii] However, the first exception of section 19 provides that, the contract is not voidable if consent was caused by misrepresentation or fraud and the party whose consent was so caused has the opportunity to discover the truth with ordinary diligence.[liv]  Moreover, the second exception of section 19 provides that, the contract is not voidable if the party to whom such misrepresentation or fraud was practised did not consent to the contact due to such misrepresentation or fraud.[lv]

If the contract is formed by using undue influence, the contract becomes voidable at the option of the party whose consent was obtained by undue influence.[lvi] Therefore, the party whose consent was taken under undue influence has only the legal right to validate the contract.

Regarding the principle of mistake, bilateral mistake of fact (mistake made by both parties) would render an agreement void[lvii] but unilateral mistake of fact (mistake made by one party) would make a contract voidable.[lviii] Mistake as to the matter of law whether bilateral or unilateral would not render a contract voidable if the mistake was made as to law in force in Bangladesh but same rule for mistake of fact would apply in respect of mistake of law not in force in Bangladesh.[lix] In the English case of Bell V. Lever Brothers Ltd[lx] the court set aside the contract between the parties by nullifying the consent as it was caused by common mistake.

8. Conclusion:

Mere consent is not enough, free and voluntary consent is necessary for a valid contract. Free and voluntary consent can be affected by coercion, undue influence, misrepresentation, fraud, and mistake. However, both statutory and case laws are in favour of the person whose consent was caused by one of the five above mentioned acts. According to the legal provisions, party to an agreement whose consent was taken by coercion, undue influence, misrepresentation or fraud has the authority to validate the contract. In respect of misrepresentation or fraud the party whose consent was so caused shall be put in the position where he would have been if the representation had not been made. However, misrepresentation and fraud has no effect upon the party whose consent was so caused if the party to the contract had the opportunity to find out the truth with ordinary diligence or had not consented because of such misrepresentation or fraud. Furthermore, bilateral mistake of fact and mistake as to law not in force in Bangladesh would render an agreement void. Where, unilateral mistake of fact and mistake as to law in force in Bangladesh would render a contract voidable.

Notes:

[i] http://www.lawsofbusiness.com/2013/04/what-is-contract.html

[ii] http://www.iep.utm.edu/soc-cont/

[iii] http://www.lawsofbusiness.com/2013/04/what-is-contract.html

[iv] The Contract Act, Section 2(h), (1872)

[v] Abdul Gani Sheikh V. Jagadish Chandra Mridha and Others, 2 BLC 121

[vi] The Contract Act, Section 2(e), (1872)

[vii] Bangladesh Mutkijoddha Kalyan Trust V. Kamal Trading Agency and Others, 50 DLR (AD) 171 (1998)

[viii] The Contract Act, Section 2(b), (1872)

[ix] The Contract Act, Section 2(a), (1872)

[x] The Contract Act, Section 2(b), (1872)

[xi] The Contract Act, Section 2(d), (1872)

[xii] http://www.lawsofbusiness.com/2013/08/types-of-contracts.html

[xiii] Haque, M. E. (2012). Law of Contract (2nd ed.). Dhaka, Bangladesh: Law Lyceum

[xiv] The Contract Act, Section 10, (1872)

[xv] Haque, M. E. (2012). Law of Contract (2nd ed.). Dhaka, Bangladesh: Law Lyceum, p.97

[xvi] The Contract Act, Section 13, (1872)

[xvii] Rose & Frank Co v JR Crompton & Bros Ltd,  UKHL 2, (1924)

[xviii] Balfour v Balfour , 2 KB 571,(1919)

[xix] Merritt v Merritt, EWCA Civ 6, (1970)

[xx] Carlill v Carbolic Smoke Ball Company,  EWCA Civ 1,  (1892)

[xxi] The Contract Act, Section 14, (1872)

[xxii] Sen, A. K., Mitra, J. K., & Mukherjee, S. (2006). Commercial law: including company law and Industrial law business law (25th ed.). Kolkata: The World Press Pvt. Ltd.

[xxiii] The Contract Act, Section 15, (1872)

[xxiv] Haque, M. E. (2012). Law of Contract (2nd ed.). Dhaka, Bangladesh: Law Lyceum, p.99

[xxv] Barton v Armstrong, AC 104, (1976)

[xxvi] Barton v Armstrong, AC 104, (1976)

[xxvii] Skeate v Beale, 11 Ad&El 983, (1840)

[xxviii] Maskell v Horner, 3 KB 106, (1915)

[xxix] Haque, M. E. (2012). Law of Contract (2nd ed.). Dhaka, Bangladesh: Law Lyceum, p.101

[xxx] The Contract Act, Section 16, (1872)

[xxxi] Bindu Mukhi V. Sm. Sarda Sundari, 6 DLR 97, (1954)

[xxxii] The Contract Act, Section 16, (1872)

[xxxiii] Purnendu Kumar Das V. Hiran kumar Das, 21 DLR 918, (1969)

[xxxiv] The Penal Code, Section 406, (1860) (Punishment for criminal breach of trust)

[xxxv] The Contract Act, Section 16(3), (1872)

[xxxvi] Abul Hossain V. Farooq and Others, 4 BLC (AD) 241

[xxxvii] Haque, M. E. (2012). Law of Contract (2nd ed.). Dhaka, Bangladesh: Law Lyceum, p.104

[xxxviii] The Contract Act, Section 17, (1872)

[xxxix] The Contract Act, Section 17, (1872)

[xl] The Contract Act, Explanation of Section 17, (1872)

[xli] Derry V. Peek, 14 App Cas  337, (1889)

[xlii] Polhill V. Walter, 3B & Ad 114, (1832)

[xliii] mckendrick, ewan (2009). contract law (8th ed.). UK: Palgrave Macmillan, p.222

[xliv] The Contract Act, Section 18, (1872)

[xlv] Pankhania V. London Borough of Huckney,  EWHC 2441 (Ch), (2002)

[xlvi] mckendrick, ewan (2009). contract law (8th ed.). UK: Palgrave Macmillan, p.218

[xlvii] The Contract Act, Section 20, (1872)

[xlviii] The Contract Act, Section 22, (1872)

[xlix] The Contract Act, Section 21, (1872)

[l] Baka Gopal Basak V. Kafiluddin Chowdhury, 11 DLR 125, (1959)

[li] Diamond V. British Columbia Thoroughbred Breedder’s Society, 52 DLR (2d) 146, (1966)

[lii] The Contract Act, Section 19, (1872)

[liii] The Contract Act, Section 19, (1872)

[liv] The Contract Act, First Exception of Section 19, (1872)

[lv] The Contract Act, Second Exception of Section 19, (1872)

[lvi] The Contract Act, Section 19A, (1872)

[lvii] The Contract Act, Section 20, (1872)

[lviii] The Contract Act, Section 22, (1872)

[lix] The Contract Act, Section 21, (1872)

[lx] Bell V. Lever Brothers Ltd,  AC 161, (1932)

References:

Primary sources:

Abdul Gani Sheikh V. Jagadish Chandra Mridha and Others, 2 BLC 121

Abul Hossain V. Farooq and Others, 4 BLC (AD) 241

Baka Gopal Basak V. Kafiluddin Chowdhury, 11 DLR 125, (1959)

BD Mutkijoddha Kalyan Trust V.Kamal Trading Agency and Oths, 50 DLR (AD) 171 (1998)

Barton v Armstrong, AC 104, (1976)

Bell V. Lever Brothers Ltd, AC 161, (1932)

Bindu Mukhi V. Sm. Sarda Sundari, 6 DLR 97, (1954)

Derry V. Peek, 14 App Cas 337, (1889)

Diamond V. British Columbia Thoroughbred Breedder’s Society, 52 DLR (2d) 146, (1966)

Pankhania V. London Borough of Huckney, EWHC 2441 (Ch), (2002)

Polhill V. Walter, 3B & Ad 114, (1832)

Purnendu Kumar Das V. Hiran kumar Das, 21 DLR 918, (1969)

The Contract Act, (1872)

The Penal Code, (1860)

Secondary sources:

Haque, M. E. (2012). Law of Contract (2nd ed.). Dhaka: Law Lyceum.

mckendrick, ewan (2009). contract law (8th ed.). UK: Palgrave Macmillan.

Sen, A. K., Mitra, J. K., & Mukherjee, S. (2006). Commercial law: including company law and Industrial law business law (25th ed.). Kolkata: The World Press Pvt. Ltd.

Website:

http://www.lawsofbusiness.com

http://www.iep.utm.edu/soc-cont/

About The Writer

Article Author Image

Md. Rafiqul Islam Hossaini

LLB (Hon’s) (2nd Class, Division I) (University of London, UK).

LLM (1st Class) (Jagannath University).
E-mail: rih.jewel@gmail.com

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