GOPALDAS JHAMATMAL ADVANI LAW COLLEGE
Bandra (W) Mumbai 400050
Assignment Topic:
The concept of Consent and Free Consent in relation to Agreeements
Submitted By:
AISHWARYA MEHTA
[Link].B
Academic Year 2021-22
Division : B
Roll No. :97
Subject: Contract I
Semester : 1
Submitted To : ADV. SIDDHARTH MAGDUM
Contact Details : Email aishwaryakmehta@[Link]
Mob : 8369769087
CONTENTS
● INTRODUCTION
● Consent
● Case Study
● References
I. INTRODUCTION:
Under Indian Contract Act, 1872 there are certain words and expressions used in the senses to
interpret and define the contract. Initially when one person signifies to another his willingness to
do something or to abstain from doing anything with a view to obtaining the assent is when the
initial stage of an agreement to contract begins. A contract is a binding agreement that creates
legal obligation(s) recognized in the eyes of law, and that a party can file a suit against another
party to the contract for breach of contract. In order to accept the contract and make it
enforceable by law there are certain factors to be taken into consideration like sanity of a person,
consent, age, purpose of forming a contract etc.
Essentials of a valid contract:
A contract is valid and legally binding if the following essential elements are present:
1) Proposal/Offer
2) Acceptance
3) Consideration
4) Understanding
5) Legal relationship
6) Certainty
7) Consent
I. Consent:
A free consent needs to be taken into consideration while forming a legal contract.
Consent as per section 13 is defined as “Two or more persons are said to consent when
they agree upon the same thing in the same sense.”
E.g. A agrees to sell his house to ‘B’. ‘A’ owns three houses and wants to sell his house in
London. ‘B’ thinks he is buying his Mumbai house. Here ‘A’ and ‘B’ have not agreed upon the
same thing in the same sense. Therefore, there is no consent and no contract afterwards.
In the case of Raffles v. Wichelhaus, two parties, ‘A’ and ‘B’, entered into a contract for the sale
of 125 cotton bales by a ship named “peerless” from Bombay. There were two ships with the
same name, and while Party ‘A’ was thinking of one ship, Party ‘B’ was thinking of the other
ship. The court held that there was no meeting of minds by both parties. Hence the contract was
invalid.
There has to be free consent in order to enter into the contract.
The consent is said to be free when it is not under the influence of:
(1) coercion, as defined in section 15, or
(2) undue influence, as defined in section 16, or
(3) fraud, as defined in section 17, or
(4) misrepresentation, as defined in section 18, or
(5) Mistake, subject to the provisions of sections 20, 21 and 22.
Coercion (Section 15)
Section 15 of the Indian Contract Act,1872 defines coercion as committing or threatening to
commit, any act 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.
Coercion means forcing an individual to enter into a contract not at his own free will. When
intimidation or threats are used to gain the party’s consent, it won’t be considered as free
consent.
Coercion may use infliction of physical or psychological harm to forcefully get threatened
person enter into a contract that he/she would not enter under normal circumstances.
The threats can be physical in nature, when the pain or injury has been implied or has actually
taken place.
E.g. pointing a gun at someone's head or holding a knife to someone's throat to enter into an
agreement are some example of physical threat.
The threats can also be psychological in nature, meaning intending to cause emotional distress.
Creating feelings of obligation, rejecting someone from a group, or threatening to disclose a
secret are all forms of psychological intimidation.
E.g. telling a person that intimate private photos of them will be emailed to their company unless
they agree to form an agreement would be a form of coercion.
Coercion is done by the way of committing or threatening to commit an act prohibited by the
Indian Penal Code or detaining unlawfully or illegally or threatening to detain any property with
the intention of forcing a person to enter into the agreement/contract.
E.g. A threatens to hurt B if he does not sell his house to A for 5 lakh rupees. Here even if B sells
the house to A, it will not be a valid contract since B’s consent was obtained by coercion.
Coercion has the effect of turning the agreement amounting to the contract voidable meaning that
at the discretion of the party whose consent was not free, the contract is voidable. Hence the
aggravated party will decide whether to perform the contract or to void the contract. So in the above
example, if B still wishes, the contract can go ahead.
Also, if any money has been paid or goods delivered under coercion then that must be repaid or
returned once the contract is void.
The burden of proof proving coercion will be on the defendant. The burden of proof is heavier on
him. This is because pure probability or fear is not a threat. In order to create coercion, a person
must show that there was a risk that was prohibited by law and that forced him to enter into a
contract that he would not otherwise have. So the aggravated party will have to prove the coercion,
i.e. prove that his consent was not freely given.
Undue Influence (Section 16)
According to Section 16 of the Indian Contract Act 1872 a contract will be said to be induced by
undue influence where the relationship between the parties allows one of the parties to dominate
over the will of the other and uses the position to obtain an unfair advantage over the other.
The person holds a dominating position when:
He has real/apparent authority over the other person Or if he is in a
fiduciary relationship with the other person
He makes a contract with a person whose mental capacity is temporarily or permanently
affected due to age, illness, or mental or bodily distress.
E.g. A sold his gold watch for only Rs 500/- to his teacher B after his teacher promised him good
grades. Here the consent of A (adult) is not freely given, he was under the influence of his teacher.
Undue influence is prevalent usually in financial contracts most of the time. It is most common
when it comes to mortgages and guarantees. The most common scenario is one where one party,
traditionally the husband, influences his wife to enter a guarantee for a loan or mortgage on a
home to support his business. The husband then defaults on loan repayments, which results in the
wife claiming that the agreement should be rescinded for undue influence.
The burden of proof lies on the claimant to show that undue influence was exerted by a stronger
party over the weaker party, and the latter could not exercise free choice when entering the
agreement.
When a person is found to be in a position by which he can dominate the will of the other or a
transaction appears to be affected due to dominance, the burden of proof that no undue influence
was exercised in the transaction lies on the party who is in a position to dominate the will of
others.
Fraud (Section 17)
According to Section 17 of Indian Contract Act, Fraud includes any of the following acts
committed by a contracting party or its connivance or its agent in order to deceive or induce a
party or its agent to enter into the contract:
The effective concealment of a fact by one who is aware of the fact;
a promise made without any intention to carry it out;
any other act fitted to deceive;
Any such act or omission as the law considers to be fraudulent.
Mere silence as to facts likely to affect a person’s willingness to enter into a contract is not fraud
unless the circumstances of the case are such that, having regard to them, it is the obligation of
the silent person to speak or unless his or her silence is, in itself, equivalent to speech.
Fraud means deceit by one of the parties, i.e. when one of the parties deliberately makes false
statements. So the misrepresentation is done with full knowledge that it is not true, or recklessly
without checking for the trueness, this is said to be fraudulent. It absolutely impairs free consent.
So according to Section 17, a fraud is when a party convinces another to enter into an agreement by
making statements that are
suggesting a fact that is not true, and he does not believe it to be true
the active concealment of facts
a promise made without any intention of performing it
any other such act fitted to deceive
Let us take a look at an example. A bought a horse from B. B claims the horse can be used on the
farm. Turns out the horse is lame and A cannot use him on his farm. Here B knowingly deceived A
and this will amount to fraud.
One factor to consider is that the aggravated party should suffer from some actual loss due to the
fraud. There is no fraud without damages. Also, the false statement must be a fact, not an opinion.
In the above example if B had said his horse is better than C’s this would be an opinion, not a fact.
And it would not amount to fraud.
Misrepresentation (Section 18)
Misrepresentation is also when a party makes a representation that is false, inaccurate, incorrect, etc.
The difference here is the misrepresentation is innocent, i.e. not intentional. The party making the
statement believes it to be true. Misrepresentation can be of three types
A person makes a positive assertion believing it to be true
Any breach of duty gives the person committing it an advantage by misleading another. But
the breach of duty is without any intent to deceive
when one party causes the other party to make a mistake as to the subject matter of the
contract. But this is done innocently and not intentionally.
Mistakes subject to section 20, 21,22
Section 20- Agreement void where both parties are under mistake as to matter of fact. When
both parties to an agreement make a mistake about a fact that is critical to the agreement, the
agreement is null and void.
Section 21- Effect of mistakes as to law. A contract is not voidable because it was made in
violation of any law in force in India; but, a mistake made in violation of a law not in force
in India has the same consequence as a factual mistake.
Section 22- Contract caused by mistake of one party as to matter of fact. A contract isn't
voidable only because one of the parties made a factual error.
II. CASE STUDY:
Avitel Post Studioz Limited and Ors. vs. HSBC PI Holdings (Mauritius) Limited and Ors., 2020
Arbitration - Fraud and Misrepresentation - Validity of Arbitration proceedings in case of such
allegations - HSBC (Counter Appellant) alleged fraud and misrepresentation being played by
Appellant Avitel whereby inducing HSBC to part with substantial investment - Arbitration
clause invoked referring SIAC for governance - Arbitrability of disputes in nature brought under
challenge - Hence, the present appeals BR>
Facts:
Appellant entered into a Share Subscription Agreement (SSA) with HSBC, whereby, HSBC
agreed to invest in Appellant's equity capital for agreed consideration. This SSA contained
arbitration clause. Subsequently both entered into Shareholders' Agreement (SHA), which
defined the relationship between the parties after the SSA was entered. The SHA also contained
an arbitration Clause which was identical to the arbitration Clause contained in the SSA. It was
the case of HSBC that a representation was made by Appellants No. 2-4 that the Appellants were
at a very advanced stage of finalising a contract with one British Broadcasting Corporation
["BBC"] to convert the BBC's film library from 2D to 3D. This contract was expected to
generate revenue of USD 300 million in the first phase, and ultimately over USD 1 billion and
thus the investment of USD 60 million was required by its 100% subsidiary to purchase
equipment to service the BBC contract. HSBC later grew suspicious about the Appellant's
business of digitising films and Ernst & Young and KPMG Dubai were appointed to inquire into
and return findings as to its business activities where it was discovered that the purported BBC
contract was non-existent and was set up by the Appellants to induce HSBC into investing the
aforesaid money of USD 60 million in the shares of Appellant No. 1. Since disputes arose
between the parties, HSBC issued notices of arbitration to the Singapore International
Arbitration Centre ["SIAC"] to commence arbitral proceedings and an Emergency Arbitrator was
appointed. The Appellants' challenged the appointment of the Emergency Arbitrator, which
however was rejected. The Appellants then filed their response to the notices of arbitration. The
Emergency Arbitrator then passed two Interim Awards in the SSA and the SHA, respectively, in
favour of HSBC, directing the Appellants to refrain from disposing of or dealing with or
diminishing the value of their assets up to USD 50 million, and permitting HSBC to deliver a
copy of the Interim Awards to financial institutions in India and the UAE with which any of the
Appellants hold or may hold or be signatory to accounts, together with a request that the
financial institutions freeze such accounts consistent with the Interim Awards. The Emergency
Arbitrator then made an amendment to Interim Awards passed in the SSA and the SHA,
respectively, granting further relief to HSBC by directing the Appellants to cease and desist from
prohibiting or inhibiting Ernst & Young and KPMG Dubai from conducting investigations into
the financial affairs of its subsidiaries. HSBC then filed Arbitration Petition under Section 9 of
the 1996 Act in the Bombay High Court seeking directions to call upon the Appellants to deposit
a security amount to the extent of HSBC's claim in the arbitration proceedings that had begun
under both the SSA and the SHA. An interim order was passed directing the Bank to allow the
Appellants to withdraw upto stipulated sum of money from their account by date fixed and not to
allow any further withdrawals until further orders, till which time, the account was to remain
frozen. Meanwhile, the Appellants challenged the jurisdiction of the three-member Arbitral
Tribunal comprising set up under the auspices of the SIAC. The Arbitral Tribunal passed a
unanimous "final partial award on jurisdiction", dismissing the jurisdictional challenge, and
stating that since Singapore law governs the arbitration agreement, allegations of fraud and
complicated issues relating to facts are arbitrable. Meanwhile, in the Section 9 petition pending
before the Bombay High Court, an order was passed by a learned Single Judge gave prima facie
findings that the seat of arbitration was at Singapore and that the arbitration agreement was
governed by Singapore law; hence, arbitrability of the dispute at hand would be governed by
Singapore law. It held that the unanimous "final partial award on jurisdiction" had not been
challenged in Singapore by the Appellants, and further held that this being the case, since HSBC
has a good chance of success in the final arbitral proceedings, the aforesaid order to deposit the
shortfall in the account so as to maintain a balance of USD 60 million was passed. Appeal
against the order of the learned Single Judge was disposed of by the impugned judgment and
order of the Division Bench returning a prima facie finding that since Singapore law governs the
arbitration agreement, there was no need to interfere with the findings of the learned Single
Judge in this respect. Further, it was held that there is no estoppel in filing the present proceeding
despite the Emergency Awards being passed in Singapore as the Section 9 petition could be
maintained on a plain reading of the arbitration agreement itself. It was further held that an issue
of fraud in the context of Sections 17 and 18 of the Indian Contract Act, 1872 referred to want of
free consent, and was a well-accepted ground that would vitiate the contract, rendering it
voidable. The dispute thus was opined to be civil in nature. Meanwhile, the SIAC Arbitrator
passed a Final Award dated 27-09-2014 and held Avitel guilty of inducing HSBC to invest in
their Company by making false representation that their investment would be used for
purchasing equipment and material to service a contract with BBC. The Arbitrator further
directed Avitel to pay a total sum of USD 60 Million along with 4.25% interest for the loss of
investment caused to HSBC. While the enforcement proceedings were pending, Appellant filed
an Appeal in the Supreme Court against the Order of the Single Bench of the Bombay High
Court, whereby the Court restrained it from making withdrawals and directed that its accounts
are frozen until further orders. HSBC filed a Cross Appeal against the Order of the Division
Bench of the Bombay High Court, whereby the Court reduced the deposit amount. Hence, the
present Appeals
Held, while disposing the appeals:
A reading of the Foreign Final Award would show that a strong prima facie case has indeed been
made out as the Award holds the BBC transaction as a basis on which the contract was entered
into and the USD 60 million paid by HSBC, which would clearly fall within fraudulent
inducement to enter into a contract under Section 17 of the Contract Act. Such a contract would
be voidable at the instance of HSBC. Also, the findings on the siphoning off of monies that were
meant to be allocated for the performance of the BBC contract would attract the tort of deceit.
The measure of damages for such fraudulent misrepresentation is not the difference between the
value of the shares on the date of making the contract and the value HSBC would have received,
if it had resold those shares in the market, after the purchase. The measure of such damages
would be to put HSBC in the same position as if the contract had never been entered into, which
is, the entitlement to recover the price paid for the shares and all consequential losses. This being
the case, it was held as difficult to accede to the Division Bench's finding as to the measure of
damages in such cases.
On the appeal of HSBC it was held that there is a substance in that the USD 60 million that was
to be kept aside vide the Single Judge's order, was fair and just in the facts of the case in that it is
only the principal amount without any interest or costs that is ordered to be kept aside. Further,
the reduction of USD 60 million to USD 30 million by the Division Bench is not justified given
our finding on the measure of damages in the facts of this case.
It is clarified that any finding made on facts in this judgment is only prima facie for the purpose
of deciding the Section 9 petition
Disposition:
Appeal Allowed
Avitel Post Studioz Limited and Ors. vs. HSBC PI Holdings (Mauritius) Limited and Ors.
(19.08.2020 - SC) : MANU/SC/0601/2020
III. Reference:
[Link]
Manupatra
[Link]
