What is an Invalid Contract?
Meaning of Invalid Contract: – The Invalid contract is an agreement which is not enforceable by law when it lacks essentials of a valid contract. The parties are not obliged to do their part. Valid contracts have all the required elements and are legally enforceable in court. A valid contract creates legal obligations between contractual parties. It gives a party cause to compel another party to do or not do something.
Contracts may become invalid under the following circumstances: –
- If the contract is against public policy;
- If the contract is illegal;
- If the offer/acceptance/consideration calls for action that violates the law such as gambling, robbery, etc.
- If the purpose of the contract is illegal.
Following are the types of Invalid Contracts: –
1. Coercion (Section 15)
Coercion is a non-binding/invalid contract. Coercion means forcing a person to enter into a contract. Therefore, force or threats are used to obtain the consent of the party, i.e., it is not free consent. Coercion is described under Section 15 of the Act.
- Committing or threatening to commit any act prohibited by law in IPC.
- Unlawfully detaining or threatening to detain any property intended to enter into a contract.
For example: – A has threatened to hurt B if he does not sell his house to A for Rs. 5 lakh. Here too, if B sells the house to A, it will not be a valid contract as B’s consent was obtained by coercion.
What is the effect of coercion?
Now the effect of coercion is that it makes the contract void. This means that the contract is void at the option of the party whose consent was not free.
It is on the discretion of the party whose consent is obtained with coercion that whether to perform the contract or to avoid it. So in the above example, if B still wishes to perform his part of the contract, it will be considered as a valid contract.
The burden of proof
Also, if any money has been paid or the goods delivered under the contract must be returned or repaid after the contract is void. And the burden of proof will be on the party who wants to avoid the contract. Therefore, the agitated party must prove coercion, i.e., that he will prove that his consent was not free.
2. Undue Influence (Section 16)
Section 16 of the Act defines undue influence. It states that when the relationship between the two parties is such that one party is in a position to dominate the other party, and uses such influence to gain an unfair advantage from the other party then it will be undue influence. Undue Influence is an Invalid contract.
The section also describes how a person can abuse his authority in the following two ways: –
- When one person holds real or clear authority over another person. Or if he is in a fiduciary (trustee) relationship with another person
- He makes a contract with a person whose mental capacity is affected by age, illness or crisis. Unsoundness of mind can be temporary or permanent.
Examples of fiduciary relationship are: –
- Solicitor and client;
- Trustee and trust ;
- Spiritual adviser and devotee;
- Medical attendant and patient;
- Parent and child;
- Husband and wife;
- Master and servant;
- Guardian and ward.
For example: – A sold his gold watch for only Rs 500 / – to his teacher B after promising to give good grades to his teacher. Here A (adult) consent is not freely given, he was under the influence of his teacher.
What is the effect of undue influence?
Now to make the dominant party clear, undue influence should be the purpose of taking advantage of the other party. If the effect is to benefit the other party, it will not be an undue influence.
But if the consent is not free due to undue influence, the contract becomes void at the option of the aggrieved party. Here, the burden of proof will be on the dominant party and he has to prove the absence of influence.
The burden of proof
If the plaintiff wants to take any action to stop the contract entered into based on undue influence, two issues must be taken into consideration. The law stated in the Indian Evidence Act, 1872 and the Indian Contract Act, 1872.
The law states that the plaintiff has to establish things to prove that he was under the undue influence:
- Not only does the defendant have a prominent position, but,
- He must also use it to get an advantage from the other party.
3. Fraud (Section 17)
Fraud means cheat by one party, that is, when one of the parties intentionally makes a false statement. Fraud is an Invalid contract. Hence misrepresentation is done with full information that it is not true, or that it is said to be fraudulent, without being casually investigated for trueness. It provides free consent.
One factor to consider is that the party incurred due to the fraud must bear some real loss. There is no fraud without loss. Also, the incorrect statement must be a fact, not an opinion.
In the above example, if B had said that his horse is better than C, then it would be an opinion, not a fact. And it will not amount to fraud.
Therefore, according to Section 17, fraud occurs when one party convinces the other to enter into an agreement by making statements that are
- Suggesting a fact that is not true and does not consider it to be true;
- The active concealment of facts;
- Purposeless promise.
For example: A purchased a horse from B and it is claimed that the horse can be used on the farm. It turns out that the horse is lame and A cannot use it in his field. Here B deliberately betrayed A and this would be fraudulent.
What is the Effect of Fraud?
- A contract arising out of fraud is a voidable contract.
- The misled party has the right to withdraw from the contract.
- Due to the fraudulent agreement, the party is responsible for the recovery of damages.
The burden of Proof
The burden to prove the validity of the deed of settlement was on the Defendant. The person whose consent is obtained with fraud, in such cases the burden of proof will lie on the person whose consent is so obtained. He has to prove that fraud had done to him and his consent to the contract is obtained from fraud.
4. Misrepresentation (Section 18)
Misrepresentation also occurs when a party makes a representation that is wrong, inaccurate, incorrect, etc. The difference here is the misrepresentation is innocent, i.e., not intentional. The party making the statement believes that the statement as true. Misrepresentation is an Invalid contract.
Misrepresentation can be of three types:
- A person makes a positive claim believing it to be true
- The person violating any duty gives one advantage by misleading the other. But the breach of duty is without the intention of deceiving anyone
- When one party causes the other party to make a mistake as the subject of the contract. But this is done innocently and not intentionally.
What is the Effect of Misrepresentation?
If a party who enters into a contract can result in a misrepresentation, choosing to terminate the contract, cancel the contract within a reasonable time under the Specific Relief Act 1963.
Kinds of Misrepresentation:
1. Negligent Misrepresentation
- It is considered to be a negligent misrepresentation if the misrepresentation happens due to lack of reasonable ground or carelessness;
- Careless misrepresentation is known only when the representative owed a duty to handle the representee carefully;
- A person shall be liable only when, in particular, he has neglected the specified duty;
- Even when no fiduciary relationship exists, the responsibility exists between the two parties.
2. Innocent Misrepresentation
- If the representation is based on a good reason to believe and there is no error and malicious motive, then it is called an innocent misrepresentation.
- When a person enters into a contract with an innocent misrepresentation, he has the right to withdraw from the contract but is not entitled to compensation.
- A contract will not be void unless there are reasonable grounds. This fact will be sufficient to prove innocence in the misrepresentation.
The burden of proof
The burden of proof is on the defendant to show that the misrepresentation was not fraudulently made by showing that “he had reasonable grounds to believe that the evidence depicted was valid during the time the contract was made.” The party who is making misrepresentation party bears the heavy burden of proof.
5. Mistake (Section 20)
Mistake is an Invalid Contract defined under section 20 of the act. There are two forms of fault under the Indian contract law:
- The mistake of fact,
- The mistake of law.
Explanation:
1. The mistake of fact:
- A mistake of fact occurs when one or both contracting parties have misunderstood a term which is essential to the meaning of the contract;
- Such a mistake can be caused by confusion, carelessness or omission, etc.;
- A mistake is never intentional, it is an acquittal. Mistakes can be unilateral or bilateral:
- Bilateral Mistakes (Section 21): When both parties to the contract are subject to a mistake of fact, such a mistake is known as a bilateral mistake, necessary for the agreement. Bilateral mistakes are sometimes referred to as mutual or common mistakes. Not all parties agree on the same thing and the same way, which is the concept of consent. Since there is no agreement, the contract is null and void.
- Unilateral Mistakes (Section 22): Unilateral Mistakes occurs when only one party mistakes for the contract. In such a case the contract will not be void. It is specified in section 22 of the Act that the contract will not be void merely because one party made a mistake. Therefore, if only one party has made a mistake, the contract remains a valid contract.
2. The mistake of law:
The mistake may be related to the mistake of Indian laws, or it may be the fault of foreign laws. If the mistake applies to Indian laws, then the theory is that ignorance of the law is not a good enough excuse. This means that either party cannot claim that they are not aware of the law.
The Contract Act states that no party can claim any relief based on neglect of Indian law. This would also include misinterpretation of any legal provisions.
However, similar treatment is not given, ignoring foreign law. Ignorance of foreign law provides some freedom, the parties are not expected to know the foreign law and its meaning. Therefore, under the Indian Contract Act, an error of foreign law is considered as an error of fact.
Case laws
1. Keates vs. Lord Cadogan
- Facts of the case: A let his house to B which he knew was in a ruinous condition. He also knows that the house is going to be occupied by B immediately. A did not disclose the condition of the house.
- The judgement of the case: In this case, the Court held that he had committed no fraud.
2. Shri Kishan vs. Kurukshetra University
- Facts of the case: Shri Kishan, a candidate for the L.L.B. Part I exam, who was short of attendance, did not mention the fact that himself in the admission form of the examination. Neither the Head of the Law Department nor the University Authorities made proper scrutiny to discover the truth.
- The judgement of the case: In this case, the Supreme Court held that there was no fraud by the candidate and the University had no power to withdraw the candidature of the candidate on that account.
3. Cooper vs. Phibbs
- Facts of the case: A agreed to take a lease of a fishery from B. Unknown to both the parties, A was already tenant for life of the fishery rights and B had no title to the same.
- The judgement of the case: In this case, the agreement was set aside on the grounds of the common mistake.
4. Tulsiram Maroti Kohad vs. Roopchand Laxman Ninawe
- Facts of the case: There was a contract by the plaintiff to give his daughter in marriage. The daughter was minor at the time of engagement ceremony, would have attained the age of majority on the date of marriage.
- The judgement of the case: In this case, the court held that the agreement would not oppose the public policy. The contract was not void-ab-initio. Plaintiff was entitled to the damages on breach of the contract by the other party as it was not an Invalid Contract.