Limitations on the Freedom of Contract

This research article is written by Akshat Manish Mehta, a student of the Institute of Law, Nirma University, Ahmedabad. In this article he has tried to mention when freedom to enter into the contract could be limited or restricted because of Vitiated Consent, Unlawful Consideration or Unlawful Object through some of the sections mentioned under Indian Contract Act, 1872.

INTRODUCTION TO THE GENERAL CONCEPT

With the emergence of transitions and growth in businesses each and, every transition of the business arena is governed and regulated by Contract Law, in India through the Indian Contract Act, 1872. From mergers of huge telecommunications companies like Idea and Vodafone to a small employment contract between employer and employee, there is some sought of the relevance of Contract Law.

Although everyone is absolutely free to make a contractual relationship with anybody but there are some restrictions when it comes to contracts, where one of the parties is acting under the fear or compulsion of other party or when one of the parties is at the higher bargaining positing which could affect the interests of other party to the contract.

As per Section 10 of the Indian Contract Act, 1872 there are three conditions or requisites of the valid contract. These are:

There must be Free Consent of the competent parties entered into the contract.
There must be Lawful Consideration.
There must be Lawful object.

When any of the abovementioned condition is not fulfilled the contract could not come into existence and this is called the “limitation to the freedom of contract.” In this article I will try to mention when freedom to enter into the contract could be limited or restricted because of Vitiated Consent, Unlawful Consideration or Unlawful Object through some of the sections mentioned under Indian Contract Act, 1872.

Contract with a Minor

There is a limitation on the freedom of contact with minors, as per Section 11 of the Indian Contract Act, 1872, minor is not competent to a contract and the contract with the minor is void ab initio. In the case of ‘Sri Kakulam Subrahmanyam v. Kurra Subba Rao’, it was held that as per Section 8 of the Hindu Minority and Guardianship Act, 1956 guardian of a minor can enter into the contract on behalf of minor but only on two conditions:

Guardian must be competent to the contract.
It must be for the benefit of the minor.

Contract with the Person of Unsound Mind

As per Section 12 of the Indian Contract Act, 1872 contract could not be made with the person of Unsound Mind. The test of unsoundness of mind/mental capacity is:

Person is incapable to understand the consequences of the transition
Person is incapable of understanding the nature of the transition.

As per Section 12, a person who usually remains of unsound mind but occasionally becomes of sound mind, he could be allowed to enter into the contract when he is of sound mind. Also, if the person is usually of sound mind but becomes occasionally of unsound mind could not enter into the contract when he is in unsound state of mind. So this is the limitation to the freedom of contract mentioned under Indian Contract Act, 1872, with the person of unsound state of mind.

Consent Induced by Coercion

As per Section 15 of the Indian Contract Act, 1872 Contract is said to be said Voidable as per Section 19, if the consent of either of the party is vitiated due to ‘COERCION.’ Coercion essentially includes two requisites:

Consent is going to be obtained by pressure exerted by either of the following techniques:
- Committing or threatening to commit any act forbidden by Indian Penal Code.
- Unlawful detaining or threatening to detain any property, to the prejudice of any person.

2) With the intention of causing any person to enter into an agreement.

So if the consent of either of the parties is taken under the ‘Coercion’, then the contract is unenforceable.

Consent Induced by Undue Influence

Section 16 of the Indian Contract Act, 1872 defines ‘UNDUE INFLUENCE.’ As per this section consent is said to be vitiated by undue influence if:

One party is in a capacity to dominate the will of other party and it is done by that party for the unfair advantage.
One party is in dominating position if either it has the real or apparent authority or there is some fiduciary relationship between the two parties. Dominion could also be established if the person is mentally ill and doesn’t have the mental capacity because of his age, illness, mental or bodily distress.
The burden of proof in the cases of Undue Influence lies on the party who is in the dominating position.

So if the consent of the party is taken by undue influence then the contract is rendered voidable under Section 19 of the said Act, at the option of the party whose consent is vitiated.

Consent Induced by Fraud

There is a restriction in forming a contract if consent of one of the parties is taken by committing fraud. ‘FRAUD’ is defined under Section 17 of the Indian Contract Act, 1872, and it means and include any of the following acts committed by a party to the contract or his agent with the intention to deceive another party or to induce him to enter into the contract:

When one party states a fact to which it knows that is not true.
Active concealment of the fact after having knowledge or belief of the fact.
A promise made by one party without the intention of performing it.
Any Act done by the party which is fitted to deceive. (This clause has a much larger ambit)
Any such Act or omission done by one of the parties which law specifically declares to be fraudulent.

If consent is taken under any of the five above mentioned conditions then the contract is rendered voidable as per Section 19, at the option of the party whose consent is vitiated by ‘fraud’.

Consent Induced by Misrepresentation

Contract is voidable as per Section 19 of the Act, at the option of the party whose consent is vitiated by Misrepresentation. As per Section 18 of the Indian Contract Act, 1872, MISREPRESENTATION includes:

When one of the parties to the contract makes a positive assertion about a fact which it believes to be true, but in actual it is not true.
There is no intent to deceive by that party but still the person or other person claiming under him gets an advantage and therefore that party misleads the other party to do its own prejudice.
Innocently causing another party to an agreement of the mistake which is of the very substance of the contract. (Same provision deals with Section 20 ICA, 1872)

Contract Induced with Mistake

As per Section 20 of the Indian Contract Act, 1872, when both the parties to the contract are at the mistake of matter of fact, which is very essential or substantial to the contract then the contract is Void. So this section again places a restriction on the freedom of parties to freely enter into the contract if either of the parties is induced by a mistake as to the subject matter of the agreement.

Contracts with Unlawful Considerations and Objects

Section 23 defines the consideration and object lawful only if:

It is not forbidden by Law.
It doesn’t defeat any of the provisions of the Law.
It is not declared fraudulent.
It should not involve any kind of injury to the person or property of another.
It should not be regarded as immoral or opposed to the public policy by the courts.

The ambit of the 5^th clause of the section i.e. ‘Public Policy’ is very large as it is a subjective term and interpreted in different ways in the court of law. So as per this section restriction or limitation on the freedom to enter into the contract is placed if the consideration or object to the contract is not lawful and comes under any of the above mentioned conditions.

Other Contracts Debarred by Law

Freedom to enter in some specific types of contracts is forbidden by Law under some of the sections of Indian Contract Act, 1872. These are:

Any ‘contract in restraint of marriage’ of any person, other than minor is void as per Section 26 of the Indian Contract Act, 1872.
Any contract in which any individual is ‘restrained to lawfully exercising his lawful profession, trade or business’ is void as per Section 27 of the Indian Contract Act, 1872.
Any ‘contract in restraint of legal proceedings’ is explicitly declared void under Section 28 of the Indian Contract Act, 1872.
Agreements of any ‘nature of uncertainty’ are void under Section 29 of the Indian Contract Act, 1872.
‘Agreements arising out by the way of wager’ is declared void under Section 30 of the Indian Contract Act, 1872.

CONCLUSION

With the growing emergence of global business and commercial transitions there is a serious need to have a protection mechanism for the parties when one party could take undue advantage of the position of the other party. Some of the restrictions and limitations are explicitly mentioned in the Indian Contract Act, 1872 while could be found under various other statutes and legislations like Specific Relief Act, 1930 and Transfer of Property Act, 1882.

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