INTRODUCTION

An organization is a fake individual running for the satisfaction of a reason, however, on occasion, there are circumstances that could prompt its defeat and when an organization wraps up it is possibly removing the work of everybody related to it and is likewise influencing the economy of the country in a negative manner. Thusly, every conceivable step is taken to stay away from this from occurring yet when it couldn’t be stayed away from and indebtedness procedures of an organization are going to initiate, the exchanges made and the agreements went into by the organization preceding the initiation of such bankruptcy procedures are judged and the ones that are viewed as unsafe for the organization and individuals related with it or are violative of the interests of the debt holder or the lender are proclaimed to be void. The cycle is known as evasion of pre-insolvency procedures. The indebtedness and chapter 11 regulations have sorted out an approach to adjusting the privileges of both borrowers as well as lender. Lenders of the element reserving an option to guarantee the levy from the home of the debt holder can not maneuver the borrower toward auctioning off the resources like land, shares and different resources or going into an agreement that isn’t leaning toward the interests of the indebted person and is in any case violative of his privileges or interests.

UNCITRAL MODEL

The Uncitral model under section 2 of its regulative aide accommodates the evasion of specific exchanges with respect to an indebted person to guarantee the equivalent treatment of the multitude of lenders and insurance of the privileges of the borrowers in order to not get controlled by any of the leaders to go into an agreement for the exchange of any of the resources at a worth lower than that of its genuine worth. One more point of view on the equivalent is keeping away from bias with respect to the borrower, the debt holder could favour a lender over the others and could go into an agreement with him in regards to the exchange of a resource when they become mindful of the forthcoming bankruptcy procedures. Consequently, these exchanges that are placed preceding the initiation of the bankruptcy procedures are dropped or are considered to be incapable to guarantee the security of freedoms of each and every elaborate party. Various purviews have put together their indebtedness regulations with respect to the Uncitral model anyway there are qualifications that could be tracked down between the laws of various nations. The Indebtedness and Chapter 11 code, 2016 arrangements with the avoidable, otherwise called weak exchanges under sections 43 to 51. The kinds of exchanges that are avoidable under the IBC are:

• Preferential transactions
• Undervalued transactions
• Extortionate credit transactions.

The previously mentioned exchanges are to stay away from the debt holder during the significant period which is two years in the event of a connected party and one year in different conditions going before the bankruptcy beginning date according to section 46 of the IBC, 2016.

EVASION PROCEDURES

The Uncitral Model Regulation is intended to help States to outfit their bankruptcy regulations with a cutting-edge legitimate system to all the more really address cross-line indebtedness procedures concerning debt holders encountering extreme monetary misery or insolvency. The regulative aide is reliable of 4 sections on indebtedness regulation covering the goals, primary issues, components accessible for the goal of the debt holder’s monetary challenges, the beginning, the disintegration of the indebtedness procedures, evasion of procedures, cross-boundary bankruptcy regulations, other like arrangements that require consideration exhaustively. The regulative aide section 2 accommodates the privileges of a borrower, wherein it is expressed that where the debt holder is a characteristic individual, certain resources are for the most part prohibited from the bankruptcy domain to empower the debt holder to protect its own freedoms and those of its family and it is positive that the option to hold those barred resources be clarified in the indebtedness law.

CRITERIA

• Objective Rules: The emphasis is on the goal questions, for example, whether the exchange occurred inside the suspect period and whether the exchange proved any of various general qualities set out in the law.
• Emotional Rules: Emotional methodology is more case explicit, the inquiries that would emerge would resemble whether the expectation to conceal the resources from the loan bosses was there, and when did the borrower become indebted whether it was at the hour of the exchange or whether it was after the transaction.
• Mix Of The Two: The bankruptcy laws of greater parts of the states are more emotionally driven, but it is joined with a time span inside which the exchange probably happened. In India, for instance, the significant period is 2 years in the event of a connected party and 1 year if there should arise an occurrence of some other loan boss.

CONVENTIONAL COURSE OF BUSINESS

A differentiation is drawn between what might be considered as an everyday practice or normal exchange in a business and what is remarkable and ought to be stayed away from as a piece of avoidable exchange. An earlier lead of the debt holder could assume a part here alongside customs and ordinary practices as continued in the business. The states are allowed to take both of the standards as a base to accommodate the avoidable exchanges as referenced previously mentioned.

EVASION ACTIVITIES ALL OVER THE PLANET

As expressed over, the Uncitral model is just giving a manual for the states to form legitimate evasion activities, various purviews follow the different arrangements of staying away from power, and after ordering them comprehensively we can come to an end result that there are single set and twofold arrangement of staying away from powers, common regulation nations, for example, France and Spain are devotees of a single bunch of keeping away from powers, while customary regulation nations follow two-fold arrangement of staying away from powers, nations, for example, UK and USA, the twofold arrangement of keeping away from powers are underestimated exchanges and unlawful inclinations.

INDIAN PERSPECTIVE

The indebtedness and insolvency code is a moderately new regulation and is impacted by the precedent-based regulation nations with regard to evasion abilities. sections 43-51 arrangement with the evasion procedures wherein agreements on the move of resources or property could be the subject of aversion procedures. Aversion of exchanges and statements of agreements went into the gatherings as invalid and void could be of any agreement, in regards to the exchange of any property or resource. A land contract is no exemption, the instance of Jaypee Infratech Restricted Versus Pivot Bank Restricted is the ideal illustration of evasion of an exchange that depends on the move of an unflinching property.

In the very recent case, Jaiprakash Partners Restricted (JIL), which is the holding organization of Jaypee infratech restricted set up the previously mentioned auxiliary as a particular reason vehicle for the development of a freeway and went into a concurrence with the Yamuna Turnpike Modern Improvement Authority. For this reason, advances were taken from different banks altogether, selling the land and 51% shareholding of JIL. Later on, JIL was pronounced to be a non-performing resource by a portion of its loan specialists and NCLT passed a request under section 7 of the IBC, 2016 to start the indebtedness procedures after the appeal was recorded by IDBI bank with respect to something similar. The selected IRP documented an application in regards to the exchanges went into by the corporate borrower that has made a responsibility on the steady property possessed by the corporate debt holder and in that application such exchanges were professed to be special, underestimated, and fake. The application was tended to and permitted. An allure was documented by the lenders to save the NCLT orders. The issues in this way, looked at by the high court were as follows:

• Whether the exchanges went into by the account holder underestimated, special and fraudulent?
• Whether the respondents were monetary leaders given the way that the property was sold to them?

SECTION 43 COMPLIANCE

The NCLT saw that the land was sold to dupe the moneylenders. At the hour of entering the exchanges, the borrower was at that point confronting a monetary crunch and the lenders knew about the indebted person’s situation at the hour of going into the home loan contract. In this manner, the settling authority was of the view that the borrower was attempting to make a deceitful exchange during the sundown time frame and the sole target of the debt holder was to produce some money, consequently not falling inside the classification of customary course of business. The re-appraising expert then again, held that section 43(2) was not drawn in and the home loan was made in the common course of business. Likewise, the exchanges were not underestimated or particular and the arbitrating authority has no ability to make orders in regards to something similar. Taking everything into account, the peak court held that the debt holders had gone into a special exchange. The high court maintained the choice of NCLT and held that Section 43 hit the current case. The three overlay test is expected to be passed by an interpretation to turn into a particular exchange under this section, i.e,. Satisfying the prerequisites of sections 43(4) and 43(2), and shouldn’t fall under the special cases referenced in section 43(3). Subsection 2 section 43 discusses the exchanges in which the corporate debt holder will be considered to have been given an inclination.

SECTION 45 COMPLIANCE

One more kind of exchange that can be stayed away from is given under section 45 of the code is the underestimated exchange. In the aforementioned instance of Jaypee infratech, the IRP was of the view that the exchanges are special as well as underestimated, it was eventually held that the exchange was truth be told underestimated. An underestimated exchange is one in which the corporate debt holder has paid a sum lesser than the real worth of the resource. The referenced case is additionally an illustration of exchanges that could be kept away from on the ground that they are duping the loan bosses. section 49 of IBC manages the arrangement of swindling the loan boss. In the event that the corporate account holder has made an underestimated exchange deliberately, this arrangement would be drawn in.

IBC ACCOMMODATION

Finally, the IBC accommodates one more sort of avoidable exchange, which is exploitative credit exchange. section 50 discusses exploitative exchanges. Any exchange that is negative to the corporate account holder and is made when the indebted person was helpless is considered an exploitative exchange. There can be circumstances like the agreement was either endorsed by the borrower without pursuing or it was intentionally made to incline toward the loan boss as the account holder would sign the agreement being defenseless at that point.

CONCLUDING REMARK

We have laid out that specific exchanges are avoidable and consequently announced void assuming the topic of interest of either the indebted person or some other bank the firm is involved. The locales across the world have chosen various perspectives in regard to the regulations overseeing such procedures. Notwithstanding, the exchanges and agreements that went into are to be judged cautiously. The chance of them being made as a standard course of business exists. Land contracts particularly, the land is one of the most significant resources of any business that could turn into an obvious objective by the loan bosses who wish to hurt the indebted person by removing it at a lower cost simultaneously the borrower likewise could go into an exchange including land with hostility. In this way, the aversion procedures are to be painstakingly analyzed and afterward kept away from to save the interests of the multitude of involved parties.

REFERENCES

1. UNCITRAL Model Law on Cross-Border Insolvency available at https://uncitral.un.org/en/texts/insolvency/modellaw/cross-border_insolvency
2. https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/05-80722_ebook.pdf page 136 point 151
3. https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/05-80722_ebook.pdf page 138 point 158
4. https://staging.hcourt.gov.au/assets/publications/judgments/1948/012–Downs_Distributing_Co._Pty._Ltd._V._Associated_Blue_Star_Stores_Pty._Ltd._(In_Liquidation)–(1948)_76_CLR_463.html
5. https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/05-80722_ebook.pdf page 137 point 157
6. UNCITRAL legislative guide on insolvency law part 2 https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/05-80722_ebook.pdf page 167 point 20

This article is written by Saumya Tiwari, Student of Graphic Era University, Dehradun.

Introduction

A company is an artificial person that exists to serve a purpose, but some circumstances could cause it to fail. When a company fails, it could potentially eliminate jobs for everyone connected to it and have a detrimental effect on the nation’s economy.

Every effort is made to prevent this from happening, but when it couldn’t be helped and an organization is about to enter into insolvency proceedings, the transactions and agreements made by the organization prior to the start of those proceedings are assessed, and those that are found to be detrimental to the organization and those connected to it or that violate the interests of the debtor or the creditor are deemed null and void. Avoidance of pre-bankruptcy procedures is the name of the process.

The laws governing insolvency and bankruptcy have figured out how to strike a balance between the rights of the debtor and the creditor. The debtor cannot be forced to sell off assets like shares of stock, real estate, or other assets, or to sign a contract that goes against his rights or interests in any way by creditors of the entity with the authority to collect debts from the debtor’s estate. The activities taken and agreements made in this regard are avoidable and preventable in order to safeguard the interests of the debtors, and as a result, are referred to as avoidable transactions.

The protection of debtors’ assets, their maximization as a value, and the availability of credit in place of those assets continue to be the goals of avoidable transactions. Ultimately, improving the company’s financial situation and streamlining the resolution procedure will result in a fair allocation of the assets.

Prior to the start of the insolvency proceedings, the two parties may enter into contracts involving simple assets like shares, buildings, or land or more complex agreements like those involving a franchise, taking over construction projects, etc. Given its prominence and value as one of a company’s most precious assets, the land would be a target for any creditor who set out to pay off their debts to the debtor while ignoring other creditors. Land contracts between a creditor and a debtor should be avoided in addition to all other contracts.

The UNCITRAL model, in accordance with part 2 of its legislative guide, calls for the avoidance of specific transactions on the part of the debtor in order to guarantee the treatment of all creditors equally and protect the rights of the debtors and prevent them from being coerced by creditors into entering into a contract for the transfer of any asset at a value that is less than its true value.

Avoiding favoritism on the part of the debtor is another way to look at the situation. The debtor can prefer one creditor over another and get into an agreement with him on the transfer of an asset as soon as they learn that bankruptcy procedures will soon begin.

To ensure the preservation of the rights of all parties involved, these transactions that were made before the start of the insolvency procedures are canceled or declared to be ineffective. There are differences between the rules of different countries, even though different jurisdictions have based their insolvency laws on the UNCITRAL model.

Under sections 43 to 51 of the 2016 Insolvency and Bankruptcy Code, transactions that can be avoided, commonly known as vulnerable transactions, are addressed.

Under the IBC, the following transactions can be avoided:

1. Preferential Transaction
2. Undervalued Transaction
3. Extortionate Credit Transaction

According to section 46 of the 2016 IBC, the debtor must avoid the aforementioned transactions throughout the relevant period, which is two years in the case of a related party and one year in all other cases before the insolvency beginning date.

Model and Avoidance Procedures for UNCITRAL

The UNCITRAL Model Law is intended to help States give their insolvency laws a contemporary legal foundation so that they can deal with cross-border insolvency processes involving debtors who are in serious financial difficulty or insolvency more efficiently¹. The legislative guide is composed of four parts on insolvency legislation, covering the objectives, structural issues, mechanisms for resolving the debtor’s financial difficulties, the start, termination, and avoidance of proceedings, as well as other similar provisions that call for detailed consideration.

In the legislative guide’s part 2 on debtor rights, it is stated that it is preferable for the right to keep those excluded assets to be made clear in the insolvency law when a debtor is a natural person and that certain assets are typically excluded from the insolvency estate to allow the debtor to preserve its rights and those of its family².

Avoidance proceedings are likewise covered by recommendations 87 to 99 in the same section of the legislative handbook. The avoidance proceedings are based on a general principle of insolvency law that gives priority to the collective goal and overall maximization of the value of the assets and credit availability to facilitate equal treatment for all the creditors and the debtor’s rights rather than providing individual remedies to the creditors who could claim the assets by entering into a contract with the debtor before the commencement of the insolvency proceedings.

“Provisions dealing with avoidance powers are designed to support these collective goals, ensuring that creditors receive a fair allocation of an insolvent debtor’s assets consistent with established priorities and preserving the integrity of the insolvency estate,” reads a statement about this in the guide.

The UNCITRAL model also stipulates a few avoidance criteria. There are several factors, including the normal course of business, defenses, and both subjective and objective criteria. The state may choose any of the criteria as long as the overall goal—to strike a balance between the interests of the individual and the estate—remains the same.

Criteria

1. Objective Criteria: The focus is on measurable issues, such as whether the transaction occurred during the questionable time frame and whether it demonstrated any of the several broad legal requirements.
2. Subjective Criteria: The subjective approach is more case-specific, and the issues that might come up include whether there was a desire to conceal assets from creditors and when the debtor became insolvent—whether that occurred during or after the transaction.
3. Combination of the two: The majority of states’ insolvency laws are more subjective in nature, but they also provide a deadline by which the transaction must have been completed. For instance, in India, the applicable period is two years for a related party and one year for any other creditor.
4. Ordinary Course of Business: There is a distinction made between what might be seen as a routine or ordinary business transaction and what is extraordinary and ought to be avoided as part of an avoidable transaction. Along with conventions and standard business practices, the debtor’s prior actions may have an impact here.

The states are allowed to use either of the criteria as a starting point when deciding how to handle the aforementioned unnecessary transactions.

Avoidance tactics used worldwide

Different jurisdictions follow different sets of avoiding powers; by classifying them broadly, we can conclude that there are single sets and double sets of avoiding powers. Civil law countries like France and Spain are followers of a single set of avoiding powers, whereas common law countries follow a double set of avoiding powers. As previously stated, the UNCITRAL model is merely providing a guide to the states to formulate proper avoidance actions.

• American Viewpoint: A technique to invalidate perfectly legal transactions because they were made before the start of insolvency proceedings is the use of clawback actions or avoidance powers. The usual justification for invalidating such a deal is that the creditors who would be getting the firm’s assets but losing all control over them once the formal processes started would try to seize control of them beforehand by manipulation or other unethical ways. The transactions made before the bankruptcy proceedings, as was already indicated, are detrimental to the firm’s assets worthwhile also violating the rights of the debtor and other creditors. The goal of American bankruptcy law is to give creditors the most advantage possible.
• Automatic Stay: A fundamental tenet of the American insolvency regime is the automatic stay. When insolvency procedures begin, the rules of the automatic stay described in Section 362 of the bankruptcy code take effect. Any creditor would not be able to seize any assets or property from the debtor as a result of the stay. By allowing the creditors to pursue their recovery options, this approach benefits them. However, there are some exceptions to the automatic stay, and the court can change it if there is a good basis to do so. Creditors are protected by the automatic stay because it prevents the value of the debtor’s property from declining and guarantees that it is distributed fairly.
• Absolute Priority Rule: Another important tenet of the US insolvency process is the Absolute Priority Rule. This rule is based on fairness and equity because it requires that creditors who have investments be paid in priority to other creditors who have smaller investments. Because equity holders have the lowest priority, they will be paid last and secured creditors will be paid first. However, this rule can be circumvented by voting of senior members; if votes of senior members are obtained, payment of junior class or unsecured creditors can be possible.
• Avoidance action: The bankruptcy law in the US outlines several techniques that let debtors avoid the pre-bankruptcy transfer of assets. Due to the possibility of bias on the part of creditors, this affords debtors the right to raise the worth of their bankruptcy estate and prevent its decline before filing for bankruptcy.

• Australian Viewpoint: The clauses specified in the Bankruptcy Act, 1924-1946 deal with the transfer of property under Australian law at the time of bankruptcy. It is addressed in Section 95 of the Act, which states that if the debtor declares bankruptcy on a bankruptcy petition filed within six months, any transfer of property, payment, or obligation made in favor of any creditor or person acting in the creditor’s behalf and a creditor a preference, precedence, or other benefits over other creditors, shall be null and void. The Downs Distributing Co. Pty. Ltd. V. Associated Blue Star Stores Pty. Ltd. In the end, the court’s conclusion was influenced by the bankruptcy act’s Ltd provision.
• Indian Viewpoint: The common law nations influence the avoidance powers of the insolvency and bankruptcy code, which is a relatively young piece of legislation. Contracts for the transfer of assets or property may be the subject of avoidance procedures, which are covered under Sections 43 to 51.

Any contract involving the transfer of any asset or property may be avoided, and the parties may declare any contracts they have entered into to be null and void. Land contracts are no exception; the Jaypee Infratech Limited v. Axis Bank Limited case is the ideal illustration of how to prevent a transaction based on the transfer of real property.

In this instance, the holding company of Jaypee Infratech Limited, Jaiprakash Associates Limited (JIL), established the aforementioned subsidiary as a special purpose vehicle for the construction of an expressway and entered into a contract with the Yamuna Expressway Industrial Development Authority. Loans were obtained for this purpose from several banks jointly, and the land and 51 percent of JIL’s stock were mortgaged.

Later, when an IDBI bank petition was filed about it, some of JIL’s lenders declared it to be a non-performing asset, and the NCLT issued an order under section 7 of the IBC, 2016 to start the insolvency procedures. The corporate debtor engaged in transactions that resulted in an obligation on its immovable property, and those transactions were alleged to have been preferential, undervalued, and fraudulent in the application submitted by the designated IRP.

The request was reviewed and approved. The creditors filed an appeal to invalidate the NCLT orders.

The issues, therefore, faced by the supreme court were as follows:

1. Whether the transactions entered into by the debtor undervalued, preferential and fraudulent?

2. Whether the respondents were financial creditors given the fact that the property was mortgaged to them?

The land was mortgaged, according to the NCLT, to mislead the lenders. The debtor was already in financial trouble at the time the transactions were made, and the creditors were aware of the debtor’s predicament at the time the mortgage contract was signed. Because the debtor’s only goal was to make money, the adjudicating authority believed that the debtor was attempting to conduct a fraudulent transaction during the twilight period and did not meet the definition of an ordinary course of business.

The appellate authority, on the other hand, determined that the mortgage was made in the normal course of business and therefore section 43(2) was not invoked. Additionally, the transactions were not preferential nor undervalued, and the adjudicating authority cannot issue any directives in this regard.

The apex court determined that the debtors had engaged in a preferential transaction in terms of preference. The supreme court upheld NCLT’s ruling and declared that section 43³ applied to the current situation. A translation must pass the three-fold criteria to qualify as a preferential transaction under this clause, i.e. observing Sections 43(4) and 43(2) criteria, and not violating any of the Section 43 exceptions (3).

The transactions in which the corporate debtor shall be judged to have been granted a preference are discussed in subsection 2 section 43. The clause expressly mentions a corporate debtor transferring property or an interest in that property to a creditor in exchange for payment of financial or operational debt. The clause intends to invalidate any transactions involving the transfer of property in which a corporate debtor granted precedence. hence include transactions relating to land within its purview.

The Goodwill Theaters v. Sunteck Realty, in which it was questioned whether the developer who had been granted development rights by the landowner should be classified as an operational creditor, adopted a different strategy and determined that because the transfer of development rights did not amount to the supply of goods or services, the developer would not be classified as an operational creditor.

The aforementioned transactions specified in subsection 3 will not be regarded as preferential transactions if the transfer is carried out in the ordinary course of business and is establishing a security interest in the property.

Undervalued transactions are another sort of transaction that can be prevented thanks to section 45 of the code. The IRP believed that the transactions in the aforementioned matter of Jaypee Infratech were not only preferential but also undervalued; nonetheless, it was finally decided that the transaction was undervalued. A deal is considered undervalued if the corporate debtor pays less than the asset’s true value.

The aforementioned situation is another illustration of a transaction that may be avoided because it is cheating the creditors. The IBC’s Section 49 addresses the prohibition against deceiving the creditor. This clause would apply if the corporate debtor had purposefully entered into a transaction at a discount.

Last but not least, the IBC allows for exorbitant credit transactions, another category of unnecessary transactions. In Section 50, extortionate transactions are discussed. A transaction is deemed exorbitant if it is unfavorable to the corporate debtor and is made at a time when the debtor is at its most vulnerable. It’s possible that the contract was either blindly signed by the debtor without reading it or that it was purposefully drafted in the creditor’s favor so that the debtor would sign it while at a vulnerable moment.

Conclusion

We have determined that some transactions are avoidable and, as a result, ruled void if there is a conflict between the interests of the debtor and any other creditors, including the firm. Regarding the laws governing such proceedings, diverse perspectives have been adopted by jurisdictions around the world. However, it is important to make very thorough judgments about the deals and agreements made.

They might be produced as part of routine company operations. Land contracts, in particular, the land being one of the most important assets of any business could become an easy target by the creditors who desire to injure the debtor by taking it away at a reduced price, at the same time the debtor could also engage in a land transaction with ill will. To protect the interests of all parties involved, the avoidance procedures must therefore be thoroughly assessed and finally dismissed.

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References

1. UNCITRAL Model on Cross-Border Insolvency (1997) available at https://uncitral.un.org/en/texts/insolvency/modellaw/cross-border_insolvency
2. UNCITRAL Legislative Guide on Insolvency Law Part 2 https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/05-80722_ebook.pdf Page 167 Point 20.
3. (1) Where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section 44.

This article is written by Bhagyashri Neware, LLM student from Maharashtra National Law University, Aurangabad.

This article is written by Siddhi P. Nagwekar, a student of Karnataka State Law University’s Law School. This article deliberates on The Bar of Limitation on Torts, what it entails, its relevance, and the related statutes in India, the US, and the UK.

A brief idea on ‘Bar of Limitations’

Limitation means a legally specified time after which an action could be defeated or the ownership doesn’t persist. The Limitation Act, 1963[1] determines[2] duration of limitation. The period fixed for any suit, appeal or application by the Schedule, and “prescribed period” means the amount of limitation computed following the provisions of this Act.

Let us consider a hypothetical case where A gives a loan of 5 lakh rupees to B for two years after which B is to return the same to A. After this period lapses, there are two courses of actions that may follow:

a.     B pays back the sum of money; or

b.     B refuses/ doesn’t pay back the sum lent

In the first occurrence, there is no complication because the agreement between the two parties has been met with, but within the second case in point, B has dishonoured the agreement in question.

An ancient Roman maxim states Ubi jus, ibi remedium meaning ‘Where there’s a right, there’s a remedy’. Considering this principle, A has a remedy for his right of procuring his refund from B, binding him by the obligation.

The Limitation Act, 1963 for the balance outstanding on a mutual, open, and current account, where there are corresponding demands between the parties, sets out a provision for three years. This three-year period starts at the close of the year during which the last item admitted or proved is entered in the account; such year to be computed as within the account.[3]

Now, if A fails to do so within the given ‘limitation bar’ that’s three years for this case, A deprives himself the right to remedy, essentially meaning the right to bring legal action against B has ended.

The Supreme Court has given a concurrent ruling in the case of Rajender Singh & Ors vs Santa Singh & Ors. [4]. The apropos paragraph of the judgment reads:

“The policy inherent to statutes of limitation, spoken of as statutes of ” repose” or of “Peace”, has been thus stated in Halsbury’s Laws of England Vol. 24, p. 181 (para 130) “330. Policy of Limitation Acts. The courts have expressed a minimum of three differing reasons supporting the existence of statutes of limitation, namely, (1) that long-dormant claims have more of cruelty than justice in them, (2) that a defendant might have lost the evidence to refute. a stale claim, and (3) that persons with valid grounds of actions should follow them with reasonable care.” The goal of the law of limitation is to put a stop to disturbance or deprivation of what may have been obtained in equity and justice by lasting enjoyment or what may be are lost by a party’s own passivity, negligence, or laches.”

After this case in 1973, fast-forward to a quarter-century later, there came the judgment of N Balakrishnan vs M. Krishnamurthy[5], germane to the theme in hand. It bolstered the stance of the judiciary on the bar of limitations and emphasized its relevance:

“Rule of limitation aren’t meant to deface the right of parties. They’re meant to ascertain that parties don’t resort to dilatory tactics, but look for their remedy promptly. the intent of providing a legal remedy is to repair the damage caused by reason of legal injury/legal rights violation. Law of limitation fixes a lifespan for such legal remedy for the redress of the wrong so suffered. Time is precious and therefore the wasted time would never revisit. During the course of time, newer causes would sprout up necessitating newer persons to look for legal remedy by approaching the courts. So, a life must be fixed for each remedy. The unending period for launching the remedy may possibly cause unending uncertainty and consequential anarchy. The Law of limitation is thus founded on public policy. It’s enshrined within the maxim ‘Interest reipublicae up sit finis litium’ (it is for the overall welfare that a period is put to litigation). The motive is that each legal remedy must be kept alive for a legislatively set period of time.”

It is quite clear from the above-mentioned judgments what the bar of limitation entails.

The aims behind statutes of limitation are that of discouraging old and deceitful claims, and that of allowing estimable claimants, who are as careful as possible, a chance to be on the lookout for redress for injuries suffered. Any person seeking relief for injury was to have brought his claim within the period stated in the statute or be barred.

Starts and Stops- Accrual of the Cause of Action

To know the extent of the limitation period is not going to play out in your favour if you don’t know when that period starts to run. There are two vital points. The primary is when the cause of action first ensues. When that is will depend upon different causes of action, for tort, it’s the purpose of injury, even where that damage could also be initially minor and unapparent. When we look at the case of claims for a debt, acknowledging the existence of the debt will restart the limitation period.

The second key point is that the point at which loss could have been reasonably discovered. As is noted above, it may apply in many cases of tort and restitution.

The Bar of Limitation on Torts

Limitation periods for various torts are found on the objectives that a tort claim sought to realize besides the gravity of the particular tort in question. The remedy for breach of duty in tort is ordinarily a claim for damages, though equitable remedies also are available in appropriate cases. The key aim of tort is taken to be compensation for harm suffered as results of the breach of an obligation fixed by law. Tort seems to put greater emphasis on wrongs of commission instead of wrongs of omission. Another important aim of tort is to discourage behaviour which in good probability to cause harm.

India

Part VII of the Schedule of Limitations Act, 1963 lays down the limitation periods for torts. It gives out a table of torts, from point 71 to 92, entailing the outline of the suit, period of limitation, and time from which period begins to run. This is the single Act that provides the authority, legitimacy and aiming to match the thought of the idea of Limitation Bars in India. It’s still in the evolving stage as and when the cases appear around it.

Under English Law

The Limitation Act allows actions for breach of contract and tort, like negligence, to be brought within six years, where the  loss wasn’t apparent at the time of the tort there’s an alternate period of three years from the date on which loss could reasonably are discovered; Considering the case of fraud, the amount of limitation doesn’t commence at all until the claimant has or could reasonably have discovered the fraud;[6]

Additionally, the three-year period is given as the special deadline for personal injury actions.

The three-year period begins to run from

(a) the date on which the cause of action arose; or

(b) the date on which the injured person becomes aware (if later).

The final question on limitation is what happens when the amount of time expires without proceedings being issued. The pivotal distinction that springs up here is: does the expiry of the limitation period simply act as a bar to seeking a remedy before the courts or does it exterminate the interest protected as the right altogether? This is not based sheerly on connotations. If a defendant can assert his right in a way other than bringing a claim, most obviously by way of asserting a set-off, then that right will still have value even where the remedy is time-barred. If the right is extinguished altogether, there is hardly left anything to say. The approach adopted by English law will depend upon the character of the claim. Talking about the case of contract[7] and most torts aside from conversion[8] only the remedy is barred. In cases concerning title to the recovery of land[9] or personal estate[10], or arising under the Consumer Protection Act 1987[11] it is the right itself that gets extinguished.

Under US Law

Under 46 U.S. Code § 30106, “Except as otherwise provided by law, a legal proceeding for damages for private injury or death arising out of a maritime tort must be brought within 3 years after the explanation of action arose.” There are some exceptions to it at present, primarily concerning Jones Act cases filed against the government, during which case the statute of limitations are often but 2 years.[12]

Every state has adopted its statute of limitations, which demands any personal injury suit be filed in court within a fixed time after the incident or injury. The defined limit prescribed by each state ranges from one year (in Kentucky and Tennessee) to 6 years (in Maine and North Dakota).

The “Discovery of Harm” Rule

While a statute of limitations may assert that a private injury lawsuit must be filed within a particular amount of time after an accident or injury, that period usually doesn’t begin to run until the instant when the person filing suit knew (or should reasonably have known) that they had suffered harm and therefore the nature of that harm.

An example of this “discovery of harm” rule may be a medical malpractice claim during which a surgeon mistakenly left a short-lived bandage inside the abdomen of a patient, but the error wasn’t discovered until years later, during another surgery. In such a case, the patient had no reason to understand what happened and this lack of data couldn’t be called unreasonable under the circumstances. Presumably, the statute of limitations wouldn’t begin to run until the day on which the primary surgeon’s mistake was “discovered” by the patient, instead of from the day on which the primary surgeon committed the error.

It is important to bear in mind that the delay in discovery must be one that’s reasonable under the circumstances. So, if the patient given in the above example was experiencing abdominal pain after the primary surgery but refused to find medical treatment for several years, his or her lawsuit may fairly be barred by the statute of limitations. Also, the “discovery of harm” rule will seldom arise within the commonest sorts of injury claims — those after car accidents and slip and fall incidents. This is often because such occurrences usually leave nothing to “discover” in terms of the source and nature of any harm suffered.

However, the discovery rule may apply in some death cases wrongfully.

Conclusion

Statutes of limitation reflect the policy of protecting defendants from stale and fraudulent claims. The implementation of the statutes doesn’t depend on the existence of a stale or fraudulent claim, but rather upon the amount of years laid out in the applicable statute. Statutes of limitation weigh conflicting public policies. As a result, some plaintiffs are going be denied recovery notwithstanding the severity of their injury.

---

[1] Enacted on 1st January, 1964, vide notification No. S.O. 3118, dated 29th October, 1963, see Gazette of India, Part II, sec. 3 (ii). Amended in West Bengal by W.B. Act 18 of 1977.

Enforced on 1st September, 1984, vide notification No. S.O. 647(C), in respect of the State of Sikkim dated 24th August, 1984, see Gazette of India, Part II, sec. 3(ii).

[2] See Sec 2(j) of Limitations Act, 1963 

[3] See Supra text accompanying note 2: The Schedule (Periods of Limitation)Part I- Suits Relating to Accounts.

[4] (1973) 2 SCC 705

[5] (1998) 7 SCC 123

[6] Section 2, 14A and 32 of the Limitation Act, 1980, Available at: <http://www.legislation.gov.uk/ukpga/1980/58/contents>

[7] Royal Norwegian Government v Constant & Constant [1960] 2 Lloyd’s Rep 431.

[8] C&M Matthews Ltd v Marsden Building Society [1951] Ch 758.

[9] Limitation Act section 17.

[10] Limitation Act sections 3-4.

[11] Consumer Protection Act 1987 section 11A(3).

[12] “33 U.S. Code § 913 – Filing of claims”. Legal Information Institute. Cornell Law School. Retrieved 09 July 2020.

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This article is authored by Pankhuri Pankaj, a 3rd-year student pursuing BA-LLB (Hons.) from Vivekananda Institute of Professional Studies, affiliated to GGSIPU. She is currently interning with Lexpeeps. This article summarises certain key provisions of “unlawful consideration and unlawful object” under the Contract Law and is qualified in its entirety by reference to the Indian Contract Act, 1872.

INTRODUCTION

In India it is said that for a contract to be understood as a valid contract two things are a must: a lawful object and a lawful consideration. To ensure the regulation of such valid contracts in the country naturally legal provisions have been implemented. Under Section 23 of the Indian Contract Act, 1872 certain restrictions have been imposed on an individual while indulging into any agreement and limits the freedom of that individual and his said privileges by drawing a parallel with the contemplations of public policies and various other provisions that have been articulated under this section. 

Under Section 23 the term ¨object” indicates “purpose” of that contract does not really imply importance in a similar sense as the term ¨consideration¨. It is understood that even if the consideration of the contract is purely legally valid but the object of that contract is found to be unlawful in nature, then the contract would be termed an invalid contract. Similarly, if consideration, which has been defined under Section 2(d) of the Act, is found to be unlawful, then even if the object of the contract is legally valid, the contract would be considered an unlawful contract.

UNLAWFUL CONSIDERATION IN A CONTRACT

As discussed under section 23 of the Indian Contract Act, 1872, the legality of a consideration is only valid if:

1. The Consideration Is Not Forbidden By Law: It is understood that if the consideration in a contract is prohibited by law then it is considered to be an unlawful consideration and the contract is said to become invalid. It is important to note that for an act forbidden by law to account as an unlawful consideration it would generally include acts that are explicitly punishable by the law and it can also include those acts that are prohibited through the medium of either rules or regulations. 
2. The Consideration Is Not Immoral In Nature: A consideration in a contract is considered to be an unlawful one if it has been regarded as an immoral act by the honourable court. In case of an immoral consideration the contract would end up being invalid and void.
3. In Case The Consideration Is Not Fraudulent In Nature: A contract becomes invalid or void by nature if the consideration of the contract is fraudulent in nature. Here, it is important to understand what may fall under a fraudulent act. To understand the term fraud better Section 17 of the Indian Contract Act, 1872, can be referred to which states that any act committed by a party to a contract with the intent to deceive another party or to induce that party into entering into the contract.
4. The Consideration Does Not Defeat the Provisions Set Under The Law Of The Country:  A consideration is termed as an unlawful consideration of a contract, and end up making the contract an invalid and void contract, when the said consideration aims at defeating the provision of law or the intentions of law. In case the court finds the consideration to be in contradiction with the provisions of the law then it can discard the contract as void.
5. The Consideration Does Not Involve Harm Or Injury To Any Other Person Or Property: A Consideration is denied to be considered a lawful consideration of a contract if the consideration includes an act which involves causing harm to any other person or property. It can be understood with the simple example of a person taking money as an object and in return as a consideration killing a third person or vandalising a third party’s property.  This type of consideration can be broadly included under an act forbidden by law as well since the consideration includes an unlawful act. 
6. The Consideration Does Not Defeat Any Rules Already In Effect: A Contract is said to become invalid or void in nature if the consideration of that contract is against the essence of any rules already implemented in the country or if it intends to defeat the intention of any rules in effect in the country at that time. Such a consideration is also termed as an unlawful consideration.
7. The Consideration Does Not Oppose The Public Policies: The ultimate motive of the Indian judiciary is to maintain the essence of natural justice in the community. In case the consideration of a contract is oppressive of the public policy then such a consideration is said to be an unlawful consideration and the contract becomes an invalid contract or void by nature.

It is important to understand what would fall under the term ¨public policy¨ here. Public Policy can be understood as a very broad concept but for the purpose of consideration of a contract it is not referred to in the wider sense but in general terms- for the good community. If the act included in the consideration is not particularly in the favour of the good of the community but rather brings inconvenience then such an act makes the consideration unlawful. 

Various examples can be discussed under this heading to further illustrate this field, like:  Trading with the enemy of the country, or interfering with the courts, or stifling a prosecution by removing evidence or witness and multiple other things, etcetera.

UNLAWFUL OBJECT IN A CONTRACT

As discussed under Section 23 of the Indian Contract Act, 1872, an object of a contract is not considered to be legally valid if:

1. The Object Of The Contract Is Forbidden By The Law: It is understood that if the object in a contract is prohibited by law then it is considered to be an unlawful object and the contract is said to become invalid and void by nature. It is important to note that for an act forbidden by law to be counted as an unlawful object it would generally include acts that are explicitly punishable by the law and it can also include those acts that are prohibited through the medium of either rules or regulations in the country.
2. The Object Of The Contract Is Immoral In Nature: An object of a contract is considered to be an unlawful one if it has been regarded as an immoral act by the honourable court. In the case of an immoral object, the contract would end up being invalid and void. An immoral object would generally include acts which are frowned upon in our society, like taking money to file for divorce. Here, the party cannot file a case in case the consideration for the immoral object is not received.
3. The Object Of The Contract Is Fraudulent In Nature: A contract becomes invalid or void by nature if the object of the contract is understood to be fraudulent in nature. Here, it is important to define what may fall under a fraudulent act. To understand the term fraud better one can refer to Section 17 of the Indian Contract Act, 1872, or the definition given above under ¨unlawful consideration of a contract¨.
4. The Object Of The Contract Defeats The Provisions Of The Law: An object of a contract is termed as an unlawful object if the said act under the object aims at defeating the provision of law or the intentions of the law. In case the court finds the consideration to be in contradiction with the provisions of the law then it can discard the contract as void.
5. The Object Of The Contract Involves Harm Or Injury To Another Person Or Property: Just as discussed under unlawful consideration an object of a contract will be denied the status of a lawful object of a contract if the object includes an act which involves causing harm to another person or property. It can be understood with the simple example of a person taking money as a consideration for the act of killing another person, which would make it the object.  This type of an object can be broadly included under an act forbidden by law as well since the object here includes an unlawful act.
6. The Object Of The Contract Defeats Any Rules In Effect: A Contract is said to become invalid or void in nature if the object of that contract is found to be against the essence of any rules already implemented in the country or if it intends to defeat the intention of any rules in effect in the country at that time. Such an object is also understood as an unlawful object.

CONCLUSION

For a contract to be considered as a valid contract it is important to have a lawful object and a lawful consideration. If either of the two is found to be missing, the contract is to be found as invalid in total. To maintain fairness in the society it is important to follow the norms and in case of an unlawful object or unlawful consideration, which in turn would affect the society, this purpose cannot be pursued.

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This article is written by Hitesh Vachhani, 4th year Law Student at GLS Law College Ahmedabad. This article focuses on the advancement of technology that has raised a question regarding the online contracts and how the Judiciary and the Legislature has responded to the same.

INTRODUCTION

The advancement of technology has changed the lifestyle of the people. Technology has no geographical limitations and thus there’s quick and wide dissemination of information than before. It has also changed the manner which the businesses are conducted. Internet is being used for electronic commerce, social networking, dispute resolution, sending emails and writing blogs. Today, electronic commerce is the most significant features of the Internet.

Electronic commerce includes all the type of activities by a person or a firm such as buying and selling of products and services like using computers or any electronic platform via the use of internet. And online contracts form a part of electronic commerce. Thus conducting business over the internet demands agreement between the parties. Online Contracts or Cyber Contracts or E-Contracts or Digital Contracts is a shift from the traditional mode of face to face contract and the parties can contract without meeting each other.

Traditionally, in a contract, one of the parties to the contract makes an offer and the other accepts the offer and thus there is a meeting of two minds and the contract is said to have been entered into between the parties. In online contracts, the parties can agree to the terms of the contract via the internet i.e., via exchange of emails or other possible suited mediums. But in both, traditionally or in online contracts, the essential requirements of the contracts have to be fulfilled for the contract to be valid and made enforceable in the courts of law.

ESSENTIAL REQUIREMENTS FOR ONLINE CONTRACTS

The following requirements have to be fulfilled for the contracts to be held valid under the Indian Contract Act, 1872:

• Offer
• Acceptance
• Intention to create legal relationship
• Lawful Object
• Lawful Consideration
• Parties must be capable to enter into contracts
• Free Consent
• Possibility of Performance

DEVELOPMENT OF THE CONCEPT OF ONLINE CONTRACTS

The Indian Contract Act, 1872 which is a colonial-era law defines a contract as an agreement enforceable by law. Traditionally the Indian Contract Act would only apply to the agreements entered into between the parties face to face. But as early as in 1996, the Hon’ble Supreme Court in Bhagwandas Goverdhandas Khedia v. Girdharilal Parshottamdas & Co.¹ was posed with a question that whether the contract entered into between the parties orally over a telephonic conversation was a valid contract capable of being enforced in a court of law. The SC by a majority of 2:1 (the majority being J. Shah and J. Wanchoo) held that the draftsmen of the Indian Contract Act, 1872 could not have envisaged the use of the telephone because it was not invented and therefore the words of the provision should be confined to communication by post. Thus, the contract was not a valid contract and could not be enforced. But the minority opinion of Hidayatullah J. is what opened the doors for online contracts.

According to J. Hidayatullah, the law should have been interpreted in the present-day context. He observed:
“The law under consideration was framed at a time when telephone, wireless, Telstar, Early bird were not contemplated. If the time has marched and the inventions have made it easy to communicate instantaneously over long distance and language of our law does not fit the new condition it can be modified to reject the old principles”.

It is true that the draftsman of the contract law could not have contemplated scientific inventions. Further, it is also important that the provisions of the law are interpreted in a progressive manner. The statues must be construed to continuously update the wordings in accordance with the changes in the social condition, science and technology.

LAWS THAT GOVERN THE ONLINE CONTRACTS

There are various laws that govern the online contracts such as the Indian Contract Act, 1872, the Indian Evidence Act, 1872, the Information Technology Act, 2000 and the Indian Stamps Act, 1899.

It is important to note that the requirements of the online contracts are similar to that of physical contracts under the Indian Contract Act, 1872 i.e., there should be a lawful object, lawful consideration, the parties must be competent enough to contract, there must be free consent and there must be an intention to create a legal relationship. Thus, even for the online contracts the provisions of the Indian Contract Act, 1872 have to fulfilled for it to be made enforceable in the courts of law.

However, the doubts as to the evidentiary value of the online contracts may arise. To settle the doubts raised qua the evidentiary value of the online contracts there are certain provisions in the Indian Evidence Act, 1872 which govern the same. They are as follows:

• Section 85 A: This section presumes the existence of the electronic agreement after the agreement is concluded by affixing the electronic signature of the parties.
  
• Section 85 B: This section allows the court to presume that the record in question is not put to any kind alteration. It also allows the court to presume that the electronic signature has been affixed with the intention of signing and approving the electronic record. This section also provides that the section should not be misread so as to create any presumption relating to the integrity or authenticity of the electronic record or digital signature in question.
  
• Section 88 A: This section allows the court to presume the existence of the electronic messages and also specifies that the court shall not make any presumptions as to the person by whom that message was sent. The Court may presume that an electronic message, forwarded by the originator through an electronic mail server to the addressee to whom the message purports to be addressed corresponds with the message as fed into his computer for transmission.
  
• Section 90 A: According to this section where the electronic documents are proved to be five years old are and are produced from the proper custody, the court may presume that the electronic signature so affixed on the document was affixed by him or any other person authorized by him so as to validate the existence of the contract.
  
• Section 65 B: According to this section any information contained in an electronic record which is printed on a paper or stored/recorded/copied on optical/magnetic media produced by a computer shall be deemed to be a document and is admissible as evidence in any proceeding without further proof of the original, provided certain conditions mentioned in sub-section 2 of section 65 B are fulfilled.

The Information Technology Act, 2000 recognizes the basic features of the contract such as communication, acceptance and revocations which may be expressed in electronic form or by means of an electronic record. Signature of the parties to the contract is essential but is not required under the Indian Contract Act as it recognizes the existence of the oral contracts as well. The principal function of signing a document is to confirm the identity of the contracting parties and to give consents to the contractual terms and to refuse repudiation, i.e. when a person appends his signature, he cannot subsequently refuse that he was not a contracting party. Therefore, the IT Act makes provision to authenticate the electronic records. Section 3 of the Information Technology Act, 2000 provides that any subscriber can authenticate the electronic record by affixing the electronic signature. Section 3 A of the Information Technology Act, 2000 defines electronic signatures and makes this electronic authentication technique reliable.

In particular, the IT Act 2000 excludes the following documents from electronic transactions:

• Negotiable Instruments
• Power of Attorney
• Trust Deed
• Will
• Sale Deed or Conveyance deed with respect to the immovable property of any documents relating to any interest in an immovable property.

Section 10A of the Information Technology Act, 2000 hints at the validity of e-mail contracts. It reads as follows: “Where in a contract formation, the communication of proposals, the acceptance of proposals, the revocation of proposals and acceptances, as the case may be, are expressed in electronic form or by means of an electronic record, such contract shall not be deemed to be unenforceable solely on the ground that such electronic form or means was used for that purpose.”

In the present era the formation of contracts via emails are increasing and to ensure that the online contracts are not faced to with any legal implications this provision was inserted into the Information Technology Act, 2000.

JUDICIAL RECOGNITION OF ONLINE CONTRACTS

In Trimex International Fze Limited v. Vendata Aluminium Limited², The petitioner had applied to the Hon’ble Supreme Court under section 11(6) of the Arbitration and Conciliation Act, 1996 for the constitution of the arbitral tribunal. The respondents objected to the same on the grounds that there was no contract between the parties and therefore there could not be any arbitration agreement between the parties. It was the contention of the respondent that the acceptance over the e-mails could not give rise to the contract and there was always an intention that a formal contract would be signed in future.

In Rickmers Verwaltung GNBH v. Indian Oil Corporation Limited³, The Supreme Court clearly contemplated that possibility of exchange of correspondence between the parties would amount to contract between parties. Thus relying on the above decision of the three-judge bench the court held that “Unconditional acceptance of contract concluded orally or in writing [or by e-mail].. mere absence of a signed formal contract, would not affect either unconditional acceptance of contract or implementation thereof.” Thus, the e-mails which convey the clear intention of the contracting parties can be treated as a binding contract.

In Ambalal Sarabhai Enterprise Limited v. KS Infraspace LLP Limited, The Hon’ble Supreme Court had decided the validity of agreements entered into by the parties using a combination of communications over WhatsApp and emails. The court stated that: “The e-mails and WhatsApp messages will have to be read and understood cumulatively to decipher whether there was a concluded contract or not. The use of the word ‘final draft’ in the e-mail… cannot be determinative (of offer or acceptance) by itself”. Therefore the courts have accepted and provided that the agreements can be executed electronically, so long as they meet the minimum requirements of the Contract Act and the IT Act.

The foreign courts have also given a more liberal construction. There are judgments which read that unless an inference can be drawn from the facts that the parties intended to be bound only when a formal agreement had been executed, the validity of the agreement would not be affected by its lack of formality.

CONCLUSION

The advancement of technology will bring more and more challenges and thus it is important that the laws are updated and upgraded from time to time to keep up with the evolving technology. The judiciary is still administering the online contracts and it still remains a developing subject as there are not many judicial decisions on this point.

However, the fact, that many Indian courts recognize the extensive inclination to e-commerce and reliance on the internet cannot be denied. The prevailing legal judicial and legislative intent appears to be that any legally valid acts would maintain their validity even if performed online or electronically provided that such contract satisfies all the essentials of a valid contract.

REFERENCES

• 1966 AIR 543 ¹
• 2010 (1) SCALE 574²
• AIR 1999 SC 504³

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This post is written by Anushree Tadge, 3^rd year law student of ILS Law College, Pune, she tries to explain briefly what the concept of free consent is and why it is regarded as foundation stone of other Acts like Transfer of Property Act, Company Act, Family Laws etc.

Introduction to ‘Free Consent’

• ‘Consent’ as a word is heard very often by individuals around the globe, as the feeling of ‘individuality’ is given importance more and more, consent as a provision is also evolving.   Derived from the Merriam Webster dictionary, ‘Consent’ is explained as ‘compliance in or approval of what is done or proposed by another.’
• In simple words a voluntary agreement of one party to the proposal of others in order to reach or not reach the desired motive. Now even consents are of different types, these include implied, expressed, informed consent and unanimous consent. But, again for a person to provide consent, he/she should not be diagnosed with a mental disorder, age more than 18 years etc along with the major factor being the consent should be voluntary and not affected by any form of coercion. Fraud, undue influence.

‘Free Consent in the Indian Contract Act, 1872’

• Section 13 of the Indian Contract Act, 1872 (hereinafter referred to as Act) defines the term ‘Consent’ as Two or more persons are said to consent when they agree upon the same thing in the same sense.
• For example, suppose there are two parties in a contract, A and B. It was seen that there was some land and “A” put a proposal to sell. “B” after being made aware of this proposal, analysed that it was the perfect opportunity, agreed to it. In this case, both parties showed their consent.
• The principle of consensus-ad-idem is to be followed in contractual agreements.

• Section 14 of the Act states that Consent is said to be free if the following factors are satisfied:
• If the consent is free from coercion.
• If the contract is not done under any undue influence.
• If a contract is performed without any fraud.
• The contract should not complete with any misrepresentation.
• The contract should not be agreed to by mistake.
• If there is no consensus, moreover free consensus between parties is very vital for the contact to be binding and legitimate. In case there is no free consent, the voidability of the contract depends if the aggrieved party wishes to challenge the legality of the contract leading them to be ‘voidable’ in nature.

Coercion

• According to Section 15, it is the committing or threatening to perform, any act that is forbidden by the Indian Penal Code, 1860; or (ii) the unlawful detainment or threatening to do the same of any property, to the prejudice of any particular person, with the intention of leading any individual to enter into an agreement.
• In the famous case of Ranganayakamma Vs. Alwar Setti (1889), A Hindu Widow of 13 years, was coerced into adopting a boy under the threat of not allowing cremation of her husband’s death. Following which, the widow feared and adopted the boy. Later she even applied for cancellation of the adoption. It was held that the adoption was voidable at her option as her consent was not free it was rather obtained by coercion is an offence under Sec 297 of the Indian Penal Code.
• Now for cases where coercion is obtained by threats like ‘filing a suit’, it will also fall under the same category, because it is explicitly stated as an offence by the Indian Penal Code. In another interesting case of Ammiraju v. Seshamma, the issue was put forth whether ‘threat to commit suicide’ was a punishable offence? The Court ruled otherwise and put forth that such kind of coercion was not punishable by the IPC,1860.

Undue Influence

• The second factor which makes ‘consent’ of particular cases to be compromised is Undue Influence. Section 16 (i) of the Act, defines undue influence as to where if the relationship existing between the parties are of such nature that one of the parties is in a superior position or can dominate the will of the other easily and actually uses that position to obtain an unfair benefit over the other person or force him/her to act particularly in a contract is ‘Undue Influence’.
• Section 16 (2) of the Act states that a person is deemed to be in a position to dominate the will of another where:
• He holds a real or some apparent authority over the other person. For e.g. Master and Servant
• There exists a fiduciary relationship based on trust and confidence for e.g. guardian and ward
• Contract with a person experiencing mental distress/ disorder/ weak intelligence/ illiterates etc.
• The burden of proof lies on the party at whose end the contract seems voidable, there has to be compulsory proving of the fact that there existed a relationship where one party could dominate another and the party actually used such position to obtain an unfair advantage.

Fraud

• The third way by which consent is unfree can be explained is Fraud. The term ‘fraud’ is defined in Section 17 of the Act as follows:
• “Fraud includes any of the acts committed by one of the parties in a contract or by anyone of his agents, with an intention to deceive the other party so as to lead him to enter into the contract:

i) the suggestion of a fact, that is not true,

ii) the active concealment i.e. hiding of a fact.

iii) making a promise without any actual intention of performing it;

iv) any other act in order to deceive; any act or omitting the law which especially shows it to be fraudulent.”

• A very interesting point to note is that the Section 17 says “Mere silence as far as facts are concerned are likely to affect the willingness of an individual to enter into a contract is not really fraud”. Although this rule has an exception to circumstances where there is a duty to speak and if the ‘contract is made in good faith.’

Misrepresentation

• A representation, when performed in a wrong manner, innocently or intentionally, is called ‘misrepresentation’.
• Misrepresentation should be made innocently, absolutely believing it to be true and without any intention of deceiving the other party.
• Misrepresentation should be pertinent to the facts of the case. A mere expression of one’s opinion is not stating of a fact. It should also be used in inducing the other party into entering the contract. Like all the other forms explained in this post, even misrepresentation is voidable at the part of the aggrieved party, he can challenge the contract to be null and void or ask for an honest performance of the same.
• However, under few circumstances the aggrieved party loses the right to rescind the contract, these are-
• If the truth could be discovered with ordinary diligence.
• If the consent is not actually induced due to misrepresentation.
• If the parties cannot be led back in such a way that they acquire their original positions.
• Even, after coming to know about misrepresentation if the party acts in such a manner that it shows it’s an affirmation to the contract, the party, in such case will automatically lose the right to rescind.

Mistake

• Mistake is an incorrect assumption turning into a belief concerning anything.
• Mistakes are of two kinds- Mistake of Law and Mistake of Fact.
• Mistake of law can be of two types further

(ii) mistake related to foreign laws

(i) mistake related to the law of the land

• A mistake of fact can also be divided into two –

(a) bilateral mistake.

(b) unilateral mistake.

• Bilateral mistake may relate to topics like the subject-matter where both parties are combinedly at fault.  Mistake of fact regarding subject-matter may be the existence of, the identity of, the title of, quantity of, quality of the subject-matter, or even its price. Such a mistake makes the Contract void.
• A unilateral mistake is when only one party is at fault by virtue of the assumption that there is the same sense of subject matters in both parties. For e.g. A wants to sell a horse but B thinks it’s a pony.

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