Agreements Void if Both Parties under Mistake of Facts
Through this research, we can learn the following points:
- To understand the scope of Section 20 of the Indian Contract Act, 1872.
- To study and analyse section 20 of the Indian Contract Act, 1872 thoroughly.
- To study the applicability of the section 20
- To understand the scope of restitution and rectification for the mistakes under section 20.
Questions Addressed in this Research Paper
- What does section 20 of the Indian Contract Act, “Agreement Void where both parties are under mistake as to matter of fact” deals with?
- What is an Agreement according to the Indian Contract Act, 1872? Briefly Explained.
- What is the meaning of Void Agreement? Briefly Explained.
- What is Mistake under Section 20 of the Indian Contract Act, 1872?
- What is the meaning of Fact under Section 20 of the Indian Contract Act, 1872?
The Indian Contract Act deals with the contractual rights of an individual granted to the citizens of India. It encovers rights, duties and obligations of the contracting parties to guide them to successfully conduct business in their day – to – day life. The Indian Contract Act, 1872 was enacted on 25th April, 1872 and came into force on the 1st day of September, 1872.
The Indian Contract Act, 1872 describes the step by step points on what are the ingredients of a conducting agreement, what causes agreements to be void, how can a contracting party deal with the voidable agreement, and many more. All these points are included in the Indian Contract Act, 1872.
According to Section 2 (e) of the Indian Contract Act, 1872, every promise and every set of promises, forming the consideration for each other, is an Agreement.
Under this definition, two points are needed to be understood by an individual.
- What is a Promise?
- What is Consideration?
Section 2 (b) of the Indian Contract Act, 1872 describes a promise as “when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted, becomes a Promise”.
It can be interpreted as when a person signifies to another his willingness to do or abstain other from doing something, with a view to obtain the consent of the other party, to such an act or abstinence, he is said to make a promise.
Section 2 (d) of the Indian Contract Act, 1872 describes consideration as “When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise”
It can be interpreted as consideration is an act, forbearance or promise done or given at the request of the promisor by the promisee or any other person.
Section 25 of the Indian Contract Act, 1872, mentions that the requirement of the consideration is an essential element of a valid agreement. If the consideration is absent in an agreement, the agreement is void.
Therefore, we can come to a conclusion that if there is a proposal made by one party, which is accepted by the other party, with free consent, with adequate consideration; is a valid, conducting agreement.
Section 2 (g) of the Indian Contract Act, 1872, describes void agreement as “an agreement not enforceable by law is said to be void”
The words “not enforceable by law” in this clause do not refer to a disability to sue arising under any procedural laws. The unenforceability contemplated in this clause is one arising under the provisions of a substantive law. It may be declared void in this Act, or by any other law. A contract void from its inception is no contract at all.
Although a void agreement is described as one not enforceable, yet reliefs can be granted under it. If the contract is discovered to be void, the obligation of restitution arises under section 65, which reads “Obligation of person who has received advantage under void agreement, or contract that becomes void”
Mistake of Fact
Section 20 of the Indian Contract Act, 1872, mentions that “Agreement void where both parties are under the mistake as to matter of fact”
Earlier we have seen what is an agreement and what are void agreements. Therefore now we have to look at what is a mistake of fact under this section.
A mistake described in this section operates to invalidate a contract, because the true intention of the parties to make their agreement conditional on the existence of some state of facts turn out not to have existed at the date of the agreement.
For example when the contract is for the sale of an object not existing, or which has ceased to exist according to the description by which it was contracted for, the result is still more easily seen, because there is nothing to buy and sell. The wording of the section tends to obscure this principle.
Mistake of fact is generally caused by the words or conduct of the one party, which leads the other party to mistaken the facts of the agreement.
Mistake of facts that is mentioned in this section deals with the mistake that is bilateral in nature. If a mistake is unilateral in nature, it is outside the scope of this section1.
Bilateral Mistakes are of three types.
- Mutual Mistake
Mutual mistake is where the parties misunderstood each other and are at cross-purpose with each other. There is no real corresponding offer and acceptance. The parties are really consensus ad idem, that is, the minds of both the contracting parties do not have the same understanding of the contract being formed.
- Common Mistake
Where both the parties make the same mistake of fact relating to the subject matter or facts surrounding the formation of contract. Common mistake arises where both the parties are mistaken about the same vital fact though they are at ad idem, that is, their minds are meeting.
- Mistake nullifying and Negativing Consent
When a mistake prevents parties from reaching an agreement, because one party intends to contract about one thing, and the other about the other, the mistake negates consent. When the parties agree about the same thing, but their agreement is based on a fundamental mistaken assumption, mistake nullifies consent. Section 20 deals with mistake nullifying consent, where the parties are agreed in the same thing in the same sense, but on the basis of an assumption which is false, and hence, both are mistaken about a matter of fact essential to the agreement. Mistake negativing consent is considered under section 13 of the Indian Contract Act, 1872.
Fact Essential to the Agreement
For Section 20 of the Indian Contract Act, 1872, to be applied the mistake must be “as a matter of fact essential to the agreement”. It is not enough that there was an error “as to some point, even though a material point, an error as to which does not affect the substance of the whole consideration”.
The error, to be relevant to vitiate a contract, should be essential and inexcusable.
In order to render an agreement void under section 20, both the parties must be labouring under the same mistake of fact.
Mistake and Equity under the English Law
In English Law, a mistake renders a contract void ab initio, and it refuses remedy for contract induced by mistake, but equity may grant relief. A contract is liable to be set aside in equity, if the parties were under the common misapprehension either as to facts, or as to their relative and respective rights, provided that the misapprehension was fundamental and the party seeking to set it aside was not himself at fault.
Section 65 provides that when an agreement is discovered to be void, any person who has received any advantage under the agreement is bound to restore it, or to make compensation for it, to the person from whom he received it.
In some circumstances, parties may have legitimately agreed, but the wording or terminology employed in the written agreement do not express or reflect their true meaning or intent. This is not an error that renders the contract void, but rather an error in language that can be rectified, if not mutually, with the intervention of the court. Section 26 of the Specific Relief Act, 1963, enables such rectifications.
As explained above, we can come to the conclusion that section 20 provides that agreements where mistakes are of such a manner where both the parties are under mutual mistake of facts, the agreement is considered to be void.
We also came to understand that an agreement is a set of promises that one party makes to the other party and the other party, with free consent, agrees to the said set of promises.
We also found that the agreements which are not enforceable by law are known as void agreements.
Therefore, we can come to a conclusion that agreements, where both the parties are under the mistaken impression of facts, are considered to be void since its inception.
Tarsem Singh vs. Sukhminder Singh
AIR 1998 SC 1400 : (1988) 3 SCC 471
The facts of the above mentioned case are as follows:
- The Petitioner and the Respondent in the particular case came into an agreement to enter into a sale deed for a land with the area of 48 kanals and 11 marlas. The Respondent paid Rs. 77000/- as earnest amount. But the Petitioner refused to sell that land and as the particular sale deed contained a clause as if the sale deed is not conducted due to any certain fact, the earnest amount would be considered forfeited.
- The Respondent filed the case in trial court and the trial court came to a conclusion that both the parties were not ad idem. The Petitioner intended to sell it in “kanal”, while the Respondent intended to purchase the said land in “bighas”.
- Not only was the unit of measurement under dispute but also the question as to how much area was agreed to be sold.
It was found by the court below that the agreement was void since its inception as both the parties were under the mutual mistake with regards to not only the area to be sold but also the price at which the agreed area was to be sold. The forfeiture clause in the sale deed was also found to be void.
It was held that an agreement was discovered to be void if one was discovered to be not enforceable by law, on the language of the section would include an agreement that was void in that sense from its inception as distinct from the contract that becomes void.
The Apex Court also passed a decree that as the petitioner had received an advantage, had to refund the earnest amount received from the Respondent.
- Indian Contract Act, 1872
- Indian Contract Act, 1872 – 16th Edition by R Yashod Vardhan, Chitra Narayan and Vinod Kumar. Edition by LexisNexis
- Tarsem Singh vs. Sukhminder Singh
Paper by Krishna Jaiwar