‘Contract’ is a bilateral transaction between two or more than two parties. Every contract has to pass through several stages beginning with the stage of negotiation during which the parties discuss and negotiate proposals and counter-proposals as also the consideration resulting finally in the acceptance of the proposal.
The proposal when accepted gives rise to an agreement. It is at this stage that the agreement is reduced into writing and a formal document is executed on which parties affix their signatures or thumb impression so as to be bound by the terms of the agreement set out in that document.
Void Contract
Section 20 of the Act lays down as under: –
“20. Agreement void where both parties are under mistake as to matter of fact.- Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.
Explanation. – An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement, is not to be deemed a mistake as to a matter of fact.”
While explaining the section, the Supreme Court in the case of Shri Tarsem Singh v. Shri Sukhvinder Singh (1998)’ said that,
“This Section provides that an agreement would be void if both the parties to the agreement were under a mistake as to a matter of fact essential to the agreement. The mistake has to be mutual and in order that the agreement be treated as void, both the parties must be shown to be suffering from mistake of fact. Unilateral mistake is outside the scope of this Section.
The other requirement is that the mistake, apart from being mutual, should be in respect of a matter which is essential to the agreement.”
Tarsem Singh Case
In Tarsem Singh (supra), there was a question of mistake of fact in agreement. In the case-
- The petitioner, who owned 48 kanals 11 marlas of agricultural land entered into a contract for sale of that land with the respondent @ Rs. 24,000/- per acre.
- At the time of the execution of the agreement, an amount of Rs. 77,000/- was paid to the petitioner as earnest money. Since the petitioner in terms of the agreement although the respondent was ready and willing to perform his part of the contract, the latter, namely, the respondent filed the suit for Specific Performance against the petitioner which was decreed by the trial court.
- The decree was modified in appeal by the Additional District Judge who was of the opinion that the parties to the agreement, namely, the petitioner and respondent both suffered from a mistake of fact as to the area of the land which was proposed to be sold as also the price (sale-consideration) whether it was to be paid at the rate of per “Bigha” or per “Kanal”.
Question in Consideration
The question in consideration in this case, was-
“What is the effect and impact of “Mistake of Fact” on the agreement?”
Bigha and Kanal
“Bigha” and “Kanal” are different units of measurement. In the Northern part of the country, the land is measured in some states either in terms of “bighas” or in terms of “kanals”. Both convey different impressions regarding area of the land.
The finding of the Lower Appellate Court is to the effect that the parties were not ad-item with respect to the unit of measurement. While the defendant intended to sell it in terms of “kanals”, the plaintiff intended to purchase it in terms of “bighas“.
Therefore, the dispute was not with regard to the unit of measurement only. Since these units relate to the area of the land, it was really a dispute with regard to the area of the land which was the subject matter of agreement for sale, or, to put differently, how much area of the land was agreed to be sold, was in dispute between the parties and it was with regard to the area of the land that the parties were suffering from a mutual mistake.
The area of the land was as much essential to the agreement as the price which, incidentally, was to be calculated on the basis of the area. The court also ordered to return earnest money of 77,000.
Counsel for the petitioner contended that Court was not justified in passing a decree for the refund of Rs. 77,000/- which was paid as earnest money to the petitioner as there was a specific stipulation in the agreement for sale that if the respondent did not perform his part of the contract and did not obtain the sale deed after paying the balance amount of sale consideration within the time specified in the agreement, the earnest money would stand forfeited.
It was contended that since the respondent did not offer the balance amount of sale consideration and did not obtain the sale deed in terms of the agreement, the amount of earnest money was rightly forfeited and a decree for its refund could not have been legally passed.
What Supreme Court said on the impact of ‘mistake of fact’?
The Supreme Court said that,
- Under Section 74 of the Act, however, the parties to the agreement stipulate either a particular amount which is to be paid in case of breach or an amount may be mentioned to be paid by way of penalty. The party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused, to receive from the party who has committed the breach of contract, compensation not exceeding the amount mentioned in the agreement or the penalty stipulated therein.
- But this Section also contemplates a valid and binding agreement between the parties. Since the stipulation for forfeiture of the earnest money is part of the contract, it is necessary for the enforcement of that stipulation, that the contract between the parties is valid.
- If the forfeiture clause is contained in an agreement which is void on account of the fact that the parties were not ad-idem and were suffering from mistake of fact in respect of a matter which was essential to the contract, it cannot be enforced as the agreement itself is void under Section 20 of the Contract Act.
- A void agreement cannot be split up. None of the parties to the agreement can be permitted to seek enforcement of a part only of the contract through a court of law. If the agreement is void, all its terms are void and none of the terms, except in certain known exceptions, especially where the clause is treated to constitute a separate and independent agreement, severable from the main agreement can be enforced separately and independently.
- Since, in the instance case, it has been found as a fact by the below that the agreement in question was void from its inception as the parties suffered from mutual mistake with regard to the area and price of the plots of land agreed to be sold, the forfeiture clause would, for that reason, be also void and, therefore, the petitioner could not legally forfeit the amount and seek the enforcement of forfeiture clause, even by way of defence, in a suit instituted for Specific Performance by the respondent.
- We may also refer to Section 65 of the Contract Act with, mirus the illustrations, is as follows:-
“65. Obligation of person who has received advantage under void agreement or contract that becomes void.-
When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.”
This Section, which is based on equitable doctrine, provides for the restitution of any benefit received under a void agreement or contract and, therefore, mandates that any “person” which obviously would include a party to the agreement, who has received any advantage under an agreement which is discovered to be void or under a contract which becomes void, has to restore such advantage or to pay compensation for it, to the person from whom he received that advantage or benefit.
- Mutual consent, which should also be a free consent, as defined in Section 13 and 14 of the Act, is the sine qua non of a valid agreement. One of the essential elements which go to constitute a free consent is that a thing is understood in the same sense by a party as is understood by the other party.
- It may often be that the parties may realise, after having entered into the agreement or after having signed the contract, that one of the matters which was essential to the agreement, was not understood by them in the same sense and that both of them were carrying totally different impressions of that matter at the time of entering into the agreement or executing the document. Such realisation would have the effect of invalidating the agreement under Section 20 of the Act.
- On such realisation, it can be legitimately said that the agreement was “discovered to be void”. The words “discovered to be void”, therefore, comprehend a situation in which the parties were suffering from a mistake of fact from the very beginning but had not realised, at the time of entering into the agreement or signing of the document, that they were suffering from any such mistake and had, therefore, acted bona fide on such agreement. The agreement in such a case would be void from its inception, though discovered to be so at a much later stage.
Reference
Tarsem Singh v. Sukhminder Singh (1998)