What Is Coercion In Business Law?

Understanding What Is Coercion In Business Law? is essential for businesses to ensure fair and ethical practices in contractual dealings. Coercion, as defined under Section 15 of the Indian Contract Act, 1872, involves the use of threats, unlawful acts, or undue pressure to compel someone to enter into a contract against their free will. This concept is critical in maintaining the principle of free consent, a cornerstone of valid contracts. Whether it's threats to withhold essential goods, force unfavorable terms, or detain property unlawfully, coercion undermines transparency and fairness in business transactions. This blog explores the meaning, examples, legal framework, and remedies related to coercion in business law, providing a comprehensive guide to its implications.

Meaning Of Coercion

Coercion, as defined in Section 15 of the Indian Contract Act, 1872, means "the committing, or threatening to commit, any act forbidden by the Indian Penal Code, or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement."

Example Of Coercion

A few examples of coercion in Business Law are:

1. If a supplier forces the business owner to accept his terms and conditions by threatening to cut off the essential supplies for business, then it is a case of coercion.
2. If an employer forces his employee to sign a non-compete agreement and threatens to be terminated immediately if he doesn't sign it, then it is also coercion.
3. If A borrows money from B and B threatens to file a false lawsuit against him unless he agrees to higher interest rates, it is also coercion.

Other examples of coercion in business transactions may include:

• Forcing a party to accept unfavorable contract terms,
• Withholding of essential goods or services required for business,
• Unlawful detention of property or assets required in business,
• Threatening to destroy reputation or goodwill.

Also Read : Difference Between Coercion And Undue Influence

Legal Framework On Coercion

Coercion is covered under Section 15 of the Indian Contract Act 1872. It is defined as committing or threatening to commit any act forbidden by the Indian Penal Code or unlawfully detaining or threatening to detain any property to the prejudice of any person to cause that person to agree. This definition provides that if a person is threatened to do something or omitted from doing any act, it is coercion.

Essentials Of Coercion

The following are essentials of coercion that must be fulfilled:

1. A threat or force must compel someone to act against their free will. The threat need not be physical; it can also be emotional or economic.
2. The act that is used to coerce a person should be unlawful. An unlawful act is forbidden by law, such as the Indian Penal Code, or it causes harm to a person, his property, or reputation.
3. The intention behind coercing a person should be to influence his consent and force him to enter into a contract.
4. Coercion makes the contract invalid as it directly infringes on the principle of free consent. If consent is not affected by coercion, then it is not coercion.

Effect Of Coercion In Business law

The effect of coercion in business law can be summarised as follows:

1. A contract that is formed under coercion is considered to be voidable as per the Indian Contract Act. A voidable contract means it can be rescinded or enforced by any party at their option.
2. When one party is coerced to agree to the contract terms, it violates the principle of free consent, which is defined under Section 13 of the Indian Contract Act. Free consent is one of the essentials of a valid contract; without it, the agreement is illegal.
3. If parties have agreed due to coercion, then the affected party has a right to ask for compensation to restore the original position of the parties.

How To Prevent Coercion In Business Transactions

The best way to prevent coercion in business transactions is to take care of the following:

1. Clearly outlining the terms and conditions in all the contract agreements between the parties promotes transparency.
2. All the documents related to contracts should be drafted with the help of legal experts.
3. There should be sufficient time for negotiation between the parties so that voluntary consent can be obtained.
4. Every business should have internal policies to prohibit coercion and such illegal activities.
5. A detailed record of all negotiations and communications should be made to prove the voluntary nature of business transactions.

Remedies Against Coercion

If a contract is formed due to coercion, then the following remedies are available to the aggrieved party:

Voidability

The contract is voidable at the option of the party whose consent was so caused (Section 19). This means the aggrieved party has the choice to either rescind (cancel) the contract or affirm (ratify) it.

Restitution Of Contract (Section 65)

Restitution means restoring any benefit received by the aggrieved party when they entered into the contract. For example, if some money was paid under the coerced agreement, it must be refunded.

Compensation (Section 73)

The aggrieved party may be entitled to compensation for any loss or damage suffered as a direct consequence of the coercion, as per general principles of contract law and potentially under Section 73 of the Indian Contract Act dealing with compensation for loss or damage caused by breach of contract.

Injunction (Specific Relief Act, 1963)

A court can grant an injunction under the Specific Relief Act, 1963, to restrain a party from enforcing a coerced contract. This is a discretionary remedy granted by the court based on the facts of the case.

Specific Performance

Specific performance is an equitable remedy where the court orders a party to fulfill their contractual obligations. Since the contract is voidable at the option of the coerced party, they would choose rescission (cancellation) rather than seeking to enforce it.

Burden Of Proof In Coercion

In cases where a party alleges that a contract was entered into under coercion, the burden of proving that coercion was exercised lies on the party alleging it. This means the party claiming that their consent was obtained by coercion (usually the defendant in a suit on the contract) bears the burden of proving the facts constituting coercion. The plaintiff, who is seeking to enforce the contract, initially has the burden of proving the existence of a valid contract, including the element of free consent. However, once coercion is pleaded as a defense, the evidential burden shifts to the party alleging coercion to establish it.

Case Laws On Coercion

Here are some relevant case laws on Coercion:

Chikkam Ammiraju vs. Chikkamm Seshamma (1911)

A landmark case establishes that threats to compel a party to act against their will constitute coercion. The facts of the case are that the husband threatened to commit suicide if his wife and son did not transfer the property to his brother. The court held that a threat to commit suicide is coercion under Section 15 of the Indian Contract Act, 1872. Thus, the agreement was held voidable.

Askari Mirza vs. Bibi Jaya Kishori (1912)

The facts are that a minor took out a loan from a money lender and mortgaged his two residences. Being a minor, he can't enter into a contract. The child, however, agreed to compromise after the moneylender threatened to file charges against him. It was held that this was coercion, as the moneylender threatened to file criminal charges against the child.

Ranganayakamma vs. Alwar Setti (1889)

The facts of the case are that there is a young widow whose relatives forced her to adopt a boy under the threat that her husband's funeral rites would not be performed unless she agreed to adopt a boy. The court held that the adoption was made under coercion, and it was invalid.

Union of India vs. Kishori Lal Gupta (1959)

In this case, the Supreme Court of India held that mere economic duress or financial pressure, in itself, does not constitute "coercion" as defined under Section 15 of the Indian Contract Act, 1872. The court emphasized that for economic pressure to amount to coercion, it must involve an unlawful act or threat that is forbidden by the Indian Penal Code. Simply leveraging a stronger economic position in negotiations, even if it creates pressure on the other party to enter into a contract, does not automatically invalidate the contract unless such pressure involves illegal or unlawful means.

Conclusion

Coercion disrupts the fairness and integrity of contractual relationships, making it vital to understand What Is Coercion In Business Law? It involves the use of unlawful pressure or threats to compel consent, rendering the resulting agreements voidable. By adhering to the principles of free consent and transparency, businesses can safeguard themselves against such unethical practices. Legal provisions under the Indian Contract Act, 1872, provide remedies for parties affected by coercion, ensuring justice and fairness. Businesses should prioritize clear documentation, legal compliance, and ethical practices to prevent coercion and maintain trust in their transactions.

FAQs On Coercion In Business Law

A few FAQs based on Coercion in Business Laws are:

Q1. What are the effects of coercion on a contract?

A contract formed under coercion is voidable at the option of the coerced party, meaning they can choose to rescind or affirm the contract.

Q2. What is the difference between coercion and undue influence?

Coercion involves physical or unlawful threats, while undue influence involves exploiting a dominant position to influence another party's decision.

Also, Read In detail the Difference Between Coercion And Undue Influence

Q3. How can I prove coercion in a contract?

The burden of proof lies on the party alleging coercion. They must provide evidence of unlawful threats or detention that compelled them to enter the contract.

Q4. What are the remedies available for a coerced party?

Remedies include rescission of the contract (making it void), restitution (restoring benefits received), compensation for losses, and potentially an injunction to prevent enforcement of the contract.

Q5. What are the key elements of coercion?

The key elements are an unlawful threat or act, the intention to cause someone to enter a contract, and the use of such threat or act to compel the person against their free will.