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CMA Foundation · Fundamentals of Business Laws and Business Communication · Capacity of Parties, Free Consent

During a tight money market, a banker refuses to lend to Suresh except at an unusually high rate of interest, and Suresh accepts. Which statement is correct under the Indian Contract Act, 1872?

The contract is not induced by undue influence. A banker who lends during a money-market stringency only at an unusually high rate is acting in the ordinary course of business, and merely driving a hard bargain does not amount to dominating the borrower's will.

  1. AThe contract is voidable for undue influence because the rate is unusually high
  2. BThe contract is voidable for coercion because Suresh had no alternative
  3. CThe contract is void because the interest is unconscionable
  4. DThe contract is not induced by undue influence, as it is a transaction in the ordinary course of businessCorrect

Explanation

The illustration to Section 16 states that a banker declining a loan in a stringency except at an unusually high rate is acting in the ordinary course of business, so the contract is not induced by undue influence. The banker does not hold a dominating position merely by charging high rates. Hence voidability and voidness are wrong.

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