Doctrine of Restitution in Void Contracts

Introduction
Courts in seventeenth century England first developed the doctrine of restitution as a contractual remedy. The concept migrated to courts in the United States, and it has since expanded beyond its original contractual roots. Courts now apply restitution in the areas of maritime, criminal law, and torts.1 In Halsburys Laws of England, it is stated, Any civilized system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is, to prevent a man from retaining the money of, or some benefit derived from, another which it is against conscience that he should keep.2 In law the term restitution is used in three senses: (i) return or restoration of some specific thing to its rightful owner or status; (ii) compensation for benefits derived from a wrong done to another; (iii) compensation or reparation for the loss caused to another.3 Even where a person has received a benefit from another he is liable to pay thereof only if the circumstances of its receipt or retention are such that, as between the two persons, it is unjust for him to retain it. The mere fact that a person benefits another is not of itself sufficient to require the other to make restitution thereof. Ordinarily the benefit to the one and the loss to the other are co-extensive, and the result of the remedies given under the rules stated in the restatement of this subject is to compel the one to surrender the benefit which he has received and thereby to make restitution to the other for the loss which he has suffered. Where benefit and loss do not coincided the amount of recovery is usually limited to the amount by which he has been benefited. Restitution literally means restoration. It is based on the noble principle that a person should not be allowed to unjustly enrich himself at the expense of another. Therefore, when a contract
1 2

http://legal-dictionary.thefreedictionary.com/restitution assessed on 14th of august, 2012 http://www.legalserviceindia.com/article/l419-Inherent-Power-of-the-Court-to-Grant-Restitution.html assessed on 16th of august, 2012 3 Cunningham & Shephard, Contract Act, Law Publishers (India) Pvt. Ltd., Allahabad, Page no. 657 & 658

becomes void, the party who has received any benefit under it must restore it to the other party or must compensate the other party by the value of the benefit. According to Anson, "the principle of restitution is that a person who has been unjustly enriched at the expense of another is required to make restitution to that other." Illustration : A agrees to sell to B, after six months, certain immovable property and receives Rs. 1,000 as an advance. Immediately thereafter, transfer of immovable property is prohibited by an Act of the Legislature. The contract becomes void, but A must return the sum of Rs. 1000 to B. The principle of restitution applies in the following circumstances: 1. When a contract becomes void, all parties who have received benefit under the contract must restore it back to the person from whom it has been received. 2. The principle of restitution also applies where an agreement is void ab- initio but the fact is unknown to both the parties, e.g., mutual mistake regarding existence of the subject-matter. The doctrine of restitution is not applicable in the following circumstances: (i) Where an agreement is known to be void e.g., where an agreement is for some impossible act to do or where it is illegal to the knowledge of both the parties from the beginning. For example, A promises B to produce gold by magic. B pays an advance of Rs. 1,000. B can neither recover Rs. 1,000 nor compel A to produce gold by magic as A and B know or ought to know that the act is impossible. (ii) The principle of restitution does not also apply where the party who has to return the benefit is a person incompetent to enter into a contract, e.g., minor. For example, in the case of Mohiribibi vs. Dharmodass Ghosh, it was seen that the minor was not asked to return Rs. 8,000 obtained by him against the mortgage, although the mortgage was declared void. However, on equitable grounds, the Court may ask the minor to restore the benefit where he has misrepresented his age. The law has not given any license or liberty to a minor to cheat men. (iii) The principle of restitution is also not applicable where a party is required to give some earnest money which serves as a security that the depositor will perform his part. Such deposit will not be refunded if the depositor fails to perform his promise.

In case where restitution of the same benefit is not possible, reasonable compensation will have to be paid to make good the loss of the other party.

Section 65 of the Indian Contract Act, 1872

Sometimes, a party does anything or delivers something, under an agreement or contracts whereby the other party receives some advantage. Then, the advantaged party is under an obligation to restore the disadvantaged party. Questions relating to restitution, or restoration of advantage, may arise: 1. If the agreement or contract is void ab initio ; or 2. If the agreement is subsequently discovered to be void; or 3. If the contracts becomes void.4 Doctrine of Restitution has no application to agreements or contracts ab initio void, and known to be so. Therefore it can be stated that this section restricts to only two cases that can termed as: 1. If the agreement is subsequently discovered to be void; or 2. If the contracts becomes void. If the case falls within any of the two categories, any person who has received any advantage under such agreement or contract becomes bound to restore it, or to make compensation for it, to the person whom he received it. It is known as Doctrine of Restitution. Section 65 of the Indian contract act, 1872 governs the doctrine of restitution. It may be observed that this section starts from the basis of there being an agreement or contract. If there was no agreement or contract or there could be no agreement or contract then this Doctrine of Restitution has no governance. A contract entered into with a minor or a person of unsound mind is a nullity, and does not give rise to any rights and obligations. It is non est. When the parties could not perform the contract for the variety of reasons, they revert back to their original previous positions, and the mere fact that the contract is one prohibited by law will not disentitle the plaintiff from recovering the

Sanjiva Row, Commentary on Law relating to The Contract Act, 1872 and tenders, 11 th edition, Volume 2, Delhi Law House, Delhi, page no. 1536

money advanced, or the present given, so long as there is no part-performance of the illegal contract. Section 65 relates to obligation of the person who has received advantage under void agreement or contract. First of all it is not a case where the contract is discovered to be void. It was not the case that contract subsequently became void. It is well established principle of equity that when one person pays money to another in pursuance of an agreement which is ineffective or which subsequently becomes so, he under certain circumstances can recover money he had paid. The said rule of equity has been incorporated in several sections of the Indian Contract Act. Section 65 of the said act is one of such sections. It lays down the principle of restitution of the benefit received on the basis of an agreement subsequently discovered to be void or void from the beginning. The provisions of Section 65 apply only when an agreement at a subsequent stage is discovered to be void or when a contract became void later on by one person or the other.5 As a corollary from this principle, if money is advanced by way of capital for carrying on illegal partnership which partnership was actually carried out, such advance is not recoverable having regard to the principle, exturpi causa non oritur action.6 Scope of section 65 of the contract act which has bearing came into consideration by the Supreme court of India in the case Kujiu Collieries Limited v/s Jharkhand Mines Limited7 while interpreting the provisions of the said section it was observed that an agreement being discovered to be void it means that agreement the not enforceable and is, therefore, not a contract. It means that it was void. In such a case an advantaged person is bound to restore the disadvantaged party. In Bank of Rajasthan Ltd. v/s Sh. Pala Ram Gupta8, it held that where even at the time when the agreement is entered into both the parties knew that it was unlawful and therefore, void, there was no contract but only an agreement and it is not a case, where it is discovered to be void subsequently. Nor is it a case of the contract becoming void due to subsequent happenings. Therefore, Section 65 of the contract act, does not apply.

Manoharlal Radhakrishna vs. Union of India, AIR 1974 Pat. 56 Sanjiva Row, Commentary on Law relating to The Contract Act, 1872 and tenders, 11 th edition, Volume 2, Delhi Law House, Delhi, page no. 1537 7 AIR 1974 SC 1892 8 AIR 2001 Delhi 58
6

In Jayantilal Goel v/s Zubeda Khanum,9 the only basis, on which the recovery of the sum is based, is the pronote and there is no other alternative allegation. Therefore, when the pronote was executed and the payment of the sum was said to be contemporaneous with the instrument and when once the instrument is held to be void on the ground that is hit by Section 87 of the Negotiable Instruments Act, then the plea under Section 65 of the Indian Contract Act is not available.

AIR 1986 A.P 120

Case Studies
1.

Virender Singh vs Laxmi Narain10

Decided on 1 November, 2006

Facts The facts as indicated in the impugned order are that the complainant gave a sum of Rs.80,000/to the petitioner and his father, who were arrayed as accused No.1 and 2 respectively. The said sum of Rs.80,000/- was allegedly paid by the complainant (respondent No.1) to the accused for the purposes of securing a job for the complainant's nephew in Haryana Police. In essence, this money was paid by way of illegal gratification for the purposes of arranging the said job through purported high profile political leaders. However, the complainant after having paid the said sum of Rs.80,000/- did not get the job for his nephew. Since the job was not made available to the

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complainant's nephew, the complainant requested the accused to return the amount of Rs.80,000/- to the complainant. The said sum was not easily forthcoming. After great persuasion and intervention of elders, the petitioner admitted liability on behalf of his father and promised to pay the sum of Rs.80,000/- to the complainant and in pursuance of this promise, issued a cheque of Rs.80,000/- on 30.03.2000 drawn on Punjab National Bank, Delhi. The cheque on presentation was dishonoured by virtue of the memo dated 07.04.2000 with the remarks "no account". Thereafter, a statutory notice was served and since the payment was not forthcoming, the present complaint under Section 138 of the said Act was filed. The learned Metropolitan Magistrate, after conducting trial, found the petitioner to be guilty of the offence under Section 138 of the said Act and, as indicated above, the petitioner being aggrieved by that decision preferred an appeal before the learned Additional Sessions Judge, who concurred with the learned Metropolitan Magistrate and upheld the conviction and sentence. The main contention raised by the learned Counsel for the petitioner before this Court is that in the background of the provisions of Section 23 of the Indian Contract Act, 1872, the payment of money that was made by the complainant to the accused was not lawful and, therefore, no binding contract resulted there from.

Issue Raised Whether contract without consideration can attract Doctrine of Restitution. Judgement of the Court The agreement between the petitioner and the complainant was void as the consideration of Rs.80,000/- was in the nature of an illegal gratification and was unlawful. What is the obligation of a person who has received an advantage under a void agreement? Apparently, these questions are answered by Section 65 of the Indian Contract Act, 1872 which reads as, When an agreement is discovered 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.

But, the provision applies to (1) an agreement which is "discovered to be void" or (2) a contract which "becomes void". The expressions "agreement" and "contract" have distinct meanings under the Contract Act. As mentioned earlier, an "agreement" becomes a "contract" only if it is enforceable in law. Thus, the phrase "a contract becomes void" appearing in the said Section 65 would not have any application in the case where an agreement is void ab initio. It has already been indicated above that the agreement in the present case was void from the very beginning. Question remain is with agreements which are "discovered to be void". This has reference to those agreements which, the contracting parties or one of them did not know, at the time of entering into the agreement, that the same was not enforceable in law but, it was later "discovered" by them or one of them as being void. Where the parties are aware and have knowledge that the agreement is unlawful and despite this knowledge they go ahead with the agreement, they would not be able to take recourse to the provisions of the said Section 65 because there would be no "discovery" of the invalidity of the agreement. That the agreement was unlawful and, therefore, void, was known to them all along. Court observed that Section 65 of the Contract Act cannot help the plaintiff on the facts and circumstances of this case. Section 65 reads as, 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. The section makes a distinction between an agreement and a contract. According to Section 2 of the Contract Act an agreement which is enforceable by law is a contract and an agreement which is not enforceable by law is said to be void. Therefore, when the earlier part of the section speaks of an agreement being discovered to be void it means that the agreement is not enforceable and is, therefore, not a contract. It means that it was void. It may be that the parties or one of the parties to the agreement may not have, when they entered into the agreement, known that the agreement was in law not enforceable. They might have come to know later that the agreement was not enforceable. The second part of the section refers to a contract becoming void. That refers to a case where an agreement which was originally enforceable and was, therefore, a contract, becomes void due to subsequent happenings. In both these cases any person who has received any advantage under such agreement or contract is bound to restore such advantage, or

to make compensation for it to the person from whom he received it. But where even at the time when the agreement is entered into both the parties knew that it was not lawful and, therefore, void, there was not contract but only an agreement and it is not a case where it is discovered to be void subsequently. Nor is it a case of the contract becoming void due to subsequent happenings. Therefore, Section 65 of the Contract Act did not apply. The question of the return of the said sum of Rs.80,000/- arose in the context of the provisions of the said Section 65. The Supreme Court held that since the parties were aware of the illegality of the agreement at the time it was entered into, it was not a case of an agreement which was "discovered to be void" subsequent to its execution. Consequently, Section 65 was found not to be applicable and the return of the sum of Rs.80,000/- could not be enforced. 2. Inklab Chaturvedi vs Ansar Mohammad11 Decided on 5 May, 2011 Facts of the Case The Explanation in section 138 of the Negotiable Instrument Act only a debt or liability which is legally enforceable can form a subject matter of the dishonour of a cheque. The money for which cheque was issued was alleged to have been paid for procuring a job in the police department and therefore, this money which had been paid to the accused was not legally recoverable. It signifies that the agreement under which money was paid was void because its object was not lawful under section 10 and 23 of The Indian Contract Act, 1872. Issue Raised: Whether ab initio void contract cannot attract the Doctrine of Restitution. Judgement of the court The argument overlooks that under section 65 of the Indian Contract Act, when an agreement is discovered to be void or a contract becomes void, any person which has received any advantage under the such an agreement or contract is bound to restore it or to make compensation for it to the person from who he received it. Thus, while the agreement being void may not have been
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enforceable, but the money which had been paid to the accused under the agreement was legally recoverable. 3. V.K.Singhal v/s M/S. Vantage Construction P. Ltd12 Decided on 3 July, 2012 Facts The appellants before this Court are the promoters of a company known as Hygienic Foods Limited (HFL). A Memorandum of Understanding was executed on 06.12.1990 between the appellants on one hand and the respondent No. 1 on the RFA 369/04 Page 1 of 8 other hand. Under the said MOU, the appellants agreed that they will cause HFL to issue and allot 50,000 fully paid-up shares and 4 lacs partly paid-up shares of HFL to respondent No.1. 50,000 fully paid shares were to be allotted within thirty days of the signing of the MOU against payment of Rs.5 lacs. Respondent No.1 was to pay Rs.2.50 per share on allotment of those 4 lac partly paid shares and the remaining amount was to be paid in three calls, subject to fulfillment of certain conditions laid down in para 6 of the MOU. HFL had taken a term loan from IFCI. HFL, vide its letter dated 08.12.1990, requested IFCI to approve the MOU executed between the appellants and the respondent No.1 so that it is able to get funds from respondent No.1 Company. IFCI vide its letter dated 03.01.1991, rejected the proposal for induction of respondent No.1 as a co-promoter in the management of HFL. As a result, 4 lac partly paid shares of HFL could not be allotted to respondent No.1. A suit for specific performance of the MOU dated 06.12.1990 or in the alternative, for award of damages on account of failure of the investment made by respondent No.1 was then filed by respondent No. 1. Issued Raised Whether contract discovered to void can allow the Doctrine of Restitution to restore the disadvantaged party. Judgement of the court

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Permission of IFCI was required only in case authorized share capital of the Company was sought to be increased and no such approval was required to issue additional capital out of the authorized share capital of the Company. Section 65 of the Indian Contract Act, 1872, to the extent it is relevant, provides that 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. The MOU, to the extent it provided for allotment of shares to respondent No.1 became void, the moment requisite permission for approval of the MOU was rejected by IFCI. The agreement between the appellants and respondent No. 1 was a package deal, whereby respondent No. 1 was to be allotted 4,50,000 shares and made a co-promoter of HFL. The provision in the agreement for allotment of 50,000 fully paid up shares formed part of that package deal and is not separable from other obligations contained in the MOU. The agreement was to necessarily frustrate, on failure to perform all the obligations which formed part of the package deal between the parties thereto. Consequently, the MOU stood frustrated, on IFCI refusing to approve the same. Therefore, the appellants are bound to restore the benefit which they received from respondent No.1 under the MOU.

Findings

Court of law in India has closely interpreted the section 65 of the Indian contract in order to grant restitution in void contracts. Restitution in void contracts are only granted when contracts turned out be void. Therefore it can be said that Doctrine of Restitution is applied in void contracts only when contract is discovered to be void and not when contract or agreement is void ab initio.

Conclusion and Suggestions

Where the terms of an agreement is found by the court to be uncertain, the liability under the section 65 of the contract act, 1872 would arise. Where specific performance was refused on the ground that the terms of the contract were uncertain, the advantaged party is ordered to refund the money paid for the performance of the contract. This section cannot be invoked where one of the parties to the contract- such as minor, known at the time to be wholly incompetent to

contract, there not only never was but there never could have been any contract. But where the incapacity to contract is in relation to the property and not a general incapacity, then, even if the contract is void ab initio, section 65 of the contract act comes into operation. Section 65 of the Contract Act which deals with payments made under a void contract. Here too, the section uses the words bound to restore it, or to make compensation for it The fundamental difference between restitution and compensation is that the former is concerned with the return of the benefit derived by the defendant while the latter is concerned with compensating the loss suffered by the plaintiff. The two are conceptually different and the difference can result in different practical outcomes too. Restitution is available to a party to an agreement where he performs services for the other believing that there is a binding contract. In order to be granted restitution, plaintiff must demonstrate that defendant received a benefit, that by receipt of that benefit he was unjustly enriched at her expense, and that circumstances were such that in good conscience defendant should make compensation. A benefit may be any type of advantage, including that which saves the recipient from any loss or expense. In researcher view, the restitution should be apply in the void contracts regardless it is void ab initio. This system will stop the minor from taking benefit of void contract as will restore disadvantaged party who in point of view that minor is competent to contract enter into contract with them.