This article is written by Rishabh Soni, 3rd-year law student, Amity law school Delhi. He discusses the doctrine of restitution.
Contract Meaning and Scope
According to Section 2(h) of the Indian Contract Act 1872, a contract is an agreement enforceable by law which is backed by some consideration which may be in cash or in kind. The main purpose of entering into a contract is to legally bind the parties for their performance of the contract.
Meaning of Restitution
Restitution in normal sense means to restore the benefit which a person has obtained and its main purpose is First to restore the position of victim .i.e ‘ Plaintiff ‘ in case of a contract to the original position which he enjoyed before entering into contract and secondly to prevent the unjust enrichment of the defendant i.e. to stop him from making wrongful gains which he is not entitled as per law to make.
Mr.Deepak entered into a contract with M/S ABZ Pvt Ltd Delhi for a purchase of 20 tonnes of wheat. Deepak paid an advance of Rs 50,000 which was 10% of the total value of the contract. Later at a future date, ABZ Pvt ltd rescinded the contract due to some financial loss after which they were declared as insolvent and decided to wind up their business. Now, in this case, the contract becomes void and ABZ ltd must return the Rs. 50,000 to Mr.Deepak.
The doctrine of Restitution in Indian Contract act
Section 65 of the Indian contract act 1872 mainly deals with the doctrine of restitution and it relates to the obligation of the person who has received some advantage under void agreement or contract. This section starts from the very basis that there being an agreement or contract and if there was no agreement or contract then the doctrine of restitution cannot come into play. This doctrine is based on a very common rule of consideration which means that a person pays consideration only when he gets something in return.
Provisions of Section 65 apply only when an agreement at a subsequent stage is discovered to be void or when a contract becomes void later on by one person or the other. But Section 65 will never come into play if the contract was void-ab-initio .i.e void from the very beginning. Supreme Court of India in the case of Kujiu Collieries limited v/s Jharkhand mines ltd held that an agreement which was discovered to be void at a later stage will invite Section 65 into the picture and in such a case an advantageous person is bound to restore the disadvantaged party.
Doctrine of restitution includes the key points as follows
- One party has entered into a contract with another for consideration.
- There was some consideration involved in the said contract.
- Both parties were competent to enter into a contract
- Thereafter one party failed to perform his part of the contract or the contract became void due to any unforeseen condition.
- Now the party which has paid any consideration as the advance is entitled to recover the same from the other party and other party is not entitled to receive an unfair advantage over it.
Applicability of Section 65
Section 65 is applicable only when an agreement was valid when it was entered into and became void only at a future date. Moreover if the agreement was entered into between a major person being the plaintiff and the minor defendant in this case then doctrine of restitution will not be applied, this was held in the case of Mohiri Bibi v/s Dharmodass Ghosh but the scenario will be different if minor has misrepresented his age and then he can be enforced by the court to return the benefit.
In another case Bank of Rajasthan Ltd v/s Sh Pala Ram Gupta it was held that an agreement or contract which was void and illegal from the very beginning can never apply the provisions of this doctrine.
Restitution v/s Compensation
Most of the times these two termed as treated to have a similar meaning but the difference between them lies in the manner in which monetary award is calculated for instance in compensation the award is calculated based on how much loss the plaintiff suffered, whereas in restitution the award is calculated based on how much gains the defendant has earned. However on certain occasions on the discretion of judge based on the facts of a particular case the judge can very much give a choice to the plaintiff to choose from restitution and compensation.
Exceptions to Doctrine of Restitution
- Where an agreement is known to be void:- This doctrine will not be applied for an agreement known to be void e.g, where an agreement is for some illegal act or an impossible act like an agreement that A will pay B Rs 10,000 if B picks stars from the sky. A pays Rs 500 as security to B, now being an impossible act to perform A cannot recover even his Rs 500.
- Where an agreement has been entered into between incompetent persons:- Contract entered into between incompetent persons like a person suffering from insanity, intoxication or a minor will not invite this doctrine to play.
- Where the party is required to give some earnest money as security and later on defaults:- This provision deals with a situation like paying application money for a residential scheme. Now if a person fails to future allotment money then his application money will also be forfeited and he can not claim his earlier earnest money by revoking the doctrine of restitution.
Now after analyzing the key aspects of section 85 we can see that restitution involves restoring the position of the affected party to his original position before entering into contract and one party is not entitled to have an unfair advantage over the other and by enforcing the provisions of Section 65 he can very much claim compensation or restitution as the case may be.