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Sections 64 and 65 of the Indian Contract Act.

Introduction:

One often thinks about the rights of a party to a contract in terms of their right to receive compensation/damages from the other party who has breached the contract. What is often overlooked is the fact that even the party who has defaulted on his obligations under the contract does have rights under the law. Sections 64[1] and 65[2] of the Indian Contract Act present to us one such facet.

Scheme of the Provisions:

While section 64[3] deals with a contract which is rescinded by someone at whose option the contract was voidable, section 65[4] deals with a contract which is later discovered to be void altogether. However, in both these cases, the party who has received any benefit/advantage under the contract becomes bound to restore such benefit/advantage to the party from whom it was received under the contract. The peculiarity of a claim under Section 64 and Section 65 is that it is not a claim for compensation but rather a claim for restoration. The aim of a claim for restoration or restitution is to bring the parties to a position as if there never was any contract between them. A claim for compensation, on the other hand, intends to bring the parties to a position as if the subject contract has been duly performed. The former restores the benefit, while the latter recoup the loss. Therefore, under the Indian Contract Act, the person who lawfully rescinds a contract is under a legal liability to restore the benefit, if any, received by him under the contract to the person from whom he has received it, but at the same time, such a person also has a legal right to claim compensation for the damage, if any, he has suffered through the non-fulfilment of the contract.[5] The restoration to which a party is entitled under Sections 64 and 65 is not for any breach committed by the other party, but only for any benefit received by such other party.[6]

For example, if advance payment is made by the purchaser as part payment of the purchase price agreed upon between the parties, the said purchaser will be entitled to receive recompense for the said advance payment if the contract fails, even though he may be himself responsible for committing a breach of the contract. The reason for this peculiarity is that Indian law, as it stands, disallows any party to be unjustly enriched at the expense of another under a contract.[7] The compensation is permissible under Ss. 64 and 65 are confined only to the return of the benefit/advantage that a party received from the other party under their agreement.[8] Thus, a party who claims restoration must prove the value of that advantage. If the advantage claimed is such that it is only of nominal or of the claimant’s perceptive value, then Ss. 64 and 65 will be of little assistance to him.[9] Also, by the words “benefit” and “advantage”, sections 64 and 65 neither refers to any “profit” nor does it matter what the party receiving the benefit under the contract may have done with it.[10]

However, not everything received by the rescinding party under the contract can be termed a benefit or an advantage within the purview of Sections 64 and 65. The relevant circumstances should be such that the rescinding party must have an option to take or not take the benefit. For example, if a landowner has contracted a builder to construct a house on his land and the builder only partly builds the house and fails to complete the project, in such circumstances, merely because the landowner has taken possession of the premises does not entitle the builder to any restitution. This is because the landowner has no other option but to accept the work already done, and that does not make him liable to pay for the incomplete work done by the builder. The builder will have no right to sue for the amount he spent on the materials and labour he had to employ to execute the incomplete work.[11]

Implementation of the Provisions

The question then to be considered is how to reconcile the defaulter’s right to such restitution with the innocent party’s right to be awarded damages. In such circumstances, the innocent party who has rescinded the contract is bound to refund only the difference between the benefit gained by him and the loss suffered by him on account of the defaulting party. The defaulting party has to first prove the benefit conferred by him on the rescinding party and state with a reasonable degree of certainty that to his knowledge, the rescinding party did not suffer any loss. However, if the rescinding party succeeds in proving that the extent of the harm suffered by him was more than what had been stated by the defaulting party, then he would be able to contest the defaulting party’s case for such restitution. [12]

The alleged advantage derived by the concerned party will eventually have to be determined and quantified in terms of money before making an order in favour of any party.[13] The sum awarded as damages can be set off against the quantified amount of money for benefits the rescinding party has to refund.[14] Any payment of compensation and restoration of advantage has to be mutual in a quantum meruit claim. If one party is asked to restore the advantage received by them, then that party may also ask the other party to restore the advantage received by them. So, only one party cannot be burdened with letting go of advantages accrued under the contract.[15]

Period when the benefit was received.

It is also essential that the advantage which is sought to be recovered must be that which was received by the party during the subsistence of the contract, i.e., before the contract became void or unenforceable.[16] A pertinent question which must be pondered upon is whether if a contract is void ab initio, then can the courts ask for restitution of benefit under such a void contract? Under the scheme of Sections 64 and 65, any restoration is not in the nature of a performance of a contract. So, even such a void contract will attract the application of Section 65 if the requirement of the said section is fulfilled, namely, any advantage that has been received under the agreement by any party must be before the agreement was discovered by the parties to be void. The basis of Section 65 is the equitable doctrine of restitution and not any implied contract.[17]

However, a distinction has to be drawn between contracts which become unenforceable on account of the failure to comply with certain forms or for want of giving expression to them in the manner prescribed by law and contracts which are immoral or opposed to public policy and are inherently illegal. In the former cases, the principles underlying Section 65 will be given effect, while in the latter cases, the Courts cannot render any assistance in enforcing them.[18]

Hence, the classic notion of English law that the right to recover damages must be based upon a valid and subsisting contract, and that a plaintiff could not declare the underlying contract as being void, cannot be taken as a guide to the use of the words “void” and “voidable” in the Indian Contract Act. In cases where both parties are in default, neither of the parties is usually entitled to seek damages from the other. But, here too, under the Scheme of Sections 64 and 65, the defendant will become entitled to have returned the sum paid by him to the plaintiff. [19]

Conclusion.

The basic proposition behind the provisions of Sections 64 and 65 was succinctly stated by the English Court of Appeal in Hulton vs. Hulton[20]: “He who seeks equity must do equity. If a contract is rescinded, benefits must be restituted.” No one can treat the contract as avoided by him in order to reclaim the property he parted with under it while also keeping the money or other benefits he obtained under it.[21]

Author(s) Name: Sujit Nair (Kishinchand Chellaram Law College Mumbai)

References: 

[1] The Indian Contract Act, 1872, s 64

[2] The Indian Contract Act, 1872, s 65

[3] The Indian Contract Act, 1872, s 64

[4] The Indian Contract Act, 1872, s 65

[5] Mirza Javed Murtaza v. U.P. Financial Corporation and Ors. 1983, AIR 234.

[6] The Registrar, Indian Council of Arbitration v. K.S. Sidhu 2014, (1) ARBLR 180

[7] De-Smet (India) Pvt. Ltd. v. B.P. Industrial Corporation (P.) Ltd.  1980, AIR 253.

[8] Hajira and Ors. v. Anto and Ors. 2018, ILR (3) 404.

[9] Govindram Seksaria & Ors. v. Edward Radbone 1948, AIR  56.

[10] Muralidhar Chatterjee v. International Film Company Limited 1944, 46 BOMLR 178.

[11] Krishna Menon v. Cochin Devaswom Board And Anr. 1963, AIR  181.

[12]De-Smet (India) Pvt. Ltd (n 3).

[13] Allahabad Bank & Ors v. Bengal Paper Mills Co. Ltd. & Ors.2004, 8 SCC 236.

[14] Bajirao v. Shivaram and Ors 1927, AIR 168.

[15] State Of Rajasthan v. Associated Stone Industries 1985, AIR 466.

[16] Hemchand v. Govinda 1925, AIR 243.

[17] Dharmeswar Kalita v. Union of India (UOI) and Ors 1955, AIR 86.

[18] Madura Municipality v. K. Alagirisami Naidu 1939, AIR 957.

[19] G. Gopala Chettiar v. N. Giriappa Gowder 1972, AIR 36.

[20] Hulton v. Hulton 1917, (1) K.B. (813).

[21] Mundakath Mathu v. Chalora Illath Sankaran Nambudripad and Ors. 1932, AIR 303.