The Right of Retention: Some Indian cases

In an earlier post, I discussed a recent decision on Scots law on the doctrine of retention. In India, there appear to be two Supreme Court decisions on the point of whether a sum can be retained on account of an as yet illiquid (or unliquidated) claim. The first case is Union of India v. Raman Iron Foundry, AIR 1974 SC 1265, decided by a Bench of 2 Judges. The question in this case arose as a matter of interpretation of a term in a standard form contract. In the facts of the case, the respondent contended that the appellant had committed a breach of the contract and was liable to pay to the respondent a certain sum as damages. The appellant counterclaimed for another amount. These claims went to arbitration, and were pending resolution. Now, while the arbitration proceedings were on, some other amounts became payable by the appellant to the respondent, in respect of some other contracts entered into between them. As the Court notes, “The respondent apprehended that the appellant would appropriate these amounts towards recovery of (he amounts of damage claimed by it even though the claim for damages was disputed by the respondent and was pending adjudication…” and the respondent prayed for interim relief pending conclusion of these proceedings, praying for an interim injunction restraining the appellant from withholding any of the amounts. After a few rounds of litigation, the matter came up before the Supreme Court. The case of the appellant was that essentially, “It is not necessary that the sum of money must be due and payable to the purchaser. It is enough if there is a claim even for damages… If the claim of the purchaser is not well founded and the appropriation made by him is, therefore, unjustified, the contractor can always institute a suit or arbitration for recovering the sums due to him which have been wrongly appropriated…”

The Court went into the question of ascertaining whether any sum was due, and for this, it relied on the meaning of the word ‘debt’. In fact, the judgment has been cited in later cases as an authority on this point. The Court then treats the matter – quite correctly – as an interpretation of the specific contract between the parties. “The language used in the body of Clause 18 also supports the view that it is with recovery of sums presently due and payable by the contractor to the purchaser that this clause deals. It may be noted that Clause 18 does not lay down the substantive rights and obligations of the parties under the contract. It is merely intended to provide a mode of recovery of "a claim for payment of a sum of money arising out of or under the contract". It, therefore, postulates a claim for a sum which is due and payable, that is. presently recoverable and may be recovered by the mode therein provided. It is difficult to believe that the contracting parties could have intended that even though a sum is not due and payable by the contractor to the purchaser under the contract, the purchaser should be entitled to recover it by adopting the mode set out in Clause 18. It is important to note that Clause 18 does not create a lien on other sums due to the contractor or give to the purchaser a right to retain such sums until his claim against the contractor is satisfied. If merely a right of lien or retention were given to secure payment of a claim, then even if the claim were for a sum not presently due and payable, the provision perhaps would not have been so startling or unusual… A mere making of a claim by the purchaser would impose a liability on the contractor to pay it. That surely could not have been the intention of the contracting parties. It would be more consonant with reason and good sense to take the view, which, as pointed out above, is plainly and indubitably supported by the language used by the contracting parties, that Clause 18 does no more than merely provide an additional mode of recovery to the purchaser, and the purchaser is entitled to exercise the right conferred under that clause only where there is a claim for a sum which is presently due and payable by the contractor…”

Of course, while the Court does not foreclose the possibility of there being such a right of retention under common law, the tenor of its observations seems to suggest that the sum must be legally recoverable before it is payable. One can argue however that this decision does not foreclose the possibility of the right of retention being exercised as a common law right. The case is not an authority against such a right because (a) the Court treated the entire matter as one of interpretation of contract, and (b) the two sums were claimed under two separate unrelated contracts; hence in any event in the specific facts the right would have been unavailable. This does not mean that the right is unavailable as a matter of law. The Court does go on to make some general observations also. “Now the law is well settled that a claim for unliquidated damages does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a Court or other adjudicatory authority. When there is a breach of contract, the party who commits the breach does not eo instanti incur any pecuniary obligation, nor does the party complaining of the breach becomes entitled to a debt due from the other party. The only right which the party aggrieved by the breach of the contract has is the right to sue for damages… That is not an actionable claim and this position is made amply clear by the amendment in Section 6(e) of the Transfer of Property Act, which provides that a mere right to sue for damages cannot be transferred. This has always been the law in England and as far back as 1858 we find it stated by Wightman, J., in Jones v. Thompson [1858] 27 L.J., Q.B. 234… Now, damages are the compensation which a Court of law gives to a party for the injury which he has sustained. But, and this is most important to note, (one) does not get damages or compensation by reason of any existing obligation on the part of the person who has committed the breach. He gets compensation as a result of the fiat of the Court. Therefore, no pecuniary liability arises till the Court has determined that the party complaining of the breach is entitled to damages” This is certainly true – but invocation of the right of retention, as seen in the earlier post, is not dependent on a debt being due at all. It is an independent right. Retention and compensation are two quite different things. Consequently, the above observations cannot be taken as pertaining to retention. It is submitted that Raman Iron does not foreclose the possibility of the right of retention being exercised in India as a common law right.

I will discuss the second decision – the three-Judge decision in Kamaluddin Ansari v. Union of India, AIR 1984 SC 29 – in detain in a subsequent post. In brief, this was again in respect of Clause 18 of the standard form contract. The clause was identical to the one being interpreted in Raman Iron; but the Court in Kamaluddin Ansari reached the conclusion that “The Union of India has no objection to the grant of an injunction restraining it from recovering or appropriating the amount lying with it in respect of other claims of the contractor towards its claim for damages. But certainly Clause 18 of the standard contract confers ample power upon the Union of India to withhold the amount and no injunction order could be passed restraining the Union of India from withholding the amount.” Raman Iron appears to have been overruled to that extent. A more detailed discussion will follow subsequently.