Restitution: The Indian Contract Act and Common Law Principles

The law of restitution and the principle against unjust enrichment has developed to a great extent under common law alongside the law of contract and the law of tort. Essentially, for a claim to be made under the unjust enrichment principle, there are four questions which are relevant – first, has the defendant been benefitted/enriched; secondly, was the enrichment at the plaintiff’s expense; thirdly, was the enrichment unjust; and finally, are any defenses available. The first and the third category were recently elaborated on by the UK Court of Appeal, in Gibb v. Maidstone & Tunbridge Wells, [2010] EWCA Civ 678.  The issue arose (in obiter, as the case was decided by the majority on another point) as to whether the foregoing of a claim can be considered to be a ‘benefit’. Lord Justice Laws stated the principle thus:

“If everything else is equal I can see no principled distinction between a benefit consisting in money paid and a benefit consisting in a claim foregone. For the purpose of this branch of the law the material benefit may take many forms…”

The approach that ‘benefit’ need not be only monetary is clearly borne out on precedent – there are several cases where the receipt of a service has been considered to be a benefit. A view was taken (Beatson, The Use and Abuse of Restitution) that pure services – i.e. services which do not produce an end product – are non-beneficial. This argument has however been criticized on strong grounds elsewhere (Burrows, The Law of Restitution).

In India, principles of restitution would be dealt with under the Contract Act. Section 70 requires that where a person lawfully does anything for another person, or delivers anything to that other person, not intending to do so gratuitously, and the other person enjoys the benefit thereof, he is bound “to make compensation to the former in respect of, or to restore, the thing so done or delivered.” On a literal reading, this is somewhat confusing – is there a restitutionary remedy under this section or is there a compensatory remedy? This same issue also arises on the text of 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. Going further in Indian law, Section 72 states that a person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it. This section does not contemplate pure services; and again, is restricted to mistake/coercion. So where does that leave the law of restitution in India? Will the law of restitution as a matter of common law continue to apply outside the Contract Act? 

The Supreme Court considered the question in Mahabir Kishore v. State of Madhya Pradesh. The Court stated:

“The doctrine of 'unjust enrichment' is that in certain situation it would be 'unjust' to allow the defendant to retain a benefit at the plaintiff's expense. The relatively modern principle of Restitution is of the nature of quasi contract. But the English law has not yet recognised any generalised right to restitution in every case of unjust enrichment. As Lord Diplock has said, "there is no general doctrine of "unjust enrichment" recognised in English law. What it does is to provide specific remedies in particular cases of what might be classed as unjust enrichment in a legal system i.e. based upon the civil law."

The principle of unjust enrichment requires: first, that the defendant has been 'enriched' by the receipt of a "benefit"; secondly, that this enrichment is "at the expense of the plaintiff"; and thirdly, that the retention of the enrichment be unjust. This justifies restitution. Enrichment may take the form of direct advantage to the recipient wealth such as by the receipt of money or indirect one for instance where inevitable expense has been saved…”

The last sentence of the second paragraph is noteworthy – it would appear then, that the proposition highlighted by the Court of Appeal in Gibb v. Maidstone recently was already covered under the Supreme Court’s broad reading of what constitutes ‘enrichment’. However, the first paragraph quoted above requires additional comment. While it may be true at the time the Supreme Court decided the case that there was no law of restitution as such clearly recognised; subsequently, the House of Lords has laid to rest all doubt in this regard in Lipkin Gorman v. Karpnale [1991] 2 AC 548. Subsequently, however, High Courts have clarified that recourse to the law of restitution would be available even outside the Contract Act as a matter of common law. After quoting the Supreme Court decision, one High Court has noted (Ganganagar Sugar Mills v. Madanlal Ramswaroop), “It may be seen that provisions under Chapter V of Contract Act only gives some of the instances of obligations arising from certain circumstances, not arising from contract but on general principle, to wit to prevent a man from retaining the money of or some advantage derived from another which it is against conscience that he should keep in the words of Lord Wright. But the fact that Contract Act gives statutory recognition to some of the circumstances, does not preclude availability of remedy of restitution in other cases…”

Much more recently, in Jay Vee Rice & General Mills v. State of Haryana (Civil Appeal 8236/2010, judgment dated September 23, 2010), the Supreme Court has cited with approval the dicta of Lord Wright Fibrosa v. Fairbairn, [2943] AC 32, which has subsequently formed the platform for the law of restitution to launch itself in England. Consequently, common law developments in this area would continue to be of relevance to Indian law, whether or not the principles laid down in the Contract Act are relevant.

There is a danger, however, that unjust enrichment would be used in every case of perceived injustice or inequity - something that would result in great uncertainty and would result in the substitution of what the law regards as unjust with subjective notions of inequity. The risk of this approach already exists through dicta in Sahakari Khand Udyog v. Commissioner of Central Excise, (2005) 181 ELT 328 (SC), which leaves open the proposition that the law of restitution would apply in all cases where the retention of benefit is contrary to justice or against equity (see thejudgment of the Bombay High Court in Shah Paper v. Union of India, (2010) 250 ELT 346 (Bom)). The better, principled approach is stated by Professor Burrows, “… the question of what is unjust is not to be answered by a vague appeal to individual morality: it is a reference to what the decided cases show as unjust…” Gibb v. Maidstone again offers some guidance with how enrichment should be treated as unjust:

“There is, I think, something of a tension … between these two propositions. (1) The categories of unjust enrichment claims cannot be closed, for if they were this branch of the law would be condemned to ossify for no apparent reason; and nothing could be further from the common law's incremental method. But (2) such a claim must fall "within one of the hitherto established categories of unjust enrichment" which suggests (at least) that the categories rather than any overriding principle are paramount. The authorities' reluctance to assert first principles may be ascribed to the justified fear of the palm tree: if the principle of unjust enrichment does no more than to invite one judge after another, case by case, to declare that this or that enrichment is inherently just or unjust, it is not much of a principle … we may see at once that clear reasoning is at least required for the elaboration of any extension of unjust enrichment. Clear reasoning, if it allows a claim in seemingly new circumstances, will provide clear analogues with other cases. No doubt this is what Mann J had in mind when he qualified his reference to established categories by the phrase "or some justifiable extension thereof"…”

Perhaps, such an incremental approach could be adopted in Indian law too.

Supreme Court on Lis Pendens and Registration of Documents

In a recent decision, Har Narain v. Mam Chand (Civil Appeal Np. 995-996/2003, judgment dated October 8, 2010), the Supreme Court has discussed and reviewed the law relating to the doctrine of lis pendens. The essential facts were that the first respondent was the owner of certain property (land) which he mortgaged to the appellant. Subsequently, the first respondent executed a sale deed purporting to transfer the property to certain bona fide purchasers for consideration. After the execution of the sale deed but before the registration of the same, the appellant filed a suit seeking to restrain the first respondent from alienating the property. In other words, the sequence of events was such, that on the date of filing of the suit, a sale deed had been executed but had not been registered. The registration was completed subsequently. The case of the appellant was that as the registration was subsequent to the filing of the suit, the sale was affected by lis pendens.

The doctrine of lis pendens, embodied in Section 52 of the Transfer of Property Act, 1882, effectively provides that during the pendency of a suit in which any right to immovable property in is question, the property cannot be transferred by any party to the suit so as to affect the rights of other parties. The contention of the appellant was that the transfer took place on the date of registration (the document being compulsorily registrable); and accordingly, the doctrine of lis pendens applied. The trial court found that although registration was subsequent to the filing of the suit, the execution of the sale deed was prior to filing; and accordingly, the doctrine of lis pendens would not be applicable. It found that under Section 47 of the Registration Act, 1908, registration dates back to the date of execution. Accordingly, the trial court found that the sale in favour of bona fide purchasers for consideration would be protected; as after the registration, the same would be deemed to have been effected on the date of the execution of the sale deed itself. The judgment of the trail court was affirmed on first appeal, and also on second appeal. The Supreme Court allowed the appeal, and held that the doctrine of relating back had no application in the facts of the case. Accordingly, the transfer was hit by lis Pendens. The Court observed:

“A similar issue though in a case of right of pre-emption was considered by the Constitution Bench of this Court in Ram Saran Lall & Ors. v. Mst. Domini Kuer & Ors., AIR 1961 SC 1747, by the majority of 3:2, the Court came to the conclusion that as the mere execution of the sale deed could not make the same effective and registration thereof was necessary, it was of no consequence unless the registration was made. Thus, in spite of the fact that the Act, 1908, could relate back to the date of execution in view of provisions of Section 47 of the [Registration] Act, 1908, the sale could not be given effect to prior to registration. However, as the sale was not complete until the registration of instrument of sale is complete, it was not completed prior to the date of its registration…”

The Court then extracted certain observations from the decision of the Constitution Bench:

“Section 47 of the Registration Act does not, however, say when sale would be deemed to be complete. It only permits a document when registered, to operate from a certain date which may be earlier than the date when it was registered. The object of this section is to decide which of two or more registered instruments in respect of the same property is to have effect. The section applies to a document only after it has been registered. It has nothing to do with the completion of the registration and therefore, nothing to do with the completion of a sale when the instrument is one of sale. A sale which is admittedly not completed until the registration of the instrument of sale is completed, cannot be said to have been completed earlier because by virtue of Section 47 the instrument by which it is effected, after it has been registered, commences to operate from an earlier date.”

Following this decision, it was held that the relevant date to be seen for determining the applicability of the doctrine of lis pendens in cases where the document of transfer is compulsorily registrable is the date of the registration and not the date of the execution of the document. While this is not a new proposition as such, given the precedent cited by the Court, it is interesting to see how this fits in with the wording of Section 47 of the Act. Before coming to Section 47, it is worth noticing, that under Section 54 of the Transfer of Property Act, 1882, a sale in the case of tangible immovable property with a value greater than Rs. 100 “can be made only by a registered instrument”. Thus, registration is not a formality but is an essential element in the transfer of property. This gives additional support for the reasoning of the Court; insofar as property cannot be said to have been transferred prior to registration. However, Section 47 of the Registration Act states:

“47. Time from which registered document operates.- A registered document shall operate from the time from which it would have commenced to operate if no registration thereof had been required or made, and not from the time of its registration.”

The Constitution Bench in the decision cited earlier has stated that the section “only permits a document when registered, to operate from a certain date which may be earlier than the date when it was registered…” On the plain language of the section, however, the section does not “permit” a document to operate from an earlier date; it mandates – as opposed to merely permits – that every compulsorily registrable document shall operate from the date of execution. This brings us to the question of what meaning should be ascribed to the word “operate” – what does it mean for a document to “operate”? It appears that ‘shall operate from’ is equivalent to ‘be effective from’. On that reading, the position of law currently existing is perhaps not in keeping with the literal meaning of the words. This is perhaps one of the many instances where courts have chosen to eschew a literal meaning in favour of a purposive one in order to serve the ends of justice.

Clarification on Equitable Set Off

In a series of earlier posts, we had discussed some principles in relation to equitable set-off and retention. One of the issues which came up in the comments was in relation to how equitable set-off is distinct from a counter-claim. The leading commentary on the subject (Rory Derham, The Law of Set-Off) discusses this in some detail, and I was recently able to access a copy of the book. On this point, the author notes that the principal difference is as follows:

“(A counter-claim) differs from a set-off in that it does not give rise to a defence, but rather it constitutes a procedural device by which the court may consider independent cross-actions in the same proceedings. The cross-actions are treated as independent actions for all purposes except execution…”

We had also discussed a recent decision in the English Courts on the requirement of “close connection” in order to successfully claim an equitable set-off. I had noted that the “impeachment of title” test laid down by Lord Denning was no longer followed; and had highlighted some observations of a subsequent judgment which do not at first glance lend themselves to application in concrete cases. The treatise (by Derham) analyses the law in this aspect in great detail. It covers the law till the Bim Kemi case (at least in the edition which I was able to access); and in a subsequent post I will discuss the cases and the principles emerging from them in greater detail. For those interested in this area of law, information about the treatise can be found here.

Update and Links of Interest

I will be resuming regular posts on this blog later this week. Meanwhile, the following are some links which readers may find useful.

1. The latest digest of cases prepared by ITAT Online (August 2010) is available here.

2. The judgment of the Supreme Court in Techno Shares, on the issue of whether stock exchange membership cards are eligible for depreciation, is available on the ITAT Online website along with a summary of the decision. A note on the decision from the Indian Corporate Law Blog is available here.

3. The judgment of the Supreme Court in GE India Technology Centre, reversing judgment of the Karnataka High Court in Samsung (on the issue of whether chargeability is essential for TDS obligations u/s 195) is available here. I had previously discussed the decision of the Karnataka High Court here; and had discussed how this ruling was not in accordance with the decision in Transmission Corporation here.

4. The Indian Corporate Law blog has this interesting note on a recent decision of the Bombay High Court in Thyssen Kruup v. SD Industries, on the appointment of arbitrators u/s 11 of the Arbitration & Conciliation Act, 1996.

5. A recent decision of the England & Wales High Court, Brandeaux Advisors v. Chadwick, highlighting some recent cases on the concept of repudiatory breach is available here.