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Restitution under Indian Contract Act

The act of returning something to its rightful owner after it has been taken away, lost, or relinquished is known as “restitution.” When a contract is declared void, neither side is obligated to fulfil its obligations. If one party receives a benefit from the other under such a contract, he is required to refund it or compensate the other party. The primary meaning of the theory of restitution is to restore a benefit that was previously obtained under a contract but has now become void.

It is worth noting that the idea of restitution only applies to contracts that later become void as a result of an incident that the promiser could not avert or a supervening impossibility. Contracts that are void-ab-initio are not subject to the restitution principle, with the exception of contracts entered into by a minor who misrepresented his age. In this case, the youngster may be required to return the benefit by the courts.

The House of Lords recognized the law of restitution as distinct from any element of contract law in Lipkin Gorman v Karpnale—the law of restitution is not based on implied contract; rather, it is founded on the concept that unjust enrichments must be reversed.

Exceptions to the Law of Restitution

According to English Law, there are four exceptions to the doctrine of restitution. These are related to plaintiff not in pari delicto, doctrine of locus poenitentiae, fiduciary relationship and statutory restitution. 

If a party to an illegal contract withdraws before the illegal aim is completed, restitution is typically granted. Only where the transaction does not include substantial moral turpitude and the bargain is entirely executory is this exception permitted. This is known as the doctrine of locus potentie. 

Plaintiffs in pari delicto

The Latin term “in pari delicto” refers to agreements whose goal or consideration is illegal in its whole. When it comes to agreements that are void for illegal consideration, the phrase “found to be void” can be confusing. The current section does not appear to apply to agreements that are void under Section 24 due to an illegal consideration or object. Because the money given cannot be recovered if the illegal intention or any major part of it has been carried out, because the parties are equally at fault, and in pari delicto melior est conditio possidentis. 

The notion of in pari delicto is used to qualify the ex turpi causa defence. In pari delicto principles apply in cases where the claimant is equally liable for the illegality, and restitution will be denied. If both parties in front of the court are confederates in fraud and/or in pari delicto, the court will not aid them. It will favour a strategy that is less harmful to the public interest.

Section 65 can only be used in circumstances where the party seeking reparation isn’t in pari delicto. When the party seeking restitution is equally or more liable for the contract’s illegality, they are said to be in pari delicto. In deciding a restitution claim under Section 65 of the Indian Contract Act, the court must evaluate the illegality that caused the contract to become void, as well as the role played by the party seeking compensation. There will be no cause for compensation if the party seeking restitution was equally or more guilty for the illegality (in comparison to the defendant).

In case there is an illegal transaction, and the transaction does not involve moral severe turpitude, then the court can discriminate between major and minor offenders and can grant restitution to the party who is less guilty. For instance, one may enter into an illegal transaction upon fraud, coercion, undue influence, misrepresentation or mistake and can claim restitution under section 65 of the Indian Contract Act 

When a party enters into an illegal contract based on justifiable ignorance of fact (and not law), then he can claim of restitution. When a party enters into a contract and withdraws from it upon learning the illegality of the contract, then he can claim for restitution for the part of the contract under he discovered illegality of the contract. 

Conclusion

In a scenario where a benefit has been received and the agreement is later determined to be void, or where the contract becomes void, Section 65 of the Act deals with the idea of restitution. Any individual who has benefited from such an arrangement is required to restore or compensate that benefit under the abovementioned clause. the doctrine of restitution under Section 65 of the Act allows a person to claim restoration if he or she is not in pari delicto and the claim is not founded on an illegal transaction but is dissociated from it.

Footnotes

  1. Aditya Mehta and others, Restitution Under the Contracts Act: The In Pari Delicto Exception, cyrilamarchandblogs (18 Apr. 2022), accessed at https://corporate.cyrilamarchandblogs.com/2022/04/restitution-under-the-contracts-act-the-in-pari-delicto-exception/#:~:text=denied%5B10%5D.-,D.,to%20be%20in%20pari%20delicto
  2. E. Sabbath, Denial of Restitution in Unlawful Transactions-A Study in Comparative Law, 8 INT’l & COMP. L.Q. 689 (1959).
  3. Principle of Restitution not applicable when the party claiming it is equally or more responsible for the illegality of the contract, accessed at https://www.tclindia.in/principle-of-restitution-not-applicable-when-party-claiming-it-is-equally-or-more-responsible-for-illegality-of-contract/ 
By Ananya Bhat