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57. Reciprocal promise to do things legal, and also other things illegal.---Where persons reciprocally promise, firstly, to do certain things which are legal, and, secondly, under specified circumstances, to do certain other things which are illegal, the first set of promises is a contract, but the second is a void agreement.
A and B agree that A shall sell B a house for 10,000 rupees, but that if B. uses it as a gambling house, he shall pay A 50,000 rupees for it.
The first set of reciprocal promises, namely, to sell the house and to pay 10,000 rupees for it, is a contract.
The second set is for an unlawful object, namely, that B may use the house as a gambling house, and is a void agreement.
Scope of the section.---It is not easy to-see what this and the following section really add to S. 24 (see the commentary thereon for explanation of the principle), or why they are inserted here; but they are plain enough.
This section applies to cases where the two sets of promises are distinct. When the void part of an agreement can be properly separated from the rest, the latter does not become invalid; but when the parties themselves treat transactions, void as well as valid, as an integral whole, the Court also will regard them as inseparable, and wholly void.
Compare S. 16 of the Specific Relief Act, which declares the application of a similar but more extensive principle to specific performance.
58. Alternative promise, one branch being illegal.---In the case of an alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced.
A and B agree that A shall pay B 1,000 rupees for which B shall afterwards deliver to A either rice or smuggled opium.
This is valid contract to deliver rice, and a void agreement as to the opium.
Quaere whether, under the terms of this section, in case B, has offered and A, has accepted smuggled opium as in performance of the agreement, A can still have an action against B for failure to deliver rice. It would seem that A, being in pari delicto, cannot sue; for he could not make out his case without showing an illegal transaction to which he was a party. The point does. not seem likely to arise in practice.
Time essence of agreement---Contract for sale of land---Period fixed by contract---Presumption that parties intended performance of agreement within reasonable time---Fixing of time limit in agreement, held, does not by itself rebut presumption and lead to inference of time intended having been made essence of agreement.
Appropriation of Payments
59. Application of payment where debt to be discharged is indicated.---Where a debtor, owing several distinct debts to one person, makes a payment to him, either with express intimation, or under circumstances implying that the payment is to be applied to the discharge of some particular debt, the payment, if accepted, must be applied accordingly.
(a) A owes B among other debts, 1,000 rupees upon a promissory note, which falls due on the 1st June. He owes B no other debt of that amount. On the 1st June A pays to B 1,000 rupees. The payment is to be applied to the discharge of the promissory note.
(b) A owes to B, among other debts, the sum of 567 rupees. B writes to A and demands payment of this sum. A sends to B 567 rupees. This payment is to be applied to the discharge of the debt of which B had demanded payment.
Debt.---Where money is paid by a debtor to his creditor with express intimation that the payment is to be applied to his discharge of some particular debt, and it is received and appropriated on that account, it b not in the power of the creditor, without the assent of the debtor (not merely of one out of several who pays on behalf of all), to vary the effect of the transaction by altering the appropriation in which both the debtor and the creditor originally concurred. The same rule applies to payment of Government revenue. But where there is no appropriation by consent, the question has arisen whether the provisions of Ss. 59-61, relating to the appropriation of payments, which apply to the case of debts, apply to arrears of revenue payable to Government. Maclean C.J. expressed the opinion that Ss. 59-61 of lilts Act do apply to transactions in relation to the realisation of land revenue. The point has been before the Privy Council, but it was not decided, as the case was one of appropriation by mutual consent, their Lordships simply observing that those sections might perhaps have had a bearing upon the case, if the parties had not by their own actions placed the matter beyond doubt.
Several distinct debts.---This section deals only with the case of several distinct debts, and does not apply where there is only one debt, though payable by installments. Thus, where the amount of a decree was by consent made payable by five annual installments, it was held that the decree-holder was not bound to appropriate the payments to the specific installments named by the judgment debtor. The amount declared to be due for principal, interest and costs in a mortgage suit under O. 34, r. 4, constitutes but one debt; it cannot be regarded as consisting of two debts, one on account of principal and interest and the other on account of costs.
Money appropriated to a purpose---How can be diverted to another purpose.---In view of section 59 of the Contract Act, the money having been put in for certain purpose must be appointed for that purpose and if either of the parties wanted to divert it to-another channel, it could be done only with the express consent of the party affected.
Money paid for specified object---When can appropriation of money be altered.---Where the money has been expressly paid for a specified object and it was received and acknowledged on that account, there is no power on the part of either of the parties to the transaction, without the assent of the other, to vary the effect of the transaction by altering the appropriation in which both originally concurred.
Situation envisaged by Ss. 59 & 60 of Contract Act, 1872 stated---When the debtor owing several different debts does not make any appropriation at the time when he makes the payment as to any particular debt the right of appropriation devolves on the creditor to apply it, at his discretion to any debt lawfully due and payable to him from the debtor---Transaction of grant of loan with a promise or an agreement to repay the same with interest cannot be termed as several distinct debts owed by the debtor to the creditor---Debt consisting of principal and interest constitutes one debt.
60. Application of payment where debt to be discharged is not indicated.---Where the debtor has omitted to intimate and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it, and his discretion to any lawful debt actually due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits.
Creditor's right to appropriate.---"If the debtor does not make any appropriation at the time when he makes the payment the right of application devolves on the creditor," and he may exercise that right until the very last moment, and need not declare his intention in express terms, he may, indeed, exercise that right even when he is being examined at the trial of the case. A decision of the High Court of Allahabad that an appropriation of payment by the creditor must be made at the time of receiving the money was overruled by a later decision, of a Full Bench of the same Court, which held that the appropriation could be made at any time up to judgment. The matter has now been concluded by a decision of the Privy Council in which after referring to the provisions of S. 60 their Lordships said: "This is the same rule as that laid down as English law by the House of Lords in Cory Brothers & Co. v. Owners of Turkish Steamship, Mecca, and under it the creditor has a right to appropriate a payment by the debtor to the principal or to the interest of the same debt. There is no obligation upon the creditor to make the appropriation at once, though when once he has made an appropriation and communicated it to the debtor he would have no right to appropriate it otherwise (cf. per Lord Herschell in Cory's case). Lord Macanghten's language in that case is equally applicable under Ss. 60 and 61 of the Indian Contract Act: 'Where the election is with the creditor, it is always his intention express or implied or presumed, and not any rigid rule of law that governs the application of the money."
It is impossible to define the circumstances which may be held to indicate a special intention. Where the earlier in date of two debts is of a different kind and specially secured, it will not be presumed that a payment made without express directions was intended to be on account of the earlier one.
When a debtor passed two mortgage bonds to his creditor, one of which carried interest payable with rests, and the other carried simple interest, and the creditor appropriated payments made by the debtor to interest on the bond carrying simple interest, it was held that the creditor was entitled to apply the payments to either of the debts, and that the mere reluctance of the debtor to pay compound interest before he executed the mortgage bond at such interest was no indication of the debtor's intention that his payments should be applied to that bond. But where by a mortgage bond the debtor agreed to repay the loan made to him by the creditor in kind by delivery of certain species of grain, or at his option in cash at a specified rate of interest, and the, creditor applied several payments in grain made by the debtor to other antecedent debts, it was held that the creditor was not entitled to do so, as the stipulation to repay the loan by delivery of grain, combined with the absence of evidence to show that the previous debts were to be liquidated by payments of grain, was a circumstance indicating that the payment was to be applied to the debt secured by the mortgage bond.
Contract of Guarantee.---A surety is bound by the creditor's appropriation.
Principal and interest.---Where there is a debt carrying interest, money paid and received without any definite appropriation is to be first applied in payment of interest. If the debtor appropriates a payment to principal, the creditor need not accept payment on those terms, but if he does not he must return the money; if he does accept he is bound by the appropriation. The same rule applies to judgment debts: Thus when a sum is realised on account of a decree, that amount is to be deducted from the interest and not from the principal. The rule is the same even if the decree be an installment decree. Thus if a decree is passed for Rs. 1,500 with interest at five per cent. per annum payable by three yearly installments of Rs. 500 each, and the judgment-debtor pays Rs. 500 at the end of each of the three years without appropriating the payments to principal, the decree-holder is entitled to appropriate Rs. 75 for the interest due and the balance of Rs. 425 to principal.
Debt barred by the law of limitation.---Where no appropriation is made by the debtor, the creditor may apply the payment to any lawful debt, though barred by the law of limitation. This frequently happens where there is a running account extending over several years. The creditor may in such a case appropriate the payments to the earliest items barred by limitation and may sue for such of the balance as is not so barred.
Novation---Means substitution of new contract for the old one---New distinct contract between parties.---Not novation.---Novation takes place when for an existing contract some new contract is substituted, either between the same parties or between different parties, the consideration mutually being the discharge of the old contract. Where, therefore, the tenant entered into a mortgage agreement with the owner of the property, it was held that the creation of mortgage, in his favour, did not affect the tenancy rights of the tenant. The plea of novation, in the circumstances, was rejected.
61. Application' of payment where neither party appropriates.---Where neither party makes any appropriation the payment shall be applied in discharge of the debts in order of time, whether they are or are not barred by the law in force for the time being as to the limitation of suits. If the debts are of equal standing, the payment shall be applied in discharge of each proportionably.
Scope of the section.---This section must be read continuously with S. 60. It must be carefully observed that it does not lay down a strict rule of law, but only a rule to be applied in the absence of anything to show the intention of the parties. Not only any express agreement, but the mode of dealing of the parties, must be looked to. On the other hand, the circumstances may show that accounts which it was at a party's option to treat as separate were, in fact, treated as continuous. and then payments will be appropriated to the earliest unpaid item of the combined account.
Mortgage of joint Hindu family property.---In a Full Bench case of the Allahabad High Court the question before the Court was "whether it is open to a mortgagee of a joint family, property, under a mortgage deed executed by the manager of the joint family, when a portion of the mortgage debt was not raised for legal necessity, to appropriate during the pendency of the suit payments made by the mortgagor, towards the discharge of such portion of the debt as was not raised for legal necessity, when no appropriation was made either by the mortgagor or the mortgagee till the date of the suit." The Court decided that as long as the two portions of the debt had not been definitely ascertained it was not open to the creditor to appropriate a payment towards an unknown and unspecified portion of the debt. But after the two portions were definitely ascertained in such a way as to make them constitute two distinct debts he was entitled to appropriate the payment. As, however, the creditor had got appropriated the debt in the trial Court, it was' held that the payment should be rateably distributed between the two portions of the debt.
Unappropriated payments---May be applied to satisfaction of debts in order of time.---Where payments made by a debtor were not appropriated towards any particular agreement, section 61 of the Contract Act would apply and the payment must be deemed to apply in discharge of the debts in order of time.
Contracts which need not be performed
62. Effect of novation; rescission and alteration of contract.---If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.
(a) A owes money to B under a contract. It is agreed between A, B, and C that B shall thenceforth accept C as his debtor instead of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted.
(b) A owes B 10,000 rupees A enters into an arrangement with B, and gives B a mortgage of his (Aís) estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishes the old.
(c) A owes B 1,000 rupees under a contract C owes C 1,000 rupees. B orders A to credit C with 1,000 rupees in his books but C does not assent to the arrangement, B still owes C 1,000 rupees, and no new contract has been entered into.
Novation.---The meaning of "novation", the term used in the marginal note to this section, and now the accepted catchword for its subject-matter, has been thus defined, "that, there being a contract in existence, some new contract is substituted for it either between the same parties (for that might be) or between different parties, the consideration mutually being the discharge of the old contract. A common instance of it in partnership cases is where upon the dissolution of a partnership the persons who are going to continue in business agree and undertake as between themselves and the retiring partner, that they will assume and discharge the whole liabilities of the business, usually taking over the assets; and if, in that case, they give notice of that arrangement to a creditor, and ask for his accession to it, there becomes (sic) a contract between the credit who accedes and the new firm to the effect that he will accept their liability instead of the old liability, and on the other hand, that they promise to pay him for that consideration."
It has to be considered in every case not only whether a new debtor has consented to assume liability, but whether the creditor has agreed to accept his liability in substitution of the original debtorís. In some circumstances the creditor may be entitled to sue the retiring or the incoming partner in a firm at his option; mere continuing to deal with the firm as reconstituted will not preclude him from suing his original debtor. Novation is not consistent with the original debtor remaining liable in any form; it requires as an essential element that the right against the original contractor shall be relinquished, and the liability of the new contracting party accepted in his place.
It is an elementary rule that trustees and others administering money of which they are not the beneficial owners are not entitled to make a novation (which is to accept one security or liability instead of another) except so far as they are authorised by the trusts under which they act. The executor of a deceased partner may agree with the surviving partners to convert the partnership into a limited company and to accept fully paid by shares in the company in lieu of the testator's share. Such an agreement is valid and binding on the estate of the testator.
A. advanced Rs. 50,000 to a firm consisting of three partners. The sum of Rs. 50,000 was made up partly of securities handed over by A to the firm and partly of cash. The firm passed a note to A promising to return the securities and repay the cash with interest at 6 per cent per annum payable every six months. Thereafter one of the partners died, and A accepted from the surviving partners a promissory note in the firm's name for Rs. 50,000 to be paid in cash with interest at the same rate, but not payable with six months rests. This was a new contract with the surviving partners alone.
The High Court of Calcutta held the present section not to apply where the agreement to substitute a new contract for the original one is made after the breach of the original contract. The plaintiff sued the defendant to recover a sum of Rs. 1,100 due on a bond. It was found that after the due date of the bond the plaintiff agreed to accept from the defendant in satisfaction of the bond Rs. 400 in cash and a fresh bond for Rs. 700 (not the mere promise to pay the Rs. 400 and to give a bond for Rs. 700). The defendant failed to pay the Rs. 400 and to pass the bond, and the plaintiff sued to recover the amount of the original bond. It was found that the plaintiff did not intend to accept the naked promise to pay Rs. 400 and to give a bond for Rs. 700. For the defendant it was contended that the subsequent agreement had made a novation. The Court, however, held that S. 62 did not apply, as the subsequent agreement was entered into after the breach of the original contract, and that the defendant, having failed to perform the satisfaction which he hail promised to give, remained liable on the original contract.
A. executed a bond for a debt due by B. Subsequently it was agreed by B, to pay a part of the debt in certain installments and execute a mortgage for the balance. B paid some installments but failed to carry out the agreement. It was held that A was absolved from liability by the subsequent agreement and that the breach of the subsequent agreement did not revive A's liability.
An attempted novation which fails to produce a new enforceable contract may put an end to the original contract if it was the intention of the parties to rescind it in any event. Such intention is a fact to be clearly proved.
In the case of such an agreement to substitute a new contract, that which is substituted must be a contract capable of being enforced in law; so that if by reason of any want of formality, such as registration, the document containing the contract is inadmissible in evidence, the original contract will still be operative.
Where a contract for the sale of goods provides for delivery being given within a specified period, and the contract contains an arbitration clause, a mere extension of the time for giving delivery does not make it a new contract so as to put an end to the arbitration clause.
Settlement contracts.---"When a settlement contract is made, reselling the goods back again from the original buyer, the intention is not that after the settlement contract the first contract should be gone. The intention is that the two contracts should stand together. That being so, there can be a set-off as regards delivery, and there can be a set-off as regards price for everything except the difference. It seems to me to be abusing S. 62 of the Contract Act to say that after a settlement contract the original contract is utterly discharged."
Promissory note oil account of pre-existing debt.---The cases referred to above must be distinguished from those where a person lends money or sells goods to another, and the debtor or buyer gives a promissory note for payment of the loan or price at a future time. In such cases the rule is that where a cause of action for money is once complete in itself, whether for goods sold or for money lent, or for any other claim, and the debtor then gives a note to the creditor for payment of the money at a future time, the creditor, if the note is not paid at maturity, may sue for the original consideration; and if from any cause the bill or note is not admissible in evidence, this will not affect the original cause of action.
Execursus to S. 62:---Unauthorised alteration of documents.---What if the document recording an agreement is altered without the consent of both parties? No answer to this question is given by the Contract Act, or anywhere in the Anglo-Indian Codes, but Indian practice follows the authorities of the Common Law. The rule is that any material alteration in an instrument made by a party, or by any one while it is in the party's custody or in that of his agent, disables him from relying on it either as plaintiff or as defendant, though he may sue for restitution under S. 65. In its earliest form it was connected with the old manner of pleading and producing deeds, but in modern times it was deliberately extended on grounds of policy: A party who has the custody of an instrument made for his benefit is bound to preserve it in its original state.
The Indian decisions on the subject may be derided into two classes. The first class comprises cases in which the suits were for bond debts brought upon the basis of altered documents. The second class relates to suits on documents which by the very execution thereof effect a transfer of interest in specific immovable property. As to the fomer class of cases, the Indian Courts have followed the principles of English Law set out above, the point for decision in each case being whether the alteration was or was not material. Thus where a bond was passed to the plaintiff by one of three brothers, and the plaintiff forged the signature of the other two to the bond, and brought a suit upon it in its altered form against all the three brothers, it was held that the alteration avoided the bond. In such a case the plaintiff is not entitled to a decree even against the real executant. Similarly, where the date of a bond was altered from 11th September to 25th September, it was held that the alteration was material, as it extended the time within which the plaintiff was entitled to sue; it did not matter that the period of limitation, though reckoned from 11th September, had not expired at the date of the suit. On the same principle an alteration in a document which has the effect of enabling the payee to sue on the document in a Court in which he could not have sued on it in its original form is a material alteration and as such destroys the right of action on the document.
But the fact that the signature of an attesting witness had been affixed after execution to a bond that does not require to be attested is not a material alteration, and does not make the bond void. Nor is it a material alteration to add in a document a description of immovable property which is not within the scope of the document.
Besides the alteration being material, it must have been made in a document which is the foundation of tile plaintiff's claim. A material alteration, therefore, in a written acknowledgment of debt does not render it inoperative, as the acknowledgment is merely evidence of a pre-existing liability. In the last-mentioned cases, it is to be observed, the suit was not founded on the acknowledgment, but on the original loan, and the acknowledgment was relied on merely to save the plaintiff's claim from being barred, and the Court admitted it in evidence for that purpose.
Novation of contract---Redemption of first mortgage and creation of second mortgage---Whether amounts to novation of contract?
Contract---Novation, revision and alteration of---Effect---Novation of contract would imply that there being contract in existence, some new-contract had been substituted for resulting in discharge of old contract---Substitution of a new contract being the core of novation, essential feature thereof, held, would be that a right under original contract was extinguished whereas new rights referable to new contract were created---Where new contract suffered from legal flaw such as want of registration, stamps, etc., on account of which same became unenforceable, original contract would not be extinguished and rights and liabilities of parties would be determined on that basis.
Novation of contract---Essential features of novation---A new and independent concerning same matter as previous agreement---Can be contrued to discharge previous agreement and take its place only if terms of two are so inconsistent and contradictory that they cannot stand together,--Held: Lower Courts in dismissing still for specific performance were right in their view rejecting plea of novation and their concurrent judgments/decrees did not attract interference u/s. 115 CPC.
Amendment in minor details of contract---No novation of contract.---Under section 62 of the Contract Act novation takes place when an entirely new contract is substituted for a previous contract. In the present case there was no new contract for the previously existing three contracts between the parties. What happened was that there were certain amendments with regard to the place of delivery of the contracted cotton. But this kind of amendment would not result in any substitution of the new contract for the previous three contracts. The basic contracts remained in existence. Therefore no novation of contract would take place.
Agreement between creditor and debtor---Does not amount to novation, when (i) agreement merely settles manner under which debtor would make payment of creditor's dues without extinguishing original debt. (ii) Clause settling the manner about payment of debt has not been acted upon, i.e. agreement amounts to an agreement to settle debts without there being actual settlement.
Novation of contract---Effect---Previous debt is wiped out and new debt takes its place
Contract---Violation of---Auction---Forest Coupe---At the time of auction details regarding quantity and quality of timber were announced---On the basis of information provided at the time of auction participants were invited to bid---Highest bid was accepted---First installment was deposited by contractor, subsequent to auction sale on inspection by contractor it was found that quantity of timber available for cutting was considerably less than the quantity announced at the time of auction---There was a clause in the sale---Notice to the effect that no claim shall be against the State Government for compensation---Contractor filed suit for the recovery of amount deposited by him to State Government with compensation---Held: Contractor was entitled to repudiate the contract and claim refund of the amount deposited by him as part payment of purchase price---Held further: In view of a specific clause in contract disentitling the contractor to claim compensation, no compensation would be payable.
Applicability---Applies only in case of substitution of contract where there is no breach of the original contract.---Section 62 applies only to those cases where no breach has been committed in respect of the original contract and then the original contract is substituted by a new contract.
Novation of contract---Possible only with another contract and not agreement.---Under Section 62 of the Contract Act, which was pleaded in this behalf, to constitute a novation of a previous complete contract, the subsequent arrangement in supersession of the first should also be complete contract, and not an agreement.
Novation of contract---Not effected by giving time to party to make payment of sum due.---By the mere extension of time for the performance of a contract, novation does not necessarily take place but the promisee gets certain rights under section 63 of the Contract Act, It is only when a new term is introduced in a contract that novation may be said to have resulted therefrom. For instance, by mere extension of the time for delivery of goods, there is no such alteration of the original contract as to operate as a rescission thereof, within the meaning of section 62 of the Contract Act. Therefore where the acceptance of the Bill was unconditional and unqualified and the Bills had matured by a regular demand being made for payment before time was granted for making the actual payment at the debtor's request. If there was to be a variation of the original contract, it was necessary to indicate it in the endorsement of acceptance itself, on the face of the Bills, in clear and unequivocal terms. Where that was not done, the case could not be held to be that of substitution of the old agreement for a new one.
Novation---Compromise decree creating new contract---New contract binding--Breach of new contract does not restore parties to original position.---If the compromise or the contract or the agreement sets up a new contract, it amounts to a novation of a contract and since in such a case the ordinary incident would be as indicated in section 62 of the Contract Act, namely, that the original contract would no longer be liable to be performed, the effect would be to substitute the old debt for a new debt arising from the date of the compromise decree. In this event the breach of the term of a compromise decree would not also, in my opinion, restore the parties to the rights which they had prior to the decree, for, after the compromise decree the rights and liabilities of the parties would be governed by the terms of the compromise itself and not by what it was before the compromise.
Sale of land---Permission liar sale to be obtained by seller---Purchaser offering to get the permission at a later stage---Terms of contract not changed by the offer.---The defendant contracted to sell a piece of land to the plaintiff and for that purpose he had to obtain the permission of the Government. He did not do that and the time which was the essence of the contract was running short. The plaintiff offered to get the permission but failed.
Held: The plaintiff only offered to help the defendant. Doubtless by this offer the defendant was not relieved of his obligation to obtain the permission.
This promise did not in any way change the terms of the contract and affords no assistance to the defendant's case.
Substitution of one contract for another---Test of.---It is always a question of fact whether the parties have substituted the old contract by a new contract or not. This would depend upon the intention of the parties. Which can best be read from the terms of the offer and the acceptance.
Contract of insurance, novation/extension of---Insurance policy for initial period from 1st September 1962 to 31st August, 1963---Premium payable quarterly---Quarterly payments meant revival of policy for each quarter and each quarter to be treated separately---Held: happenings of one quarter could not affect policy for other quarter and extension to be treated as fresh policy on terms of original policy.
Evidence Act (l of 1872), S. 92, proviso (4)---Novation of contract---Requirements of proof, lacking---Effect---Vendor's silence at time of entry of mutation that original contract had been novated or rescinded---Vendors in action before Revenue Officer at time of sanction of mutation---No writing about novation or cancellation having been produced, oral evidence of impeachable character, held, was not sufficient to prove such fact of novation and cancellation.
Substitution of contract---New contract was to be enforced subject to permission from authorities concerned---No such permission was accorded by said authorities---New contract, held, did never come into force in circumstances.
Novation of contract----Determination of nature of contract dependent on intention of parties---Contract would be rescinded by another contract between same parties where new contract, was inconsistent with, or rendered impossible the performance of the former contract---Where legal effect of both contracts i.e. new and the former one was the same though they differed in terms, even then it would be mere ratification of the former and both must be construed together---Whether an agreement was substitution of old contract or not was a question of fact depending on intent of parties---Intention of parties could be inferred from contents of documents with reference to substance of matter and not to mere form of document.
Contract---Novation, revision and alteration of---Effect---Novation of contract would imply that there being contract in existence, some new contract had been substituted for it resulting in discharge of old contract---Substitution of a new contract being the core of novation, essential feature thereof, held, would be that a right under original contract was extinguished whereas new rights referable to new contract were created---Where new contract suffered from legal flaw such as want of registration, stamps etc., on account of which same became unenforceable, original contract would not be extinguished and rights and liabilities of parties would be determined on that basis.
Novation---Effect of---Held: Substitution of new contract being core of novation, right under original contract to be extinguished and new rights referable to new contract to be created---Held further: Substituted contract must be valid and enforceable contract to be effective as novation---New agreement or contract suffering from legal flaw such as want of registration, stamp, etc.---Held: Original contract in such case being not extinguished, rights and liabilities of parties to be determined on that basis.
Contract---Substitution of by ;another---Held: Contract to be said to be rescinded by another (contract) between same parties when latter be inconsistent with or renders impossible performance of' former---In case of legal effect being same, both contracts to be construed together---Held further : Question of agreement entered into being in substitution of old agreement or not to be always question of fact depending also on intention of parties---Such intention however, to be (competently) inferred from contents of documents by looking to substance of matter and not to mere form.
Novation of contract---Essential features of novation---A new and independent concerning same matter as previous agreement---Can be construed to discharge previous agreement and take its place only if terms of two are so inconsistent and contradictory that they cannot stand together---Held ∑ Lower Courts in dismissing suit for specific performance were right in their view rejecting plea of novation and their concurrent judgments/decrees did not attract interference u/s. 115, C.P.C.
"Novation"---Meaning of---Held: The term novation implies that there being contract in existence some new contract has been substituted for it resulting in discharge of the old contract---Held further ∑ Substitution of a new contract is the core of novation. Its essential feature is that a right under the original contract is extinguished and new rights referable to new contract are created. The substituted contract therefore, must be a valid and enforceable contract to be effective as novation---If the new agreement or contract, suffers from legal flaw such as want of registration, stamps etc., on account of which it becomes unenforceable, the original contract will not be extinguished and the right and liabilities of the parties will be determined on that basis.
Recision of a contract---Held: A contract will be said to be rescinded by another between the same parties when the latter is inconsistent with or renders impossible the performance of the former---If their legal effect is the same though they differ in terms, even then it will be mere ratification of the first and they must be construed together.
Novation of contract---Original contract becomes unenforceable. It is an essential element of novation, when new contracting parties are substituted, that the rights and obligations of the original contractors shall be extinguished and the rights and liabilities of new contracting parties accepted in its place.
Subsequent agreement providing that all terms of original agreement would remain in force---No novation.---Where two agreements were made with reference to the sale of a particular property and the subsequent agreement specifically provided that all the terms of the original agreement would continue to apply to the sale.
Held: The mere fact that "bastbari" was not mentioned in the recital portion of the second agreement as one of the things sold with the land did amount to a novation of the original contract, for, the operative portion of the contract clearly stipulated that other terms and conditions of the original agreement were to remain unchanged, and therefore as provided by the original agreement the 'bastbari' would be liable to sale.
Novation of----Proof---Steps taken immediately after execution of contract would show that parties were acting trader original agreement---Mere alteration in the new agreement of amount of consideration did not establish novation of contract.
(ii) Contract for sale of land---Mere mention of period of completion in agreement does not make time essence of the contract---Presumption is that parties would perform their part of contract within reasonable time.
63. Promisee may dispense with or remit performance of promise.---Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.
(a) A promises to paint a picture for B. B afterwards forbids him to do so. A is no longer bound to perform the promise.
(b) A owes B, 5,000 rupees. A pays to B and B accepts, in satisfaction of the whole debt, 2,000 rupees paid at the time and place at which the 5,000 rupees were payable. The whole debt is discharged.
(c) A owes B, 5,000 rupees. C pays to B 1,000 rupees, and B accepts them in satisfaction of his claim on A. This payment is a discharge of the whole claim.
(d) A owes B, under a contract, a sum of money, the amount of which has not been ascertained. A, without ascertaining the amount, gives to B, and B, in satisfaction thereof, accepts, the sum of 2,000 rupees. This is a discharge of the whole debt, whatever may be its amount.
(e) A owes B, 2,000 rupees, and is also indebted to other creditors A makes an arrangement with his creditor's including B, to pay them a composition of eight annas in the rupee upon their respective demands. Payment to B of 1,000 rupees is a discharge of B's demand.
Rule of the Common Law.---This section. makes a wide departure from the Common Law. To quote an authoritative exposition, "it is competent for both parties to an executory contract by mutual agreement, without any satisfaction, to discharge the obligation of that contract"; in other words, as reciprocal promises are a sufficient consideration for each other, so are reciprocal discharges. But an executed contract cannot be discharged except by release under seal, or by performance of the obligation, as by payment where the obligation is to be performed by payment; but, by the law merchant, the obligation of a negotiable instrument may be discharged by mere waiver. Subject to the exception, the new agreement in recession or alteration of a prior contract must in general satisfy all the requirements of an independent contract, and so must an agreement to accept satisfaction for a right of action which has been arisen by breach of a contract. If the creditor has accepted in satisfaction merely the debtor's promise, to give consideration, and not the performance of that promise, the original cause of action is discharged from the date when the agreement is made, and breach of the substituted agreement does not enable the creditor to plead that the original agreement has been revived. Although the rule that the Court does not require into the adequacy of the consideration is applicable, and therefore anything different in kind from what is due may be a good satisfaction without regard to its apparent value, yet the Court cannot help knowing that nineteen pounds are not worth twenty pounds, and accordingly, a less sum of money cannot be good satisfaction for a greater sum already due.
Scope of the section.---The present section and S. 62 must be construed so as not to overlap each other. This would be done by holding that agreements referred to in S. 62 are agreements which more or less affect the rights of both parties under the contract discharged by such agreements; whilst those referred to in S. 63 are such as affect the right of only one of the parties. The former case necessarily implies consideration, which may be either the mutual renunciation of right, or, in addition to this, the mutual undertaking of fresh obligations or the renunciation of some right on the one side and the undertaking of some obligation on the other. It is only when the agreement to discharge affects the right of only one party that consideration might be found wanting.
Remission of performance.---In 1903 the High court of Bombay held that a dispensation or remission under this section involves a promise as defined by S. 2 (b) or, what is the same thing, an agreement within S. 2 (e), so that "there must be a proposal of the dispensation or remission, which is accepted": in technical terms, that the effect of the section is only to allow an accord to be good without satisfaction.
Thus the words of the section arc construed according to their natural meaning, and a promisee can discharge the promise not only without consideration but without a new agreement. The learned authors repeated part of their original protest in the sixth edition of this work, though they themselves admitted that it was no longer necessary. There is nothing in the words of the section (they said) about promise, proposal, or acceptance, and it was difficult to see why any such matter should be imported, except on the assumption that the intention was to alter the English law of accord and satisfaction only by abrogating the requirements of consideration. But if consideration is no longer required, why should agreement be required? !t is hoped that Indian Courts have at last shaken off the unfortunate and erroneous presumption that a codifying Act is to be read as saving every existing rule, however, peculiar, which it does not repeal in literal terms.
Except so far as in the case of a corporation a dispensation from performance must satisfy the conditions required for its corporate acts in general, it does not seem that a formal obligation need be formally remitted.
Conceivable but not probable cases in which a promisor would be prejudiced by not being allowed to complete the performance of his promise, though he had received the consideration in full, may be left aside until they arise. It seems that, if they can be treated as exceptional, it must be by virtue of some special term implied in the particular contract.
Where a promisee remits a part of the debt, and gives a discharge for the whole debt on receiving the reduced amount, such discharge is valid, even though the remission was in pursuance of an oral agreement, which is inadmissible under S. 92 (4) of the Evidence Act, 1872. Thus where a lessor, to whom rent is due under a registered lease, accepts a smaller amount of rent from the lessee in pursuance of a subsequent oral agreement to reduce the rent, and passes a receipt in full discharge of the rent due, the discharge will take effect independently of the prior oral agreement, which certainly is not illegal, though it cannot be proved under the Evidence Act. Similarly, where any sum has become payable under a mortgage deed, payment may be partly remitted by the mortgagee. Where a promisee remits a part of the debt and gives a discharge for the whole debt on receiving the reduced amount, the discharge is valid. The section is intended not only to enable a promisee to release a debt at the instance of a third party but also to enable the promisor whose debt has been released at the instance of a third party to take advantage of that release.
An agreement to remit in futuro clearly requires consideration, if it is to be a binding contract. But this must be distinguished from a remission or dispensation which is made contingent on the happening of a future event. In such a case the remission is in praesenti, though it is suspended until the event occurs. The holder of a promissory note from the officers of a masonic lodge agreed in writing to make no claim "if the ........ lodge building which has been burnt down is resuscitated." He cannot sue on his note after the lodge is rebuilt.
Agreement to extend time.---An agreement simply extending the time for performance of a contract is exempted by this section from any requirement of consideration to support it. No consideration is necessary to support such an agreement, exactly as none is required for the total or partial remission of performance.
It need hardly be added that this section does not entitle a promisee to extend the time for performance of his own accord for his own purposes. Thus, where a date is fixed for delivery of goods under a contract and the seller fails to deliver the goods, the buyer may not of his own accord give further time to the seller for giving delivery, so as to claim damages on the footing of the rate on the later date fixed by him; he is entitled to damages on the basis only of the rate prevailing on the date fixed for performance in the contract. Where, however, both the buyer and the seller have agreed to extend the time for delivery, damages would be at the rates prevailing on the later date.
Time for performance of a contract is liable to be extended by promisee---Consent of promisor is not needed for such extension, but that is essential for if the promisor was not prepared to give performance at all, any extension would be meaningless.
Novation---Change in agreement regarding the bank in which money is to be deposited---No novation.---Held: I do not think a Novation was created by the agreement between the parties to the effect that the money be deposited in the Eastern Bank instead of Netherland Trading Society which had refused to accept the deposit. It was not the substitution of one contract by the other. The contract was the same.
Time essence of contract---Purchaser acquiescing in default by seller---Seller should not be penalized.---(Obitor) If the purchaser has acquiesced in the default or has caused or promoted it, the seller will not be panalised for it.
Extension of time---When may be made---Not necessarily made before expiry of limitation.---- It is not even necessary that an extension of time by the promisee should take place before the expiry of the date on which the contract was to be performed, for the utmost that could be urged in a case where there is extension after the expiry of the original period would be that there was a fresh agreement rather than an extension and a fresh agreement for delivery would have no less effect than extension. If such fresh agreement be valid and binding it would give rise to a fresh cause of action, and there would be a fresh terminus a quo for limitation when the carrier failed to perform the fresh agreement. There is no law which forbids a fresh agreement as to the time of performance in the case of carriage of goods by sea and therefore such an agreement would be binding and would constitute a new basis for calculation of the period of limitation.
No date fixed in contract---Extension of time by promisee---Effect on limitation---The section will apply to a case where there is originally a date fixed for the performance as also to a case where no date has been fixed and the contract is to be performed within a reasonable time. Therefore, in all cases of carriage of goods by sea the terminus a quo for limitation will be affected, if the promisee agrees to have performance at a date later than that originally fixed or later than that which constituted a reasonable time.
Carriage of goods---Contract Act applicable---Extension of time for performance of contract---Consent of promisor not required.---In the case of a contract of carriage of goods by sea, if there be in the contract, a date fixed for delivery, that would be the terminus a quo for limitation. If, on the other hand, there be no date fixed, reasonable time would have to be ascertained, and that would depend upon the particular circumstances of a case. However, the matter does not end there. The time for the performance of a contract is liable to be extended by the promisee as provided in section 63 of the Contract Act. This section does not say that the consent of the promisor is also needed for extension, but that is obviously essential for if the promisor was not prepared to give performance at all any extension would be meaningless. However, the consent need not be express and may be implied. Similarly, extension by the promisee too may be only implied.
Acceptance by silence---Party accepting new rates without protest for two years---Terms of contract calling for negotiation in case of rise in price not resorted to---New rates cannot be challenged subsequently.---Where the contract between the gas supply company and the consumer envisaged an increase in price in certain circumstances after negotiations. But on receiving intimation of increase in the price of gas, even before this supply had commenced, the plaintiffs kept silent for almost two years, during which period they received and paid bills at the revised price. In these circumstances the doctrine of "acceptance by silence" would certainly appear to be applicable. Therefore they could not challenge the increase after the period.
64. Consequences of rescission of voidable contract.---When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is promisor. The party rescinding a voidable contract shall if, he has received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received.
Scope of the section.---Contracts declared voidable (S. 2, sub-S. 1) under this Act may be devided into two groups, namely, contracts voidable in their inception under Ss. 19 and 19-A on the ground of fraud or the like and contracts becoming voidable by subsequent default of one party, as mentioned in Ss. 39, 53, and 55.
The use of the word "voidable" is immaterial. Whenever one party to a contract has the option of annulling it, the contract is voidable; and when he makes use of that option the agreement becomes void. It has been suggested that the present section applies only to the first-named class of contracts, which are voidable for want of free consent; but there is no apparent good reason for not including the others. It has been decided by the Privy Council that the section applies to cases of rescission under section 39.
The direct application of this section, according to recognised canons of interpretation, is only to contracts declared voidable. by the Act; but the principle which it affirms is one of general jurisprudence and equity, and applicable in various other cases.
Minor's contract.--It was settled that this section did not apply to a minor's contract, assuming that such contracts were only voidable. The term "person" in the section, it was said, does not comprise a minor, but means such a person as is referred to in s. 11, namely, a person who (among other conditions) is of the age of majority according to the law to which he is subject.
A man cannot rescind a contract in part only. When he decides to repudiate it, he must repudiate it altogether. If he has put it out of his power to restore the former state of things, either by acts of ownership or the like, or by adopting and accepting dealings with the subject-matter of the contract which alter its character, as the conversion of shares in a company, or if he has allowed third persons to acquire rights under the contract for value , it is too late to rescind, and the remedy, if any, must be of some other kind. You cannot both eat your cake and return your cake.
It is hardly needful to say that rescission must be express and unequivocal. The clearest form of it is bringing a suit to set aside the contract. The will to rescind may also be declared by way of defence to an action brought on the contract; a declaration to that effect before action brought is not necessary as matter of law, though, generally speaking the prudent course is to repudiate as soon as possible.
By the Common Law lapse of time is not of itself a bar to setting aside a contract (subject to the risk of indefeasible rights having been acquired by third persons), but may be material as evidence of acquiescence, that is, of a tacit election to affirm the contract. But by the Limitation Act, a suit for the rescission of a contract must be dismissed, even though the defence of limitation is not set up, unless brought within three years from the time when the facts entitling the plaintiff to have the contract rescinded first became known to him.
Benefit received "thereunder."---Ss. 64 and 65 do not refer by the words 'benefit' and 'advantage' to any question of 'profit' or 'clear profit', nor does it matter what the party receiving the money may have done with it. The Act requires that a party must give back whatever he received under the contract. The benefit, however, to be restored must be benefit received under the contract. A., agrees to sell land to B, for Rs. 40,000. B pays to A, Rs. 4,000 as a deposit at the time of the contract, the amount to be forfeited to A if B does not complete the sale within a specified period. B fails to complete the sale within the specified period, nor is he ready and willing to complete the sale within a reasonable time after the expiry of that period. A, is entitled to rescind the contract and to retain the deposit. The deposit is not a benefit received under the contract; it is a security that the purchaser would fulfill his contract, and is ancillary to the contract for the sale of the land.
A duly appointed guardian of a minor executed a usufructuary mortgage of the minor's property but without the permission of the District Judge. The mortgage was for Rs. 1,400 at 2 per cent. per mensem interest, out of which Rs. 1,200 were paid in discharge of a debt due from the minor's father. The mortgagee constructed new buildings on the property. On attaining majority the minor rescinded the mortgage and filed a suit for recovery of possession of his property. It was held that the mortgagee was entitled only to Rs., 1,200 which had been paid to discharge the minor's father's debt and a sum of Rs. 237 spent by the mortgagee on necessary repairs to the mortgaged bungalow. The mortgagee was not entitled to the value of the newly erected buildings but was entitled to remove the materials composing them. The Privy Council decided that where a person has elected to put an end to the contract under section 39, he is bound to return any benefit that he has received under the contract, but he is entitled to damages ' for the defaulting party's breach.
Restoration of benefit---Motor car used for six months after purchase---Contract of sale rescinded on ground of fraud regarding the model of the car---Use of car not a benefit to be restored.---The defendant's had supplied a 1948 model car though they had assured the plaintiff that it was a 1949 model. The plaintiff rescinded the contract and the defendant claimed that the benefit which the plaintiff had received from the car which he used for six months must be restored.
Held; The plaintiff has not received any benefit under the contract. What was received under the contract was a car by the plaintiff and its money equivalent by the defendant, and the benefit received from the use of the car is no more a benefit under the contract than the benefit received by the defendant from the use of the money he received.
65. Obligation of person who has received advantage under void agreement or contract that becomes void.---When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.
(a) A pays B 1,000 rupees in consideration of B's promising to marry C, A's daughter. C is dead at the time of the promise. The agreement is void, but B must repay A. The 1,000 rupees.
(b) A, contracts with B to deliver to him 250 maunds of rice before the 1st of May. A delivers 130 maunds only before that day and none after. B retains the 130 maunds after the 1st of May. He is bound to pay A for them.
(c) A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights in every week during the next two months, and B engages to pay her a hundred rupees for each night's performance. On the sixth night A willfully absents herself from the theatre, and B, in consequence, rescinds the contract. B must pay A for the five nights on which she had sung.
(d) A contracts to sing for B at a concert for 1,000 rupees, which are paid in advance. A is too ill to sing. A is not bound to make compensation to B for the loss of the profits which B would have made if A had been able to sing, but must refund to B the 1,000 rupees paid in advance.
Duties of restitution.---The matter corresponding to this and the last foregoing section, besides S. 39, is scattered about English books in the shape of technical rules and exceptions unintelligible, as usually stated, to any one who is not acquainted, with the formulas of the ancient common law system of pleading which has long been obsolete and survives only in some American jurisdictions. However, the substance of the question involved may be put thus :---"In what cases may an action be brought by a person who has entered into a special contract against the person with whom he has contracted, while his own side of the contract remains unperformed?" The plaintiff, if he recover at all, must do so either on the original contract or on some other implied contract, it has to be considered whether the special contract is subsisting, but the defendant has dispensed the plaintiff from performing his part by making it impossible or otherwise, and, if it is not subsisting, whether a new contract by the defendant to pay for work done or ∑ other benefit which he has accepted, as the case may be, can be inferred. In the case where a party has contracted to do an entire work for a specific sum, he "can recover nothing unless the work be done, or it can be shown that it was the defendant's fault that the work was incomplete, or that there is something to justify the conclusions that the parties have entered into a fresh contract."
The illustrations to this section are rather miscellaneous. In (a) we have a simple case of money paid under a mistake (cp. S. 72, below). In (b) it does not seem that the contract has become void at all, but, on the contrary, that B has elected to affirm it in part, and dispense with the residue: there is no new contract under which he is bound to pay for the 130 maunds of rice, as is shown by this, that what he does accept he is undoubtedly bound to pay for at the contract price. In (c) it is not clear whether the contract is to be treated as divisible, so that A is entitled to Rs. 100 for each night on which she did sing, or the Court is to estimate what, on the whole, the partial performance was worth; nor would it be clear without fuller statement of the terms and circumstances. Illustration (d) is again simpler. This is a ground of claim which may be urged in cases to which S. 65 does not apply, but it must be framed as a suit for money had and received and not merely as a suit for refund of money, to give the defendant an opportunity to establish that some consideration had in fact been received by the plaintiff. The society obtained a decree against B, and in execution Blackacre was sold to S. It then transpired that Blackacre belonged not to B, but to his adopted son. S sued the society for a refund of the purchase-money, but it was held in a bench decision that S. 65 did not apply, as the transfer to S. was not void, and that S. could not rely on a plea of total failure of consideration since he had not framed his action as one for money had and received.
Scope of the section.---This section applies only to cases where an agreement is discovered to be void, or when a contract becomes void. It does not, therefore, apply to cases where there is a stipulation that, by reason of a breach of warranty by one of the parties to the contract, the other party shall be discharged from the performance of his part of the contract. An insurance company is not, therefore, bound under the provisions of this section to refund to the heirs of the assured the premiums paid on the policy of life assurance where the assured had committed a breach of the warranty by making an untrue statement as to his age. This section does not apply to a case where one of the parties such as a minor known at the time so to be being wholly incompetent to contract, there not only never was but there never could have been any contract. The Privy Council have applied the section to a case where a mortgage was avoided on the ground that the mortgagee failed to obtain the sanction of the Deputy Collector to the mortgage.
Where an agreement is discovered to be void.---The section deals with (a) agreements and (b) contracts. The distinction between them is apparent by S. 2; by clause (e) every promise and every set of promises forming the consideration for each other is an agreement, and by clause (h) an agreement enforceable by law is a contract. Sec. 65, therefore, deals with (a) agreements enforceable by law and (b) with agreements not so enforceable. By clause (g) an agreement not enforceable by law is said to be void. An agreement, therefore, discovered to be void is one discovered to be not enforceable by law, and, on the language of the section, would include an agreement that was void in that sense from its inception as distinct from a contract that becomes void. The expression "discovered to be void" presents some difficulty as regards agreements which are void for unlawful consideration [Ss. 23 and 24]. On the one hand it has been said that the words "agreement discovered to be void" apply to all agreements which are void ab initio, including agreements based upon an unlawful consideration. If this view be correct, it follows that the person who has paid money or transferred property to another for an illegal purpose can recover it back from the transferee under this section, even if the illegal purpose is carried into execution and both the transferor and transferee are in pari delicto. It is difficult to suppose that such a result , has contemplated by the Legislature. Moreover, it would not be correct to say that, where a person gives money for an unlawful purpose, the agreement under which the payment is made can be, on his part, discovered to be void. On the other hand, it has been said that the present section does not apply where the object of the agreement was illegal to the knowledge of both the parties at the time it was made. If this view be correct, a person who has paid money or transferred property to another for an unlawful purpose cannot recover it back even if the illegal purpose is not carried into execution and the transferor is not as guilty as the transferee. This is clearly against the provisions of S. 84 of the Indian Trusts Act, 1882. It seems on the whole that the present section does not apply to agreements which are void under S. 24 by reason of an unlawful consideration or object, and still less to those which are tainted with fraud or other moral turpitude, and there being no other section in the Act under which money paid for an unlawful purpose may be recovered back. If the illegal purpose or any material part of it has been performed, the money paid cannot be recovered back, for then the parties are equally in fault, and in pari delicto melior est conditio possidentis. An executory contract or purpose which is illegal may be recovered back upon repudiation of the transaction, as upon a failure of consideration.
It has thus been held that though an agreement for payment of money to the parent or guardian of a minor in consideration of his giving his son or daughter in marriage is void under Ss. 23 and 24 as being against public policy, yet if the marriage is not performed, as where the son or daughter to be given in marriage died before the marriage could take place or the parent or guardian refuses to give the boy or girl in marriage, a party who has paid money under the agreement is entitled to recover it back. But if the marriage is performed, money paid under the agreement cannot be recovered back.
A transferee of property which from its very nature is inalienable is entitled to recover back his purchase money from the transferor, if the transfer is declared illegal and void. So also the purchaser of an expectancy. The time at which an agreement for the sale of an expectancy is "discovered to be void," so that a cause of action to recover the consideration arises under this section, in the absence of special circumstances, is the date of the agreement.
"When a contract becomes void."---The expression "becomes void" includes cases of the kind contemplated by the second clause of S. 56. The Privy Council have held that S. 65 is applicable where a voidable contract has been avoided. On a suit to enforce a registered mortgage, the mortgage was found to be void because permission under para. 11 of the third schedule to the Code of Civil Procedure had not been obtained. The claim on the personal covenant appeared to be time-barred and was formally abandoned by the mortgagee. The Privy Council held that the mortgagee had the right to refuse to be bound by the contract of loan when the basis of the contract had gone. "The lender who has agreed to make a loan upon security and has paid the money is not obliged to continue the loan as an unsecured advance. The bottom has fallen out of the contract and ho may avoid it." The mortgagee was given relief under the section.
Sec. 108 of the Transfer of Property Act provides that, in the event of the property let being destroyed by fire, "the lease shall at the option of the lessee be void." Where a transaction is set aside under section 53, of the Transfer of property Act, the transferor as entitled to be return of the sale price but is not entitled to the cost of defending a suit against the transferor's creditors. A contract also "becomes void" when a party disables himself from suing upon it by making an unauthorised alteration. The advantage is not recoverable unless it has been received before the contract becomes void. A mere failure to sue within the time specified by a statute of limitations does not cause a contract to become void.
Contracts with corporations.---At common law the contracts of corporations must in general be under seal. To this, however, there are some exceptions. One of them is where the whole consideration has been executed and the corporation. has accepted the executed consideration, in which case the corporation is liable on an implied contract to pay for the work done, provided that the work was necessary for carrying out the purposes for which the corporation exists. The exception is based on the injustice of allowing a corporation to take the benefit of work without paying for it. This exception, however, is in certain cases excluded by statute. Contracts with a corporation are often required by the Act creating it to be executed in a particular form, as, for instance, under seal. The question in such cases is whether the Act is imperative and not subject to any implied exception when the consideration has been executed in favour of the corporation. If the Act is imperative and the contract is not under seal, the fact that the consideration has been executed on either side does not entitle the party who has performed his part to sue the other on an implied contract for compensation. This may work hardship, but the provisions of the Act being imperative, and not merely directory, it must be complied with. The present section, accordingly, does not apply to cases where a person agrees to supply goods. to, or do some work for, a municipal corporation, and goods are supplied or the work done in pursuance, of the contract, but the contract is required by the Act under which the corporation is constituted to be executed in a particular form, and it is not so executed. In such cases the corporation cannot be charged at law upon the contract, though the consideration has been executed for the benefit of the corporation. "The Legislature has made provisions for the protection of rate payers, shareholders and others who must act through the agency of a representative body by requiring the observance of certain solemnities and formalities which involve deliberation and reflection. That is the importance of the seal. It is idle to say there is no magic in a wafer .... The decision may be hard in this case of the plaintiffs, who may not have known the law. They and others must be taught it, which can only be done by its enforcement."
The plaintiff sued the municipality for the value of the materials supplied, and for damages for refusing to accept delivery of the rest of the ballast. He was held not entitled to recover; the contract, not having been committed to writing and signed as required by the Municipalities Act, could not form the basis of any suit against the municipality, notwithstanding that ballast was supplied in pursuance of it. It was also held that the section did not apply, as the case was not one where the agreement was "discovered to be void," or had "become void," within the meaning of the section. This decision is in obvious conflict with a prior decision of the High Court of Bombay already cited and considered on another point. The Bombay case was the converse of the Allahabad case, the plaintiff being the municipality and the other party to the contract the defendant, In that case the Municipality of Trimbak granted to the defendant the right of levying and collecting certain tolls for a period of fourteen months, for which the defendant agreed to pay to the municipality Rs. 15,001. The contract was required by the Bombay District Municipal Act to be sealed with the seal of the municipality, but it was not so sealed. The defendant levied and collected the tools and paid part of the agreed amount, but failed to pay the balance, for which the municipality sued him. The defence was (1) that the municipality had dispensed with payment of the balance, (2) that the contract, not being under seal, was unlawful within the meaning of S. 23, as, if enforced, it would defeat the provisions of the Act, and that it could not therefore be enforced against the defendant, though the consideration had been executed for his benefit. The defence failed on the first point, as we have seen above on S. 63, and on the second point on the ground thus stated in the judgment: "It is a well recognised law that though a contract by a corporation must ordinarily be under seal, still where there is that which is known as an ,executed consideration as action will lie, though this formality has not been observed. Notwithstanding S. 23 of the Contract Act, we see no reason for not adopting the same view of the law here. For we think, when regard is had to the principle on which the Courts have proceeded, it is clear we do not run contrary to any provision of S. 23 of the Contract Act in holding that in this country too, as in England, where there is an executed consideration, a suit will lie even in the absence of a sealed contract." In Muhammad Ebrahim Moller's case the Commissioners for the Port of Chittagong sued the defendant for the recovery of money due as hire of a tug lent to the defendant under a contract with him. The contract was not under seal as required by S. 29 of the Chittagong Port Act, 1914. It was held that the Act was imperative in its terms and that the plaintiff could not sue on the contract. It was held at the same time that the plaintiffs were entitled to payment upon a quantum meruit.
It is to be borne in mind that mandatory provisions in Municipal Acts are meant to protect rate payers against improper Municipal contracts, and to enforce a so-called contract under S. 70 would amount to a circumvention of the mandatory provisions. It is submitted that the performance of a so-called contract contrary to the provisions of a statute can hardly amount to doing an act lawfully. No doubt an honest contractor may suffer, but his honesty cannot make an unlawful performance lawful. It has also to be remembered that if the corporation has not entered into the agreement with the required formalities, there is nothing to prevent it from ratifying its act in the appropriate manner. Courts of law may feel the injustice of these provisions where the contractor has been honest, but these are considerations for the legislature.
Where a contract which fails to comply with the statutory formalities is only executory, neither party can enforce performance against the order.
Any person."---The obligation under this section to restore the advantage received under an agreement is not confined to parties to the agreement, but extends to any person that may have received the advantage. A sajadanishin leased the property of a kankah and received nazarana for the same. Thereafter a Receiver was appointed who avoided the lease. The lessee was held entitled to recover the nazarana from the Receiver on the ground that the khankah had benefited from the nazarana and the person in charge of the kankah estate was bound to restore the advantage received.
"Received any advantage."---The present section appears to include such cases so far as they fall within S. 56, and not to lay down any special rule with regard to them. It would seem, therefore, that the general rule of this section applies to such cases, and that each party is bound to return any payment received.
Burden of Proof.---A party. claiming the restoration, after a contract has become void, of any advantage received, must prove the value of that advantage. In Govindram Case the defendant had contracted to purchase machinery from Germany, and the German firm had agreed to send a technician to India to set up the machinery. The greater part of the machinery had arrived in India, and rather more than half the purchase price had been paid, when the contract was frustrated by the declaration of war. The Custodian of Enemy Property sued the defendant for the value of the machinery received, but failed to establish that the advantage received exceeded the sum of Rs. 96,010, the amount the defendant had already paid to the German firm. Their lordships said: "In estimating the value, a Court would have to take into account the fact that the balance of the machinery contracted to be supplied could not be supplied from Germany, and the fact that the purchasers could no longer have the services of a qualified erector sent from Germany and of the sellers' Chief Chemist. Further, the Court would have to consider the question whether or not the purchasers were able to procure from other sources the balance of the machinery contracted to be sent from Germany, and if so, at what price and within what period of time, and what quantity and quality of products could be produced by the plant so assembled."
Agents.---Where on the instructions of a principal an agent entered into a transaction with a third party and paid money to a third party, it was held that the agent did not become liable to restore the money to the principal on the agreement being discovered to be void, since it could not be said that the agent had received any advantage.
Contract void after part performance---Advantage obtained must he restored---Proof of advantage obtained by other party---Necessary.---On the out break of the second world war a contract between a German firm and an Indian firm which had been partly performed became void, as the two countries were at war with each other. The Custodian of Enemy Property for British India sued the Indian firm for the compensation of the advantage they had derived out of the transaction. At that time the Indian firm had received some machinery and had paid 83, 375 Reichmarks to the German firm in return.
Held; The value of the machinery which was delivered to the appellants, for the purposes of clause 65 of the Act must be taken to be the value of that machinery in India immediately after the contract had become void by reason of section 65. In estimating that value, a Court would have to take into account the fact that the balance of the machinery contracted to be supplied could not be supplied from Germany, and the fact that the appellants could no longer have the service of a qualified erector sent from Germany and of the Sellerís chief chemist. Further, the Court would have to consider the question whether or .not the appellants were able to procure from other sources the balance of the machinery contracted to be sent from Germany, and if so at what price and within what period of time, and what quantity and quality of products could be produced by the plant so assembled.
Contract void ab initio---Section not applicable to such contract.---Section 65 of the Contract Act does not apply to contracts void under the provisions of section 23 and 24 of the said Act, for the latter are void ab initio and cannot be said to have become void or to have been discovered to be void.
Agreement void 'ab initio'---Benefit obtained under agreement not to be restored.---Section 65 dose not apply to contracts void under the provision of sections 23 and 24 of the Contract Act for the latter are void ab initio and cannot be said to have become void or to have been discovered to be void. Therefore any benefit derived under the agreement cannot be directed to be restored.
Executed contract---Restoration in the form of compensation may still be ordered.---As section 65 provides for making of compensation in respect of the advantage which may have been received it must follow that cases would frequently arise where an agreement or a contract may have been performed and yet it may become necessary to order restoration in the form of compensation.
Mortgage by minor on fraudulent representation as to his majority---Suit by minor to set aside mortgage---Restitution of property ordered subject to refund of consideration by minor.---The well-known principle that "he who seeks equity must do equity" will come into play with full force in the case where the minor after fraudulently representing as to his age enters into a bargain and then brings the action as a plaintiff for the restitution of immovable property and he must be made to refund the consideration.
Restoration---Principle applies notwithstanding agreement or contract.---The principle of restoration as contained in section 65 is an equitable principle which is applied notwithstanding the agreement or the contract and in fact in spite of it.
Duty lifted after its payment but before goods were imported---If payment was by mistake---If refund possible---Paid under protest after the duty is lifted---Amount refundable.---The importers paid Rs. 1,608-9-0 prior to 14-7-49 and Rs. 54, 128-10-0 after landing of the goods on 19-8-49. The import duty on Cotton Yarn was lifted with effect from 17-8-1949. On 14-7-1949 import duty was payable under the law. Hence it cannot be urged that the payment of Rs. 1,608-9-0 was made under a mistake of law or fact. Furthermore, the evidence clearly indicates that this payment was a voluntary one. Now, when money is paid voluntarily with full knowledge of all the facts, it cannot be recovered on the ground that the payment was made under a mistake of law or fact.
In this case, there was no question of a mistake of fact or law, because when the amount of Rs. 1,608-9-0 was paid, at that time the import duty was leviable under the Act. We are, therefore, of the opinion that the plaintiffs are not entitled to claim this amount of Rs. 1,608-9-0 either under section 65 or section 72 of the Contract Act.
Rs., 54,128-10-0 was, however, paid under protest after the lifting of the import duty. The evidence shows that the plaintiffs had to pay this amount in order to get their goods. They at first refused to pay the amount, but the Customs Officer insisted, as a condition of getting their goods, on their paying this amount. Ultimately they paid it under protest. These facts clearly show that the Customs authorities extorted this payment as they thought that the plaintiffs were liable to pay this amount before clearing their goods. In the circumstances, it cannot be said that the payment of Rs. 54,128-10-0 was a voluntary payment, we are of the opinion that on the facts and circumstances of this case, the plaintiffs claim for the sum of Rs. 54,128-10-0 come under section 72 of the Contract Act.
Invalid licence to sell opium---If Government can charge the plaintiff for the amount earned by selling opium on it.---The licences for sale of opium issued to the plaintiff were invalid as the officer who issued them had no power to do so. The licences derived benefit from them but refused to pay anything to the government as fee for such licences.
Held: The principles of section 65 of the Contract Act could be invoked by the Provincial Government and the Court could order the appellants to hand over to the Provincial Government the benefit which they have derived from the sale of articles which they could not have sold without a licence.
Illegal contract---Parties part delicto---When can money be recovered.---If the contract is not yet performed or is merely an executory contract, then one of the parties may resile from his agreement subsequently, and may in such circumstances, recover money paid in consideration thereof upon the repudiation of the contract as upon a failure of consideration. But if the illegal purpose or any material part of it had been performed, then the money paid cannot be recovered for the parties in such cases must be held to be equally at fault, and the rule is that, in cases where the parties are in part delicto, the position of the defendant is always better.
Lease invalid---Benefit Derived from lease must be restored to the lessor.---The land was leased by the Municipal Committee by a written lease deed but the deed was held invalid as it was not scaled. In the meantime the lessee had taken possession of the land and had derived benefit from it. The question was whether the Municipal Committee was entitled to any restoration of benefit received by the lessee (quantum meruit) by virtue of sections 65 and 70 of Contract Act, 1872, even if the Committee had not raised any such plea; in a suit against the lessee, for damages for breach of the agreement of lease.
Held: that the question of benefit should be gone into and a decree passed in favour of the Committee in accordance with the result of the inquiry.
Quantum meruit, plea for determination---Made for the first time to Supreme Court---No equity in favour of the appellant---Request refused.---The appellant for the first time hi the Supreme Court urged, that the Court might order an enquiry so as to determine what benefit had been derived by the respondents, from the contract with a view to compelling them to refund it to the Committee, on the principle of quantum meruit embodied in section 65 of the Contract Act.
Held; This point involves an investigation into the facts and therefore ought to have been raised in the High Court. No attempt seems to have been made to do so in that Court.
The appellant had realised more than the money it would have normally realized in such a transaction.
Further held; that in the circumstances, no equities exist, compelling us to order an enquiry for the benefit of the appellant Committee on the question of quantum meruit.
Compensation for advantage---What is---How calculated.---Compensation for an advantage may appear to be a contradiction in terms, since compensation cannotes a measure of loss or damage and not the value of the advantage. It should be noted that in section 56 the expression used is compensation for any loss and that under section 64 the party rescinding the contract is to restore any benefit. Under section 65 the alternatives are to restore any advantage or to make compensation for it to the person from whom he received it. This must mean valuing the person or quantifying in money the advantage retained, if retained it be."
Compensation---How calculated---Things to be kept in view.---War was declared between Germany and India and therefore, a Contract for purchase of machinery by an Indian firm from Germany became void after its part-performance. The Court had to calculate the value of the advantage obtained by the Indian firm on account of the machinery they had received.
Held; The result of section 65 of the Indian Contract Act was that, from the 3rd September, 1939 each of the parties became bound to restore to the other any advantage which the restoring party had received under the contract of sale. In their lordship's view the Custodian could not recover any sum in his action, as pleaded, unless he proved that the value of the "advantage" which the appellants had received under the contract i.e. of the machinery which had been delivered to them was greater than the sum of 83,375 Reichmarks, which had been paid to the German firm, that sum being admittedly an "Advantage" which the Custodian had 'received under contract.
Sind Local Government Ordinance (XII of 1972), S. 42---West Pakistan Municipal Committees (Contract) Rules, 1960, r. 5---Agreement with Municipal Council/Corporation not enforceable due to non-compliance of statutory provisions and technicalities regarding execution of contract---Agreement entered into with unauthorized person or in unauthorized manner discovered to be void or unenforceable---Party to whom any service had been rendered or goods had been delivered under such agreement, held, must return same or compensate party who has rendered service or delivered goods---Fact that agreement was void from its inception would not come in way of party claiming under S. 65 or 70, Contract Act, 1872---Party having acted fraudulently or contrary to public policy could not however claim restitution or compensation under S. 65---(Muhammad Iqbal Abdul Qadir v. Karachi Municipal Corporation Suit No. 171 of 1972 dissented from).
Ss. 65, 72---Suit against bank for refund of money paid by plaintiff against delivery of shares scrips which proved to be spurious---Plaintiff in plaint clearly averring that his agent had paid money to bank thinking that they were getting genuine shares and not spurious---Plaintiff also pleading that defendant-bank was liable to make good loss suffered by plaintiff---Contended for defendant that suit as framed did not warrant granting of any relief u/s. 65 or 72---Contention repelled---Held, it cannot, in circumstances, be urged that court cannot grant relief even if a case is made out.
S. 65 & 68 read with Land Reforms Regulation, 1972 (M.L.R. 115), para, 7 (b)---Apprehension of alienees that declaration of sole transaction as void would adversely affect claim of transferees in respect of financial support provided by them to declarant to recompense which declarant transferred lands in question to them---Held: Any decision in matter under M.L.R. 115 confined to purpose of such Regulation only and does not affect any right or liabilities arising out of any contractual obligations, including those of nature envisaged under S. 65 or 68 of Contract Act which might have been assumed by declaration vis-a-vis alienees.
66. Mode of communicating or revoking rescission of voidable contract.---The rescission of a voidable contract may be communicated or revoked in the same manner, and subject to the same rules, as apply to the communication or revocation of a proposal.
67. Effect of neglect of promisee to afford promisor reasonable facilities for performance.---If any promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise, the promisor is excused by such neglect or refusal as to any non-performance caused thereby.
A contracts with B to repair B's house.
B neglects or refuses to point out to A the places in which his house requires repair.
A is excused for the non-performance of the contract if it is caused by such neglect or refusal.
Refusal or neglect of promisee.---The illustration is apparently founded as, decided by the Court of Exchequer in 1870. There the question was, in effect, whether a covenant by the lessor of a building with the lessee to repair the main walls; main timbers, and roofs was to be taken as absolute, or as implying that the lessor was entitled to have notice from the lessee of any want of repair. The majority of the Court held that it must be read as a covenant to repair on notice, as the lessor had no sufficient and reasonable means of ascertaining for himself what repairs were necessary. Perhaps a case more exactly in point is that of an apprentice, whom a master workman has undertaken to teach his trade, refusing to let the master teach him. "It is evident that the master cannot be liable for not teaching the apprentice if the apprentice will not be taught". Conversely, if a master undertakes to teach several traders, and gives up one of them, the apprentice need not stay with him. "If the master is not ready to teach in the very trade which he has stipulated to teach, the apprentice is not bound to serve."
Sale of land---Time essence of contract---Income tax certificate not procured---Failure fatal to seller.---Where in a case of sale of land the time was the essence of the contract but the seller did not procure Income tax and other certificates within the stipulated time.
Held: The seller was bound to obtain all permissions and certificates within three months of the agreement. As he failed to obtain them within the stipulated time, he committed breach of the contract. In such circumstances the plaintiff was justified in cancelling the contract.
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