Short notes on Restitution of Contracts

Restitution literally means restoration. It is based on the noble principle that a person should not be allowed to unjustly enrich himself at the expense of another. Therefore, when a contract becomes void, the party who has received any benefit under it must restore it to the other party or must compensate the other party by the value of the benefit.

According to Anson, “the principle of restitution is that a person who has been unjustly enriched at the expense of another is required to make restitution to that other.”

Illustration :

A agrees to sell to B, after six months, certain immovable property and receives Rs. 1,000 as an advance. Immediately thereafter, transfer of immovable property is prohibited by an Act of the Legislature. The contract becomes void, but A must return the sum of Rs. 1000 to B.

The principle of restitution applies in thet following circumstances:

1. A party rescinding a voidable contract is required by law to restore back to the other party any benefits that he might have received from him. (Section 64). Contracts become voidable at the option of the party whose consent is obtained by fraud, coercion, misrepresentation or undue influence. In certain cases, contracts become voidable subsequently because of the default of any one party in the performance of the contract, or when a party to a contract prevents the other party from performing his party of the contract or when a party to a contract fails to perform his promise in a contract within the time fixed in those contracts where time is the essence of the contract.

For example, a singer contracts with the manager of a theatre to sing at his theatre for two nights in a week, during the next two months, and the manager agrees to pay her a hundred rupees for each night’s performance. On the sixth night, the singer willfully absents herself from the theatre, and the manager, in consequence rescinds the contract. He must pay her for the five nights on which she had sung.

2. When a contract becomes void, all parties who have received benefit under the contract must restore it back to the person from whom it has been received.

3. The principle of restitution also applies where an agreement is void ab- initio but the fact is unknown to both the parties, e.g., mutual mistake regarding existence of the subject-matter.

The doctrine of restitution is not applicable in the following circumstances:

(i) Where an agreement is known to be void e.g., where an agreement is for some impossible act to do or where it is illegal to the knowledge of both the parties from the beginning. For example, A promises B to produce gold by magic. B pays an advance of Rs. 1,000. B can neither recover Rs. 1,000 nor compel A to produce gold by magic as A and B know or ought to know that the act is impossible.

(ii) The principle of restitution does not also apply where the party who has to return the benefit is a person incompetent to enter into a contract, e.g., minor. For example, in the case of Mohiribibi vs. Dharmodass Ghosh, it was seen that the minor was not asked to return Rs. 8,000 obtained by him against the mortgage, although the mortgage was declared void.

However, on equitable grounds, the Court may ask the minor to restore the benefit where he has misrepresented his age. The law has not given any license or liberty to a minor to cheat men.

(iii) The principle of restitution is also not applicable where a party is required to give some earnest money which serves as a security that the depositor will perform his part. Such deposit will not be refunded if the depositor fails to perform his promise.

In case where restitution of the same benefit is not possible, reasonable compensation will have to be paid to make good the loss of the other party.