Tuesday, 31 January 2012

QUASI-CONTRACTS

 Simply speaking, a quasi-contract is a contract created by law for reasons of justice without any expression of assent. The quasi-contractual obligations are based on the principle that law as well as justice should try to prevent unjust enrichment means enrichment of one person at the cost of another or to prevent a man from retaining the money of, or some benefits derived from another which it is against conscience that he should keep.
In the Indian context, sections 68 to 72 of the Indian Contract Act 1872 deal with "Certain Relations Resembling Those Created By Contract". It incorporated those obligations which are known as "quasi contracts" under English law. It covers cases where the obligation to pay arises neither on the basis of a contract nor a tort, but a person has obtained an unjust benefit at the cost of another.
This paper analyses the concept of quasi contract and its relevancy and application in the Indian context
PARTS OF THE STUDY: For the purpose of this study, this paper has been divided in the following parts:
a.       Introduction
b.      Rationale: the Theory of Unjust Enrichment
c.       Law in India
d.      Nature of quasi contracts
e.       Conclusion

INTRODUCTION:
There are many situations in which law as well as justice require that a certain person be required to conform to an obligation, although he has neither broken any contract nor committed any tort. E.g. a person in whose home certain goods have been left by mistake is bound to restore them. Such obligations are generally described, for want of better or more appropriate name, as quasi-contractual obligations.
Quasi Contracts - ‘Quasi’ means ‘almost’ or ‘apparently but not really’ or ‘as if it were’. This term is used when one subject resembles another in certain characteristics but there are intrinsic differences between the two. ‘Quasi contract’ is not a ‘contract’. It is an obligation which law created/creates in absence of any agreement. It is based on equity.[1]

There are certain situations wherein certain persons are required to perform an obligation despite the fact that he hasn’t broken any contract nor committed any tort. For instance, a person is obligated to restore the goods left at his home, by mistake, and keep it in good condition. Such obligations are called quasi-contracts.
RATIONALE: THE THEORY OF UNJUST ENRICHMENT:
The rationale behind “quasi-contract” is based on the theory of Unjust Enrichment. Lord Mansfield is considered to be the founder of this theory.
The best theoretical basis of Quasi-Contract is the principle of 'unjust enrichment' or as Professor Winfield would prefer to call it, 'unjust benefit'.[2] This is derived from the old maxim of Roman Law: 'Nemo debet locuple tavi ex aliena jactura'. Meaning no man should grow rich out of another person's loss.

In Moses v. Macferlan[3], Lord Mansfield explained the principle that law as well as justice should try to prevent “unjust enrichment”, i.e., enrichment at the cost of others.

A liability of this kind is hard to classify. Since it partly resembles liabilities under the law of tort and partly it resembles contract since it owed to only a party and not a person or individual generally. Therefore, it comes within the ambit of an implied contract or even natural justice and equity[4],[5] for the prevention of unjust enrichment.

However, in Sinclair v. Brougham,[6] the theory of “implied-in-fact” was adopted.
Facts (in brief): a building society undertook banking business which was outside its object, and therefore, ultra vires. The society came to be wound up. After paying up all outside creditors, a mixed sum of money was left which represented partly the shareholders money and partly that of the ultra vires depositors, but the money wasn’t sufficient to pay all of them. The depositors tried to get priority by resorting to the quasi-contractual action for recovery of money had and received for the depositors’ benefit, else the shareholders would have been unjustly enriched.
The House of Lords allowed pari passu[7] distribution of the mixed funds among the claimants, but did not allow any remedy under quasi-contract. It was maintained that the common law knows personal actions of only two classes, viz.,
a) those founded on contract; and
b) those founded on tort.
“When it speaks of action arising quasi ex contractu it refers only to a class of action in theory which is imputed to the defendant by a friction of law.” This approach dominated the scene for quite some time and quasi contracts were taken to be fictional contracts.[8] The identification of quasi-contracts with implied contracts restricted the scope of relief which would have been possible without any such hindrance under the principle of natural justice and equity.

The theory of unjust enrichment was again restored in Fibrosa Spolka Akeyjna v. Fairbain Lawson Combe Barbour Ltd.[9] by Lord Wright. While referring the ratio decidendi of the decision in Sinclair v. Brougham, he stated that it was against public policy to allow the recovery of an ultra vires deposit, whether the claim is based on contract or quasi-contract. The observations in this particular case were merely the obiter dicta of the Sinclair Case.

In Fibrosa v. Fairbairn,[10] Lord Wright said: “any civilized system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is, to prevent a man from retaining the money of, or some benefit derived from, another which it is against conscience that he should keep. Such remedies in English Law are generally different from - remedies in contract or in tort, and are now recognized to fall within a third category of the common law which has been called quasi-contract or restitution.

Denning L. J. (as he then was), is another exponent of the doctrine. In Brewer Street Investments Ltd. v. Barclays Woolen Co. Ltd., he said:
"The proper way to formulate the claim is on a request implied in law or, as I would prefer to 'put it, on a claim for restitution."

Underlying the law of restitution is the conception that no one should unjustly enrich himself at the expense of his neighbour. "The conception of restitution is the prevention of unjust enrichment". It may be noted, however, that as to the precise position of this doctrine in England there does not seem to be so. Far from a general agreement, Lord Porter, for example, observed: "The exact status of the law of unjust enrichment is not yet assured."

Strictly speaking, a quasi-contract is not a contract at all. A contract is intentionally entered into. A quasi -contract, on the other hand , is created by law. In an American case Miller v. Schloss,[11] it was observed:
"In truth it is not a contract at all. It is an obligation which the law creates in the absence of any agreement, when the acts of the parties or others have placed in the possession of one person, money or its equivalent, under such circumstances that in equity and good conscience he ought not retain it, and which ex aequo et bono (in justice and fairness) belongs to another".

IN INDIA:
 In Indian context, the quasi-contracts are put under chapter V of the Indian Contract Act titled “Certain Relations Resembling Those Created by Contracts”. The framers avoided the direct term “quasi-contract” in order to avoid the theoretical confusion regarding the same. In view of the clear statutory authorisation, the courts in India are not hindered in allowing relief under the different sections of the Act by the theoretical considerations concerning quasi-contracts.

In Mahabir Kishore v. State Of Madhya Pradesh.[12], the requirements of the principle of unjust enrichment were laid down by the Hon’ble Supreme Court as follows:
·        the defendant has been 'enriched' by the receipt of a benefit.
·        this enrichment is at the expense of the plaintiff
·         and the retention of unjust of the enrichment is unjust.

Sections 68 to 72 provide for five kinds of quasi-contractual obligations:
1. Supply of necessities [s.68]
2. Payment by interested persons [s.69]
3. Liability to pay for non-gratuitous acts [s.70]
4. Finder of goods [s.71]
5. Mistake of coercion [s.72]

Supply of necessities [SECTION 68][13]
When necessities are supplied to a person who is incompetent of contract or to someone who is legally bound to support, the supplier is entitled to recover the price from the property of the incompetent person. “Incompetency to contract”, here, would mean parties that are not competent to contract as per sec. 11[14] of the Act, i.e., in following circumstances:
·        Minors
·        Persons of unsound mind
·        Persons disqualified by law to which they are subject.[15]

Further, in the above two cases, it is only the property of the person which is liable to meet the liability arising out of such contracts. He is not personally liable.

The term ‘necessaries’ is not defined in the Indian Contract Act 1872. The English Sale of Goods Act 1893 defines in Section 2 as: goods suitable to the condition in life of such infant or other person, and to his actual requirement at the time of sale and delivery.

“What is necessary” is a relative fact, to be determined with reference to the fortune and circumstances of the particular minor; articles, therefore, that to one person might be mere conveniences or matters of taste, may in the case of another be considered as necessaries, where the usage of society renders them proper for a person in the rank in which he [person] moves.[16]

To make a contract valid in these conditions, two conditions must be satisfied:
·        The contract must be for goods reasonably necessary for his support in his station in life, and
·        He must not have already a sufficient supply of these necessaries.
The supplier has to prove not only that the goods supplied were suitable to the condition in life of the person, but that he was not sufficiently supplied with the goods of that class.

The author shall limit the discussion here on this because necessaries can itself be the subject matter of another paper.
Payments by interested persons [S. 69][17]
A person who is interested in the payment of money which another is bound by law to pay and who therefore pays it is entitled to be reimbursed by the other. This section s subject to certain conditions:
·        The plaintiff must be interested in making the payment. The interest which the plaintiff seeks to protect must be legally recognizable;
·         It is necessary that the plaintiff himself should not be bound to pay. He should be interested in making the payment in order to protect his own interest;
·         The defendant should have been “bound by law” to pay the money;
·         The plaintiff should have made the payment to another person and not to himself.

This section has been held to apply only to cases where the plaintiff is not only interested in the payment but is also actuated by the motive of protecting his own interest. We think that this idea is sufficiently expressed by the word 'therefore' and it is not necessary to alter the language of this section on that account.

There is a conflict of authority upon the question whether this section covers a case of contribution. One view[18] is that it deals with reimbursement, which is different from contribution, and the person who is interested in the payment which another is bound by law to pay must be a person who is himself not bound to pay the whole or any portion of the money. In other words, 'being interested in the payment of money' connotes an idea different from 'being bound by law to pay'. The other view[19] is that a person may be interested in making the payment notwithstanding that he is also liable to pay.

 In our opinion the former is the better view, and alterations should be made in the section to make this clear.[20] The principle of contribution is not founded on a contract but is the result of general equity on the ground of equality of burden and obligations. According to Winfield this principle is a head of quasi-contractual liability. There are express provisions for contribution in the Act.

The words "a person who is interested" do not mean that the 
person who makes the payment must prove that he had such an interest as would stand the test of a judicial trial. The decisions point to the conclusion that all that is necessary for a person making a payment to recover it is that he should really believe and honestly believe that he must make the payment in his own interest.[21]

Liability for non-gratuitous act [S.70][22]
S.70 creates liability to pay for the benefit of an act which the doer did not intend to do gratuitously. Where a person does something for another person not intending to do so gratuitously and such person is entitled to enjoy benefits from it. And then such a person who has used the thing has to compensate the other or restore or deliver the thing.

For example, A, a tradesman, leaves goods at B’s house by mistake. B, treats the goods as his own. He is bound to pay A for them.
Conditions of liability under this section are as follows:
·        One of the purposes of the section is to assure payment to a person who has done something for another voluntarily and yet with the thought of being paid.
·        The person for whom the act is being done is not bound to pay unless he had the choice to reject the services
·        It is necessary that the services should have been rendered without any request.
·        Services should have been rendered lawfully.
·        The person rendering services should not have intended to act gratuitously

Finder of goods [S.71][23]
Section 71 lays down the responsibility of a finder of goods. The duties and liability of a finder is treated at par with the bailee.

He is bound to take as much care of the goods as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value. He should be reimbursed by the owner for all expenses incurred in taking reasonable care of the goods as well for finding the true owner.

Mistake or coercion [S. 72]
Section 72 states that payments or delivery made under mistake or coercion must be made good or be returned. In Sri Shiba Prasad Singh v. Maharaja Srish Chandra Nandi,[24] it was made clear that money paid under mistake is recoverable whether the mistake is of fact or of law. If a mistake either of law or of fact is established, the assessee is entitled to recover the money and the party receiving it is bound to return it irrespective of any other consideration.

The scope of the word “mistake” has been clarified by the Supreme Court in Tilokchand Motichand v.Commissioner of Sales Tax.[25] A cheque was given by the State to a firm to refund the tax of about Rs. 26,000/- which was collected from persons not liable to pay tax. When refund was not done, the State asked for refund of the money, but the firm could pay it back only in on order of attachment. In the meantime, the Act under which the recovery was made from the firm was declared by the Supreme Court to be ultra vires. The firm sought to recover the money as paid under mistake of law or coercion. The recovery was not allowed on grounds of limitation.

However in New India Industries v. UOI[26], it was held that recovery proceedings generally are instituted by way of writ petition. There is no period of limitation in writs. The only requirement is that there should not be unreasonable delay amounting to laches.

In Chrisine Hoaden India Ltd. v. N.D. Godag, it was held that the period of limitation would not begin to run until the applicant has discovered the mistake or could have discovered it with reasonable diligence. The claim was laid within one month of the mistake of law becoming known. It was held that the claim could not b e defeated on the ground of limitation. The term “coercion” is used in this section in its general sense and not as defined in Sec.15.
Illustrations:
·        A railway company refuses to deliver up certain goods to the consignee, except upon the payment of an illegal charge for carriage. The consignee pays the sum charged in order to obtain the goods. He is entitled to recovers so much of the charge as is illegally excessive.
Sec. 72 does not draw any distinction between a mistake of fact and mistake of law {D. cawasji & Co. v. State, AIR. 1969 Mys.23}
·        K paid sales tax on his forward transactions of bullion. Subsequently this tax was declared ultra vires. Held, K could recover the amount of sales tax and that sec. 72 is wide enough to cover not only mistake of fact but also mistake of law.{Sales Tax Officer, Benares v. Kanhaiya Lal Mukand Lal Saraf, 1959 S.C.J. 53}.
·         An insurance company paid the amount on a policy under the mistake that the goods had been destroyed by a peril insured against. The goods infact had been sold. Held, the money could be recovered by the insurance company {Norwich etc. Society Ltd. v. Price W.H. Ltd. 1934 A.C. 455}
·        An insurance co. paid the amount on a policy which had lapsed by a reason of non- payment of premiums by the assured. The company knew this fact but it was overlooked at the time of payment. Held, the company could recover the amount "however careless the party (company paying money) may have been omitting to use the diligence to inquire into the fact"{Kelly v. Solari 1841 9 M. &W. 54}

Nature of quasi-contractual obligations – under English and Indian laws
The English Law identified quasi-contractual obligations; the framers of the Indian Contract Act modified it and placed it in the Act as- “Certain Relations Resembling Those Created By Contracts”. Therefore the elements that are present in the English Quasi-contract are also found in that of the Indian Contract Act.

1] Payments to the defendant’s use
Two principles govern this liability:
·        payment should have been made under pressure and not voluntarily;
·        the defendant should have been bound to pay and has been relieved of his liability by the payment made by the plaintiff.
The kind of pressure that the law recognizes for the purposes of this remedy is clearly understood by the case of Exall v. Partridge, where, the plaintiff had left his carriage upon the premises which the defendant was leaving as a tenant. The landlord lawfully seized all the goods on the premises including the carriage for non-payment of rent and would have sold them in execution of his claim. The plaintiff paid the outstanding rent to get back his carriage and then sued the defendant for the amount. He was held entitled to it.

2] Voluntary payments
Payments made under the mistake of fact can be recovered provided that the party paying would have been liable to pay if the mistake of fact were true. In this respect one must look at the case of Kelly v. Solary, where the money was paid under a life insurance policy which to the knowledge of the company had lapsed. But, the fact of lapse having been forgotten at the moment, the company was held entitled to recover back the money. One of the essential conditions of this action is that the mistake must be of fact and must make the person liable to pay the money.

3] Quantum Meriut
There are situations wherein a party does the performance of a contract and further performance is made useless by the other party. In such cases the former can recover reasonable compensation from latter. An authority over the principle of “quantum meruit” is the case of Plinche v. Colburn.
FACT: the plaintiff was the author of several dramatic entertainments. He was engaged by the defendants, who were the publishers of a work called “The Juvenile Library” that used to illustrate the history of armour and costumes from the earlier times. For this he was to be paid 100 guineas. The plaintiff made several drawings and completed a considerable part of the manuscript when the defendants discontinued his services. The plaintiff claimed an amount of 50 guineas for his work. Due to the principle of quantum meruit the plaintiff was held to be entitled to the claim.

ConclusionThe principle of quasi-contract is often ignored but still it holds a very important place, since the principle is grounded on the principles of justice and equity, despite the fact that quasi contract are moulded in the Indian Contract Act under a new name. However, the basic nature and essence of the principle remains same without any drastic change. Thus, quasi-contracts form an integral part of the contracts act and it definitely comes to an aid of the victim when a person is enriched unjustly over the former.
Further, in light of the preceding pages, the author most respectfully states that although India derived quasi contracts from the English Law, the position at present in India is not same as tat in England. There is marked difference. Indian position is more or less settled, given the fact that all grounds on which a quasi contract has been stated under the Indian Contac Act 1872.


BIBLIOGRAPHY:
Primary Sources:
1.      Indian Contract Act 1872.
2.      Thirteenth Law Commission Report
Secondary sources
2.      Singh, Avtar, Law of Contract, III Edn, Eastern Book Company 1999
7.      http://www.indlaw.com/



[1] Sourced from http://www.dateyvs.com/gener03.htm
[2] Thirteenth Indian Law Commission Report.
[3] (1760) 2 Burr. 1005.
FACTS: Joseph issued four promissory notes to Moses and the latter indorsed them to Macferlan, excluding by a written agreement, his personal liability on the endorsement. Even so, Macferlan sued Moses on the endorsement and he was held liable despite the agreement. Moses was thus compelled to discharge a liability which he had excluded and, therefore, sued to recover back his money from Macferlan. Moses was allowed t do so.
[4] It must be mentioned here that the term equity was used by Lord Mansfield, not to denote the jurisdiction of the Chancery Court but as a synonym for jus naturale.
[5] Equity- A Brief Conceptual Overview: Equity which means equalization or leveling down any arbitrary preferences or denial of justice is derived from a Roman term 'aequitas'. According to Sir Henry Mane, equity is "fresh body of rules by the side of the original founded on distinct principles and claiming to supercede the law by virtue of a superior sanctity inherent in those principles."

Equity is aimed at preventing a defendant from acting unconscionably (literally, contrary to conscience) in circumstances otherwise where the common law would have allowed to do so. In layman's language it can be said to interfering to protect some underlying right of the victim either because of a contract with the shyster, or because the shyster has control over some property which is rightfully theirs or because one may feel that the actions of the shyster may affect the victim in the future in some way or the other.

Though equity was faced with conflict with the laws in England in the earlier stages, it always had always played a major role in the Law of Contracts. Equity in contracts can be seen in the fields of restitution, unjust enrichment, mistake and estoppel. (Source- Dutta, Shaswata, Principles of Equity and Contracts (April 7, 2006). Available at SSRN: http://ssrn.com/)
[6] 1914 AC 398: [1915-15] All ER Rep 622
[7] Pari passu is a Latin phrase that literally means “with equal step”. It is sometimes translated as "part and parcel," "hand-in-hand," "with equal force," or "moving together," and by extension, "fairly," "without partiality."
Black's Law Dictionary (8th ed., 2004) defines pari passu as "proportionally; at an equal pace; without preference."
[8] Historical Insight: Beginning with the decision of the House of Lords in Sinclair v. Brougham, it became fashionable to discard Lord Mansfield’s formulation and to rely upon an implied-in-fact contract. This approach dominated decisions for a long time and the decision as taken to have settled that the juridical basis of quasi-contract was the implied, notional or fictional contract. Where the circumstances of a contract do not lead to an inference of this kind or where such an inference would be against the law, no liability would arise.
[9] [1942] 2 All ER 122 HL: 1943 AC 32
Brief Facts: A sum of money was paid in advance under a contract for the supply of machinery, and the performance was obstructed by the outbreak of war. Their Lordships allowed the advance to be recovered back as having been paid for a consideration which had wholly failed.
[10] Id.
[11] 918N.Y.400,N.E.337
[12] AIR 1990 S.C.313
[13] Section 68 reads  as follows:
68.Claim for necessaries supplied to person incapable of contracting, or on his account. If a person, incapable of entering into a contract, or any one whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person.
 Illustrations (a) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from B's property. (b) A supplies the wife and children of B, a lunatic, with necessaries suitable to their condition in life. A is entitled to be reimbursed from B's property.
[14] Sections 10 On 11 of the Contract Act reads as follows:
10. What agreements are contracts.-All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall affect any law in force in India and not hereby expressly repealed by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.
11. Who are competent to contract.-Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.
[15] Dharmashwar v. Union of India, AIR 1955 Ass 86.
Competency is the rule in matters relating to contracts. In Dharmashwar v. Union of India, AIR 1955 Ass 86, the High Court had held that s. 11 aims at defining inherent incompentency to contract. It does not cover cases of agents and representatives.
[16] Sigh, Avtar, Law of Contract,III edn, Eastern Book Company 1999.
[17] Section 69 reads as follows:
Section 69 Reimbursement of person paying money due by another, in payment of which he is interested.-A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other.
 Illustration to the Section:
 B holds land in Bengal, on a lease granted by A, the zamindar. The revenue payable by A to the Government being in arrear, his land is advertised for sale by the Government. Under the revenue law, the consequence of such sale will be the annulment of B's lease. B, to prevent the sale and the consequent annulment of his own lease, pays to the Government the sum due from A. A is bound to make good to B the amount so paid.
[18] See Jagapathi Raju v. Sadrusanamma Arad, 39 Mad. 795 ; and Biraj Krishna v. Puma Chandra, A. I. R. 1939 Cal. 645.
[19] Ram Lai v. Khirlda Mohini, 18 C.W.N. 113; Bepat Singh v. Shamlal, A. I. R. 1931 Pat. 234 ; Vishnu Ram v. Seth Pannalal, A. I. R. Ï937 Nag. 152
[20] See Law Commission, 13th Report.
[21] Quoted from Musammat Munni Bibi Alias Ambika v. Tirloki Nath And Ors. (1931). Available at http://www.indiankanoon.org/doc/902609/.
[22] Section 70 reads as follows:
Section 70 Obligation of person enjoying benefit of non-gratuitous act.- Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered.
 Illustrations (a) A, a tradesman, leaves goods at B's house by mistake. B treats the goods as his own. He is bound to pay A for them. (b) A saves B's property from fire. A is not entitled to compensation from B, if the circumstances show that he intended to act gratuitously.
[23] Section 71 reads as follows:
Section 71 Responsibility of finder of goods.-A person who finds goods belonging to another, and takes them into his custody, is subject to the same responsibility as a bailee.
[24] (1949) 76 IA 44 PC
[25] (1969) 1 SCC 110
[26] Air 1990 Bom 239.

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