A Critique on Section 65 of the Indian Contract Act, 1872 with special reference to Discharge of a Contract by Frustration

The following critique is based on the implications of Section 65 of the Indian Contract Act, 1872 and its inadequacies with respect to eradicating ‘unjust enrichment’ in frustrated contracts.
This paper seeks to analyze the effects of frustration with special reference to the restitution of advantages or benefits received by a party, not entitled to such advantage or benefit. On account of an agreement being deemed void, subsequent to certain obligations being fulfilled by either party, there would continue to subsist, rights to make good the loss caused. Section 65 of the Indian Contract Act, 1872, states,
“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.”

The above section is based on the principle elucidated in the English case, Fibrosa Spolka v. Fairbairn Lawson. This case may be explained as follows:
The respondent contracted with the appellant, a Polish company, to manufacture certain machinery and deliver it to Gdynia. Part of the price was to be paid in advance, and the appellant accordingly paid £1000. The contract was frustrated by the occupation of Gdynia by hostile German forces in September 1939. The appellant thereupon requested the return of the £1000. This amount was not returned only because considerable work had already been put into construction of the machinery.

The amount recovered in the above case is to be construed, not as an action on the contract but an action in restitution to recover the money paid on a consideration which had failed. Further, the term consideration as used in the above sentence is to be construed, not in the sense of consideration as may be necessary to the formation of the contract, but rather in the sense of the performance of an obligation already incurred. Therefore the essence of Section 65 may be captured in that a party who has paid money but has received no part of the bargained –for performance, is entitled to recover it, for the consideration has completely failed.

Instances exemplifying the above mentioned concept are as follows:
(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 bags of rice before the first of May. A delivers 130 bags only before that day, and none after. B retains the 130 bags after the first of May. He is bound to pay A for them.

(c) 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.

Inadequacies of Section 65
Section 65 and the subsequent explanation are considered settled law in India. However, there exist certain fallacies in such law in comparison with English law principles. On a very preliminary evaluation of Section 65 as against established English law Principles, a subtle difference may be observed with regard to the apportionment of losses on frustration in that such a concept is not provided for by the Indian Contract Act, 1872.

The concept of apportionment of losses considers any act performed by a party which may not be realized in the form of money but has been done in furtherance of one’s obligations under the contract, also to be compensated for.

If one of the above examples was used to elucidate this concept it would read as follows:
‘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. However, due consideration must be given to the efforts made by ‘A’, in preparation for the concert while repaying the advance amount of 1000rupees.

Therefore, the compensation of only such material that may be realized in terms of money as part of an obligation under a frustrated contract without giving due consideration to any act performed by the other party in furtherance of the same contract may seem to be rather unfair to the latter.

However, exposing the term ‘consideration’ to such a broad interpretation may also lead to certain complications. These complications entail converting acts or efforts made by parties into monetary value.

The concept of apportionment of losses must be reasonably brought under the purview of Section 65 of the Indian Contract Act, 1872 such that ‘unjust enrichment’ is completely mitigated.
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# [1943] A. C. 32, as cited in Anson’s Law Of Contracts, 28th Edition, 557
# Indian Contract Act, 1872, S. 65.
# Anson’s Law Of Contracts, 28th Edition, 557
# B.P. Exploration Co. Ltd. v. Hunt [1979] 1 W.L.R. 783

The  author can be reached at: christopher.vijayrao@legalserviceindia.com