Section 64 of the Indian Contract Act, 1872: Contemporary Judicial Perspectives and its Interface with Earnest-Money Forfeiture

Section 64 of the Indian Contract Act, 1872: Contemporary Judicial Perspectives and its Interface with Earnest-Money Forfeiture

1. Introduction

Section 64 of the Indian Contract Act, 1872 (“ICA”) embodies the principle that restitution must follow rescission where the contract is voidable at the option of one party. It ordains that the party rescinding “shall, if he has received any benefit thereunder, restore such benefit.” Although deceptively concise, the provision frequently confronts complicated factual matrices—particularly in disputes involving forfeiture of deposits or earnest money, conditional transfers, and unilateral cancellation of bargains. This article interrogates the doctrinal contours of §64 through a critical examination of leading Indian authorities, with particular attention to the Supreme Court’s ruling in Shree Hanuman Cotton Mills v. Tata Air Craft Ltd.[1], the Privy Council decision in Murlidhar Chattarjee v. International Film Co.[2], and subsequent High Court jurisprudence. The inquiry also maps the interface between §64 and allied provisions—§§39, 63, 65, 74—thereby situating the provision within the broader remedial architecture of Indian contract law.

2. Statutory Framework

Section 64 must be read in conjunction with:

  • Section 2(i): definition of voidable contract;
  • Section 39: anticipatory breach, furnishing the promissory basis for rescission;
  • Section 63: promisee’s unilateral remission or waiver;
  • Section 65: restitution on void (as opposed to voidable) agreements;
  • Section 74: reasonable compensation where a sum is named for breach.

The statutory juxtaposition elucidates that §64 presupposes initial validity of the bargain, subsequently rendered unenforceable at the instance of the aggrieved party; §65, by contrast, addresses agreements that are or become void ipso jure. As the Privy Council cautioned, the two provisions are mutually exclusive in their operation.[2]

3. Doctrinal Foundations

Indian courts have consistently underscored that the ICA is exhaustive where it speaks, but not a complete code of the entire law of contract.[3] Consequently, equitable doctrines—particularly restitution and unjust enrichment—inform the interpretation of §64, provided they do not collide with the statutory text. The provision thus functions as a statutory grafting of the equitable maxim that “he who seeks equity must do equity,” compelling the rescinding party to disgorge benefits simultaneously with the termination of contractual obligations.

4. The Mechanics of Rescission under Section 64

4.1 Triggering Events

Rescission may be predicated on misrepresentation, fraud, coercion, undue influence, or anticipatory breach (via §39). The rescinding party must manifest an unequivocal election. A mere plea of breach without election does not engage §64.[4]

4.2 Requirement of Benefit Received

Only “benefit received” is restitutable, qualified by the phrase “so far as may be.” Courts have treated this as authorising deductions for: (a) damages legitimately suffered by the rescinding party; and (b) expenses incurred in performance.[2] Quantification is therefore a question of fact necessitating evidence, often relegated to trial.[5]

5. Earnest Money Forfeiture and Section 64

Forfeiture of earnest money often raises the question whether §64 obliges the seller to return the deposit upon the contract’s rescission. The answer turns on the juridical basis of the rescission:

  1. If rescission is exercised by the purchaser (defaulting party), §64 compels the purchaser—not the seller—to restore benefits. The seller is not a rescinding party and may invoke contractual forfeiture clauses subject to §74.[6]
  2. If rescission is exercised by the seller owing to the purchaser’s anticipatory breach (§39), §64 obliges the seller to return benefits, again subject to equitable set-off.[7]

The Supreme Court’s unanimous decision in Shree Hanuman Cotton Mills cemented this dichotomy by holding that §64 was inapplicable where the defaulting purchaser sought to recover a deposit that the contract expressly characterised as earnest money.[1] Because the purchasers—having breached—were not “persons at whose option the contract was voidable,” they could not invoke §64. The forfeiture was instead adjudged under §74, and the Court found no occasion to relieve against it.

6. Analysis of Leading Authorities

6.1 Murlidhar Chattarjee v. International Film Co. (Privy Council)

Here, the seller rightfully rescinded after the purchaser’s breach. Lord Rankin treated the rescission as falling within §64, yet allowed the seller to retain reasonable expenses before making restitution. The case is frequently cited to show that restoration is not necessarily total but only “so far as may be.”[2]

6.2 Shree Hanuman Cotton Mills v. Tata Air Craft Ltd.

The purchasers admitted breach and sought refund of ₹2,50,000/-. The Supreme Court distinguished §64, held the deposit as earnest money, and upheld forfeiture, emphasising contractual autonomy and the absence of a plea that forfeiture was unconscionable under §74.[1] The decision thereby signals that §64 is not a panacea against forfeiture clauses; the locus of rescission and the contractual designation of the sum are decisive.

6.3 Natesa Aiyar v. Appavu Padayachi

A Full Bench of the Madras High Court split on whether forfeiture of a deposit upon rescission is governed by §64 or §74. Sankaran Nair, J. preferred the wider reach of §64, whereas Wallis, J. viewed earnest money as an independent bargain beyond statutory restitution.[8] Post-Hanuman Cotton Mills, the latter view enjoys stronger acceptance.

6.4 Gurdial Singh v. Pearey Lal Malhan

The Delhi High Court applied §64 to mandate refund of an advance after the seller cancelled the contract by telegram, treating the buyer as the innocent party.[9] The decision illustrates that once the promisor repudiates, he becomes the rescinding party and suffers the restitutionary burden.

6.5 Minors and Incapacity: Kanhai Lal v. Babu Ram

The Allahabad High Court declined to apply §§64–65 where a contract was void ab initio due to minority, reiterating the conceptual gulf between void and voidable agreements.[10]

6.6 Conditional Sales: Kaliaperumal v. Rajagopal

Although centred on property law, the Supreme Court’s insistence on parties’ intention in a conditional sale deed underscores that rescission—and therefore §64—might not arise if the parties’ rights are suspended ab initio pending payment. Instead, non-fulfilment of condition precedent simply prevents transfer, obviating the need for restitution.[11]

6.7 Public-Law Context: Union of India v. K.C. Sharma & Co.

In land-acquisition compensation, the Supreme Court emphasised that restitutionary claims grounded on allegations of fraud must be substantiated; failure to do so precludes recourse either to §64 or equitable relief, thereby safeguarding finality.[12]

7. Section 64 vis-à-vis Section 65

High Courts have grappled with borderline scenarios where contracts are discovered to be illegal or ultra vires statutory norms. Decisions such as Municipal Board v. Bachchu[13] endorse a liberal application of §65 to compel restitution even when the agreement is statutorily void. Conversely, §64 remains inapplicable because the agreement was never voidable—it was void from inception. The choice between §§64 and 65 is thus not one of discretion but taxonomy of invalidity.

8. Practical Implications for Drafting and Litigation

  • Contractual Clarity: Parties should state expressly whether deposits are earnest money liable to forfeiture or merely part-payments refundable on rescission.
  • Pleading Strategy: The party seeking refund must establish its status as the rescinding party; otherwise §64 relief is unattainable.
  • Evidence of Loss: Where forfeiture is attacked under §74, proof (or absence) of actual loss will be pivotal, as illustrated by Kamil & Bros. v. Central Dairy Farm[14].
  • Special Contracts: Statutory or policy-based contracts (e.g., insurance) may oust §64 by virtue of special terms, as held in LIC v. Thandaram Dhurua[15].

9. Conclusion

Section 64 of the ICA serves as a critical corrective mechanism in India’s law of obligations, ensuring restitutionary justice when a valid contract is unilaterally avoided. Yet its application is circumscribed by two variables: (a) the identity of the rescinding party; and (b) the contractual allocation of deposits or benefits. The Supreme Court’s decision in Shree Hanuman Cotton Mills reaffirms that defaulting parties cannot cloak themselves with §64 to escape earnest-money forfeiture. Conversely, where rescission emanates from the promisor’s repudiation, courts have shown readiness—consistent with §64—to order restoration, subject to equitable deductions. The jurisprudence therefore charts a balanced path, vindicating both contractual autonomy and the restitutionary ethos embedded in the statute.

References

  1. Shree Hanuman Cotton Mills and Others v. Tata Air Craft Ltd., (1969) 3 SCC 522 (SC).
  2. Murlidhar Chattarjee v. International Film Co. Ltd., LR 70 IA 35 = AIR 1943 PC 34.
  3. Naresh Chandra Guha v. Ram Chandra Samanta, Calcutta HC, 1951.
  4. Nandan Pictures Ltd. v. Art Pictures Ltd., 1956 SCC OnLine Cal 36.
  5. Shree Pushkar Chemicals & Fertilisers Ltd. v. Huntsman (International) India Pvt. Ltd., 2017 SCC OnLine Bom 9344.
  6. Natesa Aiyar & Anr. v. Appavu Padayachi & Anr., (1913) SCC OnLine Mad —.
  7. Subba Bau v. Devu Shetti, (1895) 18 Mad 126.
  8. Ballabhdas v. Paikaji, (1916) SCC OnLine MP —.
  9. Gurdial Singh v. Pearey Lal Malhan, 1981 SCC OnLine Del 141.
  10. Kanhai Lal v. Babu Ram, 1910 SCC OnLine All 150.
  11. Kaliaperumal v. Rajagopal, (2009) 4 SCC 193.
  12. Union of India v. K.C. Sharma & Co., (2020) 15 SCC 209.
  13. Municipal Board v. Bachchu, Allahabad HC, 1951.
  14. Kamil & Bros. v. Central Dairy Farm, 2007 SCC OnLine All 1358.
  15. Branch Manager, LIC v. Thandaram Dhurua, State CDRC, 2023.