Quasi Contract | Law of Contracts - CLAT PG PDF Download

 Introduction 

The Indian Contract Act, 1872 does not provide a clear definition of quasi-contracts, instead referring to them as situations that resemble contractual relationships. However, a quasi-contract can be understood as a scenario where there is no formal contract between the parties, yet the law establishes certain rights and obligations that mimic those of a contract. Essentially, it is an obligation imposed by law to ensure fairness and prevent unjust enrichment.

 Understanding Quasi-Contracts 

• A quasi-contract is a legal concept where the law creates rights and obligations between parties even in the absence of a formal agreement.
• It is designed to prevent one party from unfairly benefiting at the expense of another.
• Quasi-contracts are based on the principle of unjust enrichment, ensuring that parties are not unjustly enriched at the cost of others.
• For example, if goods are left in someone's house inadvertently, the law may impose an obligation on that person to return the goods.

What is a Quasi Contract?

• A quasi contract is a legal agreement recognized by the court between two parties who did not have prior obligations to each other. It is established in situations where the law and justice require one party to fulfill an obligation, even in the absence of a formal contract.
• For instance, if someone accidentally leaves goods in another person's home, the homeowner is legally obligated to return them. This principle prevents individuals from unjustly benefiting at the expense of others.
• Quasi contractual obligations arise when the law imposes a contractual obligation not based on mutual consent but to prevent unjust enrichment. It ensures that one party does not gain an unfair advantage at the cost of another.
• In quasi contracts, liability is based on the doctrine of unjust enrichment. Even when the essential elements of a contract are missing, the law may imply a promise and impose obligations on one party while granting rights to the other.
• These implied promises are not legal contracts, but the court recognizes and enforces them as if they were contracts.

 Essentials for Action of Unjust Enrichment 

• For a successful action of unjust enrichment, the following essentials must be proven:
• The defendant has received a "benefit" that has "enriched" them.
• The enrichment has occurred "at the expense of the plaintiff."
• Retaining the enrichment by the defendant is "unjust."

Types of Quasi Contracts

 1. Supply of Necessities (Sec. 68):  This type of quasi contract arises when a person supplies goods or services that are necessary for another person, and the recipient is unable to contract due to factors like age or mental incapacity. The supplier is entitled to be reimbursed for the value of the supplies.

 2. Payment by an Interested Person (Sec. 69):  When a person pays a debt on behalf of another individual, with a legitimate interest in the matter, they can claim reimbursement from the debtor. This ensures that parties are not unjustly enriched at another's expense.

 3. Obligation to Pay for Non-Gratuitous Act (Sec. 70):  In situations where a non-gratuitous act is performed for the benefit of another, the person who benefits is obligated to pay for the act. This principle prevents unjust enrichment and ensures fairness in transactions.

 4. Responsibility of Finder of Goods (Sec. 71):  When a person finds goods belonging to another, they have a responsibility to take care of the goods and make reasonable efforts to return them to the owner. If the finder incurs expenses in safeguarding the goods, they are entitled to reimbursement from the owner.

 5. Mistake or Coercion (Sec. 72):  In cases where a contract is entered into under a mistake or coercion, the parties may be released from their obligations. This ensures that individuals are not bound by agreements made under duress or misunderstanding.

 Claim for Necessaries Supplied to Person Incapable of Contracting (Section 68)

• If a person who is unable to enter into a contract, or someone they are legally obligated to support, receives necessaries suitable to their condition in life from another person, the supplier is entitled to reimbursement from the property of the incapable person.
• For example, if A supplies necessaries to B, a lunatic, suitable to B's condition, A can seek reimbursement from B's property.
• As mentioned in the chapter on "capacity to contract," agreements involving minors or individuals incompetent to contract are void from the beginning.
• No legal action can be taken against such incompetent individuals for the claim of necessaries supplied to them or their dependants.
• Reimbursement can only be claimed from the property of the incompetent person.

 Reimbursement of Person Paying Money Due by Another (Section 69)

• A person who has an interest in the payment of money that another is legally obligated to pay and makes the payment is entitled to reimbursement from the other party.
• For instance, if B holds land on a lease from A, the zamindar, and A's revenue to the Government is in arrears, leading to the advertisement of B's land for sale by the Government, B can pay the amount due from A to prevent the sale and protect his lease. A must reimburse B.

 Essential Requirements of Section 69 

• The payment made should be bona fide for the protection of one's interest.
• The payment should be voluntary.
• The payment must be for a sum that the other party is bound by law to pay.

 Essentials of Section 69 

• One must have an interest in making the payment.
• The person seeking reimbursement must have a genuine interest in making the payment.
• The payment should be made in good faith to protect the payer's interest.
• In India, this provision is broader than English law, where the payer must be legally compelled to pay the debt or discharge the other party's liability.
• In India, having an interest in making the payment is sufficient.

 Conditions for Compensation in Non-Gratuitous Acts 

• To claim compensation for non-gratuitous acts, the following conditions must be met:
• The act must be done or the item delivered lawfully.
• The person performing the act or delivering the item must not intend to do so without charge.
• The recipient must voluntarily accept the act or item and enjoy the benefits of it.

 Example: 

• If a tradesman mistakenly leaves goods at a person's house, and the person treats the goods as their own, they are obligated to pay for them.

 Legal Precedent: 

•  In the case of Indu Mehta v. State of U.P., where Miss Indu Mehta provided legal services under a void appointment, the state was not entitled to reclaim fees already paid because it benefited from her services. 

 No Intention to Do the Act Gratuitously 

• When someone performs an act with the expectation of payment, rather than out of goodwill, they can seek compensation under Section 70. For instance, if a tenant makes improvements to a property and the landlord accepts these changes, it is assumed that the tenant did not intend to act gratuitously, thus allowing the tenant to claim compensation.
• Similarly, if a person makes an advance payment for an agreement that is later found to be void, they can recover the amount not only under Section 65, which specifically addresses such cases, but also under Section 70, as the advance was not intended to be gratuitous.

 Enjoyment of Benefits by the Defendant is Necessary 

• For a claim under Section 70, it is essential to prove that the defendant benefited from the work done or the item delivered by the plaintiff.
• The voluntary acceptance of the benefit is the basis for the claim under Section 70. When a person accepts the benefit of the work done, it suggests that the work was not intended to be done gratuitously.

 Unjust Benefit to the Defendant Necessary 

• Section 70 is based on the principle that one should not gain unjust enrichment at the expense of another. If there is no unjust gain in a transaction, section 70 does not apply.
• In the case of  C.I. Abraham v. KA. Cheriyan  , A purchased property for B, who was abroad, and collected rents on B's behalf. A delayed depositing the rent in B's account and later claimed remuneration from B for these services.
• However, it was determined that A had not proven that the services were not intended to be gratuitous. B did not gain at A's expense; instead, A benefited by using the rent money until it was deposited in B's account. Therefore, A was not entitled to claim under section 70.

 Application of Section 70 Against the Government 

• Section 70 applies to individuals, corporations, and the government to prevent unjust enrichment.
• If services or goods supplied to the government under a purported contract do not materialize due to non-fulfillment of formalities under Article 299 of the Constitution, the government can still be liable to compensate under section 70 if it benefited from the services.
• In the case of  State of West Bengal v B.K. Mondal and Sons  , the respondents constructed various structures for the civil supplies department of the government at the request of some officers. They claimed Rs. 19,325 for these works.
• The appellant (State of West Bengal) tried to avoid liability by claiming the requests were invalid and did not constitute a valid contract under section 175(3) of the Government of India Act, 1935.
• However, since the appellant accepted the benefits of the constructions, it was held liable under section 70 to compensate for the works done.

 Section 70 Cannot Be Invoked Against a Minor 

• A minor's agreement is considered void because minors are not competent to enter into a contract.
• Since a minor's agreement is void from the beginning, they cannot be held liable under sections 64 and 65 of the Contract Act.
• However, if necessaries are provided to a minor, their estate can be held liable under section 68.
• It has been established that no legal action can be taken against a minor to recover compensation under section 70.

 Responsibility of the Finder of Goods (Section 71) 

• A finder of lost goods is someone who discovers the belongings of another person, not knowing the true owner at that moment.
• Finding lost goods does not grant absolute ownership to the finder. Similarly, if someone possesses goods, they cannot be considered the finder.
• The individual who gains possession of lost goods is the best owner and has superior rights over the goods, except for the true owner.
• In this case, the finder is only the apparent owner.
• A "finder of goods" is defined as a person who discovers goods belonging to another and takes them into custody.
• Even though there is no contract between the finder and the owner of the goods, certain responsibilities are imposed by Section 71. A person who finds goods belonging to someone else and takes them into custody is subject to the same responsibilities as a bailee.

 Responsibilities of the Finder of Goods 

• A finder of goods is subject to the same responsibilities and liabilities as a bailee.
• The finder has the right to retain the goods against the owner until compensation is received.
• The finder has a lien on the goods for expenses incurred in preserving them, but cannot sue the owner for the trouble and expenses.
• The finder can sue the owner for a reward if a specific reward has been offered.
• The finder is entitled to possession against everyone except the real owner.
• If the finder dishonestly appropriates the goods when knowing or having the means to discover the true owner, it constitutes criminal misappropriation.
• However, taking the property to protect it or return it to the owner does not constitute an offense.
• The finder must take care of the goods as a prudent person would with their own belongings and is obliged to return the goods to the true owner.

Duties of a Finder of Goods

 Duty to Take Reasonable Care of Goods 

• The finder of goods is responsible for taking care of the  found items  as a  reasonable person  would take care of their own belongings. This means they should act with  ordinary prudence  .
• If the finder fails to take proper care, they cannot defend themselves by saying they treated their own goods poorly as well.
• The key duty is to ensure the found goods are cared for as well as one would care for their own possessions.

 Duty Not to Make Unauthorized Use of Goods 

• If the finder uses the  found goods  in a way that is not permitted by the bailment agreement, they are responsible for  compensating the owner  for any damage that occurs as a result of that use.
• This principle outlines the liability of someone who uses  bailed goods  in an unauthorized manner.

 Duty not to mix goods (section 155 — 157) 

According to Section 155, if the finder of goods mixes the owner's goods with his own with the owner's consent, both parties will have an interest in the mixture proportional to their respective shares.

•  Effect of mixture without owner's consent when goods can be separated (Section 156):  If mixed goods can be separated, the finder and owner retain their respective shares, with the finder bearing the separation costs and any damages.
•  Effect of mixture without owner's consent when goods cannot be separated (Section 157):  If the goods cannot be separated, it is considered a loss for the owner, who cannot claim compensation from the finder. The bailee must not mix the bailor's goods with his own.

 Duty to return goods (section 160 & 161) 

•  Return of goods found on expiration of time period (Section 160):  The finder must return or deliver found goods to the true owner before the specified time period.
•  Finder's responsibility when goods are not duly returned (Section 161):  If the finder fails to return the goods on time, they are responsible for any loss or destruction of the goods from that moment.

 Duty to return increase (Section 163) 

•  According to Section 163, the bailee must deliver any increase or profit from the bailed goods to the bailor unless otherwise agreed.  For example, if A leaves a cow with B for care and the cow has a calf, B must return both the cow and the calf to A.

 Duty not to set up Jus Tertii 

The bailee has the responsibility not to claim an adverse title to the goods when the bailor requests them. The finder of goods is not liable for returning the goods to the owner without a legal title.

 Rights of the Finder of Lost Goods

According to Sections 168 and 169 of the Indian Contract Act, the finder of lost goods has the following rights:

•  Right to Retain Possession:  The finder can keep the goods until the true owner claims them. The finder is considered the best owner against everyone except the true owner.
•  Compensation for Expenses:  The finder is entitled to compensation for the trouble and expenses incurred in preserving the goods and locating the owner. However, the finder cannot sue the owner for these expenses. The finder has a particular lien on the goods, meaning they can hold onto the goods until compensated for their expenses.
•  Claiming Rewards:  If the owner offers a reward for the return of the lost goods, the finder can sue for the reward and retain the goods until it is received.
•  Selling Found Goods: If the found goods are commonly sold items and the owner cannot be found with reasonable effort, or if the owner refuses to pay the finder's lawful charges, the finder may sell the goods if:
  • They are in danger of perishing or losing significant value.
  • The finder's lawful charges amount to two-thirds of the goods' value.

 Liability of a Person Gaining Benefit under Mistake or Coercion (Section 72) 

Unjust benefit under mistake: Section 72 addresses situations where money or goods are transferred from one person to another by mistake or under coercion. For example, if a railway company demands an illegal charge for carriage before releasing goods to the consignee, and the consignee pays this charge to obtain the goods, the consignee is entitled to recover the excess amount that was illegally charged.

 Money Paid or Anything Delivered Under Mistake

 New India Industries Ltd v. Union of India 

• According to Article 265 of the Constitution, no tax shall be levied or collected except by the authority of law. Here, "law" refers to a valid law.
• If a payment towards tax or duty is made without the authority of law, it is considered a payment under mistake as per Section 72.
• In such cases, the government is obligated to refund the amount because it cannot unjustly enrich itself by keeping the tax that was improperly collected.

 Sales Tax Officer, Banaras v. Kanhaiya Lal 

• In this case, the respondent paid sales tax on forward transactions in silver bullion under the U.P. Sales Tax Act.
• However, the levy of sales tax on these transactions was deemed ultra vires by the Allahabad High Court.
• The respondent sought a refund of the tax paid.
• Section 72 does not differentiate between mistake of law and mistake of fact, and the refund of payment made under mistake of law was granted in this instance.

 No Refund if the Plaintiff Did Not Pay from His Own Pocket 

• In the case of Roplas (India) Ltd. v. Union of India, the petitioners mistakenly paid excise duty but had recovered the entire amount from their customers.
• It was ruled that the petitioners were not entitled to a refund of the amount paid by mistake because the money had not come out of their pocket.
• Granting a refund in such a situation would result in the unjust enrichment of the petitioners.

 The Plaintiff at Fault 

• To invoke Section 72, the plaintiff cannot be allowed to profit from their own mistake.
• For instance, in Radha Flour Mills Pvt. Ltd. v. Bihar State Financial Corporation, there was an accounting error on the part of the corporation in recovering a loan and interest from the appellant.
• Due to this error, Rs. 29,000 could not be recovered from the appellant-debtor.
• When the corporation discovered the error after 15 years, it demanded the amount along with interest.
• The Patna High Court ruled that the demand for interest was inappropriate as it would penalize the corporation for its own mistake, leading to unjust enrichment.

Conclusion

• Qumsi contracts are not true contracts but rather legal obligations designed to prevent one party from gaining an unfair advantage at the expense of another.
• These obligations fall under the Indian Contract Act, 1872, in Chapter V, titled "OF CERTAIN RELATIONS RESEMBLING THOSE CREATED BY CONTRACT." However, the term "quasi contract" is not used in the Act to emphasize the distinction between these obligations and real contracts.
• The law compels parties who gain unduly to compensate the other party based on the principle of equitable justice.
• Quasi contracts are founded on the principles of Equity, Justice, and Good Conscience, which aim to prevent unjust enrichment, where one party benefits at the expense of another.
• The essence of quasi contracts is that legal technicalities should not override the requirements of justice. When one party benefits from the actions of another without formal agreement, the benefitting party is expected to compensate for the expenses and efforts incurred.
• The distinction between contracts and quasi contracts lies in the nature of agreements and obligations between the parties.
• The principle of unjust enrichment has its roots in the Roman legal maxim "Nemo debet locupletari ex aliena jactura," meaning no one should become wealthy at the expense of another's loss.
• Quasi contracts play a vital role in the Indian Contract Act, 1872, addressing situations where one party suffers a loss due to the undue benefit gained by another party.