Section 65 Contract Act - Principle Of Restitution Not Applicable When Party Claiming It Is Equally Or More Responsible For Illegality Of Contract: Supreme Court

The Supreme Court observed that the principle of Restitution under Section 65 of the Indian Contract Act will not apply when the party claiming restitution was equally or more responsible for the illegality of the Contract.

In adjudicating a claim of restitution, the court must determine the illegality which caused the contract to become void and the role the party claiming restitution has played in it, the bench comprising Justices DY Chandrachud, Surya Kant and Vikram Nath observed.

In this case, the appellant Loop Telecom approached Telecom Disputes Settlement and Appellate Tribunal claiming a refund of Rs 1454.94 crores, the Entry Fee (together with interest) paid by it for 2G licences for twenty-one service areas. The 2G licences which were granted by the Union of India, including to the appellant, were quashed by the Supreme Court in Centre for Public Interest Litigation v. Union of India.

The TDSAT held that the quashing of the appellant's licences by this Court cannot be equated with the UASL agreements becoming void within the meaning of Section 65 of the Indian Contract Act and therefore it cannot claim restitution under Section 65. It held that, in any case, the claim for restitution under Section 65 would be governed by the principle of in pari delicto potio rest condition defendentis (in equal fault, better is the condition of the possessor).

In appeal, the contention raised was that the quashing of the licences by the Supreme Court amounted to a frustration of each licence, which was in the nature of a contract, in terms of Section 56 of the Indian Contract Act. Consequently, the appellant contended that it entitled to a restitution of the Entry Fee paid in terms of Section 65, as the licences were quashed not on account of the fault of the appellant but due to the culpability of the Union government.

Section 65 of the Contract Act, which recognizes the principle of Restitution, reads as follows: 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 Apex Court bench, to answer this argument raised by the appellant, referred to various authorities and observed that the application of Section 65 has to be limited to those cases were the party claiming restitution itself was not in pari delicto. When the party claiming restitution is equally or more responsible for the illegality of a contract, they are considered in pari delicto, the court noted. The bench further observed:

"Thus, in determining a claim of restitution, the claiming party's legal footing in relation to the illegal act (and in comparison to the defendant) must be understood. Unless the party claiming restitution participated in the illegal act involuntarily or the rule of law offers them protection against the defendant, they would be held to be in pari delicto and therefore, their claim for restitution will fail."

Referring also to the judgments of Indian Supreme Court, the bench observed:

Hence, in adjudicating a claim of restitution under Section 65 of the Indian Contract Act, the court must determine the illegality which caused the contract to become void and the role the party claiming restitution has played in it. If the party claiming restitution was equally or more responsible for the illegality (in comparison to the defendant), there shall be no cause for restitution. This has to be determined on the facts of each individual case.

Rejecting its contention that the 2G licences were quashed not on account of the fault of the appellant but due to the culpability of the Union government, the bench observed thus while dismissing the appeal:

In the present case, the appellant has been held to be in pari delicto. The decision of this Court in CPIL (supra) leaves no manner of doubt that the appellant was among the group of licensees who were found to be complicit in obtaining benefits under the "First Come First Serve" policy of the Union government at the cost of the public exchequer. In such a situation and following the well-settled principles which have been enunciated above, the appellant could not be held entitled to claim a refund of its Entry Fee.

Case: Loop Telecom and Trading Limited vs Union of India | CA 1447-1467 of 2016 | 3 March 2022
Citation: 2022 LiveLaw (SC) 238
Coram: Justices DY Chandrachud, Surya Kant and Vikram Nath
Counsel: Sr. Adv A M Singhvi, Sr. Adv Huzefa A Ahmadi for appellant, ASG Vikramjit Banerjee for UoI