Quasi-contracts – The Importance Of Good Faith In Performance

KEY TAKEAWAYS

A court may impose quasi-contracts to ensure that a dispute involving several parties with competing interests, in the absence of a formal contract, is settled as equitably as feasible.

Sections 68 to 72 of the Indian Contract Act of 1872 deals with quasi-contracts. 

The compensation for damages resulting from the breach of a quasi-contract will be the same as in any other contract.

INTRODUCTION

Contracts are an integral part of any business. An agreement that establishes a legal duty to carry out actions between two or more parties is known as a contract. In case the agreements are violated contracts give redress, define terms, and avoid ambiguities. Contracts under business law enable safe business transactions that promote responsibility, compliance, and trust in the marketplace.

The Indian Contract Act, 1872’s Section 2(h) defines a ‘Contract’ as ‘An arrangement enforceable by law.’

Put otherwise, a contract is defined as anything that is a legally enforceable agreement. Contracts are further classified into various types according to their requirements and needs, such as implied contracts, express contracts, quasi-contracts, and e-contracts.

In this article, we will learn more about quasi-contracts.

WHAT IS A QUASI-CONTRACT?

A contract that is implied by law and serves as a settlement mechanism for disagreements between non-contracting parties is known by the term ‘quasi-contract.’ A quasi-contract is not a typical contract; rather, it is a court-mandated legal obligation for one party to reimburse the other. A quasi-contract, then, is a judgment that is applied retroactively to rectify a situation where one party gains something at the other party's expense. It is a legal obligation imposed by law to prevent unjust enrichment.

It is also possible to refer to it as a pseudo contract because the word ‘quasi’ implies pseudo, partly, or almost.

These arrangements may be imposed when goods or services are accepted by a party even though they might not have been requested. The acceptance then creates an expectation of payment for the providing party. E.g. A ordered a watch online, but a much more expensive watch was delivered to him by mistake. Despite knowing that there has been a mistake in the delivery of the watch, he uses it. Here the concept of quasi-contract arises, and A is obliged to pay the price of the watch which he got and used.

• The doctrine of quasi-contract has been significantly shaped and interpreted by the Indian Supreme Court. In the 1980 AIR 727 case Bhim Singh v. Kan Singh, the court determined that the foundation of the Quasi-Contract Doctrine is the idea that no one should be permitted to unfairly benefit at the expense of another. The Court maintained the doctrine's validity in the right circumstances and underlined the need to prevent unfair enrichment.

BACKGROUND AND ORIGIN

Roman law gave rise to the idea of a quasi-contract, which is still in use in certain modern systems of law. Empirical laws derived from the Latin proverb ‘Nemo debet locupletari ex aliena iactura’ assert that no one should profit from the misfortune of another. It was among the main tenets of Roman Law.

The Common Law actions of ‘indebitatus assumpsit’ (a type of action in which the plaintiff seeks to recover damages for the defendant's breach of an implied promise to pay a debt to the plaintiff) paved the way for the law of quasi-contract. Before the creation of assumpsit, covenants and personal debts were used to enforce contractual obligations. The most popular tool for keeping promises was debt. In the debt instances, the defendant was found accountable not because he had promised something and then broken it but because he had profited from it and had not given back the agreed-upon amount.

• One could refer to Lord Mansfield's ruling in the Moses v. Macferlan case as the first ever time that someone acknowledged the idea of a quasi-contract in law. He stated “But it lies for money paid by mistake, or upon a consideration which happens to fail; or for money got through imposition; or extortion; or oppression; or for an undue advantage taken of the plaintiff’s situation, contrary to laws made for the protection of persons under those circumstances. In one word, the gist of this kind of action is that the defendant upon the circumstances of the case is obliged by ties of natural justice and equity to refund the money."

What must exist for a quasi-contract to be enforced by the courts?

A quasi-contract can only be granted by a judge if the following conditions are met: 

• A transfer must have resulted in a loss for one person, the plaintiff.
• The valuable object must have been owned by the defendant, who admitted receiving it and kept it however, they did not attempt to pay for it. 
• The burden of proof then shifts to the plaintiff to show why the defendant received an unjust enrichment. 
• The good or service was not offered as a gift. 
• The option to accept or reject the benefit must have been presented to the defendant.

In the case of Mahabir Kishore & Ors. Vs. the State of MP, the court presented three conditions:

(1) the defendant's condition improved because of the benefit received. 

(2) the enhancement or improvement occurred at the plaintiff's expense; and 

(3) the maintenance of such enhancement or improvement is deemed unjust.

ATTRIBUTES OF THE CONTRACT

• A quasi-contract is not a real contract. It is fictitious in nature as no formal agreement is drawn between the parties.
• It is based on the principles of justice and equity.
• A kind of lawsuit where the plaintiff demands damages from the defendant for violating an implicit agreement to settle the plaintiff's debt.
• In addition, the advantages must be reasonable in value and the recipient must have unfairly benefited at the expense of another party.

PRINCIPLE OF JUSTICE AND EQUITY - THE NUCLEUS OF THE CONTRACT

Fairness and equity are the cornerstones of quasi-contracts. The goal is to stop one person from unfairly gaining an advantage over another. It would be unjust for one party to keep a benefit or advantage that they obtain from another without paying the other party something in return. Parties are guaranteed equitable treatment.

The purpose of quasi-contracts is to avoid unjust enrichment. Ensuring that parties do not unfairly profit from their conduct or get benefits for which they have not given consideration is the goal of the principle of preventing unjust enrichment. Quasi-contracts aim to put people back in their proper place and stop them from keeping advantages to which they are not legally entitled. The person who gave the benefit must be compensated or make restitution to the person from whom he received it. This helps in maintaining a balance. 

• Mohd. Ishaq versus State of Jammu & Kashmir (2014) 

The Indian Supreme Court ruled that a quasi-contract can exist even if there is no formal contract between the parties. The court underlined that enforcing quasi-contractual responsibilities is based on the principle of restitution and preventing undue enrichment.

• State of Madhya Pradesh versus Sahi Infracon India Pvt. Ltd. (2021) 

The Madhya Pradesh High Court ruled that the unjust enrichment concept is the consideration in assessing liability resulting from a quasi-contractual arrangement. The court decided that the principle of restitution should be used to put the person who was wronged back in the same position if they had gained an advantage or profit at the expense of another.

QUASI CONTRACTS – UNDER THE INDIAN CONTRACT ACT, 1872

Sections 68 through 72 of the Indian Contract Act of 1872 deal with quasi-contracts. 

The many kinds of quasi-contracts that Indian law recognizes are described in these sections. Different quasi-contracts under the Indian Contract Act are as follows: 

Section 68: Claim for Necessaries Supplied to a Person Incapable of Contracting-

Section 68 of the Indian Contract Act addresses the matter, when necessary, products or services are provided to someone unable to engage in a legally binding contract, like a person with unsound mind or a child who has not yet attained the age of majority. It specifies that a person who provides necessities to an individual who is unable to contract or to a person who is legally required to support an individual who is incapable of contracting has the right to reimbursement from the individual's assets. The provider may demand payment for the supplies provided as if they were under a contract.

Section 69: Reimbursement of Person Paying Money Due by Another, in Payment of Which He is Interested -

The Indian Contract Act's section 69 covers those situations in which someone makes a payment to discharge a debt owed by another person, motivated by a need or interest to protect their rights. This clause permits the person on whose behalf the payment was made to compensate the person who made it. The payer may claim repayment in their capacity as the creditor.

• In Brook's Wharf v. Goodman Brothers, the plaintiffs and the defendants shared a warehouse for some products imported from Russia by the defendant. The products were stolen. The warehouseman may be able to reclaim the charge on the items from the owners under the circumstances outlined in the customs law. The customs duty owed by the defendants, who were the owners of the commodities, was demanded to be paid by the warehouseman, or plaintiffs. The plaintiffs claimed from the defendants the amount of duty they had paid. It was decided that they had a claim for the same compensation.

Section 70: Obligation of Person Enjoying Benefit of Non-Gratuitous Act – 

The Indian Contract Act's Section 70 addresses circumstances in which someone gains something from another's non-gratuitous deed. Assume that even in the absence of a formal contract, a person benefits from the deeds or services of another. In that instance, the individual will be required by law to pay the person who carried out the act or rendered the services. It is required of the person getting the benefit to pay a fair price for it.

• The offended party advertiser in Aries Advertising Bureau v. C.T. Devraj created advertisements for a circus at the owner of the circus's request. The deal between the financier and the owner of the circus did not involve the advertiser.To recover promotion expenses from the financer, the sponsor filed a lawsuit against the latter. It was decided in this instance that the financier could not be held accountable for payment under Section 70 since they received no profit from the advertisements.

Section 71: Responsibility of Finder of Goods - 

When someone recovers and takes custody of another person's missing property, they are subject to Section 71 of the Indian Contract Act. The finder is responsible for taking reasonable care of the goods if the owner is unknown or difficult to identify. A quasi-contractual duty exists for the finder to either reimburse the owner for any damages or losses incurred or return the things to their legitimate owner.

Section 72: Liability of Person to Whom Money is Paid or Thing Delivered by Mistake or Under Coercion – 

Section 72 of the Indian Contract Act addresses circumstances in which someone is given anything or money by error or under duress. The law requires that person to reimburse or return items or money that they received or obtained. The party who delivered the products or made the payment may demand compensation for the error or compulsion, as well as restitution.

• In Sales Tax Officer, Banaras v. Kanhaiya Lal. The High Court of Allahabad ruled that section 72 does not distinguish between a mistake of law and a mistake of fact and that the money that was paid in error in this case could be refunded.

WHAT MAKES IT DIFFERENT FROM OTHER CONTRACTS?

DOCTRINE OF QUANTUM MERUIT

Another equitable remedy that is somewhat comparable to unjust enrichment but distinct from it is quantum meruit. The fundamental distinction between the two is that, although there may have been no agreement in the case of unjust enrichment, there is an agreement in quantum meruit, but it never specifies a price.

The foundation of the quantum meruit theory is the notion that, in cases where another party has been unjustly and unfairly wealthy, one party should be entitled to recoup from the other the value of their services. Quantum meruit refers to requesting that the court grant damages in proportion to the cost of the labour completed. The goal of this idea is to uphold justice and reasonableness. It guarantees that the equity is preserved and makes sure that the provider of goods or services is paid for their contributions.

• It was decided in the Pavey & Matthews Pty Ltd. v. Paul case that reasonable compensation for work performed under an otherwise unenforceable contract could be recovered through a quantum meruit action.

REMEDIES AVAILABLE UNDER THE LAW

Courts impose remedies in quasi-contracts to make up for the part wronged by another party. These legal remedies, which frequently take the shape of monetary awards, make sure that the party who gained the unfair advantage of the situation makes up for it.

• It was laid down in the case of Hadley vs. Baxendale that damages of quasi-contract will be the same as in any other contract. According to the ruling in Hadley v. Baxendale, the harmed party is entitled to damages that would have resulted from the breach in the normal course of events. 

This has to do with: 

a) Ordinary damages that arise naturally; or 

b) Damages that the parties knew, at the time the contract was made, were likely to be caused by the breach. 

c) No compensation will be provided for any indirect or remote loss or damage incurred as a result of the breach.

d) The compensation for damages resulting from a quasi-contract breach will be the same as in any other contract.

Suit for damages – ‘Damage’ is not the same as ‘damages’. Damages are defined as injury and monetary recompense for the loss incurred by the party that was wronged in a contract violation. Placing the harmed party in the same financial situation as if the contract had been fulfilled is the goal of awarding damages for breach of contract. For instance, in the role that he would have played had there been performance rather than a breach.

Suit upon Quantum Meruit: ‘As much as earned’ is what is to be understood by the term ‘Quantum Meruit.’ When one party's partial performance of a contract results in the other party's breach of the agreement, the party who availed the goods or services has the right to sue on a quantum meruit. The basis for the right is an implicit commitment made by the other party as a result of that party accepting a benefit.

THE PERKS OF ENABLING A QUASI-CONTRACT

1. In company law, quasi-contracts are essential since they serve as a means of redress in cases where one or both parties are dealing with legal difficulties in the absence of a contract. For example, if a provider delivers items without a specified contract by accident, a quasi-contract can be used to guarantee just compensation.
2. It helps to stop injustice, fill up any gaps, and provide pertinent solutions. Business law strives to preserve equity and defend justice by utilizing quasi-contracts.
3. Quasi-contracts are also great for protecting vulnerable and innocent parties.
4. Furthermore, because a court order generates the quasi-contracts, they are less subjective and legally binding.
5. A suit for the damages of violations of the contract can be filed in the case of a quasi-contract in the same way as in the case of a legally framed contract.

ISSUES THAT ONE MAY FACE WITH QUASI-CONTRACTS

The burden of proof of unfair enrichment lies on the person to whom it happened.

If you are aware that someone has taken your belongings, and you don't have proof of the theft, obtaining a quasi-contract to compensate for the losses might turn out to be quite challenging.

The amount of compensation that the party that was harmed can get is very limited in quasi-contracts.

Usually, only the amount judged necessary to prevent undue benefit is developed. If the parties had come to a comprehensive legal agreement, the plaintiff would have gotten some profit or additional compensation.

The enriched party will not be held liable in situations where the benefit they received was given carelessly, foolishly, or by the deceptive calculation of the party that was aggrieved.

It is not possible to negotiate or amend a quasi-contract in the same manner as a traditional contract.

CONCLUSION

The common law legal systems of the US, Canada, Australia, India, and the United Kingdom have been using the quasi-contract doctrine for centuries. Even though it is an outdated idea, it is nonetheless very important today since it guarantees justice and equity in transactions even in the absence of a formal contract.

The Indian Contract Act, 1872's Chapter 5 (Sections 68–72) governs the quasi-contractual responsibilities. Quasi-contracts frequently arise when a benefit is given out without a formal agreement or when a payment is made in error or under duress. Comprehending quasi-contractual duties is essential for risk management in both personal and business contexts, as well as for legal compliance and fairness. Fundamentally, the Doctrine of Quasi-Contract acts as a sort of safety net for the legal system, bridging the gaps left by informal agreements and guaranteeing that parties are treated equally and fairly in the eyes of the law.