Termination of contract

1.   A contract which becomes void is a contract at its inception, but is rendered void by some later event.

1)  Under Indian Contract Act, 1872, a contract becomes void under section 56, when the act promised becomes impossible or unlawful by reason of some event which the promisor could not prevent.

2)  Section 65 provides that when the contract becomes void, any person who has received any advantage under it is bound to restore it or make compensation for it to the person from whom it was received.

®     For example:

Ø  A agrees to sell B after one month 10 quintals of wheat at Rs. 1,625 per quintal and receives Rs. 500 as advance, soon after the contract private sales of wheat are prohibited by on Act of the legislature. The contract becomes void, but A must return the sum of Rs. 500 to B.

Ø  Here, A is only bound to return advance received and is not liable to compensate for loss of profits, if any, suffered by B.

2.   Such types of contracts are also known as “frustrated contracts”.

Ø  Case - C Boggiano & Co. v. Arab Steamers Ltd. (1916) 40 Bom 529.

Ø  Facts and Judgement: - Where the voyage was abandoned because of Government prohibitory orders, a suit to recourse freight paid in advance was held governed by section 65.

3.   One may argue that Section 65 uses the word compensation, than why only an advantage received under the contract is only to be restored and nothing else. It is only because of the intention of this section that advantage received can either be restored in the form in which it was received or its equivalent can be awarded to the other party by way of compensation.

4.   This section therefore contemplates only refund of what has been received, and not the payment of damages to make up for the loss which the party not at fault has suffered.

5.   At the same time there is no liability to pay interest on the restoration of benefit or compensation granted under this section. [Madhura Municipality v. K Alagirisami Naidu, ILR (1939 Mad 928, AIR 1939 Mad 957]

6.   Application of this section extends to any person who may have received advantage under the contract.

7.   Under this section, every party deriving benefit under such a contract is liable to make compensation to the other party to the extent of the benefit derived by that party.

[State of Rajasthan v. Associated stone Industries Kotah Ltd. AIR 1971 Raj 128 at 134].

8.   The claim for restoration can be made by claiming it as a relief in a suit.

9.   Section 65 is applicable only if advantage is received before the contract becomes void.

10.       Section 65 works in both the directions, where both parties have derived benefits under the void contract, each party if obliged to restore the benefit to the other party.

11.       The liability for restoration may be set off by the parties to the contract.

12.       The liability to restore benefit arises, irrespective of whether the contract provides for the refund or not.

13.       Remedy stated under section 65 is quasi contractual and it is different from a claim under the contract itself.

14.       A quasi-contractual remedy arises where original contract is put to an end or becomes ineffective.

15.       Therefore, there cannot be a clause in a contract which debars a person from remedy under section 65 and if it is there in the contract such clause is void.

16.       Conclusion – Your brother cannot claim any compensation for loss suffered, but a suit for refund of money paid before the contract becomes void, can be filed and I hope above mentioned legal provisions will also help you in furtherance of your legal actions. 

When contract because impossible to perform beyond the control of both the parties to the contract in your case because of government rules the agreement becomes in itself  unenforceable / void hence no compensation can be claimed for the same unless you can prove the contrary