Unjust Enrichment in Indian Law: Some Foundational Questions [Part 1 of Series on UE]

Anirud Raghav S U |

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I.              Introduction

Unjust enrichment has rapidly gained prominence in England in the late half of the 20^th century. Thanks to the meticulous taxonomy developed by Professor Birks, the chaotic state of affairs was compendiously reduced to a set of intelligible principles. Legions of academic work and judicial decisions on unjust enrichment followed. Few would disagree that the law on unjust enrichment is of substantial commercial significance. To take one instance, ‘failure of basis’ as a ground to claim unjust enrichment could potentially entitle one to an unjust enrichment remedy where a contractual stipulation is fundamentally breached, so that the basis for entering into the contract has failed. In Indian law, this is arguably located under s.65 of the Contract Act (this will be addressed in greater detailed in a subsequent post). The broader relationship between unjust enrichment and contract, and the possibility of ‘concurrent’ remedies under both unjust enrichment and contract (such as those available under tort and contract) is also a practically significant question. The purpose of this post is only to locate the concept of unjust enrichment and restitution in Indian law and raise some fundamental questions: what is the broad Indian approach towards unjust enrichment—does it align more closely with common law or the civilian approach?

II.            Unjust Enrichment, Speaking Generally

A)   Unjust Enrichment, Restitution and the Remedial Aim of Restitution

Four brief remarks may be made about restitution and unjust enrichment. First, I adopt the terms ‘unjust enrichment’ and ‘restitution’ in the sense in which they were used by Peter Birks: that unjust enrichment is one of the causative events to obtain the remedy of restitution. Put differently, unjust enrichment is a cause of action, for which the remedy is restitution. Restitution is to unjust enrichment what damages is to breach of contract—it is a remedy for an causal event. For our purposes, it is sufficient to say that unjust enrichment is one event (apart from, say, wrongs) that triggers restitution.[1] 

Second, today is it recognized that restitution responds to more events than unjust enrichment: an instance is ‘restitutionary damages’ granted for breach of contract (a wrong, where ‘wrong’ is defined as a breach of duty).[2] This paper, however, will content itself with exploring restitution for unjust enrichment.

Third, the word ‘unjust’ in unjust enrichment is not referable to vague moral notions or equity-based intuitions: as of now, ‘unjust’ refers to a set of factors which vitiate the basis of the transfer of value. We will see below what this means. For now, it suffices to say that unjust enrichment has been carefully disciplined, thanks to the work of Peter Birks and the American Restatement on the Law of Restitution. Today, unjust enrichment exists (based on whether you are a common law lawyer or a civilian one) only if a specific unjust factor (like failure of basis, mistake, ignorance inter alia) can be shown.

Fourth, to truly understand what this area of law is concerned with, one must appreciate what restitution as a remedy is concerned with. It is a gain-based remedy, i.e., it focuses on taking away the gain of the defendant in circumstances where keeping such gain is inequitable or unjust, not compensating the loss of the plaintiff (which is what damages does). As held seminally in Moses v. Macfarlane: 

“[The action for money had and received] lies for money paid by mistake; or upon a consideration which happens to fail; or for money got through imposition (express or implied); or extortion; or oppression; or an undue advantage taken of the plaintiff’s situation, contrary to the 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 the ties of natural justice and equity to refund the money.”

B)   The Two Models: English and Civilian

There are two main models in the unjust enrichment world: the English model and the Civilian (unjustified enrichment) model. The main difference is that English law requires that a specific unjust factor be proved, while civilian law only requires that there be an ‘absence of basis’ for the transfer.

English law follows a four-fold test: a) there must be enrichment; b) such enrichment must be at the cost of the claimant; c) there must be an unjust factor; d) no defences must be available. Multiple issues subsist on each of these prongs—for instance, under prong a), what does enrichment really mean? Does it have to be solely in monetary terms? Or could you be enriched by the receipt of services mistakenly delivered to you? Would it be open for you to ‘subjectively devalue’ such benefits, such that you are no more enriched? Similarly, much controversy surrounds the ‘unjust factor’ prong c): English law has, over time, recognized a list of unjust factors, which must be established on facts for a claim in unjust enrichment to succeed. Such factors include mistake, fraud, duress, failure of basis and ignorance among others. 

Alternatively, civil law follows the absence-of-basis approach. The idea is simply that where there is a transfer of value without an underlying basis, a claim in unjust enrichment succeeds. Here, the only emphasis primarily on the legal basis for the transfer of value. Most commonly, valid legal bases include contracts, trusts or any other arrangements founded on consent. Consider the wording of the §812 I of the German Civil Code, the Bürgerliches Gesetzbuch (BGB): ‘He who obtains something through somebody else’s performance or in another way at his expense without a legal cause, is obliged to make restitution to the other.’ Interestingly, gifts are a valid basis for transfer. So, where I transfer money to you, mistaking you for someone else, it might be open for the defendant to claim that I gifted the money: since gifts are a valid legal basis, the unjust enrichment claim should fail.

The principal difference between the two approaches is that the English approach requires the claimant to actively prove the unjust factor, from the recognized list of factors, to succeed. This is not so in the civilian approach—true, the claimant must still discharge the burden of showing absence of basis, but no particular ‘unjust factor’ burden needs to be established. Whether the two are, in principle, different is still a matter for debate. Could one say that absence of basis is simply a residual unjust factor and reconcile the two theories? Birks thinks not, at least taxonomically so: absence of basis does not stand alongside an unjust factor; unjust factor is an instantiation of the absence of basis. More practically, as some authors recognize,[3] even proving an absence of basis requires positively proving an event which vitiates intent to transfer: this vitiating event will likely be one of the unjust factors like mistake or failure of consideration. Thus, one might be right in suspecting that the results do not drastically differ whether the unjust factors or the civilian approach is applied. Canada is a great case study on the tension between the common law and the civilian approach: it has seen the gradual shift from the former to the latter. As for a practical reconciliation between the two approaches, many champion the idea that the common law’s unjust factors approach must be the default model, and the absence of basis approach should only be considered where vitiating event cannot be pigeonholed into any one of the recognized unjust factors.[4] The question now is: where does Indian law stand? The statute does not offer us much guidance in answering this question. However, some judicial decisions do.

III.          The Law of Restitution for Unjust Enrichment in India

A)   Statute: Indian Contract Act, s.68-72?

The first source of unjust enrichment law in India is the Indian Contract Act. This is puzzling at first, since the general rule is that the presence of a contract excludes a claim for unjust enrichment.[5] However, we may be assuaged by knowing that unjust enrichment claims (if they may be properly so-called) are codified under Chapter VII entitled ‘Certain obligations resembling those created by Contract’. In this sense, unjust enrichment is a quasi-contractual claim. A quasi-contract, however, is not a contract; it does not have to respect any of the preconditions of contract including free consent, consideration or capacity. As Birks famously quipped:

Among the sillier Oxford stories is that of the Dean’s dog. The college’s rules forbid the keeping of dogs. The Dean keeps a dog. Reflecting on the action to be taken, the governing body of the college decides that the labrador is a cat and moves to next business. That dog is a constructive cat. Deemed, quasi- or fictitious, it is not what it seems. When the law behaves like this you know it is in trouble, its intellect either genuinely defeated or deliberately indulging in some benevolent dishonesty. The trouble with language of this kind is twofold. It displaces the truth. And it introduces a lie. These are distinct mischiefs. You lose the benefits of calling the event by its proper name, here unjust enrichment. And you are obliged to suppose instead that it has some affinity with events to which it is wholly unrelated. Unjust enrichment is an event which has nothing whatever to do with making agreements, declaring trusts or assigning assets.

Sections 68-72 are often referred to as dealing with restitution for unjust enrichment.[6] I say ‘restitution’ because these sections provide remedies as well, not just rights. We will see broadly how s.68 to 72 provide gain-based remedies against the ‘unjustly enriched’. Moving on, it is curious how oddly specific the sections are. Section 68 deals with minor’s (and other persons lacking capacity to contract) necessaries, and the supplier’s right to be reimbursed from the minor. Presumably, this is a gain-based remedy insofar as it requires the minor to ‘give up’ the gains received from his supplier. Section 69 deals with cases where I need to pay the government some money, but you pay on behalf of me, so you have a claim to be reimbursed by me. Once again, if I were to turn my back, I would be enriched at your expense. The law’s concern is to prevent this, so it requires me to reimburse you if you so wish. Perhaps the broadest of them all is s.70, which deals with cases where one confers benefits upon another gratuitously without intending to do so. Let us say there is a window cleaner, commissioned to clean my neighbour’s house. He instead mistakes my house for my neighbour’s and cleans mine. Surely, he did not do this out of the goodness of his heart but simply out of a mistake; he did not intend to gratuitously confer benefits. Can he ask me to pay for the value of his services? The question is whether I was enriched. This is subject to debate, with defences like ‘subjective devaluation’ being recognized in English law. Without dwelling on the specifics, we can see why s.70 provides a restitutionary remedy: it asks me, the (albeit unwilling recipient) of a benefit (subject to defences), to pay for the value of those benefits. Else, I would be unjustly enriched. Section 71 deals with the peculiar situation of a finder of goods of another: he is responsible as a bailee to those goods. This is hardly paradigmatic of unjust enrichment, and we might be forgiven to think that this deals with a peculiar case of ‘quasi-contracts’, where by operation of law, it is deemed just that such finder must undertake a certain type of responsibilities. Lastly, section 72 codifies the quintessential case of unjust enrichment by mistake: if I mistake you for my employee and pay you salary, I was operating under a mistake. If you are allowed to keep the money, you will be enriched at my expense, unjust because of a mistake as to identity. But interesting complications arise here: what is a mistake? Is it the same as a mistake qua vitiating factor under s.20? Is an uncertain belief a mistake? What about a misprediction? It takes whole theses to answer such questions. But the bottom line is simple: if you happen to transfer under a mistake, the other person is enriched for no other reason than the fact that there is defective intent to transfer. Arguably, section 65 also deals peripherally deals with unjust enrichment. What if I enter into a contract with you, paid you money under that contract, and later discovered to be vitiated by fraud? Can I claim back the money I paid? The answer would seem to be yes: s.65 allows such recovery. Whether this would ground ‘failure of basis’ claims is a different—and more advanced—question altogether.

From the above provisions the idea appears to be to reverse the defendant’s unjust enrichment. The enrichment is unjust not because of vague moral notions but because of a failed intent to transfer—s.70 is the clearest illustration of this. It is also noteworthy that unjust enrichment Restitution then responds, by operation of law, to reverse such unjust enrichment.

B)   Judicial Decisions

Most Indian law on unjust enrichment is judicially developed. This owes partly to the lack of any clear statutory guidance on unjust enrichment and partly to Indian Courts’ habitual reliance on English law.[7] On balance, it appears that Indian Courts prefer the English law’s ‘unjust factors’ approach.

In the Supreme Court decision in Mahabir Kishore v. State of Madhya Pradesh, we see the common law ‘unjust factors’ test being imported. X Ltd. was engaged in the business of manufacture and sale of liquor. At the relevant time, they had to pay a cess on the manufacture of liquor to the MP Government. This was until a later decision of the MP High Court in Surajdin v. State of M.P., which declared that the Government of MP had no such power to charge mahua and cess on the manufacture of liquor. Subsequently, X Ltd. sued to recover the mahua and cess they paid to the Government of M.P. The Court allowed recovery based on the principles of unjust enrichment. Citing Moses v. Macfarlane and Lord Wright in Fibrosa Spolka v. Fairbairn Lawson, [1943] AC 32, they held the English conception of unjust enrichment to be applicable to the facts, and imported their four-fold unjust factors test: a) the defendant must be enriched; b) at the claimant’s expense; c) an unjust factor must operate; d) there must be no defences. To their credit, they made sure to root these principles under s.72 of the Indian Contract Act. To justify the import of English law, the Court cites Prof. Mulla, who said “The Indian Contract Act is in effect…a code of English law. Like all codes based on an existing authoritative doctrine, it assumes a certain knowledge of the principles and habits of thought which are embodied in that doctrine.” Following this up, the Court notes: “It is, therefore, helpful to know ‘those fundamental notion in the common law which are concisely declared, with or, without modification by the text.’” Thus came to be imported the four-pronged unjust factors test in Indian law.

However, two observations may be made, with the effect that the Court’s dictum on unjust enrichment is merely peripheral and thus obiter. First, a significant chunk of the decision is devoted not to substantively assessing unjust enrichment, but rather, a limitation question: whether X Ltd.’s claim is barred by limitation; the Court after surveying a gamut of precedents answers in the affirmative. Second, after rejecting the Government’s arguments on limitation, the Court does not answer the substantive question on whether the excess sum paid could be recovered but simply remands the matter back to the trial court. In other words, there was no substantive pronouncement on the application of unjust enrichment to the facts of the case, with a finding one way or another. Interestingly, Mahabir Kishore is not a standalone case that invokes unjust enrichment in the context of restitution of tax/imposts paid: this goes back to the decisions in Kanhaiya Lal and has been put conclusively to rest in Mafatlal (also see here for a more detailed review of the case).

More recently, the Delhi HC and the Madras HC have endorsed the unjust factors approach as well. One wonders if this is historically consistent with the legislative object behind the codification of s.68-72 in India. Indian ‘unjust enrichment law’, even if it can be called that, by design differs considerably from English law. Consider how Damodara Mudaliar had noted the expansive scope of s.70 of the ICA (that somewhat approximates a quantum meruit claim, shorn of the strict four-fold unjust enrichment test) compared to the more restricted doctrine in English law at the time: first, s.70 can be applied in more cases that just salvage and second, it does not require that persons stand in certain relations to each other to be able to advance a claim, both of which were qualifications in English law at the time.

That said, some commentators have examined s.70 and applied the four-fold test to it.[8] In my view, this is largely an academic exercise in organizing Indian law in terms of English law rather than a reflection of Indian judiciary’s own approach to s.70.

C)   Amendments?

Both Malaysia and Myanmar have an identical Contract Act. Fascinatingly, the closest we will get to a UK Supreme Court judge’s (and practitioner’s) commentary on ICA would be Burrows and Briggs on Myanmar Contract law. In their book, they recognize an artificiality with the description ‘relations resembling contract’ as well as the awkward gaps that are left by s.68-72. Instances of this awkwardness include the inability to read in a clear failure of basis unjust factor into the Contract Act and having to sheepishly invoke English law every time that has to be done: while mistake is codified under s.72, nothing in s.68-72 really codifies failure of basis. This also results in doctrinally confused reasoning. They suggest that the following amendments be passed to the Act, to make it more doctrinally aligned with common law as it stands today:

67A. Restitution for unjust enrichment.—Sections 68 to 72A of this Act shall be interpreted as recognising that, where a person is unjustly enriched at the expense of another person, the latter has the right to restitution from the former subject to defences (such as the defence of bona fide change of position)

72A. Restitution by person unjustly enriched in cases not expressly provided for.— In any case not falling within the scope of Sections 68 to 72, where there is no contract, but a person is unjustly enriched at the expense of another person, the latter has the right to restitution from the former subject to defences (such as the defence of bona fide change of position).

While this brings about much needed clarity, some issues must be addressed first. Firstly, this overlooks the legislative intent to deliberately articulate unjust enrichment-like provisions (like s.70) widely. This is precisely recognized by Damodara Mudaliar. Hence, it is worth considering whether the superimposition of the English position would be contrary to the legislative intent. Second, it would also be necessary to indicate whether this approximates the common law position or the civilian position: at first blush, it seems to endorse the civilian position since there appears no need to pigeonhole the vitiating factor into any specific set of unjust factors. This also matters because certain defences are unjust factor-sensitive. Thirdly, the defences need to be either exhaustively (preferably) or indicatively enumerated. The question of whether there are even any restitutionary defences like change of position or passing on has been debated in case law: see Kanhaiya Lal as well as Mafatlal —the law today (Mafatlal) recognizes that s.72, at the very least, is codifies an equitable principle and thus it only stands to reason that equitable defences are also available. If this reasoning is true, then restitutionary defences should apply to all provisions in Chapter V. Must we remain restricted to the equitable defences present in English law or invent more for good measure? What implications would this have for commercial predictability in Indian law? These questions are relevant as a matter of policy while considering a legislative amendment.

IV.          Conclusion

All said and done, the Indian law on unjust enrichment is still nascent. This explains why the principle is often applied haphazardly: see Indian Council for Enviro-Legal Action, where the Court superfluously invoked ‘unjust enrichment’ in reference to the need to pay compound interest for significant delays, which is not only objectionable on principle but also unnecessary since the case only concerned the polluter pays principle. Other instances include using ‘unjust enrichment’ almost colloquially: as simply an enrichment that is intuitively unjust— see Delhi HC decision in Indian Oil Corporation v. Lloyds Steel Industries, where it was held that if liquidated damages is granted where the amount awarded exceeds actual loss, it would amount to ‘unjust enrichment’. Expressing a similar sentiment, Nariman J in Kailash Nath v. DDA was more careful to use the word ‘windfall’ instead of ‘unjust enrichment’; such felicity is important for the obvious reason that the latter is a term of art. Much work remains to be done about unjust enrichment in India: this is a foundational piece with the fairly modest agenda of locating unjust enrichment and adumbrating the unjust factors approach in Indian law. But more advanced, exciting questions await scrutiny: are proprietary remedies for unjust enrichment possible under Indian law? What is the status of defences to unjust enrichment in India? What are the unjust factors identified in Indian law and how do they differ from English law? Is there a potential relationship between trusts and unjust enrichment law in India the same way that Peter Birks and Robert Chambers posit that the resulting trust can be viewed as a tool for reversing unjust enrichment? Further posts will address some of these questions.

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[1] This is the multi-causalist view in restitution and unjust enrichment law, while there is also a quadrationist camp, which maintains that unjust enrichment is the only event that triggers restitution and that restitution is the only response to unjust enrichment: see Peter Birks, ‘Unjust Enrichment and Wrongful Enrichment’ (2000) 79 Tex. L. Rev. 1767.

[2] Peter Birks, Introduction to the Law of Restitution (Clarendon Press 1985) 39.

[3] See Alvin W-L See, ‘Recovery of Non-Gratuitously Conferred Benefit under s.70 of the Indian Contract Act 1872’ in Andrew Robertson & Michael Tillbury (eds.) Divergences in Private Law (Hart 2016).

[4] Andrew Burrows, ‘Absence of Basis: The New Birksian Scheme’ in Andrew Burrows & Alan Rogers (ed.), Mapping the Laws: Essays in Memory of Peter Birks (OUP 2006); Zoë Sinel, ‘The Methods and Madness of Unjust Enrichment’ in Andrew Robertson & Michael Tillbury (eds.) Divergences in Private Law (Hart 2016).

[5] However, the point is more nuanced than ‘contract excludes unjust enrichment’: see Peter Birks, ‘Failure of Consideration and Its Place on the Map’ (2002) 2 Oxford University Commonwealth Law Journal 1; Stephen A Smith, ‘Concurrent Liability in Contract and Unjust Enrichment: The Fundamental Breach Requirement’ (1999) 115 Law Quarterly Review 245, 247–48.

[6] MP Ram Mohan & Mridal Godha, ‘The law of restitution and unjust enrichment in India’ (2020) Lloyd’s Maritime and Commercial Law Quarterly 104.

[7] Shivprasad Swaminathan, ‘Persistence of the “Codeless Myriad”: The Indian Contract Act and a Puzzle Surrounding Common Law Codification’ (2023) 44 Statute Law Review.

[8] Divergences.