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PETITIONER: KUJU COLLIERIES LTD.

       Vs.

RESPONDENT: JHARKHAND MINES LTD. & ORS.

DATE OF JUDGMENT12/08/1974

BENCH: ALAGIRISWAMI, A. BENCH: ALAGIRISWAMI, A. REDDY, P. JAGANMOHAN BEG, M. HAMEEDULLAH

CITATION:  1974 AIR 1892            1975 SCR  (1) 703  1974 SCC  (2) 533

ACT: Contract  Act.  s.  65--Scope  of--Payment  not  made  under coercion or ignorance of law--Whether recoverable.

HEADNOTE: The  appellant paid to the first respondent a large  sum  of money  in  respect  of  mining  lease  granted  to  it.  the appellant  (plaintiff)  instituted a suit for  recovery,  of possession of the leased property or in the alternative  for refund  of  the  sum paid to the  first  respondent.   After institution of the suit the Bihar Land Reforms Act came into force as a result of which the appellant’s claim in  respect of  possession  of  the  mines  became  unenforceable.   The appellant, therefore, confined its claim for the recovery of the sum paid. Dismissing  the  appeal,  the  trial  court  held  that  the appellant  was not entitled to claim any relief under s.  65 of the Contract Act because there was no occasion for it  to have  been  under any kind of ignorance of law  and  as  the Mineral  Concession Rules of 1949 rendered  any  stipulation for  payment of salami illegal, the lease on that basis  was also  illegal.  The High Court unheld the view of the  trial Court. Dismissing the appeal, HELD : This is not a case to which sections 65, 70 and 72 of the  Contract Act apply.  The payment of the money  was  not made  lawfully  nor was it done under mistake  or  coercion. [709A] (1)  Where  an  agreement is void ah initio  or  a  contract becomes  void  due  to  subsequent  happenings  any   person receiving  an advantage under such agreement at contract  is bound to restore such advantage or to make compensation  for it to the per-son from whom he received it.  But where  even at  the  time when the agreement was entered into  both  the parties  knew that it was not lawful and, therefore,  void,. there was no contract but only an agreement. [705F] Harnath Kaur v. Inder Bahadur Singh, 1923, 50 I.A. 69, 75-76 and  Shri Ramagya Prasad Gupta & Ors. v. Sri Murli Prasad  & Ors.  C.A. Nos. 17 10 of 1967 & 1986 of1966 decided on 11-4- 1974, referred to. Budhulal  v. Deccan Banking Company A.I.R. 1955 Hyd. 69  and

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Sivaaramakrishnaiah  v. Narahari Rao, A.I.R. 1960 A.P.  186, approved. (2)  Section  4  of the Mines and  Mineral  (Regulation  and Development)  Act, 1948 provides that no mining lease  shall be granted otherwise than in accordance, with the Rules made under  the Act.  Rule 45 of the Mineral  Concession  Rules,, 1949 provides that a mining lease shall be granted only to a person  holding  a certificate of approval  from  the  State Government.   Rule  49 provides that no  grantor  of  mining lease shall charge any premium in addition to or in lieu  of the rent specified in such a lease.  In the present case the appellant  had  no certificate as required under r.  45  and contrary  to r. 49 there was a stipulation for payment of  a premium,  under the lease deed.  The lease in favour of  the appellant was, therefore, contrary, to the provisions of the Act and the rules and as such void. [708F] (3)  There  was no occasion for the plaintiff to  have  been under  any kind of ignorance of law under the  Contract  Act and  the Mineral Concession Rules, 1949.  The appellant  was in  the  business  of  mining  and  had  the  advantage   of consulting-. its lawyers and solicitors. [708H]

JUDGMENT: CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  1865  of 1967. Appeal by Special Leave from the Judgment & Decree dated the 19th  October,  1965  of the Patna High  Court  in  Original Decree No311 of 1960. 704 O. P.  Malhotra and D. N. Mishra, for the appellant. D. N. Mukherjee and N. R. Chaudhury, for respondent Nos.  1, 3, & 5. S. N. Prasad, for respondent Nos. 3 & 4. D.  P.  Singh,  S. C. Aggarwala, V. J.  Francis  and  S.  S. Bhatnagar,for the intervener. The Judgment of the Court was delivered by ALAGIRISWAMI, J.-This appeal is against the judgment of  the Patna High Court by Special Leave granted by this Court.  It arises  out of a mining lease granted by the 1st  respondent but  alleged  to have been ,done so in the name of  the  1st respondent  by  the 2nd respondent in favour  of  Haricharan Singh  J.D. & Co. on 7-9-1950.  In pursuance of the lease  a sum  of  Rs. 80,000/- was paid to the 1st  respondent.   The plaint allegation was that the 1st respondent was a  Limited Company created by the 2nd respondent.  There was an earlier lease  in  respect  of  the  same  property  in  favour   of respondents  3 and 4 which expired on 4-4-1950.   Haricharan Singh  J.D. & Co. later changed its name to Kuju  Collieries Ltd.  who are the appellants.  As the plaintiff did not  get the  possession of the leased property it instituted a  suit for recovery of possession of the leased property along with mesne  profits and in the alternative for refund of the  sum of Rs. 80,000/- and certain other sums.  The present  appeal is, however, concerned only with that amount. In  the suit the 1st respondent and the 2nd respondent  took the stand that the 1st respondent was not created by the 2nd respondent, that the lease was by the 1st respondent and the amount  was paid to the 1st respondent alone and not to  the 2nd respondent.  The 1st respondent also contended that  the leased  properties were handed over to the  plaintiff,  that they were not aware that respondents 3 and 4 were  resisting the plaintiff’s claim and that the 1st respondent was not in any  case  responsible  therefor  and  that  therefore   the

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plaintiff  was  not  entitled to  any  relief.   During  the pendency  of this appeal respondents 2 and 3 died and  their legal representatives have not been brought on record.   The appellant  is  not claiming any relief against  any  of  the other  respondents  except  respondent  No.  1  and  it  is, therefore,  unnecessary  to refer to the attitude  taken  by them in the :suit. It  is  necessary at this stage to mention  that  after  the institution of the suit the Bihar Land Reforms Act came into force as a result of which any lessee working a mine  became direct lessee under the State, and ,as the plaintiff was not working the mines any claim in respect of the possession  of the   mines  became  unenforceable.   The   appellant   has, therefore, confined his claim to the sum of Rs. 80,000/-  as payable to it by the 1st respondent. The  Trial Court held that as the pailntiff was  already  in the  business of mining and had the advantage of  consulting its lawyers and solicitors and their lease deed was drawn up and  prepared by solicitors, there was no occasion  for  the plaintiff to have been under 705 any  kind of ignorance of law and as the Mineral  Concession Rules of 1949 rendered any stipulation for payment of salami illegal  and the lease on that basis was also  illegal,  the plaintiff  was not entitled to claim relief under s.  65  of the Indian Contract Act.  It, therefore, dismissed the suit. On appeal the High Court also held that neither s. 65 nor s. 72 of the Contract Act applied to the facts of the case. We  are  of the view that s. 65 of the Contract  Act  cannot help  the plaintiff on the facts and circumstances  of  this case.  Section 65. 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  section makes a distinction between an agreement and  a contract.   According  to  s.  2  of  the  Contract  Act  an agreement  which is enforceable by law is a contract and  an agreement  which  is not enforceable by law is  said  to  be void.   Therefore,  when  the earlier part  of  the  section speaks of an agreement being discovered to be void it  means that the agreement is not enforceable and is, therefore, not a contract.  It means that it was void.  It may- be that the parties or one of the parties to the agreement may not have, when  they  entered  into  the  agreement,  known  that  the agreement was in law not enforceable.  They might have  come to  know later that the agreement was not enforceable.   The second  part  of the section refers to a  contract  becoming void.   That refers to a case where an agreement  which  was originally  enforceable  and was,  therefore,  a  contract,. becomes  void due to subsequent happenings.  In  both  these cases  any person who has received any advantage under  such agreement or contract is bound to restore such advantage, or to  make  compensation  for it to the person  from  whom  he received it.  But where even at the time when the  agreement is entered into both the parties knew that it was not lawful and,  therefore,  void, there was no contract  but  only  an agreement and it is not a case where it is discovered to  be void  subsequently.   Nor  is  it a  case  Of  the  contract becoming  void due to subsequent happenings.  Therefore,  s. 65 of the Contract Act did not apply. The  Privy Council in its decision in Harnath Kaur v.  Inder Bahadur Singh (1923, 50 f. A. 69, 75-76) observed:

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             The section deals with (a) agreements and  (b)               contracts.   The distinction between  them  is               apparent  by s. 2; by clause (c) every set  of               promises  forming the consideration  for  each               other  is an agreement, and by clause  (h)  an               agreement  enforceable by law is  a  contract.               Section   65,   therefore,  deals   with   (a)               agreements  enforceable  by law and  (b)  with               agreements not so enforceable.  By clause(g)an               agreement not enforceable by law is said to 706 .lm15 be  void.  An agreement therefore, discovered to be void  is one  discovered  to be not enforceable by law, and,  on  the language of the section would include an agreement that  was void  in  that sense from its inception as distinct  from  a contract that becomes void." A  full Bench of five Judges of the Hyderabad High Court  in Budhulal  v.  Deccan  Banking Company  (AIR  1955  Hyd.  69) speaking  through  our brother, Jaganmohan Reddy J.,  as  he then  was, referred with approval to these  observations  of the  Privy  Council.   They then went on  to  refer  to  the observations  of  Pollock and Mullah in  their  treatise  on Indian  Contract and Specific Relief Acts, 7th Edn.  to  the effect  that  s. 65, Indian Contract Act does not  apply  to agreements  which  are  void under s. 24  by  reason  of  an unlawful  consideration or object and there being  no  other provision in the Act under which money paid for an  unlawful purpose  may  be recovered back, an analogy of  English  law will be the best guide.  They then referred to the reasoning of the learned authors that if the view of the Privy Council is right namely that agreements discovered to be void’ apply to  all  agreements  which  are  ab-initio  void   including agreements based on unlawful consideration, it follows  that the  person  who has paid money or transferred  property  to another for .an illegal purpose can recover it back from the transferee under this section even if the illegal purpose is carried   into  execution  and  both  the   transferor   and transferee are in pari delicto.  The Bench then proceeded to observe:               "In.  our  opinion, the view  of  the  learned               authors  is  neither supported by any  of  the               subsequent  Privy Council decisions nor is  it               consistent  with  the natural  meaning  to  be               given to the provisions of S. 65.  The section               by  using  the  words ’when  an  agreement  is               discovered to be void’ means nothing more  nor               less than: when the plaintiff comes to know or               finds  out  that the agreement is  void.   The               word ’discovery’ would imply the  preexistence               of  something which is subsequently found  out               and  it may be observed that s. 66,  Hyderabad               Contract Act makes the knowledge (11m) of  the               agreement  being  void  as  one  of  the  pre-               requisites for restitution and is used in  the               sense  of an agreement being discovered to  be               void.  If knowledge is an essential  requisite               even  an  agreement  ab-initio  void  can   be               discovered to be void subsequently.  There may               be   cases  where  parties  enter   into   an.               agreement  honestly  thinking  that  it  is  a               perfectly  legal  agreement and where  one  of               them sues the other or wants the other to  act               on it, it is their. that he may discover it to               be  void.  There is nothing specific in s.  65

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             Indian  Contract  Act  or  its   corresponding               section of the Hyderabad Contract Act to  make               it inapplicable to such cases.               A  person  who, however, gives  money  for  an               unlawful  purpose knowing it to be so,  or  in               such    circumstances   that   knowledge    of               illegality or unlawfulness can as a finding of               fact  be  imputed to him the  agreement  under               which  the payment is made cannot on his  part               be  said  to be discovered to  be  void.   The               ,criticism that if the aforesaid view is right               then a person who has  707               paid money or transferred property to  another               for  illegal purpose can recover it back  from               the transferee under this Section even if  the               illegal  purpose  is carried  into  execution,               notwithstanding   the  fact  that   both   the               transferor and transferee are in pari delicto,               in  our  view,  overlooks the  fact  that  the               courts  do not assist a person who comes  with               unclean. hands.  In such cases, the  defendant               possesses at,. advantage cover the  plaintiff-               in   pari   delicto   potior   est    conditio               defendentio. Section  84, Indian Trust Act however has made an  exception in a case               where  the owner of property transfers  it  to               another for illegal purpose and such  purposes               is  not  carried  it  into  execution  or  the                             transferor  is not as guilty as the  t ransferee               or the effect of permitting the transferee  to               retain  the  property might be to  defeat  the               provisions of any law the transferee must hold               the   property   for  the   benefit   of   the               transferor".               This   specific   provision   made   by    the               legislature  cannot be taken advantage  of  in               derogation   of  the  principle  that  s.   65               Contract Act in applicable where the object of               the agreement was illegal to the knowledge  of               both the parties at the time it was made.   In               such  a case the agreement would be  void  ab-               initio  and  there would be no  room  for  the               subsequent discovery of that fact,,. We consider that this criticism as well as the view taken by the Bench is justified.  It has rightly pointed out that  if both  the transferor and transferee are in pari delicto  the courts do not assist them. A  Division  Bench of the Andhra Pradesh High Court  in  its decision  in Sivaramakrisnaiah v. Narahari Rao (AIR 1960  AP 186 held that               "In order to invoke section 65 the  invalidity               of   the   contractor  agreement   should   be               discovered  subsequent  to the making  of  it.               This  cannot be taken advantage of by  parties               who  knew  from the beginning  the  illegality               thereof.  It only applies to a case where  one               of the parties enters into an agreement  under               the belief that it was a legal agreement, i.e.               without  the knowledge that the  agreement  is               forbidden by law proposed to public policy and               as such illegal.  The effect of section 65  is               that in such a situation, it enables a  person

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             not in pari delicto to claim restoration since               it  is  not based on an illegal  contract  but               dissociated  from it.  That is permissible  by               reason  of the section because the  action  is               not founded on dealings which are contaminated               by  illegality.  The party is only seeking  to               be  restored to the status quo ante.   Section               65  also  does net recognise  the  distinction               between a contract being illegal by reason  of               its being opposed to public policy or morality               or  a contract void for other  reasons.   Even               agreement the performance of which is attended               with  penal consequences, are not outside  the               scope of section 65.  At the same time  Courts               will  not  render assistance  to  persons  who               induce   innocent   parties  to   enter   into               contracts  of that nature by playing fraud  on               them to retain the benefit which they obtained               by their wrong". 708               They  also  referred  with  approval  to   the               earlier  decision of the Hyderabad High  Court               in   Budhulal  v.  Deccan  Banking  Co.   Ltd.               (supra). In  a recent judgment of this Court in Shri  Ramagya  Prasad Gupta  & Ors v. Shri Murli Prasad & Ors. (C.A. Nos. 1710  of 1967  & 1986 of 1968 decided on 11-4-1974). to which one  of us  was  a  party,  this  Court  quoted  with  approval  the observations  of the Full Bench of the Hyderabad High  Court in  Budhulal  v.  Deccan  Banking  Company  (supra).   These decisions are in accordance with the view we have taken. The Mineral Concession Rules came into force on  25-10-1949. As the lease came into force on September 7, 1950 and  money was  paid on that date, the fact that there was  an  earlier unregistered  contract does not make any difference  to  the question  at  issue.  Section 4 of the  Mines  and  Minerals (Regulation and Development) Act. 1948 provides "no  mining" lease  shall be granted after the commencement of  this  Act otherwise than. in accordance with the rules made under this Act. and any mining lease granted contrary to the provisions of  sub-section (1) shall be void and of no effect".   Under Rule   45  of  the  Mineral  Concession.   Rules  1949   "no prospecting license or mining lease shall be granted  except to  a  person  holding  certificate  of  approval  from  the Provincial  Government having jurisdiction over the land  in the  respect  of  which the concession  is  required".   The plaintiff  had  no certificate of approval  from  the  State Government.   Under  Rule 49 "no grantor  of  a  prospecting license  or  a  mining lease shall charge  any  premium  in. addition to or in lieu of the prospecting fee. surface  fee, surface rent, dead rent or royalty specified in such license or lease".  There was a stipulation for payment of a premium under the lease deed in favour of the plaintiff.  Therefore. clearly the lease in favour of the plaintiff was contrary to the  provisions  of  the Mines and  Minerals  (Regulation  & Development)  Act.. 1948 and the Mineral Rules 1949  and  as such void. The  further question is whether it could be said that  this contract  was either discovered to be void or  became  void. The facts enumerated above would show that the contract  was void at its inception and this is not a case where it became void subsequently.  Nor could it be said that the  agreement was  discovered  to be void after it was entered  into.   As pointed out by the Trial Court the plaintiff was already  in the  business of mining and had the advantage of  consulting

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its  lawyers and solicitors.  So there was no  occasion  for the  plaintiff have been under any kind of ignorance of  law under the Act and the Rules.  Clearly, therefore this is not a case to which s. 65 of the Contract Act applies. 709 Nor is it a case to which s. 70 or s. 72 of the Contract Act applies.   The payment of the money was not  made  lawfully, nor was it done under a mistake or under coercion. We agree with the Trial Court that the plaintiff should have been  aware of the illegality of the agreement even when  it entered  into  it and therefore s. 65 of  the  Contract  Act cannot help it. The appeal is therefore, dismissed but in the  circumstances without costs. P.B.R.                                Appeal dismissed. S--M 185Stp.  C1/75 710