Monday, November 17, 2014

The Bombay High Court on Mutual Mistake, Damages and Restitution

In Rolta v MIDC, the Bombay High Court has recently considered some important questions relating to the doctrine of mutual mistake, damages for breach of contract and restitution. It is worth examining the judgment closely as it appears to depart from some well-established principles of contract law.

The case arose out of a Memorandum of Understanding (‘MoU’) which Rolta and MIDC entered into in March 1999. The MoU provided that MIDC, which owned an industrial area known as the Millennium Business Park (‘the Park), would grant a 95-year lease of a building in the Park to Rolta. The building was described as ‘admeasuring 80,000 square feet…in the aggregate land area of 7435 square metres’. Rolta was to pay yearly rent of Rs. 100 and lease premium of Rs. 10.6 crores, the latter in four instalments. The first instalment, of about Rs. 53 lakhs, was paid as earnest money when the MoU was signed. The MoU provided that a lease deed for the building would be executed in the future on terms to be agreed and that Rolta was entitled to a refund of the earnest money without interest should agreement not be reached. Rolta already owned 25,000 square metres of land elsewhere, and it agreed to surrender 7435 square metres of this parcel of land to MIDC, with MIDC to facilitate the sale of the remainder of the parcel.

The lease deed which the MoU envisaged was never executed because a dispute arose between the parties about the construction of the MoU: Rolta claimed that it was entitled to a lease of the 80,000 sq ft building and of a certain portion of land referred to in the MoU (in exchange for the land it had surrendered), while MIDC said that the lease contemplated in the MoU was of the building only. Rolta sought specific performance and in the alternative damages. The arbitrator rejected the claim for specific performance (it is not clear on what grounds) but awarded damages instead. This was challenged in the High Court under section 34.

The Bombay High Court held that there was no contract between the parties because they did not ‘agree on the same thing in the same sense’. Before considering the Court’s reasoning, it is worth pointing out that the question of certainty of terms can arise in two different ways in specific performance cases. Under section 21(c) of the (old) Specific Relief Act, 1877, one ground for refusing specific relief was that the terms of the contract cannot be identified with ‘reasonable certainty’. This provision was omitted from the Specific Relief Act, 1963, based on the (erroneous) view of the Law Commission that any agreement whose terms are not certain is automatically void. That view is erroneous because, as Lord Hoffmann explained in Argyll Stores, the terms of an agreement may be sufficiently certain to constitute a contract, but not to justify the grant of specific performance. If, therefore, the Bombay High Court had invoked uncertainty as a ground for refusing specific performance, a question would have arisen about the effect of the deletion of section 21(c), but the Court went further and held that there was no agreement at all, that is, that there was no ‘consensus ad idem’ between the parties (see, eg, [36]). Yet, it also awarded ‘damages’ for breach of contract assessed on the basis that the contract ‘had never been entered into’.

Mutual Mistake
How was the Bombay High Court able to reach the conclusion that a written MoU signed by the parties is in fact not a contract? By accepting the proposition that Rolta’s interpretation of it (lease of building and land) was ‘as plausible’ (see [32]) as MIDC’s interpretation of it (lease of building only) and therefore that there was no consensus ad idem:

The MoU which is, of course, final and upon which the lease deed had to be executed was, therefore, seen by the parties differently. The parties, therefore, did not agree to the same thing in the same sense…The question of termination is seen to be secondary—in fact there was no agreement at all and none to terminate.  

It is respectfully submitted that this conclusion is wrong, because it is founded on the erroneous premise that ‘consensus ad idem’ requires subjective agreement between the parties. The test, in both Indian and English law, is what a reasonable person in the position of the parties would have understood the contract to mean: in the case of a written agreement, this involves asking how a reasonable person in the possession of all the shared background knowledge (excluding pre-contractual negotiations) would have understood the language used. In ITC v George Fernandes—a case that the Bombay High Court cites—the Supreme Court said expressly that contracts are construed objectively, and the principle is also illustrated by the well-known case of Smith v Hughes, where Blackburn J said this:

I apprehend that if one of the parties intends to make a contract on one set of terms, and the other intends to make a contract on another set of terms, or, as it is sometimes expressed, if the parties are not ad idem, there is no contract, unless the circumstances are such as to preclude one of the parties from denying that he has agreed to the terms of the other…If, whatever a man's real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party's terms.

The Bombay High Court unfortunately appears to have overlooked this principle. It relies on another well-known case—Raffles v Wichelhaus—but the crucial difference is that Raffles, unlike Smith and this case, is what is known as a ‘perfect ambiguity’ case, ie, a case where a reasonable person would have had no basis for preferring the interpretation of one party to that of the other. The plaintiff in that case alleged that the defendants had agreed to buy 125 bales of Surat cotton to arrive ‘ex Peerless from Bombay’ and that they had refused to accept delivery when the ship arrived in Liverpool. The problem was that there were two ships named Peerless: one left Bombay in October and the other in December. The defendants pleaded that they meant the October Peerless and that the plaintiff had refused to deliver any cotton when this ship had arrived in Liverpool. Contrary to the Bombay High Court’s analysis (see [21]), judgment was actually given for the defendant on the ground that the plaintiff’s demurrer to the defendant’s plea was bad, and the case has subsequently treated as an application of the objective principle to circumstances where the parties were simply at cross-purposes (see, eg, Bell v Lever and Professor Brian Simpson’s historical account).

In this case, therefore, the question was simply how a reasonable person with all the background knowledge available to MIDC and Rolta would have understood the MoU: he must, ex hypothesi, have construed it either as an agreement to lease the building only, or as an agreement to lease the land as well, and that is what the MoU (objectively) means, irrespective of what MIDC and Rolta (subjectively) thought it meant. It is difficult to see how the objective construction of the MoU could possibly lead to the conclusion that there is no contract.

Assuming there was no contract at all, the question of awarding damages for breach of contract does not arise. Yet, the Bombay High Court, at [41], held that Rolta was entitled to a refund of the earnest money (and certain other heads) it paid with 9 percent interest, on the ground that this is ‘adequate compensation to put the petitioner in the same position as he would have been had the contract not been entered into’. If the court was indeed awarding damages for breach of contract (leaving aside the difficulty that there is no contract to breach), the object of the award should have been to put the claimant in the position in which he would have been if the ‘contract had been performed’, not ‘if the contract had not been entered into’ (see section 73 of the 1872 Act and Robinson v Harman). It may be that the High Court was making a restitutionary award even though it used the language of ‘compensation’ and ‘damages’: however, even if MIDC was enriched by the payment of Rs. 53 lakhs, it appears that it had a change of position defence since it constructed a building for Rolta for which it did not receive full payment, and presumably undertook other obligations as well. There are similar difficulties in the Court’s analysis of the other two heads of damages that were awarded (see [41] and the counterclaim in [43]).

In short, the judgment is, with respect, questionable because it appears to construe the MoU in terms of what the parties subjectively thought it meant, and award ‘damages’ for the breach of a ‘contract’ with the use of a restitutionary measure (but without identifying the defendant’s enrichment).

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