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.

Damages
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).

About the author

V. Niranjan

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