Ex Gratia Payments in Indian Law: Concept, Enforceability, and Deductibility

Ex Gratia Payments in Indian Law: Concept, Enforceability, and Deductibility

1. Introduction

The vocabulary of Indian legal practice is replete with Latinisms; “ex gratia” – literally “as a favour” – is among the most ubiquitous. Despite frequent legislative and judicial deployment, the normative contours of an ex gratia payment remain unsettled. Is such a payment purely benevolent, or can it ripen into an enforceable right? Does receipt of an ex gratia benefit diminish compensatory damages otherwise payable? This article undertakes a doctrinal analysis of these questions, synthesising statutory provisions and jurisprudence – notably United India Insurance v. Jyotsnaben (1998), Ghaziabad Zila Sahkari Bank v. ALC (2007), and Reliance General Insurance v. Shashi Sharma (2016) – to elucidate the legal character of ex gratia payments in India.

2. Conceptual Foundations

2.1 Definition

Indian courts consistently describe an ex gratia payment as a voluntary, uncovenanted, and discretionary disbursement made without recognition of legal liability[1]. Dictionaries adopted judicially reinforce that the term signals beneficence rather than obligation[2].

2.2 Functional Taxonomy

  • Compassionate Assistance by the State: Lump-sum assistance to dependants of deceased employees (e.g., Haryana Compassionate Assistance Rules, 2006).
  • Employer Benevolence in Industrial Relations: Payments outside the Payment of Bonus Act, 1965, or in lieu of production bonus schemes.
  • Disaster or Accident Relief: Grants from relief funds after industrial or public accidents (e.g., Bhopal Gas, railway accidents).
  • Settlement Facilitation: Sums offered “without admission of liability” to compromise litigation.

3. Contractual Versus Voluntary: When Does “Ex Gratia” Bind?

The Karnataka High Court in K. Ajitkumar Gadiyar v. Corporation Bank (2011) clarified that the mere adjectival use “ex gratia” does not ipso facto negate the existence of a binding contract; parties may validly covenant to pay a specified ex gratia amount, which then becomes enforceable notwithstanding the absence of underlying liability[3]. Conversely, where the payment is predicated on unilateral administrative discretion (e.g., Government resolutions granting compassionate assistance), no vested right accrues, and policy can be prospectively modified[4].

4. Ex Gratia Payments and Compensation Law

4.1 Motor Vehicle Accident Claims

A recurring controversy concerns whether ex gratia assistance should be deducted from damages awarded under the Motor Vehicles Act, 1988. High Courts have overwhelmingly answered in the negative, reasoning that such payments emanate from benevolence and are not intended to indemnify the tort-feasor[5]. The Supreme Court’s decision in Reliance General Insurance v. Shashi Sharma (2016) endorsed this position, rejecting insurers’ attempts to subtract amounts received under the Haryana Compassionate Assistance Rules from judicial compensation[6].

4.2 Principle of Collateral Benefits

Indian courts have adopted the English collateral benefit rule articulated in Perry v. Cleaver that “it would be revolting to the ordinary man’s sense of justice” if the wrong-doer alone benefited from third-party benevolence[7]. Payments from disaster-relief funds (Redpath v. B&CDR) or employer grants (Bimla Dubey v. HRTC) are therefore non-deductible unless proved to be quid pro quo for liability discharge.

4.3 Strict-Liability Undertakings

In tort contexts involving hazardous activities, such as electricity supply, State entities have occasionally offered ex gratia sums recognising strict liability. The Madras High Court in M. Muthukali v. State of Tamil Nadu (2024) emphasised that while such gestures are laudable, they do not exhaust the statutory obligation to pay full compensation under the principle in M.P. Electricity Board v. Shail Kumari[8].

5. Ex Gratia Payments in Labour and Industrial Law

5.1 Bonus Jurisprudence

Historically, employers have made ex gratia “production bonuses” outside the statutory framework. The Supreme Court in B.N. Elias & Co. (1960) held that long-continued, uniform ex gratia payments may crystallise into a customary bonus enforceable as a condition of service. Subsequent cases draw a distinction between (i) ad hoc ex gratia payments (non-enforceable) and (ii) those paid with sufficient regularity to establish an implied term[9].

5.2 Interaction with the Payment of Bonus Act, 1965

Section 34 of the Bonus Act provides overriding effect; yet it does not preclude employers from granting ex gratia to employees outside the Act’s wage-ceiling. The Bombay High Court in Petroleum Employees Union v. Industrial Court (1980) upheld such parallel payments, reiterating their voluntary character while noting that withdrawal may constitute an unfair labour practice if protected expectations arise[10].

5.3 Public-Sector Employees

In Ghaziabad Zila Sahkari Bank (2007) the Supreme Court ruled that a one-time ex gratia payment sanctioned from public funds did not create a precedent for future years and fell outside “remuneration” under Section 2(rr) of the Industrial Disputes Act, 1947[11].

6. Public Law Perspective: State as Parens Patriae

The Supreme Court in Charan Lal Sahu v. Union of India (1990) affirmed the State’s authority to act as parens patriae in settling Bhopal Gas claims. Although not styled “ex gratia”, the statutory settlement underscores that State-facilitated lump-sum payments, even when denominated as compassionate or interim relief, may coexist with – rather than replace – adjudicatory compensation mechanisms.

7. Ex Gratia and the Law of Restitution

While ex gratia payments are generally irrecoverable, the Supreme Court in South Eastern Coalfields v. State of M.P. (2003) invoked restitutionary principles to award interest on royalties held up by interim orders. The case illustrates that voluntarily paid amounts may still invite ancillary statutory liabilities (interest, tax) where enabling provisions exist.

8. Synthesis of Governing Principles

  1. Voluntariness Presumed, Not Conclusive: The label “ex gratia” raises a presumption of absence of legal liability, but context can rebut or modify the presumption.
  2. No Automatic Deduction from Damages: Benevolent third-party payments do not diminish tort compensation unless they are specifically intended to substitute liability.
  3. Custom May Ripen into Right: Regular, uniform ex gratia disbursement may create an implied contractual obligation.
  4. Policy May Be Changed Prospectively: Where the payment is rooted purely in executive policy, beneficiaries cannot claim continuation as a vested right.
  5. Collateral Benefits Rule Applies: Courts lean towards shielding benevolent payments from being appropriated by wrong-doers or tort-feasors.

9. Conclusion

Ex gratia payments occupy a liminal space between philanthropy and enforceable entitlement. Indian jurisprudence, while recognising the moral impetus behind such disbursements, refuses to allow them to dilute statutory or common-law entitlements to full compensation. Simultaneously, the judiciary remains sensitive to the evolution of such payments into customary rights in labour relations. Practitioners must therefore scrutinise the provenance, frequency, and surrounding representations of any purported ex gratia payment before advising on its legal consequences.

Footnotes

  1. United India Insurance Co. Ltd. v. Jyotsnaben, 1998 (2) GLR 662 (Guj HC).
  2. Renubala Bhuyan v. Indian Bank, 2017 SCC OnLine Ori 538.
  3. K. Ajitkumar Gadiyar v. Corporation Bank, 2011 SCC OnLine Kar 555.
  4. Partha Bandyopadhyay v. RBI, 2016 SCC OnLine Cal 7794.
  5. New India Assurance Co. v. Santosh, 2010 SCC OnLine P&H 9133; Bimla Dubey v. HRTC, 1990 SCC OnLine HP 16.
  6. Reliance General Insurance Co. v. Shashi Sharma, (2016) 9 SCC 627.
  7. Lord Reid in Perry v. Cleaver, [1969] 1 AC 1 (HL); adopted in United India Insurance v. Jyotsnaben, supra.
  8. M.P. Electricity Board v. Shail Kumari, (2002) 2 SCC 162.
  9. B.N. Elias & Co. Ltd. v. Their Workmen, AIR 1960 SC 886.
  10. Petroleum Employees Union v. Industrial Court, 1980 SCC OnLine Bom 52.
  11. Ghaziabad Zila Sahkari Bank Ltd. v. ALC, (2007) 11 SCC 756.