Non-Payment of Consideration in Indian Contract Law: Validity, Remedies, and Restitution

Non-Payment of Consideration in Indian Contract Law: Validity, Remedies, and Restitution

1. Introduction

Consideration constitutes the “life-blood” of contractual obligations in India, being expressly required by Sections 2(d) and 25 of the Indian Contract Act, 1872 (“ICA”). Yet litigation frequently arises where the stipulated price or promise is not in fact performed. The legal consequences of such non-payment of consideration traverse multiple branches of private law: contract formation, transfer of property, restitution, negotiable instruments, and specific performance. This article undertakes a doctrinal and jurisprudential analysis of the phenomenon, synthesising leading Supreme Court and High Court precedents, statutory provisions, and equitable principles.

2. Statutory Framework

2.1 Indian Contract Act, 1872

  • Section 2(d) defines consideration as an act, forbearance, or promise “at the desire of the promisor”.
  • Section 25 renders agreements without consideration void, but preserves (i) written promises to compensate for past voluntary services or time-barred debts and (ii) completed gifts.
  • Section 70 creates a restitutionary action for the recipient’s benefit where a person lawfully does something for another without intending it gratuitously, provided the other enjoys the benefit.
  • Section 73 allows damages for breach; Section 74 limits stipulated sums to “reasonable compensation”.

2.2 Transfer of Property Act, 1882 (“TPA”)

Section 54 characterises a sale of immovable property as a transfer for “price paid or promised”. Non-payment therefore does not per se invalidate the conveyance, unless the parties intended payment as a condition precedent.[1]

2.3 Registration Act, 1908

Under Section 35, the registering officer verifies execution, not consideration. The Jammu & Kashmir High Court has held that refusal to register merely for non-payment is ultra vires.[2]

2.4 Specific Relief Act, 1963

Section 16(c) requires plaintiffs seeking specific performance to aver and prove readiness and willingness to perform, including payment of consideration.

3. Validity of Instruments Despite Non-Payment

3.1 Sale Deeds

Early authorities (e.g., Achobandil Kuari v. Mahabir Prasad, 1886) placed the burden on vendors alleging non-payment to rebut the presumption arising from a registered deed. Later cases nuanced this position:

  • Narain Prasad v. Dy. Director of Consolidation (1997) affirmed that a deed remains valid if the price is merely promised, unless the parties intended otherwise.[3]
  • The Rajasthan High Court in Vimal Chand v. Gyan Chand Phophalia (1996) reiterated that title passes on execution and registration; mere non-payment does not “arrest” transfer unless payment was a condition precedent.[4]
  • Conversely, where intention indicates conditionality, courts may treat the deed as inchoate (Motilal Sahu v. Ugrah Narain Sahu, 1950 Pat).[5]

3.2 Promissory Notes and Acknowledgements

In M/S Raghavendrarao Vakil v. B.R. Elavia (Karn 1972) both forums found want of consideration and refused enforcement, illustrating that negotiable instruments are susceptible to the defence of “no consideration”, notwithstanding Section 118 of the Negotiable Instruments Act, once the presumption is rebutted.[6]

4. Remedies for Non-Payment

4.1 Contractual Damages and Forfeiture

The Supreme Court in Kailash Nath Associates v. Delhi Development Authority (2015) curtailed arbitrary forfeiture of earnest money under Section 74 ICA and Article 14 of the Constitution, holding that where the promisee suffers no loss, retention of earnest money is unjust.[7] Similarly, Jagdish Chand Radhey Shyam v. State of Punjab (1973) struck down statutory provisions allowing both resumption and forfeiture as discriminatory.[8]

4.2 Specific Performance

The jurisprudence stresses the plaintiff’s financial readiness:

  • Man Kaur v. Hartar Singh Sangha (2010) denied relief where the purchaser failed to adduce personal evidence of readiness and willingness.[9]
  • Aloka Bose v. Parmatma Devi (2008) nonetheless enforced a vendor-signed agreement because the purchaser had paid earnest money and proved willingness.[10]
  • Nirmala Anand v. Advent Corporation (2002) illustrates equitable conditioning: specific performance was granted upon payment of an additional sum to prevent unjust enrichment attributable to market escalation.[11]

4.3 Restitution for Total Failure of Consideration

Where neither performance nor counter-promise materialises, restitution is the primary remedy. In Apollo Health & Lifestyle v. Anupam Saraogi (AP 2017) the High Court ordered refund of monies paid under MoUs whose performance collapsed, invoking English authorities and Section 70 ICA.[12] Historical decisions such as Kundan Lal v. Bisheshar Dayal (All 1927) reached similar conclusions under Articles 62/97 of the Limitation Act (1908).[13]

5. Non-Payment in Regulated Auction Contexts

5.1 Statutory Auctions

In M. Lachia Setty & Sons Ltd. v. Coffee Board (1980) bidders attempted to retract without paying consideration. The Supreme Court enforced strict compliance with auction conditions, emphasising that telegraphic retractions were invalid under Condition 8 and that defaulting bidders were liable for resale loss.[14]

5.2 Earnest Money and Public Auctions

The ratio in Kailash Nath safeguards bidders against disproportionate forfeiture, aligning contractual discretion with constitutional principles of non-arbitrariness.[7]

6. Negotiable Instruments: Cheque Dishonour

Non-payment under a cheque presents a statutory offence. K. Bhaskaran v. Sankaran Vaidhyan Balan (1999) liberalised territorial jurisdiction and deemed service of notice, thereby preventing drawers from evading liability for non-payment.[15]

7. Registration, Possession, and Third-Party Challenges

7.1 Registration

The Jammu & Kashmir High Court in Ghulam Mohd. v. Registrar (1989) held that the registering authority cannot insist on payment of balance consideration as a pre-condition to registration.[2]

7.2 Possession and Limitation

Where the vendee remains out of possession for years without paying price, courts may infer absence of consideration and deny relief (Achobandil Kuari). Statutes of limitation (Article 97, Limitation Act 1963) apply to restitutionary suits seeking recovery of price for failed consideration.

7.3 Standing of Strangers

Recent dicta caution that strangers cannot impeach a sale deed on grounds of unpaid price (Chinta Venkatamuni v. Rasetti Ademma, Orissa 2024).[16]

8. Burden of Proof

The general rule places the onus on the party alleging non-payment to rebut the recital of consideration.[17] However, prolonged non-possession, retention of title documents, or admissions may create a strong counter-presumption requiring the purchaser to prove payment (Achobandil Kuari). In mortgage contexts, the mortgagor carries the burden of proving non-receipt of consideration (Madras HC, Ponnammal v. Nagappan, 2014).

9. Policy Considerations

Indian courts balance several imperatives: (i) sanctity of written instruments; (ii) prevention of unjust enrichment; (iii) commercial certainty; and (iv) constitutional mandates of fairness under Article 14 when the State is a contracting party. The modern trend favours restitution or equitable adjustment over formalistic invalidation, thereby aligning private law doctrines with broader notions of justice.

10. Conclusion

Non-payment of consideration does not invariably vitiate contracts in India. Its legal consequences are context-dependent: a sale deed may convey title despite non-payment, whereas a promise to pay may fail for lack of consideration; specific performance may be refused absent readiness and willingness; earnest money may or may not be forfeited depending on loss. Restitutionary principles under Section 70 ICA and equitable doctrines ensure that neither party is unjustly enriched. The jurisprudence, from Lachia Setty to Kailash Nath, underscores a consistent judicial commitment to substantive fairness over rigid formalism.

Footnotes

  1. TPA s 54; Vimal Chand v. Gyan Chand Phophalia, 1996 (1) Raj LR 652.
  2. Ghulam Mohd. v. Registrar of Registration, 1989 SCC OnLine J&K 12.
  3. Narain Prasad v. Dy. Director of Consolidation, 1997 SCC OnLine All 722.
  4. Vimal Chand v. Gyan Chand Phophalia, supra.
  5. Motilal Sahu v. Ugrah Narain Sahu, AIR 1950 Pat 288.
  6. M/S Raghavendrarao Vakil v. B.R. Elavia, 1972 SCC OnLine Kar 53.
  7. Kailash Nath Associates v. DDA, (2015) 4 SCC 136.
  8. M/S Jagdish Chand Radhey Shyam v. State of Punjab, (1973) 3 SCC 428.
  9. Man Kaur v. Hartar Singh Sangha, (2010) 10 SCC 512.
  10. Aloka Bose v. Parmatma Devi, (2009) 2 SCC 582.
  11. Nirmala Anand v. Advent Corporation, (2002) 8 SCC 146.
  12. Apollo Health & Lifestyle v. Anupam Saraogi, 2017 SCC OnLine AP 25.
  13. Kundan Lal v. Bisheshar Dayal, AIR 1927 All 469.
  14. M. Lachia Setty & Sons Ltd. v. Coffee Board, (1980) 4 SCC 636.
  15. K. Bhaskaran v. Sankaran Vaidhyan Balan, (1999) 7 SCC 510.
  16. Chinta Venkatamuni v. Rasetti Ademma, 2024 SCC OnLine Ori 142.
  17. Achobandil Kuari v. Mahabir Prasad, 1886 SCC OnLine All 83.