Understanding Mistake of Facts and its Consequence

SRI TARSEM SINGH v. SRI SUKHMINDER SINGH [AIR 1998 SC 1400]

The Concept

This a landmark case on the validity of a contract in case of mistake of facts. According to Section 20 the Indian Contract Act, the mistake has to be mutual and both the parties must be shown to be suffering from mistake of fact, and not just one of the parties. It also must relate to a fact that is essential to the contract. A contract is said to be declared void when all these conditions are satisfied. Further, section 65 governs the consequences of a void agreement. It states that if someone receives an advantage under a void agreement, then they are bound to return or restore the same. 

Facts

Tarsem Singh who was the owner of 48 kanals of land, entered into a contract with Sukhminder Singh to sell the land to him. . A part payment as earnest money (Rs. 77,000) was also made. The contract contained a stipulation that if Sukhminder Singh failed to pay the balance consideration before a required date, then the earnest money shall stand forfeited. Sukhminder Singh failed to pay the balance amount. The lower court ordered the refund of the earnest money. The High Court confirmed the said order. The reason behind Sukhminder Singh not paying the balance amount was that there was a bilateral mistake of  fact as the petitioner(Tarsem Singh) had meant kanals as the unit of measurement while making the offer and the Respondent (Sukhminder Singh) thought the land was in bighas.

Issues

Whether the petitioner is under a legal obligation to refund the earnest money to the respondent?

Arguments by the Petitioner

1. It was argued that the contract contains an express stipulation that if the balance money is not paid, then the earnest money will be forfeited. Hence, the lower courts and the High court are in error in ordering that the earnest money be refunded.
2. A mistake of fact with regard to the `price’ or the ‘area’ is not pertinent to the agreement. The only dispute is with regard to the unit of measurement which is that the land is measured in kanals or bighas. As this mistake is not essential to the agreement, Section 20 cannot apply, and the agreement cannot be void.
3. Petitioner argued that Sections 73 and 74 of the Indian Contract Act which deal with damages for the breach of contract would be applicable in the present case. 
4. Section 65 talks about those agreements which were discovered to be void’, as the present agreement was void since inception, section 65 will not be applicable.

Arguments by the Respondent

Since the contract was a void one due to the bilateral mistake of facts, the earnest payment of Rs. 77, 000 should be refunded with an appropriate rate of interest.

Judgment

The Hon’ble Court denied the Appeal by relying on following reasons: 

1. In this case, the mistake was regarding the area of the land. The area of the land is essential to the agreement as the price is determined by taking into account the area. 
2. Sections 73 and 74 of the Indian Contract Act which deal with damages for breach of contract presuppose the existence of a valid and binding contract. As the contract in the present case was void on account of mistake of fact, these provisions are inapplicable.
3. The court referred to section 65 of the Indian Contract Act. Section 65 talks about the restitution of benefits received under a void contract. The court held that as this was a void contract and the earnest money was a benefit which accrued to the petitioner under a void contract, as per section 65, the petitioner was bound to refund the same. 
4. In the given situation, a mistake of fact existed since the very beginning, however was discovered at a later stage. There was no consensus ad idem  or meeting of minds, hence the agreement was void.
5. The High court and the lower courts were right in ordering the refund of the earnest money. 

Reflective question 

What would the decision be if the petitioner knew that the Respondent was under a mistake of fact and still went ahead?