When a party files a complaint alleging breach of contract in India, it generally has access to two different sets of remedies. First, a party who has been wronged may seek damages to, among other things, put itself in the same financial situation as though the contract had continued and the claimed breach had never occurred. Second, to stop the contract from being broken, the harmed party may ask for injunctive relief or specific performance. The Specific Relief Act, 19632 (Specific Relief Act) governs reliefs such as specific performance and injunctions, whereas the Contract Act, 18721 (Contract Act) covers the remedy of damages. One equitable remedy that a court may offer to enforce the parties' contractual obligations is specific performance.
In legal contexts, "determine" can actually mean "terminate," meaning "to come or bring to an end." For instance, "option to determine the lease" refers to the option to terminate the lease, while "this agreement shall determine upon the expiry of the Term”. Determinable is a term used to describe an interest in property that automatically terminates upon a specific event. Examples include determinable fee estate, determinable fee, and fee simple determinable. These terms refer to an ownership interest in real property that will terminate automatically if a specific event occurs. For instance, a church has a fee simple determinable in a property, but its rights will terminate if it ceases to use it.
The Indian courts have a judicial interpretation of a contract as determinable due to the different termination clauses in different types of agreements, a subject that has been a contentious issue with varying court views.
PROVISION OF DISCRETIONARY RELIEF v THE NEW REGIME
The Specific Relief (Amendment) Act, 2018 introduced an optional reprieve for specific performance. The unamended version stated that the court's discretion to order specific performance is discretionary, not legal, but sound and reasonable, supported by judicial principles, and subject to appeals court review.
The old regime for not granting relief of specific performance was based on commercial onerosity/ hardship. This includes situations where the terms of the contract or conduct of the parties give the plaintiff an unfair advantage over the defendant, where the defendant did not foresee the hardship of the performance, or where the defendant entered into the contract under circumstances that make it inequitable to enforce specific performance.
The 2018 Amendment to the Specific Relief Act has made specific performance a non-discretionary and mandatory relief. Section 10 now emphasizes that the court shall enforce specific performance, subject to the provisions carried under Sections 11(2), 14, and 16. This change marks a departure from the old regime in relation to granting specific performance of contracts. The amendment aimed to do away with the broader discretion vested upon Indian courts to grant specific performance and make specific performance of contracts a general rule than exception subject to certain limited grounds. The Supreme Court in B. Santoshamma v. D. Sarala concluded that although the relief of specific performance of a contract is no longer discretionary, it would still be subject to Section 11, Section 14, and Section 16 of the Specific Relief Act after the 2018 Amendment.
The Specific Relief Act allows a party to request specific performance of a part of a contract in certain circumstances. If a party cannot fulfill all their obligations but can compensate for a minor portion, the court can order the feasible portion of the contract and provide financial compensation. If the unperformed part is significant, the court may decline specific performance. The Supreme Court emphasized that Section 12 of the Relief Act must be interpreted purposefully to allow the court to direct specific performance.
Section 14 of the Specific Relief Act states that certain contracts cannot be specifically enforced, including those where a party has obtained substituted performance, contracts involving continuous duties that the court cannot supervise, contracts dependent on personal qualifications, and contracts that are determinable in nature. These provisions provide a comprehensive analysis of specific performance and determinable contracts.
The Specific Relief (Amendment) Act, 2018, replaced Section 10 of the un-amended Act with a provision allowing the court to enforce specific performance of a contract, subject to Sections 11(2), 14 and 16 of the Act. Section 20 of the un-amended Act, which outlined the court's discretion and cases where it could not grant specific performance, was replaced with a provision relating to substituted performance. As a result, the grant of specific performance of a contract is no longer a matter of discretion and must be granted subject to the exceptions set out in the Act.
Section 16(c) of the Specific Relief Act requires a plaintiff to demonstrate readiness and willingness to fulfill essential contractual obligations. There is no straightforward formula to determine readiness and willingness, but the factum is determined by the conduct of the parties, attendant circumstances, and court evidence. The Supreme Court in C.S. Venkatesh v. A.S.C. Murthy emphasized that "ready and willing" implies the plaintiff's readiness to carry out the contract to its logical end, requiring continuous readiness and willingness. If the plaintiff fails to prove this, they must fail. The court must consider the plaintiff's conduct before and after filing the suit, along with other circumstances.
The Supreme Court in Mehboob-Ur-Rehman v. Ahsanul Ghani ruled that specific performance of a contract cannot be enforced if a person fails to prove readiness and willingness to perform essential terms of the contract, except those that have been prevented or waived by the other party. The 2018 Amendment to Section 16(c) of the Specific Relief Act replaced the expression "who fails to aver and prove" with "who fails to prove." This change renders the effect of amendments somewhat redundant, as no evidence can be led without averments in plaint or pleadings.
In Sughar Singh v. Hari Singh, the Supreme Court ruled that specific relief was no longer discretionary, and the applicability of unsubstituted provisions on transactions before the 2018 Amendment Act remained open.
The plaintiff must demonstrate unwavering commitment to fulfill essential terms of a contract to plead for specific performance. The Supreme Court in Aniglase Yohannan v. Ramlatha and Shenbagam v. K.K. Rathinavel emphasized that courts must consider the conduct of the parties and whether one party will unfairly benefit from the decree when granting specific performance relief.
In His Holiness Acharya Swami Ganesh Dassji v. Sita Ram Thapar, the Supreme Court differentiated between readiness and willingness in determining a suit for specific performance. Readiness refers to a plaintiff's capacity to perform the contract, while willingness is a matter of conduct.
DEFINING A DETERMINABLE CONTRACT
Determinable contracts are legally binding agreements that can be terminated at any time or by a specific contingency. Enforcing specific performance in such contracts is challenging as the court may mandate termination, making litigation futile. Termination can occur due to specific cause, mutual agreement, set time periods, event occurrence, or at will with or without notice.
The Act defines and amends laws regarding specific reliefs, but it is not exhaustive in addressing specific performance of contracts. If the Act prohibits specific performance, it must be assessed if the natural right of a contracting party is interdicted. The grant of specific performance and the issue of interlocutory orders for relief depend on the nature of the agreement, party conduct, surrounding circumstances, and other relevant factors.
Section 42 of the Act states that a contract with an affirmative agreement and a negative agreement cannot be specifically enforced if the court cannot compel specific performance of the affirmative agreement. Injunctions are not granted for breach of contract, non-performance that cannot be specifically enforced, or when a party has an equally effective remedy available. The general law in relation to determinable contracts states that contracts that could be compensated for damages in terms of money cannot be enforced. Additionally, granting a declaration and injunction is not sustainable in such contracts.
In Indian Oil Corpn. Ltd. v. Amritsar Gas Service, the Supreme Court ruled that a distributorship agreement was determinable due to two clauses governing termination. The first clause provided for termination contingent on a specific event, while the second allowed for termination without reasons. The court did not make any observations on whether the agreement was determinable based on the first or second clauses. However, the court suggested that damages could be awarded for the 30-day notice period.
Contracts can be terminated at the option of either party, post a specified event or breach, or upon expiry without giving any reason. Termination upon breach can occur immediately or upon defaulting party's failure to cure the breach. There is a difference in opinion on the classification of determinable contracts, with some courts focusing on specific events.
The Supreme Court ruled in Shantidevi P. Gaikwad v. Savjibhai Haribhai Patel that a land development agreement could be unilaterally terminated before the plaintiff was given possession of the property, stating that such contracts were determinable in nature.
INTERPRETATION BY VARIOUS HIGH COURTS
In Rajasthan Breweries Ltd. v. Stroh Brewery Co., the Delhi High Court ruled that private commercial agreements can be terminated without a specific clause, even without assigning a reason. If termination is deemed bad in law, compensation for wrongful termination is sought, but specific performance cannot be claimed. In Turnaround Logistics (P) Ltd. v. Jet Airways (India) Ltd., determinable contracts are also considered voidable, but specific performance cannot be granted.
In Rattan Lal v. S.N. Bhalla and Anr., the Delhi High Court held that an agreement to sale with a clause stating termination if approvals aren't received within six months was determinable and not enforceable under the Act. However, the Supreme Court ruled that the clause didn't provide an escape route for the obligated party, and they were not entitled to determine the agreement. The court instead decided to award costs to the appellant due to a step hike in real estate prices.
In the Ministry of Road Transport and Highway case, the Delhi High Court ruled that an agreement with 60 days’ notice for termination falls under "determinable contracts," contradicting the Orissa Manganese case's view that such agreements are not. The Delhi High Court relied on the Supreme Court's decision.
In T.O. Abraham v. Jose Thomas, the Kerala High Court ruled that a contract must be determinable, allowing either party to end it at their own will without providing a rationale, ensuring specific performance.
In Indian Oil Corpn. Ltd. v. Bhagawan Balasai Enterprises, the High Court of Madras ruled that all contracts that can be revoked or voidable are determinable. However, in Jumbo World Holdings Ltd. v. Embassy Property Developments, the court ruled that a termination clause based on specific events or breaches does not make an agreement determinable. The court categorizes contracts into five categories for determinability: inherently revocable, unilaterally terminated, immediately terminated for cause, with a breach notice and opportunity to rectify, and without a termination clause.
In Times Internet Limited v. ALT Digital Media Entertainment Limited, the Delhi High Court found itself bound by Rajasthan Breweries, but disagreed with the position that all commercial contracts are determinable. The court observed that when a contract provides for termination in specific circumstances, it should be the court's responsibility to decide whether such circumstances have occurred and whether specific performance should be ordered. In Golden Tobacco Limited v. Golden Tobie Private Limited, the court held the agreement not determinable, stating that agreements reserved for a specific party are determinable but only at the party's instance.
The Bombay High Court in Narendra Hirawat and Co. v. Sholay Media Entertainment Pvt. Ltd. ruled that determinable contracts can be terminated at either party's will without assigning reasons or referring to breach.
The High Court of Orissa ruled that an agreement requiring 90 days notice before contract termination was not determinable and enforceable, as the breach condition never arose. The court ruled that the contract was not determinable unless the condition was fulfilled, thus section 14 (1) (c) was not attracted. The Supreme Court of India appealed the case, but did not address the determinability of the agreement.
In Atlas Interactive (India) Pvt. Ltd. v. Bharat Sanchar Nigam Limited, the court ruled that determinable contracts require fair and just State instrumentality.
The High Court of Orissa ruled in Indian Oil Corporation Ltd. v. Freedom Filing Station that a dealership agreement, which lasted for five years, could be terminated by either party with three months' written notice. The court also allowed the petitioner to terminate the agreement if the dealer intentionally contaminated or tampered with the quality of the Corporation's product. The court set aside the trial court's and appellate court's injunctions.
If a contract allows termination for convenience, it may be considered "determinable" and not enforceable. In such cases, specific performance may not be the remedy, but a claim for compensation could be made. It's important to note that even when a contract is determined before its stipulated term, the performing party should receive payment proportionate to their obligations.
The termination provisions of contracts should be carefully considered and deliberated, considering the viewpoints of various courts. Parties should not demote or give less importance to these provisions, but deliberate on all possible outcomes upon termination. Given India's globalized and growing economy, it is crucial for the judiciary to pay attention to joint venture and IPR-related agreements for fair outcomes.
The law in Delhi suggests that contracts with termination clauses are not subject to specific performance, while in Tamil Nadu, Kerala, and Maharashtra, the concept of determinability is more nuanced. This discrepancy results in legal uncertainty and potential forum shopping for unscrupulous parties. It is crucial for all stakeholders to work together to establish a pro-contract enforcement regime and reach a suitable resolution. This collective effort will effectively end conflicting stances on determinability and allow for effective implementation of the principles underpinning the 2018 Amendment of Specific Relief Act.
COMMON LAW’S STANCE
Indefinite contracts, such as partnerships, employment, public leases, and perpetual licenses, often lack clear termination clauses. However, common law disagrees, based on the rule against perpetuities and the standard of reasonableness. Over a century ago, the US and UK courts recognized that obligations without a specified time cannot be enforced, with Echols v. New Orleans and Postlethwaite v. Freeland rulings respectively.
In the UK and US, contracts without termination clauses are considered terminable at will, with reasonable notice required for sales commissions, agency, goods supply, and perpetual software licenses.
Indian law provides remedies for breach of contract, including specific performance, damages, injunctions, and quantum merit. Specific performance is an age-old remedy for breach of contract, where the contract is enforceable at law or in equity, and damages as compensation. The principles governing these remedies are found under the Act, and the Act governs the grant of specific performance and injunctions.