Determinable contracts under the Specific Relief Act, 1963 – Part I

Introduction

The remedies most resorted to for breach of contract are damages, specific performance, and injunctions. The remedy of damages is governed by the Indian Contract Act, 1872, whilst specific performance and injunctions are governed by the Specific Relief Act, 1963 (the “Act”).

Prior to the amendment of the Act in 2018, the grant of specific performance was not available as a matter of course but was based on the discretion of the court. Section 10 of the un-amended Act laid down cases in which the court could exercise this discretion viz. when no standard exists for ascertaining the actual damage caused by non-performance of the act agreed to be done or when the act agreed to be done is such that compensation in money for its non-performance would not afford adequate relief. The Specific Relief (Amendment) Act, 2018 substituted Section 10 of the Act, which now provides that specific performance of a contract shall be enforced by the court, subject to Sections 11(2), 14 and 16 of the Act.[1] Section 20 of the un-amended Act, which set out the contours of the court’s discretion and enumerated cases under which the court may exercise discretion not to grant specific performance, was substituted in its entirety with a provision relating to substituted performance. The grant of specific performance of a contract is, therefore, no longer a matter of discretion and must be granted subject to the exceptions set out in the Act.

Section 14 of the Act deals with contracts which are not specifically enforceable viz. (i) where a party has obtained substituted performance of the contract (introduced vide the amendment in 2018), (ii) a contract whose performance involves performance of a continuous duty, which the court cannot supervise, (iii) a contract, which is so dependent on personal qualifications of the parties that the court cannot enforce specific performance of its material terms, and (iv) a contract, which is in its nature determinable. This also has a bearing on injunctions which may be sought by parties, as Section 41(e) of the Act provides that an injunction cannot be granted to prevent breach of a contract, the performance of which would not be specifically enforced. However, where a contract comprises an affirmative agreement to perform a certain act, coupled with a negative agreement (express or implied) not to perform a certain act, the circumstance that the court is unable to compel specific performance of the affirmative agreement will not preclude it from granting an injunction to perform the negative agreement, provided that the plaintiff has not failed to perform the contract so far as it is binding on him.[2]

In Part I of this post, we examine the concept of determinable contracts under the Act and judgments of the Supreme Court, which throw some light on what would qualify as a determinable contract under the Act.

What is a determinable contract?

Contracts usually provide for termination at the option of one or each of the parties, post the occurrence of a specified event/ breach of contract, upon expiry of the term of the contract i.e. by efflux of time and/or by one or each of the parties, without giving any reason for doing so. Termination upon breach could be either forthwith or upon failure of the defaulting party to cure such breach. There appears to be a difference of opinion in the application of Section 14(d) of the Act [erstwhile Section 14(1)(c)] to contracts insofar as some courts have held that only contracts, which can be terminated at the will of either party without assigning any reasons can be classified as determinable, while others have held that even contracts, which enable parties to terminate on the happening of certain specified events are determinable.

Supreme Court

In Indian Oil Corporation Ltd. v. Amritsar Gas Service & Ors.,[3] a three-judge bench of the Supreme Court was dealing with a case where Indian Oil Corporation Ltd. terminated a distributorship agreement on account of complaints that Amritsar Gas Service was selling unauthorised gas connections. The agreement contained two clauses which governed termination – one which provided for termination on the happening of certain specified events and another which entitled either party to terminate the agreement by giving 30 days’ notice to the other party, without assigning any reason for such termination. Indian Oil Corporation Ltd. terminated the agreement under the former clause. An arbitral tribunal found the termination to be a breach of contract and held that Indian Oil Corporation Ltd. was liable to restore the distributorship and also pay compensation. The Supreme Court was of the view that the agreement was revocable and therefore determinable in nature under the Act. The Supreme Court also held that once the arbitral tribunal found that the termination for alleged breach was wrongful, the only remedy which could be granted was compensation for the 30-day notice period, since the agreement was revocable without assigning any reason.

Notably, the Supreme Court did not highlight whether it found the agreement to be determinable on account of the ability of either party to terminate without assigning any reason or on the very ability of the parties to terminate, but simply referred to (as held by the arbitral tribunal) both termination clauses as rendering the contract determinable. It could be argued that compensation (for a period of 30 days) was held to be the only possible remedy by the Supreme Court whilst noticing that the agreement contained a clause, which permitted termination without assigning any reasons, but this may be tenuous.

In Her Highness Maharani Shantidevi P. Gaikwad v. Savjibhai Haribhai Patel,[4] the Supreme Court had occasion to deal with an agreement for construction of dwelling units on a parcel of land. The agreement provided that it shall not be unilaterally rescinded by either party after the plaintiff has been put in possession of the property. The Supreme Court interpreted this to mean that the contract could be unilaterally terminated before delivery of possession and held that the contract could not be specifically enforced as it was determinable.

Amritsar Gas (supra) led to several subsequent decisions by various High Courts where contracts were held to be determinable even if they contained a clause which enabled parties to terminate on the happening of a specified event. Conflicting decisions by various High Courts are analysed in Part II of this post.


[1] For an analysis of whether the Specific Relief (Amendment) Act, 2018 is prospective or retrospective, please see https://corporate.cyrilamarchandblogs.com/2018/09/specific-relief-amendment-act-2018-prospective-retrospective/. For an analysis of the relevant amendments, please see https://corporate.cyrilamarchandblogs.com/2019/01/contract-law-enforcement-india/

[2] Section 42 of the Act

[3] (1991) 1 SCC 533

[4] (2001) 5 SCC 101

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Photo of Aditya Mehta Aditya Mehta

Partner in the Dispute Resolution Practice at the Mumbai office of Cyril Amarchand Mangaldas. Aditya has expertise and extensive experience in commercial litigation and arbitration (both domestic and international), handling disputes both of a general commercial nature as well as public and regulatory…

Partner in the Dispute Resolution Practice at the Mumbai office of Cyril Amarchand Mangaldas. Aditya has expertise and extensive experience in commercial litigation and arbitration (both domestic and international), handling disputes both of a general commercial nature as well as public and regulatory disputes across sectors, including financial regulation, administrative, white collar, sports, media and entertainment, food and beverage, local government, planning and environment and public sector projects. He regularly appears and argues matters before Courts (including High Courts and the Supreme Court), Tribunals and Regulatory Authorities. He can be reached at aditya.mehta@cyrilshroff.com.

Photo of Arjun Sreenivas Arjun Sreenivas

Senior Associate in the Dispute Resolution Team at the Mumbai office of Cyril Amarchand Mangaldas. Arjun has about 5 years’ experience in dispute resolution. He focuses on arbitration as well as litigation before the Supreme Court and High Courts across various sectors including…

Senior Associate in the Dispute Resolution Team at the Mumbai office of Cyril Amarchand Mangaldas. Arjun has about 5 years’ experience in dispute resolution. He focuses on arbitration as well as litigation before the Supreme Court and High Courts across various sectors including infrastructure, sports, technology, media and entertainment and food and beverage. He can be reached at arjun.sreenivas@cyrilshroff.com

Photo of Swagata Ghosh Swagata Ghosh

Associate in the Dispute Resolution Team at the Mumbai office of Cyril Amarchand Mangaldas. Swagata focuses on arbitration matters as well as litigation emanating from contractual / corporate commercial disputes. She can be reached at swagata.g@cyrilshroff.com.