Introduction
Recently, I had the privilege of delivering my third lecture at the Rajasthan State Judicial Academy to a batch of newly inducted trainee judges. The subject of the lecture was “Specific Performance of Contract, Alternative Remedies and Practical Problems.” As has become a practice with me, I am once again attempting to translate the substance of that lecture into a series of blog posts. The purpose is not merely to reproduce what was discussed in the classroom, but to revisit the subject from the perspective of its practical application in judicial proceedings. In this series, I propose to begin with the fundamentals—understanding the essentials of a contract and the role they play in determining enforceability; examining what is meant by specific performance; and then navigating the statutory scheme governing the remedy under the Specific Relief Act, 1963. The subsequent parts will move from the statutory framework to alternative remedies and, finally, to some of the practical problems that frequently confront courts while dealing with suits for specific performance.
Contract and Essentials of a valid contract
Contract Act defines a Contract as “An agreement which is enforceable by Law”. An Agreement is a settlement between two parties, which contains obligations or promises which both parties need to fulfil. When such an agreement is made binding by law it becomes a Contract. Therefore, an agreement consists of reciprocal Promises which are to be performed by parties to the contract. Promises are reciprocal when both parties have to perform something for the other.
Section 10 states conditions which are required for a contract to be valid.
Offer: Firstly, there must be an offer from either party, without an Offer a contract cannot arise. However, in some cases, this principle could not be applied. For instance, Mulla talks about a situation in which offer and acceptance could not be traced, for instance, a commercial agreement reached after multiple rounds of negotiations.
Acceptance of the offer: Secondly, the Offer must be accepted and accepted by the person to whom it was intended. So, an offer by A to B has to be accepted by B only.
Acceptance in ad-idem: Thirdly, though acceptance is important, there must be “Consensus ad-idem”. Consensus ad-idem means meeting of minds. It means that parties to the contract should accept the terms of the contract in the “same sense”. Thus parties to the contract must have the same understanding of the terms of the contract.
Parties must be competent to contract, under the laws they are subjected to i.e. they must be legally capable to contract. (Unsound, Minor)
Free consent, according to section 10 of contract act” agreements are contracts if they are made by free consent” It means that contract must be entered into out of parties own volition and without being forced, or deceived into. Section 14 of the contract act defined free consent as consent not given under coercion, undue influence, fraud, misrepresentation and mistake.
The general averment that consent was not free is not maintainable. It must be proved that consent was vitiated by any of the 5 elements mentioned in section 14. If consent manifests any of such elements then the contract is voidable at the option of the party whose consent was obtained.
Consideration, for the performance of promises there must be a consideration, something given for performance of promise from both parties to the contract.
Further, the objective and consideration of the contract must be lawful.
There must be an intention to enter into a legal relationship.
Certainty, Contract must be certain and not ambiguous and vague. (Section 29)
A contract must not be expressly declared void. (Section 10 of Contract Act) According to section 10, consideration and object of the contract should be lawful and is an essential element of a contract. Accordingly, Section 23 defines unlawful consideration. Unlawful consideration and object is one which is either,
- forbidden by law;
- or is of such a nature, that if permitted, then it would defeat the provisions of law;
- or the purpose of the contract is fraudulent;
- or involves or implies giving injury or damage to someone or to someone’s property; or
- or the court considers it as immoral or against public policy.
If a contract shows any of these elements then it is unlawful and void u/s 23.
So, for specific performance of a contract the first and foremost essential is there should be a valid contract between both the parties. In regard to existence of a contract and its validity a separate issue has to be framed during the course of trial.
Specific Performance of Contract and Difference between Old and New Regime
Under Indian law, when a party complains of the breach of a contract, it may typically seek recourse to two distinct sets of remedies. Firstly, an aggrieved party may claim damages for, amongst other things, placing itself pecuniarily in the same position as if the alleged breach never took place and the contract subsisted. Secondly, the aggrieved party may claim specific performance or seek injunctive relief to prevent the breach of the contract. The remedy of damages is covered under the Contract Act, 18721 (Contract Act), while reliefs such as specific performance and injunctions are governed by the Specific Relief Act, 19632 (Specific Relief Act).
Specific performance constitutes an equitable remedy granted by a court to uphold the contractual commitments among the parties. (Zarina Siddiqui v. A. Ramalingam, (2015) 1 SCC 705) Unlike a claim of damages, which involves compensation for not fulfilling the contractual stipulations, specific performance operates as a remedy that enforces the terms agreed between the parties.
The old regime- Specific performance: A discretionary relief under the old regime
The first clause of the unamended version of Section 20 of the Specific Relief Act, as it stood prior to the introduction of the Specific Relief (Amendment) Act, 2018 (2018 Amendment), reads as below:
“20. Discretion as to decreeing specific performance: (1) The jurisdiction to decree specific performance is discretionary, and the court is not bound to grant such relief merely because it is lawful to do so; but the discretion of the court is not arbitrary but sound and reasonable, guided by judicial principles and capable of correction by a court of appeal.…”
As may be seen above, Specific Relief Act, in its original form, envisaged specific performance as a discretionary relief and bestowed broad discretionary authority upon the Indian courts to grant or refuse to grant a decree of specific performance and to allow or decline issuing injunctions. This broad discretion frequently resulted in the Indian courts predominantly opting for awarding damages as the general rule, with specific performance being granted only in exceptional cases.
The legislative threshold for granting and not granting specific performance under the old regime
Section 10 of the unamended Specific Relief Act outlined a twofold criterion for the courts to exercise the discretion to grant a decree of specific performance. Under the old regime, specific performance of a contract could be directed:
(i) In the absence of a reliable standard for ascertaining the actual damage caused by the non-performance of the contractual obligations.
(ii) When the act(s) agreed to be performed under the contract are such that compensation in money for non-performance would not afford adequate relief.
A third criterion for the exercise of discretion to grant a decree of specific performance was found in Section 20(3) of the unamended Specific Relief Act, which states that a court may allow specific performance in any case where the plaintiff has substantially performed or suffered losses in consequence of performing its part of the bargain under the contract.
Insofar as the circumstances for not granting the relief of specific performance are concerned, Section 20 of the old regime provided a handful of grounds centred around commercial onerosity/hardship, which include:
(i) Where the terms of the contract or the conduct of the parties at the time of entering into the contract or the other circumstances under which the contract was entered into are such that the contract, though not voidable, gives the plaintiff (party seeking specific performance) an unfair advantage over the defendant (party against whom specific performance is sought).
(ii) Where the performance of the contract would involve some hardship on the defendant which they did not foresee, whereas its non-performance would involve no such hardship on the plaintiff.
(iii) Where the defendant entered into the contract under circumstances which though not rendering the contract voidable, makes it inequitable to enforce specific performance.
The new regime
The 2018 Amendment plays a pivotal role in making specific performance a non-discretionary and mandatory relief under Specific Relief Act. Post the 2018 Amendment, Section 10 of the Specific Relief Act, as it stands now, emphasises that the court shall enforce specific performance, subject to the provisions carried under Sections 11(2), 14, and 16 of the Specific Relief Act.
The amended language of Section 10 under Specific Relief Act marks a remarkable departure from the old regime in relation to granting specific performance of contracts. This intent is captured in the Statement of Objects and Reasons for introducing the 2018 Amendment, which states that the amendment was brought to do away with the broader discretion vested upon the Indian courts to grant specific performance and to make specific performance of contract “a general rule than exception subject to certain limited grounds”.
In B. Santoshamma v. D. Sarala, (2020) 19 SCC 80, the Supreme Court while examining the amended provisions of Specific Relief Act, especially the changes made to Section 10 of the Specific Relief Act through the 2018 Amendment observed that the words “specific performance of any contract may, in the discretion of the Court, be enforced” have been substituted with the words “specific performance of a contract shall be enforced subject to the provisions contained in sub-section (2) of Section 11, Section 14 and Section 16”. It was concluded that although the relief of specific performance of a contract is no longer discretionary, the same would still be subject to Section 11, Section 14, and Section 16 of the Specific Relief Act after the 2018 Amendment.
Consequently, after the 2018 Amendment, opting for specific performance appears to have become an equally viable option compared to substitutive reliefs such as granting damages. However, despite the amendments brought in by the 2018 Amendment, the broad principles of granting specific performance seem to have remained consistent in India.
Legal Provisions
Section 10 of SRA states that the specific performance of a contract shall be enforced by the court subject to the provisions contained in sub-section (2) of section 11, section 14 and section 16.”
The significance of the present Section 10 lies in the change from the pre-amendment position. Earlier, specific performance was generally understood as a discretionary equitable remedy, with the court being required to exercise its discretion within the framework of the Act. After the 2018 amendment, the language of Section 10 is considerably more direct: specific performance “shall be enforced”, subject, of course, to the statutory limitations contained in Sections 11(2), 14 and 16.
Section 12 of SRA provides for the situations where a part of the contract can be enforced. The Supreme Court in B. Santoshamma opined that the provisions of Section 12 of the Relief Act must be construed and interpreted in a purposive and meaningful manner to empower the Court to direct specific performance by the defaulting party of so much of the contract, as can be performed. It was further clarified that a contractee who frustrates a contract deliberately by his own wrongful acts cannot be permitted to escape and scot-free.
Situations where Specific Performance can’t be granted
In terms of the provisions contained in Section 14 of the Specific Relief Act, the following contracts cannot be specifically enforced:
(i) Where a party to the contract has obtained substituted performance of the contract in accordance with the provisions of Section 20.
(ii) A contract, the performance of which involves the performance of a continuous duty which the court cannot supervise.
(iii) A contract which is so dependent on the personal qualifications of the parties that the court cannot enforce specific performance of its material terms.
(iv) A contract which is in its nature determinable.
What is Substituted Performance and the one who has claimed Substituted Performance can’t claim specific performance
Substituted performance primarily offers the following benefits to the promisee. It puts the promisee in a position as if the contract is performed. This is the objective of awarding damages under contract law.
The second benefit is that it provides a concrete method to compute losses suffered owing to non-performance or failure by the promisor to perform the contract. Instead of proving the market price as on the date of breach, damages is computed as the difference between the expenditure that the promisee has reasonably incurred in actually completing the contract through substituted performance and that would have been incurred in completing the contract through the promisor. Recognizing substituted performance as a substantive statutory right is a reform in the right direction.
The 2018 Act does away with the general rule in contract law that damages will be the default remedy and specific performance will be the exception. It alters the legal position which has been in vogue in the common law world for a long time. Although several jurisdictions have specific performance as a default remedy, damages is the normal remedy in common law jurisdictions. The present amendments do not merely priorities specific performance over damages; they go a step further than the recommendations of the Expert Committee by holding that specific performance would be available if substituted performance is possible but was not opted by the promisee.
The new Section 20 is titled ‘Substituted performance of contract’. Section 20(1) states that where the contract is broken due to non-performance of promise by any party, the victim of the breach shall have the option of substituted performance through a third party or by the victim’s own agency. It further states that the victim can recover the expenses and other costs actually incurred, spent or suffered by him, from the party committing such breach. Section 20(2) prescribes substituted performance on the fulfillment of below mentioned conditions:
● The victim has to give a written notice of a minimum of thirty days to the perpetrator of breach.
● The notice should call upon the perpetrator to perform the contract within time specified in the notice, which shall not be less than thirty days.
● The perpetrator should have refused or failed to perform the contract within such time.
On satisfaction of the above conditions, the victim can get the contract performed through a third party or by his own agency. The proviso to Section 20(2) clarifies that unless the contract is performed through a third party or by his own agency, the victim will not be entitled to recover the expenses and costs mentioned in Section 20(1). Section 20(3) talks about events happening after the completion of the work by the third party or by the victim. It states that once this happens, the victim cannot claim specific performance. Section 20(4) states that the right of substituted performance will not prevent the victim from claiming compensation from the perpetrator for loss caused due to the breach. Section 14(a) states that where the promisee has obtained substituted performance of the contract as per Section 20, the contract is not specifically enforceable. Section 16(a) provides that specific performance cannot be enforced in favour of a person who has obtained substituted performance of contract.
Application of Substituted Performance in Sale of Goods Act
As regards sale of goods, Section 58 of the Sale of Goods Act, 1930, permits the court to decree, on application, specific performance in suit for breach of contract to deliver specific or ascertained goods. This is made subject to Chapter II of the Specific Relief Act, 1877, which has been replaced by the 1963 Act. Chapter II of the 1963 Act contains provisions relating to when specific performance would be available and would not be available. After the 2018 Act, the new Section 20 (substituted performance of contract), contained in Chapter II, would also apply to sale of goods. Consequently, Section 58 of the Sale of Goods Act, 1930 would be subject to the amended Sections 10, 14(a), 16(a), and 20 of the 1963 Act. The implication of this is that in the case of sale of goods, the remedy of specific performance would be available, except in circumstances provided under Section 14 and 16 of the 1963 Act, as amended.
What are Determinable Contracts and Why can’t they be Specifically Enforced
In legal terminology, the term “determinable” means something that is “liable to end upon the happening of a contingency”, or in other words, is “terminable”. In essence, from the traditional textbook/dictionary definition of “determinable”, a determinable contract would generally mean a contract that can be ended by either party at will or upon the occurrence or non-occurrence of a particular contingency.
The inherent challenge in enforcing the specific performance of a contract that includes a termination clause lies in the fact that if the court mandates specific performance, the party directed to perform its part of the bargain could potentially terminate the contract. This situation makes a court order and the litigation undergone by the parties practically futile, as the impending termination of the contract negates its continued applicability and enforceability. It doesn’t mean that such contracts can be ended anytime without any repercussions, what is meant here is specific performance of such contracts cannot be enforced and aggrieved party has to seek alternative remedy like damages.
Contracts can be terminated due to various reasons such as
- specific cause;
- mutual agreement of parties;
- the passage/efflux of a set time period;
- occurrence of an event; and
- at will with or without notice.
In Indian Oil Corpn. Ltd. v. Amritsar Gas Service (1991) 1 SCC 533, the Supreme Court came across a case where Indian Oil Corporation Ltd. terminated a distributorship on account of certain complaints that the respondent was indulging in unauthorised sale of gas connections. The distributorship agreement contained two clauses governing termination. First, a clause that provided for termination contingent on the happening of certain event. Second, a clause that permitted either party to terminate the agreement by giving a thirty days’ notice without assigning any reasons for such termination. The Supreme Court opined that the distributorship agreement was determinable in nature and the only remedy for the respondent was to seek appropriate damages. Interestingly, the Supreme Court did not render any observations on whether the distributorship agreement was determinable on account of the first clause or the second clause in the provisions pertaining to termination. However, some inference may be drawn from the fact that the Supreme Court in this case suggested that the damages that may be awarded to the aggrieved party for the period of notice for termination i.e. 30 days. Thus, it appears that the Supreme Court in Indian Oil Corpn. Ltd. relied on the second clause to hold that the agreement was determinable.
In Shantidevi P. Gaikwad v. Savjibhai Haribhai Patel (2001) 5 SCC 101, the Supreme Court was dealing with a matter pertaining to the construction of dwelling units on some land. The underlying agreement entered between the parties for land development stated that either party shall not unilaterally rescind the agreement after the plaintiff was put in possession of the property. The Supreme Court interpreted this provision to mean that the agreement could indeed be terminated unilaterally before the plaintiff was put in possession of the property. Thus, the Supreme Court held that the contract could not be specifically enforced as it was determinable in nature.
The position as to whether all contracts that can be terminated are determinable in nature or not is hotly debatable under Indian law. Within this dilemma of drawing the fine lines of determinability, the most contested subject is whether a contract that lacks a provision allowing for one-sided termination without attribution of reasons can be considered as having the characteristic of being “determinable”. High Courts across jurisdictions have offered their own interpretation.
The precedent coming from Hon’ble Madras High Court is one which has elaborately dealt with this topic. In Jumbo World Holdings, the High Court of Madras observed that Section 14(d) of the Specific Relief Act does not necessarily mean that all contracts capable of termination are inherently immune to specific performance. If such an understanding were given effect, almost no commercial contract could be specifically enforced. The High Court then went on to categorise contracts into five distinct categories for the purpose of determinability:
(i) Contracts that are inherently revocable or dissolvable unilaterally, such as licences and partnerships at will.
(ii) Contracts that can be terminated unilaterally without cause or fault.
(iii) Contracts that can be terminated immediately for a cause without the option to rectify the breach.
(iv) Contracts that can be terminated for a cause, but with the condition of a breach notice and an opportunity to rectify the breach.
(v) Contracts without a termination clause, which could be ended due to the violation of a condition but not a warranty, following relevant common law principles.
Upon categorising contracts into the above categories, the Madras High Court in Jumbo World Holdings held the first and second categories to be determinable. The third category of contracts was held generally not determinable, although the ease of terminability could influence the decision to grant specific performance. The fourth and fifth categories were held not determinable in nature.
Injunction cannot be granted to prevent breach of a contract, the performance of which would not be specifically enforced
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. (Section 42)
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.
More to follow in the next parts