India Takes A Step To Ensure Sanctity Of Contracts
There are some things that money can buy. For everything else, there is the Specific Relief Act.
The provisions of this law come into play when a contract is breached by one party and the other party says - money isn't enough, the terms of the contract must be met. It dates back to 1963 and this week the Lok Sabha approved some important changes to it. The amendments approved by Lok Sabha has yet to be approved by Rajya Sabha after which they will have to be notified before they come into effect.
Anand Desai, managing partner at DSK Legal and Chairman of the expert committee set up to recommend changes to the Specific Relief Act shared his views on BloombergQuint’s weekly law and policy show- The Fineprint
For what kind of contracts and remedies does the Specific Relief Act become crucial?
The Specific Relief Act is normally read with the Indian Contract Act, 1872 for enforcement of contracts and that has been the principle for many years now. Take a business which has to setup a large factory which involves a host of activities - like you buy the land, have a contract to construct, buy equipment, install the equipment, commission the plant, you get finance for the plant and utilities for the plant. It is a whole host of things. The objective is to run a business and not to get damages when a contractor or counterparty to the contract has not performed. So, it is important in today’s world, when contracts have become so complex, to ensure parties meet the terms of the contract and the aggrieved party is not just chasing money at the end of a potential arduous litigation.
Specific Performance To Be The Rule
The Specific Relief Act provides for two remedies- the party that has suffered a loss as a result of a breach of contract can either ask for monetary compensation or request the court to compel the defaulting party to meet the terms of the contract. The court can use its discretion to direct performance if the monetary compensation is inadequate or it cannot be easily ascertained.
The amendment has taken away this discretion of courts. How crucial is this change and what do you see as its impact?
The principle in India has been that damages is a norm and performance is the exception. The principle has been that most contracts have a monetary reason to enter into them. Therefore, money should be an adequate relief. But the reality is the time it takes to get the damages is very long. I don’t enter into a contract only to get money. I have other objectives. I want the job done - whether it is setting up a plant or any other activity. I want something and therefore I am contracting for it. And if I don’t get it, then should I be getting it through a court enforcing the contract or should I be just getting money in, let’s say, 10 years. We felt that unless we push the court into giving performance, except in certain circumstances which it still will not, a party won’t get what he bargained for.
And you believe this will deter parties from reneging on contracts?
When a party knows that he has to perform, hopefully he will enter into the contract with more seriousness. What they have also provided for is substituted performance. So, if a party does not perform, then the party that suffers the breach has a right to give a 30-day notice. If it’s still not performed, then he can appoint somebody else. So, he can get his job done and the difference in price and loss suffered can be sought then from the party in default.
Concept Of Substituted Performance
That’s the second key change. The aggrieved party can ask for substituted performance i.e. arrange for performance of the contract by a third party. What has prompted this change and how will this work?
We already had a concept of mitigation of damages. When the party was in breach, then the aggrieved party had a duty under the Indian law to mitigate the quantum he would claim. He could reduce the damages by, for example, buying the same goods from elsewhere and that was a duty cast upon him. It could not be that he just waited at the end of suit and asked for the full quantum of damages. This has been refined to say that when you can get performance by someone else, and it may not be in all the cases, but if you can get it, then you have an option to do so without waiting for this party to perform or have a risk where you considered a mitigation and it is not being agreed to by the other side or the court. Legislation is something which a party knows in advance, that it could happen and that surely helps.
For what sort of contracts will the provision of substituted performance be useful?
There are different kinds of contract. A simple supply contract like buying rice or wheat. There is a market for them. You can go and buy it which is what mitigation was anyway. But suppose you’re building a plant for chemical manufacturing or a power plant. There are other contractors in market. It is not that only one party can deliver it to you. So, you have an ability to go to court and say that look this party is not doing what it was supposed to do; so why can’t I go to someone else. For instance, an interior decorator disappears one day and I am stuck with a half made office. With this provision, you can still complete the work and claim damages. You don’t have to wait with a half-completed office till your suit or arbitration is over.
Injunctive Relief Narrowed
The third important change is aimed at infrastructure projects. The power of courts to grant injunctive relief in case of infrastructure projects has been taken away and they’ve defined it to mean projects in the transport, energy, commercial infrastructure projects etc. Why is this important?
All of these projects are considered to be in public interest. So, if the contract may be between the contractor and government or a contractor and a person providing potentially that service - the impact of delay, non-performance and impact on people, society as a whole is huge. Take a port, airport, power plant or a bridge. All of us will benefit from having it and lose out once it doesn’t happen. Let’s say there’s a toll road that’s getting delayed. If a toll road goes way over cost, the party will recover his money from somewhere. That could be you and me who will be paying for this cost. So, the public interest is paramount if the project has some significance from public perspective and where it is not a private contract between two parties.
There has been a history of injunctions, appeals and therefore projects getting stuck for a long time. It is not unusual to hear about this or to even see it. if you coupled this with substitutive performance, the two go together. There is one party unable to perform. But once an injunction is given, it even stops anyone else getting the contract. It affects the public. If you read all these provisions together, the purpose was to ensure that the purpose of the contract, especially for a public objective, is met.
Watch this video for Desai’s views on appointment of technical experts and impact on India’s ease-of-doing business ranking.