Contracts that are Determinable in Nature
The Specific Relief (Amendment) Act, 2018 (“Amendment Act“) has brought about significant amendments to the Specific Relief Act, 1963 (“Act“), the critical one being that specific performance is now (unless a case falls within the exceptions) the norm instead of a discretionary power with Indian Courts. Our present series of articles focus on the four exceptions to the specific performance rule. In Part 1 of the series we discussed substituted performance, in Part 2 we discussed contracts that involve a continuous duty which cannot be supervised by Courts, in Part 3 we discussed contracts involving personal qualifications and in this Part 4 we shall discuss the fourth exception that has been carved out i.e. contracts that are determinable in nature cannot be specifically enforced.
Specific Performance of Contracts –Contracts that are Determinable in Nature
Section 14 (d) of the Amendment Act is equivalent to an earlier provision (Section 14 (c) of the Act) present in the old act. Both provisions provide that a contract that is determinable in nature cannot be specifically enforced. Commercial contracts dictate business relations between the counterparts and specify their respective rights and obligations. These contracts also determine the exit mechanism or the grounds on which the parties can terminate the contract. Section 14 (d) of the Amendment Act states that a contract which is determinable in nature cannot be specifically enforceable. It therefore becomes important to understand which contracts are determinable in nature and hence not specifically enforceable.
Apex Court Decisions
The Supreme Court of India first deliberated on the interpretation of ‘determinable contracts’ in Indian Oil Corporation Ltd. vs. Amritsar Gas Services and Ors. in 1991 (1991 SCC (1) 533), wherein it held that a distributorship agreement which included a clause that provided for termination on the occurrence of specific events or termination by either party by giving thirty days’ notice without any reason would be determinable in nature. The Supreme Court further stated that specific performance of the distributorship agreement would be contrary to the mandate in Section 14(1) of the Act and the agreement could not be enforced. The Supreme Court in this case only awarded compensation for the loss of earnings for the notice period.
The Supreme Court reiterated in 2001 in the case of Her Highness Maharani Shantidevi P. Gaikwad vs. Savjibai Haribai Patel and Ors. (AIR 2001 SC 1462) that an agreement that could be unilaterally terminated by a party would be determinable in nature and therefore, the agreement could not be specifically enforced.
Interpretations of Other Courts
The concept of the term “determinable” has been subject to several judicial interpretations by different High Courts. It was in the case of Rajasthan Breweries Ltd. vs The Stroh Brewery Company(AIR 2000 Delhi 450) that that the concept of determinable was extensively deliberated. In this case, the Delhi High Court equated the facts of the case as being identical to the Amritsar Gas Services case and ruled that there is no manner of doubt that the contracts by their nature are determinable. While interpreting the term determinable under Section 14(1)(c), the Court also stated that even in the absence of specific clause authorizing and enabling either party toterminate the agreement in the event of happening of the events specified therein, from the very nature of the agreement, which is private commercial transaction, the same could be terminated even without assigning any reason by serving a reasonablenotice. At the most, in case ultimately it is found that termination was bad in law orcontrary to the terms of the agreement or of any understanding between the partiesor for any other reason, the remedy of the appellants would be to seek compensationfor wrongful termination but not a claim for specific performance of the agreements.
The Delhi High Court in Turnaround Logistics (P) Ltd. vs. Jet Airways (India) Ltd. and Ors. in 2006 (MANU/DE/8741/2006) that the word ‘determinable’ means a contract which can be put to an end. The Delhi High court further held that the plaintiff is not entitled for any relief in respect of an agreement/business dealing which is determinable and which has been determined. Even if the determination is not in accordance with the terms and conditions, it will only entitle a party for damages and not specific performance of the agreement.
In 2012, the Bombay High Court in Spice Digital Ltd. vs. Vistaas Digital Media Pvt. Ltd(2012 (114) BOMLR 3696) relied on the Supreme Court’s decision in Amritsar Gas Service as well as the Delhi Courts Rajasthan Breweries decision and stated that the contract which in its nature is determinable, cannot be specifically enforced. Furthermore, it was held by the Court that the prima facie finding of the arbitral tribunal that the contract is determinable and thus no specific performance of such contract can be enforced in view of section 14(1)(c) of the Act warrants no interference at this stage.
These decisions of the High Courts however are much wider than that of the Apex Court and can be interpreted to mean that that the mere existence of a termination clause in a commercial contract could lead to the contract being held as “determinable” and, hence, not specifically enforceable.
The position of courts regarding determinable contracts has remained largely unchanged over the years. Earlier under the Act, Indian Courts had the discretion to decide whether to provide specific performance. As a result, Indian Courts often awarded damages for breach of contract as a general rule and granted specific performance as an exception. One of the most significant amendments in the Amendment Act is that it does away with the wider discretion of Courts to grant specific performance and to make specific performance of contracts a general rule subject to certain limited grounds. It will be interesting to note the decisions of Courts with respect to the specific performance subsequent to the enforcement of the Amendment Act.