Determinable Contracts Under Specific Relief Act, 1963- An Issue Still Undetermined

14th March, 2024 - 9:59 am Categories: News & Updates 0 Comments

Introduction

India has been a ‘global trade hub’ since time immemorial. It’s abundant supply of raw materials, creative ideas and booming businesses gave it the name that needs no introduction- ‘sone ki chidiya’. It was this same business that drew the East India Company to our country. They perhaps understood the value of this business far before us and therefore felt the need to have a law that would govern the nature of these business transactions. It was this thought that gave rise to one of the oldest mercantile laws of the country, The Indian Contract Act, 1872.[1] A breach of contract attracts remedies like compensation in the form of damages, injunction or specific performance.

The Specific Relief Act, 1963 governs two of these remedies- injunction and specific relief.[2] Out of these two remedies specific performance becomes significantly important especially after the 2018 amendment to the act. Before 2018 the grant of specific relief was not a norm but a matter of discretion of the court. The court could grant specific performance under the circumstances laid down under the erstwhile Section 10 of the act.[3] However, in 2018, after the amendment it became clear that the intention of the parliament was now to make specific performance the norm rather than the exception. In lieu of that The Specific Relief (Amendment) Act of 2018 replaced Section 10 of the Act, which now states that, subject to Sections 11(2), 14 and 16, the court shall demand specific execution of a contract.[4]

[Image Sources: Shutterstock]

Section 14 of the act becomes especially relevant as it enlists certain conditions where specific performance cannot be granted.[5] It is clear that this provision needs to be exercised sparingly because just the way the Indian Constitution is a living document an act should also be treated as a ‘living statute’. In M/s Girdhari Lal & Sons v. Balbir Nath Mathur, the Supreme Court held that the Court should attempt to interpret the legislation with the intention of the parliament in mind, even if doing so requires deviating from the principle that simple language should be construed in accordance with their plain meaning.[6] A bone of contention in this regard is Section 14(d) of the act which states that if the contract is in its nature determinable then specific performance cannot be granted.[7] This issue has risen to prominence once again because of the recent proceedings in the case of Affle India Limited v. Talent Unlimited Online Services Private Limited.[8] The question that is being explored here is not what exactly is ‘determinable’ rather how contracts are determined in India, a question that has sought different interpretations by different high courts and is surprisingly an issue not yet settled by the Supreme Court.

Cases Where Contract Was Held To Be Determinable In Nature

The Supreme Court in Indian Oil Corporation v. Amritsar Gas Service And Others held a contract of distributorship to be a determinable contract as it was revocable.[9] The contract had two clauses one which allowed for termination of the agreement on the happening of certain specified events and another which allowed for termination by either party without assigning any such reason. The Court did not specify which clause it referred to while holding the contract to be determinable and therefore not granting specific performance.

In Jindal Steel and Power Ltd. v. SAP India Pvt. Ltd. the Court held that all revocable deeds and voidable contracts may fall within “determinable” contracts because as per Rajasthan Breweries Ltd. v. Stroh Brewery Company ‘determinable’ means putting an end to a thing.[10] So if a contact can be terminated then the Court will not go through cumbersome process of ordering the execution of a deed or instrument which is revocable at will of the ones who execute the deed. Therefore, all terminable contracts were held to be determinable in nature. This reasoning was also followed in D.R. Sondhi v. Hella KG Hueck & Co. where the contract was held to be determinable even though it was determinable by the parties and not by its very nature.[11] The fact that it could be terminated was enough to bring it within the purview Section 14(1)(c) of the un amended Specific Relief Act, 1963.[12]

In Stoughton Esports Pvt. Ltd. v. Godlike Esports Pvt. Ltd a clause in the agreement allowed for termination due to ‘cause’.[13] This means that the contract could be terminated only under certain specific conditions. Here a reliance was placed on the Amritsar Gas Case and the court held the contract to be a determinable contract under Section 14(1)(c), therefore no injunction was granted in view of the bar envisaged by section 41(e) of the Act.[14] This reasoning seems questionable as the court in the Amritsar Gas Case never specified why the contract was held to be determinable and the Delhi High Court has consistently interpreted the Supreme Court’s decision to mean that when the contract is terminable it is determinable. However, it is very well possible that the court held the contract to be determinable due to the presence of a ‘unilateral termination’ clause and not a ‘termination for cause’ clause.

The Delhi High Court in its very recent judgment in M/S Ksheeraabad Construction Pvt Ltd v NHIDCL & Anr, decided on 23^rd May 2023, referred to all these earlier decisions to hold the contract to be determinable.[15] It clarified that determinable contracts are not contracts that rae voidable but also those which stipulate termination on the occurence of a particular event. Moreover, the legislature never used the phrase ‘inherently determinable’ that was being used by the courts which gave the opposing line of judgments. Finally, a difference was shown between ‘revoke’ and ‘determined’ to gauge the intent of the legislature while replacing the former with the latter and enunciate that the term revoke was inaccurate.

The same court did not hesitate in Yassh Deep Builders LLP v. Sushil Kumar Singh & Anr., decided on 16^th March 2023, to call a contract determinable by its very nature merely because the Collaboration Agreement was a commercial transaction between the parties.[16]

Having discussed the long history of such cases we come to our next set of cases where the contract was not held to be determinable in nature and specific performance was granted.

Cases Where Contract Was Not Held To Be Determinable In Nature

The Kerala High Court in T.O. Abraham v. Jose Thomas focused on how the word revoked was replaced by determinable in the old act while denying specific relief.[17] This was done to use a more specific word and bring greater clarity that when a contract is ‘inherently determinable’ then only can specific relief be denied.To assess if a given contract is naturally determinable or not, we must first ascertain whether the parties to the said contract are free to decide upon its terms or to end it on their own, without consulting one another or giving a reason. Only if the contract is unilaterally terminable will it be determinable.

The Delhi High Court in Ascot Hotels and Resorts Pvt. Ltd. v. Connaught Plaza Restaurants Pvt. Ltd. has analyzed the phrase ‘in its nature determinable’.[18] The act does not contemplate determinability due to fault. If that was the case then the contract would be terminated on committing the fault and termination would amount to the contract being determinable. The party committing the fault would take advance of its own neglect and this would be against the principles of equity.

In A Murugan And Others v. Rainbow Foundation Limited And Others, the Madras High Court drew a distinction between contracts that may be determined and contracts that are by their very nature determinable.[19] This distinction is profound. This is because if all contracts that could be terminated are classified as determinable contracts then almost no commercial contract would ever be specifically enforceable. Therefore, only contracts that could be terminated by a single party unilaterally without giving any reason or suggesting a fault could be called determinable. If that was not the case then the rationale for Section 14(c), that is the grant of specific performance of contracts that are by nature determinable, would be an unnecessary exercise leading to nullification of effectiveness of the order by reason of subsequent termination. This was reaffirmed in the subsequent ruling of the Madras High Court in the case of Jumbo World Holdings Limited And Another v. Embassy Property Developments Private Limited Rep. By Its Director Mr. K.Y. Gobikrishnan And Others.[20]

The Bombay High Court in Narendra Hirawat And Co. v. Sholay Media Entertainment Pvt. Ltd. And Another,[21] interpreted determinable contracts as elaborated in Section 14(d) to mean contracts that are terminable at the sweet will of the party without reference to the other party, any breach, eventuality or circumstance i.e a unilateral right to determine a contract without assigning any reason. A mere termination of contract cannot amount to determinable contract. An appeal against this order is pending in the Supreme Court.

A recent decision in this regard was rendered by the Delhi High Court in DLF Home Developers Limited v. Shipra Estate Limited and Others,[22] here the court held that as per the principles of equity a contract cannot be terminated there is willingness and ability on part of the other party to perform its obligations because otherwise all contracts can be terminated when there is a breach of obligations by the other party, that itself cannot make a contract determinable. This means that the defaulting party must be given time to fulfill their obligations. Given that a contract gives one party the right to cancel it in the event that the other party breaches the agreement, it cannot be said that a contract is not explicitly enforceable by nature.

Conclusion

We see that two sets of High Court decisions exist and the confusion primarily arises because of the Supreme Court decision in the Amritsar Gas Case where the court does not specify that based on which of the two clauses in the contract in question was it held to be determinable.[1] This results in the first set of decisions where all contracts that can be terminated are said to be determinable and the second set of decisions where only contracts that are unilaterally and inherently terminable without assigning any cause or reason are determinable. Even though the second set of reasoning seems more commercially apt and logically sound, the position of law is tilted in favor of the first set. These differing and conflicting views pose a serious question of law and make us wonder how exactly do we determine if a contract is determinable or not. It is time

Author: Aarushi Gupta, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

[1] Supra, note 9.

References

7. Jindal Steel and Power Ltd. v. SAP India Pvt. Ltd. 2015
8. Rajasthan Breweries Ltd. v. Stroh Brewery Company 2000
9. R. Sondhi v. Hella KG Hueck & Co. 2001
10. Stoughton Esports Pvt. Ltd. v. Godlike Esports Pvt. Ltd
11. M/S Ksheeraabad Construction Pvt Ltd v NHIDCL & Anr. 2023
12. Yassh Deep Builders LLP v. Sushil Kumar Singh & Anr. 2023
13. O. Abraham v. Jose Thomas 2017
14. Ascot Hotels and Resorts Pvt. Ltd. v. Connaught Plaza Restaurants Pvt. Ltd. 2018
15. A Murugan And Others v. Rainbow Foundation Limited And Others 2019
16. Jumbo World Holdings Limited And Another v. Embassy Property Developments Private Limited Rep. By Its Director Mr. K.Y. Gobikrishnan And Others 2020
17. Narendra Hirawat And Co. v. Sholay Media Entertainment Pvt. Ltd. And Another 2020
18. DLF Home Developers Limited v. Shipra Estate Limited and Others 2021

[1] The Indian Contract Act, 1872, No. 9, Acts of Parliament, 1951 (India).

[2] The Specific Relief Act, 1963, No. 47, Acts of Parliament, 1951 (India).

[3] The Specific Relief Act, 1963, § 10, No. 47, Acts of Parliament, 1951 (India).

[4] The Specific Relief(Amendment)Act, 2018, No. 18, Acts of Parliament, 1951 (India).

[5] The Specific Relief(Amendment)Act, 2018, § 14, No. 18, Acts of Parliament, 1951 (India).

[6] M/s Girdhari Lal & Sons v. Balbir Nath Mathur and others (1986) 2 SCC 237.

[7] Supra, note 5.

[8] Affle India Limited v. Talent Unlimited Online Services Private Limited 2023 SCC OnLine Del 1174.

[9] Indian Oil Corporation v. Amritsar Gas Service And Others (1991) 1 SCC 533.

[10] Jindal Steel and Power Ltd. v. SAP India Pvt. Ltd. 2015 SCC OnLine Del 110067 ; Rajasthan Breweries Ltd. v. Stroh Brewery Company 2000 (55) DRJ (DB).

[11] D.R. Sondhi v. Hella KG Hueck & Co. 2001 SCC OnLine Del 1273.

[12] The Specific Relief Act, 1963, § 14(1)(c), No. 47, Acts of Parliament, 1951 (India).

[13] Stoughton Esports Pvt. Ltd. v. Godlike Esports Pvt. Ltd 8-IAL-16497-2022-in-appl-16492-2022-J.

[14] Supra, note 9.

[15] M/S Ksheeraabad Construction Pvt Ltd v NHIDCL & Anr. 2023/DHC/3525.

[16] Yassh Deep Builders LLP v. Sushil Kumar Singh & Anr. 2023/DHC/001809.

[17] T.O. Abraham v. Jose Thomas 2017 SCC OnLine Ker 19872.

[18] Ascot Hotels and Resorts Pvt. Ltd. v. Connaught Plaza Restaurants Pvt. Ltd. 2018 SCC OnLine Del 7940.

[19] A Murugan And Others v. Rainbow Foundation Limited And Others 2019 SCC OnLine Mad 37961.

[20] Jumbo World Holdings Limited And Another v. Embassy Property Developments Private Limited Rep. By Its Director Mr. K.Y. Gobikrishnan And Others 2020 SCC OnLine Mad 61.

[21] Narendra Hirawat And Co. v. Sholay Media Entertainment Pvt. Ltd. And Another 2020 (5) Mh. L.J.

[22] DLF Home Developers Limited v. Shipra Estate Limited and Others 2021 SCC OnLine Del 4902.

[23] Supra, note 9.