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Will India’s Amended Law On Contract Enforcement Be A Game Changer?

By: Ramesh Vaidyanathan and Aishini Mandal

The (Indian) Specific Relief Act, 1963 (Earlier Act) provides the mechanism for contract enforcement in India. It includes provisions for the recovery of possession of property, specific performance of contracts, rectification and cancellation of instruments, rescission of contracts and preventive reliefs (injunctions).

Introduction

The present business environment in the country involves increased foreign direct investment, contract based infrastructure development, public private partnerships and other public projects involving huge capital costs. In this background of tremendous economic activity, the Earlier Act has failed to facilitate the enforcement of contracts and settlement of disputes in a speedy manner.

An expert committee (Expert Committee) was constituted by the Government of India in early 2016 to suggest amendments to the Earlier Act. Based on the recommendations of the Expert Committee, the Specific Relief (Amendment) Act, 2018 (Amended Act) was enacted on August 1, 2018.

The Amended Act is expected to make contract enforcement more effective and business friendly, enable timely settlement of disputes and encourage contractual compliance.

The highlights of the Amended Act are briefly discussed below.

1. Specific Performance as a General Rule

(i) Specific performance of contracts: The Earlier Act had favored the grant of compensation for loss and damages resulting from breach of contract as a general rule, with specific performance as an exceptional remedy. Grant of specific performance of a contract was at the sole discretion of the court. Owing to such discretionary power conferred on courts, enforcement of contracts in India suffered from uncertainty. The Amended Act has sought to rectify the situation and mandated the grant of specific performance of contract as a norm, subject to certain limited exception.

Similarly, the Amended Act also provides for specific performance of contracts where the act agreed to be done is in the performance of a trust, i.e., a contract made by a trustee in exercise of her powers under the trust shall now be specifically enforced. However, the trustee cannot act in excess of the powers conferred on her or in breach of the trust.

(ii) Contracts that cannot be specifically enforced: In the Amended Act, contracts where compensation for breach is an adequate remedy and contracts running into minute or numerous details have been removed from the list of contracts that cannot be specifically enforced. However, a newly added ground clarifies that the person claiming breach, who has obtained substituted performance, cannot claim specific performance of a contract.

Additionally, in relation to construction projects, the Amended Act has also removed the conditions that had to be fulfilled for specific enforcement of such contracts such as (a) sufficient description of the building in the contract (b) substantial interest of the plaintiff in the performance of the contract (c) such interest not capable of being compensated in money and (d) defendant having obtained possession of the land.

(iii) Persons for or against whom contracts may be specifically enforced and who may obtain specific performance: The Act provides for a list of persons who may seek specific performance and against whom specific performance may be sought. Conspicuously, the Earlier Act did not include LLPs in the aforesaid list. Under the Amended Act, an LLP formed by the amalgamation of two existing LLPs, one of which may have entered into a contract before the amalgamation, has been added to the above-mentioned list.

(iv) Personal bars to relief: The Earlier Act had provided that specific performance of a contract cannot be granted in favor of a person when he would not be entitled to recover compensation for its breach. However, the Amended Act has replaced it with a provision that a person who has opted for substituted performance of the contract cannot enforce specific performance.

Additionally, the Earlier Act had provided that specific performance could not be granted in favor of a person who failed to aver in the pleadings and prove that he had performed or always had been ready and willing to perform the essential terms of the contract. The Amended Act has removed this stringent requirement of averment and it is now sufficient to prove that the parties have been ready and willing to perform the contract.

(v) Substituted performance of contracts: The Amended Act has incorporated a new concept of ‘substituted performance’ of contracts, which has wholly replaced the erstwhile section dealing with guidelines for exercising discretion for grant of specific performance. Substituted performance of the contract (by a third party or by its own agency) acts like an alternative remedy to a party suffering breach of a contract. Notice of 30 days is a condition precedent to avail the remedy of substituted performance and recover the expenses and other costs actually incurred by the aggrieved party from the opposite party. Additionally, a party who invokes this remedy of substituted performance forfeits the right to specifically enforce the contract; however, she may still claim compensation from the party in breach.

(vi) Compensation: The Earlier Act allowed compensation for non-performance of contract either in addition to or in substitution of specific performance of a contract. However, the Amended Act now provides for compensation only in addition to specific performance of the contract.

Therefore, a party suffering breach would have the following options under the new regime: (a) seek substituted performance, or (b) seek specific performance or claim damages.

2. Amendments related to Contracts pertaining to Infrastructure Projects

(i) Injunctions in contracts relating to infrastructure projects: Under the Earlier Act, courts could grant preventive relief by way of injunctions. However, various circumstances have been outlined in the Earlier Act wherein the courts cannot grant preventive relief to parties. To add to this list, the Amended Act has incorporated a new provision in relation to denial of grant of injunction in an infrastructure project if such injunction would hinder or delay the completion of the project.

Categories of infrastructure projects have been notified by the Central Government and listed in the schedule to the Amended Act. The list may also be modified by the Central Government.

(ii) Special courts: The Amended Act also provides for creation of special courts that are to be designated to try suits relating to infrastructure projects. This is a new provision that aims to improve investor sentiments, as their fear a long-drawn litigation process, creates an impediment to incoming investments in infrastructure and development projects.

3. Miscellaneous Amendments

(i) Recovery of possession of immovable property: Prior to the amendment, dispossessed persons were permitted to file a suit for recovery of possession of immovable property. However, the Earlier Act was silent on the question whether a person in joint possession of the immovable property has a right to sue. There have been divergent judicial opinions on this issue and the Amended Act settles this controversy by clarifying that the right under this section extends to a joint-possessor as well. Consequently, the Amended Act permits a person through whom the dispossessed person had obtained possession of the immovable property to file a recovery suit.

(ii) Experts: The Amended Act provides that courts can engage technical experts to assist on any specific issue involved in the suit. The costs will be borne by both the parties. Appointment of experts will enable the court to assess the technicalities in a suit, for example, suits relating to complex infrastructural developments, etc.

(iii) Expeditious disposal of suits: As per the Amended Act, suits will have to be disposed of within 12 months from the date of service of summons to the defendant. This period may be extended by 6 months after recording reasons.

4. Implications of the Amended Act

The Amended Act has introduced significant changes to the contract enforcement mechanism in India. In conclusion, the key takeaways can be summarised as follows.

(i) Discretionary power of courts: The court’s power to grant compensation in suits for breach of contract has been severely curtailed. Specific performance of the contract is the go-to remedy, encouraging parties to perform their contracts. The move is laudable as it aims to restore the confidence of parties to a contract in a definitive and visible relief mechanism.

(ii) Substituted performance of contracts: Introduction of ‘substituted performance’ will immensely benefit industries like construction and infrastructure where damages do not often adequately compensate for the breach. By availing substituted performance, the aggrieved party is expected to be restored to the position prior to the breach.

(iii) Infrastructure contracts: The deletion of the conditions for enforcement of a construction contract acts as a major impetus for the growth of the sector. Given the underlying public interest and social costs of delayed decisions, the Amended Act aims to minimize the court’s intervention in relation to infrastructure and development projects.

(iv) Power of the Central Government: The Central Government has been given the power to amend the list of category of projects or infrastructure sub-sectors. A problem with this power is the likely conflict of interest as the government is often a party to such infrastructure projects. The use of this power might prejudice the rights of the other party as it closes the option to obtain injunction in the event the government takes any arbitrary step in breach of its contractual obligations.

(v) Special courts and expedited disposal: Establishment of special courts to resolve disputes relating to infrastructure projects will not serve its purpose if the courts are not technically equipped and do not have specific knowledge of this subject.

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