The Bombay High Court on the Agreed Sum and Penalties: A Missed Opportunity?

It
has often been said that a court cannot arrive at the right answer unless it
asks itself the right question. This resonates particularly in the field of
private law, because—as it is perhaps more technical and complex than some other
areas of the law—the applicability of certain rules depends upon the
characterisation of the issue at hand (for eg, is it a sale or a licence, a
penalty or liquidated damages, negligence or breach of contract, causation or
remoteness and so on). A good example of this is the field of remedies for
breach of contract: what distinguishes the agreed sum from damages and
penalties? In the one case (debt), an immediate obligation has crystallised
which the claimant may enforce through an action for the agreed sum. In most
common law jurisdictions, although India is perhaps a notable exception, the
action for the agreed sum is by far the most frequently used contractual remedy
(see for eg A Burrows Remedies for Tort
and Breach of Contract
at 433).

The
Bombay High Court has recently considered some of these questions in Indiabulls
Properties v Treasure World Developers
. For the reasons that follow, it
is respectfully submitted that the Court erred in its analysis of the
difference between the agreed sum and damages and in omitting to consider the
important cases of Andrews and
Makdessi.
Indiabulls is the latest of a series
of High Court cases dealing with ‘leave and licence’ agreements: in outline,
the typical dispute is something like this. The claimant (in this case
Indiabulls) gives (usually expensive) property on a medium or long-term licence
to the defendant, with what is described as a ‘lock-in’ period during which the
defendant licensee cannot ‘terminate’ the agreement. The contract usually
provides that the defendant is liable to pay the licence fee for the remainder
of the lock-in period whether it occupies the property or not. An analysis of
the contractual language is important in this respect, because on it turns the
question whether the defendant’s decision to leave the property prematurely
constitutes a breach of contract or the exercise of an option for a price. In
the present case, clause 3.1 provided that Indiabulls thereby granted ‘leave
and licence’ to use the Property for a period of 60 months and that:

3.1 … there shall be a 36
(thirty-six) months Lock in period for the Licensee during which period the
Licensee shall not be permitted to terminate the Leave and License
Agreement.   
 
Clause
13.2 provided that Treasure World,

13.2 …‘if it desires to terminate this
Agreement prior to the expiry of the Lock in Period or the Licensor is
compelled to terminate this Agreement before the expiry of the Lock in Period
for defaults of the Licensee not cured within a period of one month as provided
in clause 12, then the Licensee shall be required and liable to pay to the
Licensor the License Fee, Car Parking Fees, Maintenance charges for the entire
un-expired Lock in Period.

Treasure
World occupied the Property on 15 June 2011. It fell into arrears with respect
to the licence fee for the period June 2012-October 2012. In late October it expressed a desire to leave and soon after left the Property. The learned
judge, Patel J, finds that this constituted a termination of the contract. It is unnecessary to consider for
present purposes whether that finding is correct, although one may be permitted
to respectfully question the accuracy of the observation (see [16]) that it must constitute a
termination simply because ‘possession… is the sine qua non of a [leave and licence] agreement’. Indiabulls then
demanded that Treasure World pay inter
alia
the licence fee for the remainder of the lock-in period (what Patel J
calls ‘Claim 3’, at [22]) under
clause 13.2 above. When Treasure World refused, it served notice under section
433 of the Companies Act, 1956, and the question of law that Patel J had to
decide was whether the sum claimed by Indiabulls constituted a ‘debt’ for the
purposes of sections 433 and 434.

Patel
J begins his analysis by considering the recent High Court cases on this
subject, the effect of which is summarised at [41][45]. The learned
judge then says, in the light of well-known authorities that describe this concept
with the aid of the expression ‘debitum
in praesenti solvendum in futuro’ that Treasure World’s
obligation under clause 13.2 is:

53 …a
sum of money payable now; expressed even at the time of the execution of the
agreement to be payable but only on the happening of a contingency; and that
contingency having happened, the amount is ascertained, payable immediately and
is therefore a debt due and a debt owed sufficient to sustain a petition for
winding up. The obligation was ever eo instanti; it was only, at the time of
the execution of the agreement, solvendum
in futuro
. Now that the contingency contemplated by the contract has
occurred, it is solvendum in praesenti
(it is not clear if [53] is counsel’s submission or a finding but [58] below is a finding to the same effect)

58…I must disagree with Mr.
Andhyarujina when he says the contingency requires determination. That is only another
way of saying that Indiabulls must establish that an oral understanding of
abandonment of the written contract did not exist. The moment the contingency
occurs, Treasure World’s liability is instantly crystallised. It immediately
incurs a debt payable immediately
.

With
respect, it is submitted that even if Treasure World ‘immediately incurs a [sum]
payable immediately’ under clause 13.2, one cannot conclude that it is an enforceable ‘debt’
without asking two further questions: (1)
was thatimmediate obligation triggered
by a breach or by an event other than breach; and (2) even if was triggered by an event
other than breach (and was therefore arguably an ‘agreed sum’), does the penalty
doctrine nevertheless apply so that the claimant is not entitled to the sum specified
in clause 13.2? Unfortunately, neither question appears to have been considered
by the Court.

On
the first question, Patel J finds that clause 13.2 is not ‘damages’ (see [59]),
but it is difficult to see how this is consistent with the finding at [16] that
Treasure World’s decision to leave the property constituted a ‘termination’ of
the contract. One can conceivably reconcile the two findings by positing that
the finding at [16] was only that the ‘option
to terminate’ was exercised by Treasure World although that sits uncomfortably
with the ‘possession is a sine qua non
comment. Even assuming that is what [16] means, the Court did not consider
whether the decision to leave constituted
a breach of contract or not
, and it is this question that is decisive of
whether clause 13.2 is liquidated damages. If it was a breach of contract for Treasure
World to leave before the expiry of the lock-in period, it must follow that the
sum payable under clause 13.2, whether described as ‘consideration’ or
‘damages’, is not a debt in Indian law. 
If the Court had dealt with this issue, it would, in particular, have had to determine whether premature exit is a breach of clause 3.1, in which event the sum specified in clause 13.2 would have been triggered by breach. On the other hand, if Treasure World
was
contractually entitled to leave
before the expiry of the lock-in period by paying the ‘price’ specified in
clause 13.2, then clause 13.2 is a debt. 

The
second question—which would only have arisen if the Court had answered the
first question in the negative—is whether a sum named in a contract as payable
on the happening of an event other than
breach is nevertheless subject to the penalty doctrine: this depends on whether
the penalty doctrine applies only to
breach or also to non-breach events. Although s 74 of the Indian Contract Act
opens with the words ‘when a contract has been broken…) it was settled by the
cases decided before the 1899 amendment that it is not exhaustive of the Indian court’s penalty jurisdiction (see for eg

Chowdhury v Chowdhury 2
CWN 234 and Lal v Dayal ILR 26 Cal
300). Further, two well-known cases have discussed this recently but neither
appears to have been considered by the Bombay High Court—Andrews
(High Court of Australia) and 
Makdessi (Court of Appeal). We have previously commented on Andrews,
which raised exactly this question: it undermines the assumption at in Indiabulls that an obligation not
triggered by breach is always recoverable once it has accrued. Makdessi was
slightly different, as the sanction was triggered by breach although it was not
in the form of a sum of money; nevertheless, Christopher Clarke LJ’s analysis of
the law is instructive.

An
alternative argument—which Patel J rejected on the facts at [16]—was that Treasure
World had left the Property but without terminating the contract. If this had
been correct, it would have given rise to the question whether Indiabulls could
have rejected the repudiation and sued for the licence fee that would have
accrued each month. The Indian law on this point is presently uncertain,
because the Supreme Court has
endorsed the rule in White &
Carter
without indicating whether Lord Reid’s exceptions (cooperation
and legitimate interest) are also good law in India. There are some High Court cases
that effectively reject the cooperation exception but also Privy Council authority to the
contrary.

In
sum, it is interesting that Patel J observed that the defendant’s conduct was ‘commercial
deceit’ ([20]) and that its defence to the claim was ‘speculative, spurious,
specious, illusory … and no defence at all’ ([64]). However, the merits apart, was
it not arguable (for all the reasons above) that Indiabulls had at best a claim and not a debt? One respectfully
wonders whether it was appropriate to exercise the jurisdiction to wind-up a company
for its refusal to pay a claim which (whatever its strength) is only a debt if these potentially difficult questions of law are resolved in the creditor’s favour.

About the author

V. Niranjan

2 comments

  • Impromptu

    "…..unless it asks itself …."
    As understood, this talks of what needs to be the most idealistic or ideological , but the rarest of rare happening ever in the court room ; not only in our mother land, but elsewhere as well. Further, asking itself' might, for obvious reason, serve no useful purpose, unless put across to the representing counsel (s) for an answer.

    Though not often said, as one of those very few of renowned legal legends once said,quoting a jurist, to the effect that, – it is only a judge who. if at all, can have a good excuse for not knowing/being ignorant of all the laws on the statute book.
    Underlining the self-same firm conviction of his, again once said, :

    " A lawyer with a well furnished mind alone can be truly a counselor at law; he alone can, not merely look up precedents, but guide his client along the path of wisdom, even of generosities which may appear irrelevancies to the preoccupied client. In the hands of such a lawyer, the law represents the application of reason to noble and purposeful ends.”

    If intelligently viewed, that simply means it is the representing counsel, and counsel alone, who can be of assistance to court to adjudicate any issue on hand, judiciously /objectively, so as to pronounce a right or better judicial opinion.

    For more such earnest lamentations of that towering personality, Palkhivala, a lawyer par excellence himself, if interested, one may care to read his published thought provoking speeches and writings rich in worldly wisdom.

  • Thanks for the wonderful analysis of the decision.

    I was wondering, whether such lock in clauses in leave and license agreement are valid at all, in law. License, as differentiated from lease, has an essential characteristic where it can be terminated at will. A lock in period clause would go against the logic of a license itself. This is one point of view. The other being, that an agreement is entered into as a lease but masked as a license to give the landlord certain advantages. That being so, if the landlord wishes to ensure his licensees presence for a fixed term, he could always insert a lock in period.

    What in your opinion is the stance on the validity of a lock in period in a license agreement?

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