[Aayush Mitruka is a lawyer based in New Delhi.
An earlier post on the topic is available here]
In the wake of India’s poor ranking in terms of enforcing contracts and ease of doing business, the Government decided to amend the 54 year old Specific Relief Act, 1963 (the “Act”). As a result, the Government constituted a six-member expert committee to examine the Act and suggest necessary changes. The expert committee comprised partners from law firms, a member of a think tank, an academician and an additional secretary of the law ministry. In June 2016, the committee after reviewing the existing legal framework, submitted its report to the Government and, amongst other things, recommended a change in the approach, from damages being the rule and specific performance being the exception, to specific performance being the rule and damages being the alternative remedy. Unfortunately, the report of the expert committee is not readily available in public domain.
Following this, in December last year, the Specific Relief (Amendment) Bill, 2018 (the “Bill”) was introduced in the Lok Sabha and was passed in March 2018 by voice vote. The Bill proposes to do away with the wider discretion of courts to grant specific performance and to make specific performance of contract a general rule rather than an exception subject to certain limited grounds. In addition, the Bill aims to inter alia: (a) introduce the remedy of substituted performance; (b) designate special courts to try suits in respect of contracts relating to infrastructure; (c) provide for employing a technical expert wherever needed; and (d) prevent the courts from granting injunctions in infrastructure related cases. The Bill largely seems to be well-intended and is indicative of a mature drafting. It highlights the significance of public utility contracts and recognizes the importance of those contracts being fulfilled without many interruptions.
In this post, I intend to discuss one pivotal aspect of the Bill – the proposed paradigm shift from damages to specific performance.
It will be useful to begin with understanding that under both civil law and common law systems the basic remedies available for breach of contract is damages, specific performance and termination. However, the ways in which these remedies are applied in the two systems vary considerably. The remedies for breach are ranked in a different order of importance in the two systems and that is probably because of different historical developments of the two systems. Damages assume primary role in common law countries because of the economic considerations, whereas specific performance is placed at a higher pedestal under civil law system on the basis of moral considerations.
Historically, the common law was a writ-based system, and that the writs only provided for damages as a remedy, which meant that damages necessarily became the primary remedy in the common law. The equity courts used to grant the relief of specific enforcement only in cases where the common law courts either did not provide for the remedy or where the remedy provided was inadequate. The English courts have remarked that equity will grant specific performance to an aggrieved person when damages are inadequate to meet the justice of the case. Protection of individual liberty is another argument favoring supremacy of damages. The ambit of specific performance was therefore circumscribed by the fact that it was a supplementary remedy, granted only when damages would be inadequate in the circumstances of the case.
On the other hand, in civil law the approach towards specific performance is entirely different. Specific performance is considered to be not only an ordinary remedy, but in fact the principal one for a breach of contract. The explanation for this phenomenon is that when a person contracted to perform a particular undertaking, that person incurred not only a legal obligation but a moral one as well, in that he was bound in conscience to keep his word. If he did not do so, the role of the law was to ensure that he did. Therefore, the plaintiff has the option of seeking specific performance from the defendant, whenever this is still possible.
Notwithstanding the marked contrast, the two systems seem to achieve the same goal and that is to place a disappointed promisee in as good a position as he would have enjoyed had his promisor performed. This goal of ‘compensation’ can essentially be achieved by providing the disappointed promisee damages so that he can get the bargain from somewhere else or by forcing the breaching party to honor his part of the promise (i.e. specific performance).
The erstwhile Specific Relief Act, 1877 and the current Act have largely adopted the common law approach. The main provisions of the specific relief law embody the doctrines evolved by the English equity courts.
Under current law, the general rule in case of a contractual breach is to award damages; and specific relief was only awarded as an exception. It must be borne in mind that specific performance cannot be claimed as a matter of right and, accordingly, the court is not bound to grant relief merely because it is lawful to do so but it is discretionary. However, the discretion of the court cannot be arbitrary but must be guided by sound and reasonable judicial principles. Case law suggests that before exercising discretion, the Indian courts take into consideration several factors such as hardship to parties, unfairness, inadequacy of consideration, conduct of claimant and impossibility of performance. Owing to these considerations, it is always uncertain if the party will be entitled for a decree of specific performance.
The Bill limits the types of contracts which cannot be specifically enforceable. In addition, it must be pointed out that currently in order to achieve a remedy of specific performance, the plaintiff must “allege and prove” his readiness to perform the contract. Considering the large number of cases on this lone point, the Bill has dropped the mandatory condition of “alleging or averring” the willingness by the plaintiff to perform his part in his plaint. Arguably, readiness, willingness and ability need not be specifically pleaded, because it is implied in the pleading.
Although it will be debatable as to which approach (common law or civil law) suits the best because both has its pros and cons, specific performance does provide the disappointed party with the precise performance that he bargained for. As discussed, the Bill is designed to protect contractual expectations and wipe out the uncertainties while enforcing contracts. More often than not, it is seen that the Act remains a hindrance since the courts always seem to be inclined towards granting damages which are assessed from a theoretical point of view. Whilst damages do compensate the injured party, they prevent the aggrieved from getting a remedy which aims at the exact fulfilment of an obligation. This also leads to unnecessary delays and other costs.
Once effective, specific performance may well become the preferred remedy in contract law – or at the very least will be granted more readily than it is today. One can also argue, and rightly so, that the judicial order of specific performance (or, more precisely, the perceived likelihood of the order) will effectively act as a deterrent for a party to readily breach his contractual obligation. Further, it is not uncommon now to see parties breaching their contractual obligations because the cost of their breach (i.e. damages) is still less than the cost of performance. Promisors frequently breach when their gains from breach exceed the damages a court will assess. The proposed change will help tackling such situations as well.
There is merit in expanding the availability of specific performance as it would produce certain efficiency gains: it would minimize the inefficiencies of under-compensation (or risk of over-compensation), reduce the need for liquidated damages clauses, minimize strategic behavior, difficulties of mitigation and save the costs of litigating complex damage issues. In addition to saving cost and time, this will surely help in mitigating uncertainties in contract enforcement.
In view of the vast economic developments taking place in India, it is important that the law of contracts and specific relief also develop in response to the tremendous increase in commercial litigation. While the Bill seems to be a step in the right direction, it is yet to get the blessings of the upper house of Parliament. Given that the legal profession and the courts have become used to the present arrangement, it remains to be seen how these amendments are dealt with in courts. Implementation of these provisions will be the key factor to determine whether they will achieve the main objective.
– Aayush Mitruka