Is India Ready to Adopt the CISG? The Plight of Determinable Contracts

[Anshul Butani is a 5th year B.A. LL.B. (Hons.) student at National Law School of India University (NLSIU), Bangalore]

On August 1, 2018, the Government of India enacted an amendment to the Specific Relief Act, 1963 to improve the ease of doing business in India. Prior to the Amendment, specific performance was an exceptional remedy for breach of contracts, granted at the discretion of the court, particularly when damages were inadequate. However, the Amendment attempted to alter this position, by making specific performance a mandatory relief, at the discretion of the aggrieved party. It has been argued that the Amendment, by mandating a good faith performance of the contract, aligns the Indian position with that of the Convention on International Sale of Goods (“CISG”), thus paving the way for India’s adoption of the CISG. Whereas the eventual adoption of the CISG is desirable for India, a few aspects of Indian law must first be amended. In this article, it is argued that the expansive interpretation of ‘determinable contracts’ by Indian courts undermines the purpose of the Amendment, and would render an immediate adoption of CISG futile. Thus, this position must be revised, to allow for a smooth transition to the CISG framework.

Exception of ‘Determinable Contracts’ under Indian Law

Prior to the Amendment, the Act enumerated situations where specific performance could not be granted. One of these situations, in section 14, was when a contract “is in its nature determinable”. Despite the Amendment making specific performance a mandatory remedy, this exception still exists. The rationale for this is simple – if the parties are entitled to unilaterally terminate the contract without reason, the court’s order for specific performance would be nullified by the exercise of this power. It may also be said that by including a clause of termination for convenience (which has been held to be valid in India and under common law), the parties intended to preclude the remedy of specific performance. Therefore, to the extent that “determinable contracts” in section 14(d) is restricted to contracts with clauses of termination for convenience, the exception is desirable in the interest of party autonomy. However, Indian courts have read the term more expansively.

In Indian Oil Corporation. v. Amritsar Gas Service, the Supreme Court of India was faced with a contract containing two termination clauses. The first clause provided for termination with notice, without assigning any reason, while the second clause provided for termination on the occurrence of certain specified events. The court declined the request for specific performance on the ground that the contract was determinable in nature. However, in its reasoning, the court did not clarify which of the two termination clauses rendered the contract determinable. This ambiguity has led to severe uncertainty in the interpretation of section 14(d) before High Courts. For instance, relying on this case, the High Court of Bombay, in Gujarat Chemical Port Terminal v. Indian Oil Corporation of India held the contract to be determinable, when it only contained a termination clause on the happening of certain specified events (similarly, see here). This defeats the idea of excepting only those situations where parties can bypass the order of specific performance by terminating the contract as per their convenience.

In fact, in Rajasthan Breweries. v. The Stroh Brewery, the High Court of Delhi held that even in the absence of any termination clause, private commercial contracts, by their very nature are determinable, since they “could be terminated even without assigning any reason by serving a reasonable notice”. This problematic position effectively precludes the remedy of specific performance for all private commercial contracts, and therefore undermines the effect of the Amendment. Although this case was decided prior to the 2018 Amendment, it was relied upon by the High Court of Delhi in Inter Ads Exhibition v. Busworld International in May 2020. In Busworld International, without addressing the purpose of the Amendment and the drastic change in legislative position regarding contract enforcement, the court simplistically relied on Rajasthan Breweries to decline specific performance of a contract which contained a clause for termination on default. Further, the court stated (similar to another case) that even when a contract has been wrongfully or illegally terminated, the only possible remedy is damages, not specific performance. While this may have been a viable position prior to the Amendment, it is inappropriate under a legislative framework which intends to make specific relief mandatory.

Moreover, section 41(e) of the Act specifies that an injunction cannot be granted to prevent the breach of contract, performance of which cannot be specifically enforced. In other words, no injunction can be granted to prevent breach of determinable contracts. When the definition in Rajasthan Breweries or even Gujarat Chemical Port is considered, this effectively excludes a wide range (if not all) of private commercial contracts from the ambit of specific performance, and takes us back to the pre-Amendment position. This contradicts the report of the Expert Committee on the Specific Relief Act, which advocates “minimal interference” with the remedies of specific performance and injunctions. Having said that, it is surprising that in advocating for the primacy of specific relief, the report did not even acknowledge the problem of determinable contracts.

Problems with Immediate Adoption of CISG

The CISG, following the civil law approach, gives primacy to the remedy of specific performance. The parties can claim specific performance as a matter of right, by virtue of Articles 46 and 62. The only exception specified for this right, is when the injured party has “resorted to a remedy which is inconsistent” with specific performance, but no exception is provided for determinable contracts. On the face of it, therefore, although the Amendment attempts to align Indian law with the ‘civil’ approach, the wide exception of determinable contracts creates a departure from the CISG stance. The question then arises – if India were to adopt the CISG, then in light of this conflict, which law would prevail?

Article 28 of CISG addresses this concern. It states that the forum court would not be obliged to order specific performance unless it would do so under its own domestic law, when faced with a domestic contract of similar nature. This was introduced as a compromise between civil law countries, which grant specific performance more routinely, and common law countries, which tend to view it as an extraordinary remedy. In Soinco v. NKAP, the arbitral tribunal used this provision to deny specific performance since under the buyer’s and the seller’s domestic laws (Russian and Swiss law), it was not an available remedy.

Thus, an Indian court faced with an international commercial contract governed by the CISG, would not be obliged to grant specific performance unless it would do so for a similar domestic contract governed by the Specific Relief Act. The recourse to Indian law, once again, allows the court to deny specific performance for all determinable contracts governed by the CISG. When this is interpreted, as in Rajasthan Breweries, to include contracts with clauses of termination on the occurrence of specified events, or all private commercial contracts in general (which the CISG exclusively deals with), the futility of adopting the CISG is but obvious.

At the same time, Article 6 of the CISG allows parties to contractually derogate from any provision of the Convention. It may thus be argued that even if India adopts the CISG, parties can escape the exception of determinable contracts by expressly excluding the application of Article 28 in their contract. However, it has been clarified by scholars that Article 28 constitutes “mandatory law”, from which the parties are not entitled to derogate.[1] Thus, even if a contract governed by the CISG expressly mandates specific performance, the Indian courts may still refuse to grant the remedy if the contract is considered determinable for the purpose of section 14(d) of the Act.

Concluding Remarks

The exception of determinable contracts must be clarified in order to allow for a seamless transition to the CISG framework on specific performance. This can be done most effectively through a legislative amendment. The legislature should incorporate an explanation to section 14 of the Specific Relief Act, expressly limiting the scope of determinable contracts to those with a clause of termination for convenience. This would essentially overrule all contrary judgements of the various High Courts. As a more immediate recourse, the Supreme Court may resolve the ambiguity in Amritsar Gas Service, and clarify the restricted nature of the exception in light of the Amendment. While some High Court cases (here and here) have commendably held that the ratio of Amritsar Gas Service should only apply only to clauses of termination for convenience, a decision by the Supreme Court would have binding value.

Anshul Butani

[1] Bianca, C.M. & Bonell, M.J. (1987): Commentary on the International Sales Law: The 1980 Vienna Sales Law. Milan, p 239; Schlechtriem, P. (1998): Commentary on the UN Convention on the International Sale of Goods CISG. 2nd Edition (in translation). Oxford, p 208.

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