Contractual remedies for investors in India

By Monali Dutta and Sudipta Bhattacharjee, Advaita Legal

Typically, contracts are basic tenets of the world of commerce. Broadly, there exist two sets of remedy for a breach of contract in India. One by way of damages under the Indian Contract Act, 1872, and the other by way of specific performance under the Specific Relief Act, 1963.

Monali DuttaPrincipalAdvaita Legal
Monali Dutta
Advaita Legal

While the remedy by way of damages has been largely prevalent and preferred in India, remedy by way of specific performance has been used sporadically, historically speaking.

The Specific Relief Act, first introduced in 1877, among others, envisages a judicial redress through an exact fulfilment of an obligation arising out of a contract, and provides for performance of the contract as opposed to avoidance or non-performance of contract by payment of compensation.

Over the years, the jurisprudence on law relating to contract and compensation as a remedy for non-fulfilment/performance of contracts has evolved, but not much has changed from a Specific Relief Act perspective since the basic premise on which that statute has been predicated reduces it to a discretionary relief to be awarded by the court only when it is convinced that damages will not be an adequate remedy. This, subject to certain exceptions embodied in the Specific Relief Act, is the basic philosophy of that statute.

As a part of various reforms and initiatives towards ease of doing business, amendments have been proposed to the Specific Relief Act by way of the Specific Relief Amendment Bill, 2017, which was passed by the Lok Sabha (House of the People) on 16 March 2018. A few key takeaways from the amendment bill are as follows:

  1. Contracts that are not specifically enforceable. The amendment bill sets out the kinds of contracts that cannot be specifically enforced. Generally speaking, contracts that have expert technical elements to them may qualify under that list. Further, such a list will also include contracts which are “determinable in nature” – a contract that can be put to an end, either by way of express termination clauses in the contract (at will or convenience, or for a cause), or by necessary implication;
  2. Substituted performance of contract. The party which has suffered a breach of contract must have an option of substituted performance of the contract through a third party or its own agency, and a right to recover costs and expenses actually incurred towards this end from the party that caused the breach of contract. This change may provide a flexibility to a party to have substituted performance through one’s own agency;
  3. Contract relating to infrastructure project(s). The courts are now barred from granting any injunction on a contract relating to infrastructure projects, particularly in the category of transportation, energy, water and sanitation, communications and social-commercial infrastructure that are annexed to the schedule of the amendment bill.
    While the intent and objective of the amendment bill is praiseworthy, as it seeks to trim down the discretionary powers of the courts, on a careful reading of the amendment bill it appears that the envisaged changes may have wide-ranging ramifications that may cut across the way in which contracts are usually enforced in India.
Sudipta BhattacharjeePartnerAdvaita Legal
Sudipta Bhattacharjee
Advaita Legal

For example, in a typical manufacturing unit, the existing contract relating to vendor and service-level agreements may fall under the list of contracts that are technical in nature, making them out of the purview of the proposed amendment. Similarly, it would be a safe assumption that most of the existing contracts will have an arbitration clause, in which case such contracts would also be out of the purview of the proposed amendment, since the arbitration statute in India puts a bar on civil courts to adjudicate arbitrable disputes.

The substituted performance of contracts in the bill’s present version has the potential to yield unintended consequences, there being an entire pass-through mechanism of cost and expense with no checks and possibly leading to “gold plating”. Another facet of the proposed amendment are the coverage of “contract relating to an infrastructure project”, which makes the provision sweeping in nature to potentially include within its ambit sub-sub-contractor-level project agreements.

One hopes that some of the issues and concerns that are highlighted above will be taken up when the amendment bill is presented in the Rajya Sabha (Council of States).

Given the above, it may be opportune to revisit and reassess the existing contracting structure and contracting philosophy in light of the far-reaching changes that are envisaged under the amendment bill.

Monali Dutta is a Principal – Infrastructure, Projects and Corporate Advisory, at Advaita Legal. Sudipta Bhattacharjee is a Partner – Tax, Controversy Management and Contract Documentation, at Advaita Legal

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