The Governments initiative in development new infrastructure including inter alia highways, buildings, Airports in different cities has led to a surge in contractual disputes between the parties. The parties involved in such disputes prefer resolving their disputes through arbitration; given the fact it consumes lesser time and the procedure is more efficient.
Generally, the parties seek remedies either under the provisions of Indian Contract Act (in the form of damages) or seek specific performance of the Contract or injunctions in terms of Specific Relief Act, 1963 (“SRA”) for seeking remedies in case of default on part of either of the parties in performance of the Contract.
In case the parties fail to perform their duties/ obligations as per the terms of the Contract, the SRA provides remedy for its specific performance, although, there are certain exceptions to this. Section 14 of the SRA includes all the Contracts which are not specifically enforceable. These include (i) where a party to the Contract has obtained substitute performance of the Contract in accordance with Section 20; (ii) a contract which requires continuous duty which the court cannot supervise; (iii) a contract which is dependent on the personal qualifications of the parties that the court cannot enforce specific performance of its material terms, and; (iv) a contract which is in its nature determinable.
Section 10 of the Specific Relief Act provides for enforcement of specific performance of contracts by the Courts which is subject to certain restrictions as imposed under Sub-Section (2) of Section 11 (cases in which Specific Performance of Contracts connected with Trusts enforceable), 14 (contracts not specifically enforceable) and 16 (personal bars to relief) of the SRA.
In this article, the primary focus is on the contracts which are determinable in nature since this topic has been heavily deliberated by the parties in cases concerning specific performance of contract.
Determinable Contracts
Over the past few years, the subject of determinability of contracts has garnered a lot of attention by the legal fraternity. Different Courts across the India have given their own interpretation in respect of the subject.
Under the Specific Relief Act, there are certain contracts which are not specifically enforceable. Section 14 of the Specific Relief Act specifically prescribes the type of contracts which are not specifically enforceable.
The word ‘determinable’ or ‘determinability’ have not been defined under the SRA however, Merriam Webster’s dictionary defined ‘determinability’ as liable to be terminated whereas, the Black’s Law Dictionary, 2nd Ed and Collin’s Dictionary define “determinability” as liable to termination under certain conditions. While the former implies that a Contract which can be terminated is regardless of specific conditions is a terminable contract; the later implies that a Contract which can be terminated under specific conditions is a determinable contract.
The determinability of a contract is dependent on the type of termination clause which is envisaged under the Contract thereby, deriving their existence from the said Clause. A Termination Clause can be in the form and shape of (i) a termination for cause (which is dependent on the breach of contract or contingency); (ii) termination for convenience, and; (iii)termination upon an expiry of term. The type of Contracts which are inter related with the determinable contracts are the type of contracts wherein the termination could occur “without cause” or at the will of either of the parties.
Therefore, the Contract which is in nature determinable cannot be specifically enforced and the Court cannot grant an injunction in case of such contracts.
JUDGMENTS ON INTERPRETATION OF DETERMINABLE CONTRACTS
In the absence of any clear definition of determinable contracts, various Courts have expounded the law relating to determinable contracts vis-à-vis the SRA.
The law regarding the Contracts which are determinable in nature was first laid down by the Apex Court in the case of Indian Oil Corporation v Amritsar Gas Services and Ors, (“Indian Oil Corporation”) the Contract provided for termination of the Contract by 30 days notice to the other party without assigning any reason for such termination. The Court after observing the facts of the case held that the Contract was in nature determinable.
The Hon’ble Delhi High Court in the decision of Rajasthan Breweries v The Stroh Brewery Company while relying on the ratio as laid down in Indian Oil Corporation (Supra) held that the contract was determinable in nature. Further, the Court opined that even in the absence of specific clause authorizing and enabling either party to terminate the agreement in the event of happening of the events specified therein, from the very nature of the agreement, the same could be terminated without assigning any reason by serving a reasonable notice.
The High Court of Madras in A Murugan and Others v Rainbow Foundation Ltd and Ors, has further elaborated on the aspect of determinable contracts. In its pronouncement, the Hon’ble Court bifurcated the categories which fall under the purview of determinable contracts into different categories including:- (i) Contracts that are unilaterally and inherently revocable or capable of being dissolved such as licenses and partnerships at will; (ii) Contracts that are terminable unilaterally on “without cause” or “no fault” basis (iii) Contracts that are terminable forthwith for cause or that cease to subsist “for cause” without provision for remedying the breach; (iv) Contracts which are terminable for cause subject to breach notice and an opportunity to cure the breach, and; (v) Contracts without a termination clause, which could be terminated for breach of a condition but not a warranty as per applicable common law principles. The Hon’ble Court held that the third; fourth and fifth categories of Contract are not determinable contracts. Further, it went to the extent of saying that although the fourth and fifth categories are terminable yet the same are not determinable contracts in nature determinable and that the rationale for Section 14 (c) is that the grant of specific performance of contracts that are by nature determinable would be an empty formality and the effectiveness of the order could be nullified by subsequent termination.
The Hon’ble High Court of Bombay in Narendra Hirawat v Sholay Media Entertainment Pvt. Ltd (“Narendra Hirawat”) had held that the words “a contract which is in its nature determinable” means a contract which is determinable at the sweet will of a party to it, that is to say, without reference to the other party or without reference to any breach committed by the other party or without reference to any eventuality or circumstance. Further, it was opined that determinable contracts contemplate a unilateral right in party to a contract to determine the contract without assigning any reason or, for the matter, without having any reason. The said approach adopted by the Hon’ble Bombay High Court was also contract specific.
In T.O. Abraham v Jose Thomas (‘T.O. Abraham”), the Hon’ble Kerala High Court addressed the determinability of a share transfer agreement under the unamended Act. It was opined by the Hon’ble Kerala High Court that for a contract to become determinable, it has to be first shown by the defendant that its clauses and terms are such that it would become possible for either of the parties to determine and terminate it without any reason and the word used in Section 14 (1) (c) is “inherently determinable”.
Recently, in 2023, the Hon’ble Delhi High Court in Ksheeraabd Construction Pvt. Ltd. V National Highways and Infrastructure Development Corporation Ltd. and Another, had two questions before it for consideration. (i) Whether the Contract Agreement in the present case is one which would fall within the parameters of Section 14 (d) of the Specific Relief Act, 1963?, and; (ii) Whether the injunction as sought in respect to the Termination Notice would be legally sustainable bearing in mind Section 14 (d) of the Specific Relief Act, 1963?
After perusing the termination notice in the said case, the Hon’ble Court observed that the same was issued not only for failure in achieving the milestones in construction work but also raised the issue of certain forged bank guarantees. On merits, Section 14 of the Act specifies contracts which are not specifically enforceable. Clause (d) stipulated that a contract which in its nature is determinable cannot be specifically enforced. Resultantly, the grant of an injunction in respect of such contract stands prohibited in light of Section 41 (e) of the Act and which prescribes that an injunction cannot be granted to prevent the breach of a contract, the performance of which would not be enforceable. Upon analyzing the decisions in Narendra Hirawat (supra) and T.O. Abraham (supra), the Hon’ble Court was unable to persuade itself that the word ‘determinable’ would construe to mean ‘inherently determinable’. Further, the Court was unable to hold or interpret Section 14 (d) of the SRA to be confined only to those contracts where parties have the right to terminate without assigning any reason or where that power be exercisable even in the absence of an event or breach. Thus, the Hon’ble Court was unable to accede with the reasoning as provided by the Hon’ble Bombay High Court and the Kerala High Court.
CONCLUSION
The dependency on SRA for specific performance of a Contract is on the basis of termination clause as incorporated in the Contract between the Parties. The Conundrum surrounding the arena of determinable contract have been given different interpretation by different courts across India. While some courts have held determinable contracts to be inherently determinable i.e., the right to terminate without assigning any reason or even in absence of an event or breach. The Specific Performance of a contract in the context of determinable contracts is largely on the basis of the termination clause as provided in the contract. The Courts across India have given their own views with respect to the issue of determinability of contracts. While some Courts have held determinable contracts to be inherently determinable that is to say, the right to terminate the contract is without assigning any reason or even in absence of an event or breach; the others Courts have adopted a separate approach and held that the word determinable is not confined to only those contracts where the parties have the right to terminate without assigning any reason and the same has a wider interpretation. Further, the nature of the contract is also a determinative factor in deciding as to whether the contract is enforceable or not. In cases where the termination of the contract is without any reason, it is hard for the parties to prove that the said contract is not in nature determinable and thus, the only alternative remedy left for the party is to seek compensation in the form of liquidated damages.
The above article is authored by Anil Tiwari(Partner), and Siddharth Sharma (Associate).
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