CONTRACT LAW AND SPECIFIC RELIEF: LATEST UPDATE

Posted on 27-11-2019

The Government of India has been hard-selling its ‘Make in India’ campaign to boost foreign investment and has brought several changes and amendments to increase the country’s ranking on the index of ‘ease of doing business.’ One significant amendment has been the change to the ‘common-law’ borrowed contract law regime to foster trade and investment by making enforcement of contracts easier. Doing away with the discretionary regime related to specific relief and specific performance of contracts and damages as the primary remedy, the law now provides for mandatory performance [1] and substituted performance [2] i.e., investors can now have their opposite parties perform the contract rather than seek just damages. This step goes a long way in fostering business sentiment as parties or investors can now demand the ‘benefit of the bargain’ exactly, which will afford necessary protection to trade and investments. In line with the UNIDROIT Principles of International Contracts, [3] and impliedly affirming the philosophy of the Convention on International Sale of Goods (“CISG”), [4] the passing of the Specific Relief (Amendment) Act, 2018 (“Relief Act”) has turned the contract law regime on its head, as India has now adopted specific performance as the primary remedy for breach of contracts. This was well received by the business and legal fraternity as contract law finally seeing relief. [5] However, without necessary amendments and adoption of the general philosophy of the contract law regime of civil law countries, which accepts specific performance of the contract as the primary remedy for enforcement of contracts after crossing several safeguards, the amendment to the Relief Act stands as another example of patchy legislative fixes of symptoms rather than addressing the underlying problems. In adopting specific performance as the primary remedy, the legislature has completely ignored the underlying fundamental differences between common law and civil law countries: A. Good Faith In civil law countries, there is an overarching requirement of pacta sunt servanda, i.e., that a contract entails as much a moral as a legal obligation. [6] Therefore, parties are not only required to negotiate in good faith, giving rise to pre-contractual liability, but are also required to perform the contract in good faith, i.e., there exists an implied duty of collaboration and cooperation in performance of the contract. On the contrary, the concept of good faith in common law is looked upon as a concept which is applied by litigators when they have nothing else to argue. [7]Even though some common law jurisdictions such as the United States provide for good faith under the Uniform Commercial Code (“UCC”), the Indian Contract Act, 1872 (“ICA”), is silent on the same. [8] The rationale of good faith in civil law stems from the stronger and more stringent role played by the State in contracts as opposed to the approach of ‘freedom of contract’ as adopted under common law. [9] In essence, civil law acknowledges that contracts are necessarily incomplete, and parties cannot specify optimal obligations. Hence, a good-faith interpretation will provide terms that parties ought to have bargained for, thereby curbing opportunistic behaviour by parties. B. Mandatory Contract Rules Another classic example of the interventionist approach of civil law is the supplying of mandatory contractual terms, or specifying the ‘types of contracts’ that may be entered into. It is not to say that parties are not free to enter into contracts in civil law countries, but there are certain pre-packaged terms that override the freedom of parties. [10] In common law, such terms are usually contained in standard form contracts or boilerplates aimed at reducing transaction costs, but the statutory backing in civil law jurisdictions ensures greater compliance with such mandatory rules. Therefore, the contract law in civil law jurisdictions provides and monitors substantive clauses to ensure broader social values and objectives. Common law, on the other hand, does not interfere with the bargain between the parties and enforces the contract as agreed upon. C. Adaptation and Gap Filling A feature that distinctly separates common law from civil law is the leeway granted to courts in civil law to adapt contracts, fill gaps or adjust the contractual terms after the execution of contracts. Such leeway is considered necessary to account for commercial interests and commercial viability of contracts (including force majeure and hardship). [11] Common law jurisdictions take great pride in discarding extrinsic evidence about negotiations and rejecting implied contract terms beyond those spelled out in the agreement as in the case of the parole evidence rule. [12]Therefore, the rule of ‘parole evidence’ lies at the heart of contract law jurisprudence and evidence rules in contracts. D. Fairness A core concept enshrined in civil law is the idea of fairness in contracts. [13] Parties must enter into fair contracts, failing which the contract may not be enforced. Common law, on the other hand, recognises unconscionability in a limited sense with respect to specific clauses rather than the contract itself. In India, such recognition exists mostly in social welfare legislation such as the Consumer Protection Act, 2019, the Real Estate (Regulation and Development) Act, 2016, but is often missing in purely commercial contracts. E. Efficient Breach and Penalty Clauses Another novel feature of common law contract jurisprudence is the idea of an ‘efficient breach,’ i.e., a party may voluntarily breach a contract and pay expectation damages in the event it is economically efficient to breach the contract for some other gain. [14]Tied to this idea, is the absence of penalty clauses. Since contract law permits efficient breaches in common law, penalty clauses are considered to be invalid. On the contrary, civil law provides for periodic fines for non-performance [15] and enforces penalty clauses unless they are exorbitant, clearly rejecting the notion of an ‘efficient breach.’ Conclusion If one was to read these differences holistically, there appears to be a clear philosophy in civil law that stems from state regulation of contracts, supplying of mandatory terms, imposing a duty of good faith and fairness, and only subsequent to passing these thresholds, providing the remedy of specific performance. Common law, on the other hand, does not have similar safeguards, and has hence adopted the remedy of damages, with specific performance being discretionary, and to be used in exceptional circumstances. After the amendment to the Relief Act, India has adopted the remedy of specific performance borrowing from civil law, but the ICA continues to be a common law legacy disregarding civil law safeguards. Hence, as is with most legislative amendments, the Relief Act mandating specific performance has, in fact, created a curious problem of Indian Law being “the uncommon” law which is neither true to common law remedies nor accepting of civil law safeguards. This half baked approach has several implications such as specific performance of unfair contracts, an upheaval of specific relief from being discretionary to mandatory, turning the jurisprudence of interim measures on its head as damages are no longer adequate remedy, and most importantly, creating a glaring inconsistency in the contract formation, performance and remedy for breach. These implications will only add to the pre-existing problems of slow enforcement and will further hamper business sentiment. If India is to truly foster ‘ease of doing business’, it requires a more holistic and well-thought-out change to the contract law regime, instead of the same slip-shod approach adopted to nearly all legislative amendments. ~ courtesy Mr.Ajar Rab