India: Determinable Contracts

The word "determinable" used in clause (c) to Subsection (1) of Section 14 of the Specific Relief Act, 1963 (the "Act") means that which can be put an end to. Determination is putting of a thing to an end... Meaning thereby, all revocable deeds and voidable contracts may fall within "determinable" contracts and the principle on which specific performance of such an agreement would not be granted is that the Court will not go through the idle ceremony of ordering the execution of a deed or instrument, which is revocable at the will of the executant.1

Determinable Contracts derive their existence from the termination clause envisaged therein. There are essentially three types of termination clauses, viz. (i) termination for cause (breach or upon a contingent event), (ii) termination for convenience and (iii) termination upon expiry of the term. While a termination clause may be drafted in several ways, broadly speaking, termination could occur "without cause" (that is, without assigning any reason) at the option of either party and/or the contract may also provide for the right of a non-defaulting party to terminate the contract on the occurrence of certain specified events.

The law being all about equity and fair play provides certain remedies in case a party to the contract fails to discharge its contractual obligations. These remedies include- specific performance of the contract, damages for breach of contract, injunction to a party to not commit a breach of the contract and Quantum Meruit (what one has earned). Under Indian law, the principles governing the grant of specific performance and injunctions are found under the Act.

Specific performance is an age old remedy for breach of contract. A contract is an agreement between parties consisting of a bundle of mutual rights and obligations that the law will enforce. The commonest reliefs for breach of contract are specific performance, where the contract is specifically enforceable at law or in equity or damages as compensation.

Though the Act defines and amends the law relating to certain kinds of specific reliefs, it appears to be exhaustive in dealing with specific performance of contracts. At any rate, specific performance of a contract cannot be had if the Act prohibits it. It is against such legal backdrop that it must be assessed whether the natural right of a contracting party to obtain what has been promised to him under the contract is interdicted by the provisions of the statute. As to whether or not specific performance is to be granted and as to whether or not any interlocutory order in aid of the ultimate relief of specific performance may be issued will depend, inter alia, on the nature of the agreement, the conduct of the parties, the surrounding circumstances and other relevant considerations.

Further, Section 10 of the Act enumerates the kinds of cases in which the specific performance of any contract, in the discretion of the court, can be enforced. Thus, even though Section 10 enumerates the cases in which court may specifically enforce the contract, yet it makes it clear that the relief of specific performance of a contract is a discretionary relief. Thus, before granting the relief, the court has to make out the facts and circumstances of the case, conduct of the parties, etc. Therefore, in certain cases, even though the contract in question falls in the category of contracts specifically enforceable, the court may refuse the relief on the basis of facts and circumstances of the case, conduct of parties, etc. Where there is a case that falls within the category i.e. clause (c) of subsection (1) of Section 14, the court cannot by exercising its discretion, order specific performance of court. A combined reading of Sections 10 and 14 (1) (c), shows there is more scope of discretion with the court in refusing specific enforcement rather than allowing it.

Moreover, Section 42 of the Act provides that notwithstanding anything contained in clause (e) of Section 41, where a contract comprises of the affirmative agreement to do a certain act, coupled with a negative agreement express or implied, not to do a certain act, the circumstance that the court is unable to compel specific performance of the affirmative agreement shall not preclude it from granting an injunction to perform the negative agreement.

Perusal of the above referred sections reflect that a contract cannot be specifically enforced which in its nature is determinable and injunctions are not to be granted on breach of contract, non-performance of which could not be specifically enforced and/or when a party has an equally efficacious remedy available to him. The general scheme of law in relation to determinable contracts is that in a contract which could be compensated for damages in terms of money cannot be enforced. Further, in a contract where no specific performance can be granted the grant of declaration and injunction as prayed for is also not sustainable.

Under a plethora of judgments pronounced by various courts while deliberating definition of determinable, it also included contracts that allowed the defendant to terminate the contract without notice and/or without assigning any reason.

The law with regards to specific performance of determinable contracts was first laid down by the Supreme Court of India in the case of Indian Oil Corporation Ltd. v. Amritsar Gas Service and Ors.2 wherein the Court held that a distributorship agreement which contained a clause that entitled either party to terminate the agreement with 30 days prior notice and without assigning any reason was "determinable" in nature and hence, could not be specifically enforced. This view has further been reaffirmed by the Supreme Court in 2001, when it observed an agreement for construction unilaterally terminable before delivery of possession to be "determinable" in nature, in the case of Her Highness Maharani Shantidevi P. Gaikwad v. Savijbhai Haribhai Patel3.

The Delhi High Court in its various judgments broadened the definition of "determinable" so much so that an observation of the judgments suggest that the mere existence of a termination clause might lead to the contract being held "determinable" and hence, not specifically enforceable. The Delhi High Court in a case titled Rajasthan Breweries v. Stroh Brewery Co.4 while deciding the dispute arising out of a technical know-how agreement between the parties, held that even in the absence of a specific clause enabling either party to terminate the agreement, in the event of happening of the events specified therein, from the very nature of the agreement, which is private commercial transaction, it could be terminated even without assigning any reason and by serving a reasonable notice and was hence, determinable and not eligible for an injunction/ specific performance under the Act.

Further, the High Court of Orissa in its judgment in Orissa Manganese and Minerals Pvt. Ltd. v. Adhunik Steel Limited5 observed that the agreement in question in which the only clause in regard to termination stated that either party had to before termination of contract serve notice of 90 days to the other party to remedy the breach as not determinable and hence, specifically enforceable. The Court said, occasion of such nature never arose and hence the contract was not determinable unless the condition therein was fulfilled and thence section 14 (1) (c) was not attracted. Although, the case was appealed in the Supreme Court of India, the Court did not particularly deal with the determinability of the agreement in question and refrained from granting any injunction.

In a matter titled Atlas Interactive (India) Pvt. Ltd. v. Bharat Sanchar Nigam Limited6, the court observed that the contract may be determinable in nature but the instrumentality of the State has to act in a fair and just manner and not arbitrarily.

In a matter titled Rattan Lal (since deceased) v. S.N. Bhalla and Anr.7 the hon'ble High Court of Delhi observed an agreement to sale with a clause that the same shall be terminated if the requisite approvals are not received within six months, to be determinable and hence, not specifically enforceable under the Act. However, the Supreme Court in its decision of the appeal against delhi High Court's decision observed that the relevant clause of the agreement in question was never meant to provide the obligated party with an escape route if they themselves failed to discharge their responsibility and that in the absence of any material on record to show that they had made positive efforts for procuring the necessary sale permission and clearance certificates, they were not entitled to determine the Agreement and hence the agreement was held to be wrongly terminated. But due to the step hike in the real estate prices the Court instead of decreeing the suit for specific performance decreed the suit for costs to the Appellant.

Further the High Court of Orissa in Indian Oil Corporation Ltd. v. Freedom Filing Station8 opined that a dealership agreement entered into between the parties, stating that the agreement shall remain in force for five years and continue thereafter for successive periods of one year each until determined by either party by giving 3 months' notice in writing to the other of its intention to terminate the agreement and further, as per Clause 56(1) the Petitioner shall be at liberty to terminate the agreement if the dealer deliberately contaminates or tamper with the quality of any of the Corporation's product as such is determinable in nature. Therefore, the Court set aside the orders of the trial court as well as the appellate court that granted injunctions with respect to the agreement.

In another case (Ministry of Road Transport and Highway, Government of India v. DSC Ventures Pvt. Ltd.9), the High Court of Delhi, whilst placing reliance upon the decision of the Supreme Court in Indian Oil case (supra.), observed that an agreement that provides for termination by serving 60 days of notice to rectify the default in any event of default falls within the ambit of "determinable contracts". Notably, this view of the Delhi High Court is contrary to that of the High Court of Orissa in Orissa Manganese case (supra.).

Based on the above discussion, it is to be noted that if any contract entitles either party to terminate a contract for convenience subject to notice period then as per the provisions of the Act and precedents, such a contract may qualify as "determinable"; hence, not capable of being specifically enforced. Meaning thereby, in such cases specific performance may not be 'the' remedy, but a claim for compensation could be resorted to. Further, it should be borne in mind that even when contract is determined prior to its stipulated term, the performing (non-terminating) party should get paid in proportion to the obligations fulfilled by such party

Giving due regard to the viewpoint of various courts it is pertinent that due consideration and deliberation is given while drafting the termination provisions of any contract. In other words, the parties to a contract must not demote or give less importance to the termination provisions of the contract, rather deliberate on all and any possible outcomes upon termination of the contract. Lastly, it is critical and duly hoped, given the large amount of joint venture and IPR related agreements executed in a globalized and growing economy that is India that due attention is paid to this by the judiciary so that the net outcome for the contracting parties is fair.

Footnotes

* Priya Dhankhar Law Intern (4th Year, New Law College, Bharati Vidyapeeth Deemed University)

1. Rajasthan Breweries Ltd. vs. Stroh Brewery Company (AIR 2000 Delhi 452)

2. (1991)1SCC533

3. AIR2001SC1462

4. AIR2000Delhi450

5. AIR2005Ori113

6. 2005 (40) RAJ 585

7. AIR2012SC3094

8. 2011(I)ILR-CUT93

9. 2015(2)ARBLR142(Delhi)

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