Specific Performance v Substituted Performance: Critique of the Proposed Amendments to Specific Relief Act

So far, we've had about five posts on the Specific Relief (Amendment) Bill, 2018 (pdf) providing a virtually unbridled right to specific performance:

Download the Expert Committee Report on Amendments to the Specific Relief Act

Why Should Specific Performance not be the Default Remedy: A Critique of the Recently Proposed Amendments

Efficient Breach as a Justification for Specific Performance as an Exception

Specific Performance as the Default Remedy in India? The Specific Relief (Amendment) Bill, 2018

Comments on the Specific Relief (Amendment) Bill, 2018

In this last post on the subject, we discuss why the amendment goes much beyond the Expert Committee's Report (pdf) on Specific Performance and is likely to lead to draconian results, especially for innocent promisors.

Whether the Bill Prioritises Specific Performance over Damages?

The Bill seeks to amend Section 10 such that the court's discretion is removed and specific performance is mandatorily ordered except in certain limited exceptions. Section 14. The heading of Section 10 is also sought to be changed from "Contracts which can be specifically enforced" to "Specific performance in respect of contracts". The Expert Committee also recommended the heading to be changed but the Committee's recommendation was to change it to "Specific performance and injunctions in respect of contracts". (See para 18.9).

As stated in an earlier post, the proposed amendment does not make specific performance as the first remedy but provides an option to the victim of the breach to either seek specific performance, or claim damages, or even claim the costs and expenses of substituted performance. In other words, the victim of the breach is empowered to decide the remedy of her choice. 

Why does the Bill not Balance the Interests of the Victim with that of the Promisor?

In the previous post, we had argued that Contract law does a fine balancing act between the interests of the victim whose contract was broken and at the same time ensures that the promisor who broke the contract is not made to pay the price and suffer as a consequence of the breach: contract law's focus is not to punish the breaching party but to satisfy the expectations of the promisee. We request readers to access the previous post for the discussion on this fine balancing act, which was discussed with an example.

It is true, as was acknowledged in the previous post, that Indian contract law does a bad job of compensating the victim and within reasonable time. Hence, the recommendation of the Expert Committee to provide for specific performance is fine. Recognising the fine balancing act that we're talking about, the Committee has also sought to protect this equilibrium: A perusal of Para 18.13 of the Committee's Report would reveal that the second ground that is sought to be a ground for refusing specific performance is where the party seeking specific performance could reasonably obtain substituted performance from another source on comparable terms, including price and time. Please recollect the lengthy example we discussed in the previous post where it was possible for Gowri to obtain substituted performance from Shyamu but even so Gowri sought to obtain specific performance from the original promisor Ramu, which would have resulted in disastrous consequence (and possibly loss of life) for the promisor, and which the law could not have intended.

The Committee's recommendation is in line with international practice. For instance, Article 7.2.2(c) of the UNIDROIT Principles of International Commercial Contracts provides that specific performance cannot be sought where the promisee "may reasonably obtain performance from another source". A similar provision can be found in Article 9:102(d) of the Principles of European Contract Law. (See, Para 12.2.2. of the Committee Report.

Why is the New Section 14 beyond the Committee's Recommendations and Erroneous?

Despite the recommendations by the Committee, the Government has sought to exclude this requirement and provide instead that specific performance cannot be claimed where a party to the contract "has obtained substituted performance". The difference between the clause recommended by the Committee and the one in the proposed Section 14(a) is that the proposed one excludes only those contracts for which substituted performance has been obtained while the one recommended by the Committee excluded cases where substituted performance "could be reasonably" obtained. Courts would have had the leeway to eliminate the injustice likely to be caused by an order for specific performance had the recommendation of the Committee been accepted. Instead, the Government chose to adopt a draconian provision that could result in substantial injustice, as in the case of Gowri discussed in the previous post.

There is absolutely no reason or justification why the Government did what it did: disregard the fine balancing act sought to be maintained by the Expert Committee and replace with a provision is draconian and is likely to cause substantial injustice. This is especially true especially in cases involving poor, uneducated or illiterate litigants. Considering the corruption in the legal system, it would do well to provide such safeguards as recommended by the Committee. Also, the recommendation by the Committee would only further genuine cases of efficient breach theory (see this post) where transaction costs of obtaining substituted performance are reckoned in the calculation.

There is also another problem with Section 14 of the 2018 Bill. It states that the "following contracts cannot be specifically enforced" but Section 14(a) does not strictly speak of a contract but of a situation "where a party to the contract has obtained substituted performance..."  

How to Remedy this Defective Provision?

There are two options to remedy this situation: the first option is for the Government to introduce amendments Clause 14(a) and incorporate the recommendations of the Expert Committee. The Bill is not yet an enactment; it has only been passed by Lok Sabha. The second option is to be exercised by the courts; in case the Bill in its current form is passed, the courts should construe Section 14(a) such that "has obtained substituted performance" would be read as "has or could reasonably obtain substituted performance." 

"Court May Refuse Specific Performance"

In Section 14, the Committee recommended: "(1) The Court may refuse to grant specific performance or injunction in the following cases, and in no others..." Note that the term used is "may". This means that even if the grounds in Section 14(1) for refusing specific performance, the court could still enforce specific performance. However, this is not found in the Bill. Section 14 of the Bill simply starts off with the expression: "The following contracts cannot be specifically enforced..." Thus, it appears that the Government avoided the phrase used by the Committee. But does it mean that the Government chose to reject the Committee's recommendation on the issue? We are not too sure.  

Committee's Report and the Bill does not go the Whole Way

In Para 11.9, the Committee recommended that Section 14 should have limited grounds on which specific performance could be refused. The Committee stated: "Such change will cast the burden of proving the grounds of refusal on the party against whom such relief is sought.." However, the Committee did not clearly cast the burden on the promisor while making its recommendations on the text of the amendments. Section 10 merely proposed that the victim would be entitled to specific performance, "unless relief can be refused under sections 14, 16 or 41..." (see Para 18.10). However, even this Section does not clarify who has to prove the availability of a reasonable source for substitute performance. Similarly Section 14 of the Bill also does not clearly cast the burden. 

Of course, owing to Section 103 of the Indian Evidence Act, 1872, it could be argued that the the burden of proof of the availability of reasonable substitute would  be on the person who would wish to be believe in its existence. It could also be argued that the plaintiff/ victim cannot be expected to prove the negative: that no reasonable substituted performance is available. On the other hand, the facts regarding substituted performance could very well be especially within the knowledge of the victim/ plaintiff, who then has to establish that no reasonable substitute was available as per the mandate of Section 106 of the Indian Evidence Act, 1872.

We are not very sure if the Expert Committee sought to leave it for courts to come up with the onus: going by the recommendations of the Committee in para 11.9, it appears that the burden was supposed to be cast on the defendant. We are also not altogether sure if the Government consciously had a view to leave it to the courts to construe the provision and cast the onus accordingly. 

We therefore suggest that Section 14 of the Bill be modified to state: The following contracts cannot be specifically enforced "All contracts can be specifically enforced unless the promisor in breach of the contract establishes that...  Note that it is sufficient if the party breaching contract establishes one ground in Section 14.  

Download the Expert Committee Report on Amendments to the Specific Relief Act

Followers of this blog are well-aware that the recent Expert Committee Report on the Amendments to the Specific Relief Act, 1963 was not in public domain. Despite several requests to the Law Ministry, the Report was kept away from public domain. 

Pursuant to an Right to Information Act, 2005 application by this blawgger, the Ministry has sent a copy of the Report. We take this opportunity to thank the Deputy Secretary & CPIO of the Legislative Department to have acted in consonance with the letter and the spirit of the Right to Information Act, 2005 and disclosed the Report. 

Readers can access a scanned copy of the Report from this link (pdf). Happy Reading! 

Delineating Investor-State Arbitration: Delhi High Court's Vodafone Judgement

Yesterday's judgement by Manmohan, J. of the Delhi High Court in the civil suit by Union of India seeking a declaration and an injunction against the second investor-treaty arbitration invoked by Vodafone in its lengthy tax dispute with the Union of India is one of the clearest expositions of law in the recent times. The judgement, although a little lengthy (80 pages) is a must read for those who are interested in arbitration, be it commercial, investor-treaty, or otherwise.

The judgement should form a part of any reading material in Indian law schools on Investor-Treaty Law and Arbitration. The judgement can be accessed from this link.

For those who wish to read the judgement later but are curious to know what the judgement says, we quote the conclusion by Manmohan, J. which succinctly summarises the law on the subject:

"142. To conclude, investment treaty arbitration between a private investor and the host State, which results by following the treaty route is not itself a treaty, but is sui generis and recognized as such all over the world. It has its roots in public international law, obligations of States and administrative law. As a species of arbitrations, it is of recent origin and its jurisprudence cannot be said to be settled or written in stone; far from it. Investment Treaty jurisprudence is still a work in progress. 

143. However, there is some disquiet over the spectrum of nations both developed and developing as to the spiraling consequences of investment awards and its impact on sovereign functions, as reflected in the speech of Mr. Justice Sundaresh Menon, Chief Justice of Singapore on International Arbitration : The Coming of New Age for Asia (and Elsewhere) (supra). 

144. It also cannot be said as an absolute proposition of law that the moment there is an investment treaty arbitration between a private investor and the State, National Courts are divested of their jurisdiction. The Court of Appeal in England in Republic of Ecuador (supra) rejected the argument that the Courts have no jurisdiction to interpret or apply unincorporated International treaties between an investor and a host State. Consequently, in the opinion of this Court, there is no legal bar over the subject matter of the suit. 

145. Further, Investment Arbitration disputes are fundamentally different from commercial disputes as the cause of action (whether contractual or not) is grounded on State guarantees and assurances (and are not commercial in nature). 

146. As the present case is not a commercial arbitration, the Act, 1996 shall not apply. This Court is of the view that in a situation where the Act, 1996 does not apply, its inherent powers are not circumscribed by anything contained in the Act and the ratio in McDonald (supra) will not apply. Even in commercial arbitration, the jurisprudence of minimum intervention is relatively of recent vintage. It has its roots in Article 5 of the Model Law of 1985 which then took fifteen to twenty years to gain traction and general acceptance in the body of nations. 

147. Notwithstanding, this limited intervention role, it is not unknown for Courts to issue anti arbitration injunction under their inherent power, especially when neither the seat of arbitration nor the curial law has been agreed upon. In Excalibur Ventures LLC (supra), the Court held that where he foreign arbitration was oppressive or unconscionable, the Court may exercise its power to grant an injunction. In fact, the said judgment cites seven cases which have upheld the Court‟s jurisdiction to restrain foreign seated arbitrations. 

148. Of course, it is a matter of practice that National Courts will exercise great self restraint and grant injunction only if there are very compelling circumstances and the Court has been approached in good faith and there is no alternative efficacious remedy available. Such a restrictive approach and jurisdiction is in consonance with any international obligation, India may have under VCLT or any other treaty. 

149. However, keeping in view the aforesaid findings vis-a-vis, the abuse of process, kompetenz-kompetenz issues, the present suit and application are dismissed with liberty to the Plaintiff-Union of India to raise the issue of abuse of process before India-United Kingdom BIPA, that now stands constituted... "

Why Should Specific Performance not be the Default Remedy: A Critique of the Recently Proposed Amendments

Edward Fry in his epochal work on Specific Performance prophesied:

"It may be suggested that [] a perfect system of jurisprudence ought to enforce the actual performance of contracts of every kind and class, except only when there are circumstances which render such enforcement unnecessary or inexpedient, and that it ought to be assumed that every contract is specifically enforceable until the contrary be shown. But so broad a proposition has never, it is believed, been asserted by any of the judges of the court of chancery, or their successors in the high court of justice, though, if prophecy were the function of a law writer, it might be suggested that they will more and more approximate to such a rule."

This prophecy did not become true in English law but might in India.

Readers may recollect the three recent posts in this blog (here, here, and here) on the proposed amendments to the Specific Relief Act, 1963. In this post, we critically evaluate the proposed amendment making specific performance as the default remedy. As a prelude to this discussion, we draw readers' attention to a previous post in this blog where we stated that the proposed amendments sought to do away with the general rule in contract law that damages would be the default remedy and specific performance would be the exception. 

The amendment Bill seeks to alter the legal position which has been in vogue for more than 200 years (see, for instance, Harnett v Yielding (1805)). Although Scots law and certain civil law jurisdictions have specific performance as a default remedy, damages as the default remedy is the near universal rule in common law jurisdictions. The present amendments seek to alter this approach in India.

We argue in this post that the said proposal should be re-thought. We supply reasons in this post for this. Before this, we wish to give two disclaimers: One, most of the members of the Expert Committee who proposed the amendment have tremendous experience in the subject. Yet, with a lot of deference, we state that the approach might not be altogether correct. The second, and the most important disclaimer is that we have not yet read the report as it is not in the public domain, and therefore, we are not in a position to completely fathom why the report so suggests. Anyway, we can only hazard a guess: India has a dismal rate of contract enforcement, and the report intends to correct this state of affairs by making such contracts specifically enforceable. We also think that this paper (by one of the members of the Committee) might throw some light on why the Committee so proposed.

Before Critiquing the Proposal, let us briefly see what the amendment proposes.

Proposed Amendments on Specific Relief

Section 10 of the existing 1963, which enumerates cases where, and conditions in which, specific performance of contract is enforceable, is sought to be replaced with the following provision: “10. The specific performance of a contract shall be enforced by the court subject to the provisions contained in sub-section (2) of section 11, section 14 and section 16.”

Note that the newly proposed Section 10 refers to Section 14. The existing Section 14, which enumerates grounds that are not specifically enforceable, is sought to be replaced with the following:

“14. The following contracts cannot be specifically enforced, namely:— 

(a) where a party to the contract has obtained substituted performance of contract in accordance with the provisions of section 20; 

(b) a contract, the performance of which involves the performance of a continuous duty which the court cannot supervise; 

(c) a contract which is so dependent on the personal qualifications of the parties that the court cannot enforce specific performance of its material terms; and 

(d) a contract which is in its nature determinable."

Except for ground 14(a) above, the rest of the grounds are available in the existing Section 14. The new Section 14 proposed does away with few of the existing grounds and the one which we are concerned about is where where compensation for breach is an adequate remedy. The proposed Section 14 replaces this ground with where the victim of breach has obtained substituted performance.

Note that the existing sub-heading for Sections 20 to 24 of the 1963 Act, "Discretion and Powers of Court" is sought to be replaced with the sub-heading “Substituted performance of contracts, etc.”. The existing Section 20 titled "Discretion as to decreeing specific performance" is sought to be replaced with a section on Substituted Performance.The new Section 20 provides the victim of breach "the option of substituted performance through a third party or by his own agency." 

Therefore, a victim of breach under the new regime would have the following options:

• seek substituted performance under the new S. 20,
• seek specific performance under the new S. 10, if he has not sought substituted performance under the new S. 14, or
• claim damages or liquidated damages [the new S 20(1) on substituted performance starts off with the phrase "without prejudice to the generality of the provisions contained in the Indian Contract Act, 1872...".]

Thus, the victim of breach can claim any of these things. The law as it stands now provides that specific performance cannot be ordered when compensation for non-performance is an adequate relief [S. 14(1)(a)].

Strictly speaking, it is not that specific performance is proposed to be made as the default remedy; rather, all three (or four, if you include liquidated damages) are the default remedies.

Why is Specific Performance not the Default Remedy?

Specific Performance is not the default remedy but damages is, in India. The law allows the promisor to 'efficiently' breach the contract, which under circumstances, is socially optimal (see this post).(this ground is not without counter-arguments). In many cases, specific performance is unduly harsh on the promisor (more on this later).

What is the Problem with Damages being the Default Remedy?

Damages is difficult to prove. Even then at times parties suffer special damages but for reasons do not foresee (although they should) at the time of contracting. Owing to the difficulty of proof, damages are, most of the times, undercompensatory. In many cases in India, the road to recovering the money is a long drawn process and results in substantial injustice to the victim of the breach. In pursuing the legal remedies, the victim is often not even compensated for the costs incurred. The victim has better information than the courts as to the adequacy of damages, and the courts/ legislature should not forcibly impose such a standard on the victim.

Alan Schwartz wrote an important paper titled "The Case for Specific Performance" 89 Yale L. J. 271 (1979) where he argued that the victim has to be provided the option of deciding to go for damages or specific relief depending on which of those two will properly compensate her. Schwartz argued:

"The compensation goal of contract law can be achieved by requiring the promisor to pay damages or by requiring the promisor to render the promised performance. Under current law, a promisee is entitled to a damage award as of right but the court retains discretion to decide whether specific performance should be granted. Because specific performance is a superior method for achieving the compensation goal, promisees should be able to obtain specific performance on request."

[The compensation goal that Schwartz was referring to was to put the victim in the position as if the contract was performed.]

This is what the Bill proposed to do: provide the victim the option to either choose, without limit, specific performance or damages (substituted performance can by assumed to be a type of damages)

Which of these Two, then?

Thus, the Bill seeks to make out a strong case for specific performance. But this should not be so. The reason is the fine balancing act played by contract law between the victim of the breach and the promisor who broke the contract. What is this fine balancing act about?

For a movie-maker, a conflict between characters is good because that gives scope to develop a character and take the movie forward. But conflict is not good in real life. Law should ensure that conflict is either resolved, or at the least, avoided. When specific performance is the default remedy, the conflict is neither avoided nor resolved but the promisor and the victim are put in a conflict zone, ripe for the deepening of conflict and even for sabotage of one's interests by the other. To take an analogy, specific performance as the default remedy is like death penalty in criminal law; it calls for the blood of the guilty. We quote Lord Hoffmann extensively in this part of the post; he puts it so aptly: "[The order for specific performance] yokes the parties together in a continuing hostile relationship. [It] prolongs the battle." (Co-operative Insurance Society Ltd v. Argyll Stores [1997] UKHL 17).

So, by awarding damages, law seeks to provide the equivalent to the promisee's expectation out of the contract. Damages put an end to the warring parties and protects the expectation interests of the victim. Lord Hoffmann says: "A remedy which enables [the victim] to secure, in money terms, more than the performance due to him is unjust... An award of damages [] brings the litigation to an end. The defendant pays damages, the forensic link between them is severed, they go their separate ways and the wounds of conflict can heal."

That law does a miserable job out of protecting the expectation interest of the victim, especially in the Indian context, is no excuse for putting the parties in the hostile zone by making specific performance the default remedy or providing a chance to the victim to get more out of the breach than what warrants. We always look for shortcuts instead of reforming what is to be reformed: the judicial system and the delays. We bye-pass it by 'reforming' only the contract law enforcement parts of it, and do a bad job with it.

Consider this example: There is a village Sitapur where Ramu, a mango retailer, promises to deliver 100 kg of mangoes to Gowri for Rs. 1000 (Rs. 10/ kg) on a particular date. Ramu thinks he will invest Rs. 800 that he has with him for buying mangoes from the wholesale market, sell it to Gowri, and get Rs. 200 as profit (at Rs. 2/kg). On the date when he is supposed to go to the wholesale market, his child falls sick and is to be admitted in the hospital. Ramu expects that he will have to spend about Rs. 700 for the hospital. So he tells Gowri that he will not be able to perform the contract. Gowri is angry at Ramu and shouts at Ramu that he is no man as he cannot even keep his promise! So she threatens to teach Ramu a lesson. Gowri enquires with another retailer Shyamu who agrees to sell the mangoes at Rs. 1100 (at Rs. 11/ kg). Still angry at Ramu, she gives a complaint to the village Panchayat. The elders of the Panchayat summons both Ramu and Gowri and a sitting is held on a sunny Sunday. Ramu, whose daughter's surgery is scheduled to be held the next day attends the sitting. After hearing both the parties, the Panchayat says that even the Parliament of India in its infinite wisdom has amended the Specific Relief Act, 1963 to give the option to the victim of breach to decide on whether the victim wants specific performance or damages. So the elders ask Gowri. Gowri says she wants specific performance. Ramu's implores with Gowri to forgive him and his cries that unless he pays up Rs. 700 to the hospital, his daughter will not be operated on and might die fails to move Gowri. Suddenly Shyamu jumps up and says he'll provide a solution. He says that if Gowri buys Shyamu's mangoes at Rs. 11/ kg and if Ramu pays to Gowri that Rs. 1/ kg extra that Gowri has to shell out to Shyamu, Gowri will get the mangoes, Shyamu will make a profit (at Rs. 3/kg) and Ramu will have to shell out Rs. 1/ kg (Rs. 100), which he will be able to do even after paying up for his daughter's surgery. Shyamu says if the solution he proposed is adopted, Shyamu, Gowri and Ramu will all get what they want. What should the Panchayat do?

We'll leave the readers to answer the question in the way they wish to but we'll conclude with the words of Lord Hoffmann: "[T]he purpose of the law of contract is not to punish wrongdoing but to satisfy the expectations of the party entitled to performance... From a wider perspective, it cannot be in the public interest for the courts to require someone to carry on business at a loss if there is any plausible alternative by which the other party can be given compensation."

[Note: In understanding and writing several on concepts of Contract Law Theory, this blawgger has substantially used Mindy Chen-Wishart's superb text book on Contract Law. The specialty of the book is it presents theoretical aspects of contract law in a simple manner.]