Critique of the Specific Relief (Amendment) Act, 2018

Over at Obiter Dicta, the respected Dr. Nilima Bhadbhade, one of the foremost experts in India on Contract and Specific Relief law, has penned a comprehensive critique on the Specific Relief (Amendment) Act, 2018. The post by Dr. Bhadbhade primarily argues that the amendment was a case of hurried legislation and was a comprehensive deviation from the Expert Committee Report. The post notes that the Ministry of Law & Justice did not publish the report but the same was made available through the RTI Act. This was probably a reference to our post making the Report public pursuant to an RTI application by us.

We had several posts in this blog (here, here, here and here) and elsewhere critiquing one particular aspect: the way in which the amendment affected the balance maintained by contract law between the interests of the victim of the breach and the perpetrator of breach. The post by Dr. Bhadbhade confirms the validity of the criticisms made, and coming from a person with immense expertise and who was a part of the Expert Committee, the Government should take it seriously to explore the option of amending the amendment to ensure that legitimate criticisms of the Act are addressed. 

Article Review: Shivprasad Swaminathan's De-inventing the Wheel: Liquidated Damages, Penalties and the Indian Contract Act, 1872

Shivprasad Swaminathan's latest article in the Chinese Journal of Comparative Law (link-subscription required) De-inventing the Wheel: Liquidated Damages, Penalties and the Indian Contract Act, 1872, 6 Chinese Journal of Comparative Law 103-127 (2018) presents an interesting read and is an article which every Indian lawyer- practitioner, judge or academician- should read, Good articles on Contract Law from an Indian perspective are rare and the paper provides deep insights on the subject. 

Ask any lawyer about what are essentially required to be established in a court to be entitled for liquidated damages and he is likely to scratch his head or mislead you. If you file a claim in a court (or an arbitral tribunal) for liquidated damages and furnish some evidence, you can only hope to god on whether the court will award you the said amount.  So the claimant ends up furnishing the best evidence he has, "whether or not actual damage or loss is proved to have been caused".

The key takeaways of the article are listed out below:

• The article provides a much-required drafting history of Section 74
• It also discusses the objective of Section 74- to no more get into the LD-penalty dichotomy and how the dichotomy was introduced through the 1899 amendments. 
• The article notes how the supposedly "landmark" decisions on LD repeatedly brought the dichotomy into S. 74 when it was not warranted at all.
• "Reasonable" was a "trouser word": its determination was by establishing unreasonableness. 
• The article also analyses the relatively recent judgement Kailash Nath v DDA and how the Supreme Court tried to construe Section 74 to mitigate the uncertainty brought about by the dichotomy. 

The author argues that a "trichotomy" was introduced in Kailash Nath- liquidated damages, other liquidated amounts and penalty in place of the standard dichotomy (See, Part II of the article). This blawgger is not sure if RF Nariman, J did that in the case.  We'll quote the relevant portion of the judgement from which the author seeks to draw this inference:

"Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive as reasonable compensation such liquidated amount only if it is a genuine pre-estimate of damages fixed by both parties and found to be such by the Court. In other cases, where a sum is named in a contract as a liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount so stated. Similarly, in cases where the amount fixed is in the nature of penalty, only reasonable compensation can be awarded not exceeding the penalty so stated. In both cases, the liquidated amount or penalty is the upper limit beyond which the Court cannot grant reasonable compensation.

Reasonable compensation will be fixed on well known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act.

Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the Section.

The Section applies whether a person is a plaintiff or a defendant in a suit.

The sum spoken of may already be paid or be payable in future.

The expression "whether or not actual damage or loss is proved to have been caused thereby" means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded."

Kailash Nath nowhere uses the phrase "other liquidated amounts". It appears that "liquidated amounts" referred to above is qualified by "payable by way of damages". Nariman's decision is that if the above said liquidated amount payable by way of damages is found by the court to be a genuine pre-estimate of damages fixed by both parties, then the said amount is reasonable compensation but if it is not a genuine pre-estimate of damages fixed by both parties, it is a penalty for which only reasonable compensation could be awarded. In sum, there seems to be no trichotomy.

Nevertheless, this is just a minor issue with the paper that's a brilliant read. The author admirably concludes that the Act has deviated from the drafter's design, which originally could accommodate the test of legitimate interests of the promisee in assessing reasonableness (and enforcement of) the LD clause. The test is currently in vogue post-Cavendish Square. The author argues that the Section as originally drafted without the dichotomy could accommodate the legitimate interest test "[b]ut it was not to be". Now that Canvedish is the law in the common law world, it is time for us to exorcise the dichotomy and embark on reforming the law. 

Specific Relief (Amendment) Act, 2018 Brought into Force from 1 October

We had done several posts on the Specific Relief (Amendment) Bill, 2018 and later Act.  See this post for a compilation of the past posts. On 19.09.2018, the Government of India has appointed 1 October 2018 as the date from when the new provisions would come into force. The Gazette Notification is available here.

Interesting times ahead. We'll keep readers posted on the developments. 

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.  

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.]

Reliance Interest in Contract Damages and Expectation Damages

In the past few weeks, we have been discussing the recently proposed amendments to the Specific Relief Act, 1963 (this, this and this). In this post we discuss one of the most monumental contributions to contract law, Fuller & Perdue's paper, "The Reliance Interest in Contract Damages", which was published in two parts (Part 1 & Part 2). One of the main ideas in the paper was the popular (or notorious, depending on your view) three-fold classification of contract damages. We also discuss the reason why expectation damages are awarded in contract law.

The Three-Fold Classification of Damages

F&P classified the reasons for the award of damages into protection of three kinds of interests:

• Restitution interests: The restitution interest consists of any benefit the promisee has provided the breaching party. For example, if a seller agrees to make monthly deliveries of a commodity in return for fixed payments due 60 days after each delivery and the buyer repudiates the contract after receiving and retaining two deliveries but making no payments, restitutionary damages would restore to the seller the value of the delivered goods.
• Reliance interests: The reliance interest is measured by the promisee’s wealth in the pre-contractual position. Reliance damages provide compensation both for any benefit conferred on the breaching party and for any other reliance investments made by the promisee in anticipation of performance to the extent such investments cannot be recovered.
• Expectation interests: The expectation interest is measured by the net benefit the promisee would receive should performance occur.

After making the three-fold classification, F&P observed:

• In most instances, the restitution measure will provide the lowest amount of recovery and the expectation measure the highest recovery. 
• However, the restitution measure will provide the strongest claim while the expectation measure will provide the weakest. The restitution measure seeks to correct unjust impoverishment of the breacher and the unjust enrichment of the non-breacher. In case of reliance interest, it seeks to correct the unjust loss suffered by the non-breacher but does not undo any corresponding gain of the breacher. 

The three-fold classification has attained a lot of prominence. Two papers could be referred to for a critique of the classification: Friedmann, The Performance Interest in Contract Damages (1995) 111 LQR 628 and Richard Craswell, Against Fuller & Perdue, 67 Uni Chi L Rev (2000). The two articles criticise F&P on numerous grounds. We do not need to go into these criticisms for the purpose of the present article but the classification presents a simple and a powerful analysis of the interests sought to be protected by contract law. F&P's contribution is regarded as influential so much that it has been regarded as the most famous contract article ever written (see Friedmann). Like many influential works, it appears that F&P's article went unnoticed for a long time. Later, it was dusted off from the graveyard of law review articles, taught, analysed and criticised.

The interesting trivia around the F&P article is that Perdue was a third year research assistant of Lon Fuller. The theoretical parts of the paper were written by Fuller himself and the case laws were researched by William Perdue Jr. Another interesting trivia is that Richard M Nixon, the former American president (the only President of the US to have resigned- notorious for the Watergate scandal) would have "almost served as Fuller's research assistant" for the article (see, William M. Wiecek, The History of the Supreme Court of the United States, p. 449, foot note 39). Fuller should be credited for the ethical decision to let Perdue be the co-author for the work. This is an important lesson for academicians in India. In an age where research supervisors hijack the work of research scholars and at times sexually abuse them, Fuller's action of acknowledging Perdue as the co-author should be the lesson that academicians should learn.

Why Expectation Damages?

The concept of "expectation damages" was further brought to the mainstream by the law and economics scholars, who argued that so long as performance is not inefficient (notice the double negative), expectation damages provide the incentive for the promisor to perform the contract. If there is no expectation damages, the promisee would be left with non-performance, which was not desirable from the social welfare point of view.

[Note: The next part of this post cannot be understood unless the previous post is read]

Now read the hypothetical case discussed in the previous post (read carefully). The profit of Dintel in the transaction between Dintel and Denovo was Rs. 2,000 (Rs. 10,000- Rs. 8,000). The benefits out of the transaction for Denovo was Rs. 2,000.  But the profit of Dintel in the transaction between Dintel and Yechee was Rs. 5,000 (Rs. 13,000- Rs. 8,000). If Dintel was allowed to breach after compensating Denovo for Rs. 2,000, Dintel would still earn Rs. 3,000 (Rs. 5000-Rs 2000), which was provided as the justification for the efficient breach theory. It was a win-win situation for all the three parties (under the assumption that Denovo could make alternative arrangements). 

Now what would have happened if Yechee offered only Rs.11,000? After compensating Denovo (of Rs. 2000), Dintel would have earned a profit of only Rs. 1000, which was Rs. 1000 less than what it would've earned had it performed the contract with Denovo. Consider a scenario where Yechee offers only Rs. 11000 to Dintel, and if Dintel breaches the contract with Denovo, Denovo would have to pay Rs. 2000 for alternative procurement for another company CMD. In a case where expectation damages does not exist (and Dintel did not incur costs), Dintel would simply breach the contract with Denovo, leaving Denovo in the lurch, and go for Yechee's contract, thus earning a cool profit of Rs. 3,000. Denovo would then have to spend Rs. 2,000 extra and its profits from the sale of the laptop would be eroded, leaving Denovo worse off. Only if expectation damages existed would Dintel be prevented from breaching the contract with Denovo as it would earn a profit only of Rs. 1000 giving no incentive for Dintel to breach the contract with Denovo. 

This is the justification for expectation damages. More on the relevance of this discussion in the next post.

Efficient Breach as a Justification for Specific Performance as an Exception

Readers may recollect the two recent posts in this blog (here and here) on the proposed amendments to the Specific Relief Act, 1963. Taking the topic forward, we discuss why damages and not specific performance is the default remedy. We discuss the efficient breach theory as popularised by Richard Posner and others. 

The Efficient Breach Theory

Efficicent breach theory was first introduced by Robert Birmingham in a 1970 article Breach of Contract, Damage Measures and Economic Efficiency, 24 Rutgers L Rev 273 (1970) and was subsequently developed by Richard Posner’s 1972 book titled, Economic Analysis of Law.

One of the most powerful theoretical justifications to the principle that damages should be the default remedy in case of contractual breaches and specific performance should be the exception is the efficient breach theory. As early as in 1897, OW Holmes famously stated: "The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it- nothing else." This is the battle cry of the proponents of the efficient breach theory.

The theory of efficient breach argues that damages as awarded by courts gives the promisor an incentive to perform the contract except when the result would be an inefficient use of resources. In such a case, the theory prescribes, promisor should be allowed to breach the contract so long as the victim is adequately compensated. The theory seems to be morally repugnant on the face of it but its appeal can be explained through a hypothetical example. 

What does the Theory Say? A hypothetical Case: 

Let us take a hypothetical case of laptop and processors business. The hypothetical case is slightly complicated and hence readers may pay close attention to each word in the case.

On 01.01.2018, manufacturers of processors, Dintel enters into contract to sell processors to Denovo Computers, a manufacturer of laptops. As per the contract, Dintel is supposed to deliver 100 units to Denovo on or before 01.07.2018. If Dintel breaches the contract, Denovo can procure the equivalent processors from another manufacturer, CMD at, say, around the same rate and without much delay. But Dintel's maximum capacity is only, say, 100 units in seven months.

Under the contract, Denovo is to pay Rs. 10000 per Processor or Rs. 10,00,000 by 01.08.2018 for delivery thereof. Dintel has to spend Rs. 8000 on manufacture, shipment and overheads. Denovo has to use the processors to manufacture laptops. On top of the cost it would incur for the processor, Denovo has to spend an extra Rs. 6000 per laptop (for other parts) and will sell the laptop at Rs. 18,000.

• Total cost of producing the laptop = Rs. 8000 (cost of processor) + Rs. 6000 (other parts of the laptop) = Rs. 14,000.
• Overall value created out of the deal= Rs. 18,000 (selling price) – Rs. 14,000 (cost) = Rs. 4000
• Of the value of Rs. 4000, Rs. 2000 will go to Dintel (Rs. 10,000- 8000) and Rs. 2000 will go to Denovo [Rs. 18,000- (Rs. 10,000+6,000)]

Depending upon the relative bargaining power, either Dintel or Denovo may adjust the profit but would generally not make a loss-making deal, such as selling the processor at Rs. 6000 to Denovo (loss to Dintel) or at Rs. 13000 (loss to Denovo)

Although the above deal presents overall value to both parties, risks involved or new situations could make the deal unattractive to either one of them. One such situation is discussed below:

Consider a scenario where on 01.04.2018, YECHEE, a competitor to Denovo offers Rs. 13,000 per unit of 100 processors for delivery on 01.07.2018. YECHEE is offering so because it can produce the remaining parts in cheaper costs using its technology at just Rs. 3000. Please recollect that the overall value created in the transaction between Dintel and Denovo was Rs. 4000, that is, Rs. 18,000 (selling price) – Rs. 14,000 (production cost) = Rs. 4000. 

Whereas the overall value created in the transaction between Dintel and YECHEE would be [Rs. 18,000 (selling price) – (Rs. 8000 + Rs. 3000)] = Rs.  7000. [note that the production costs for YECHEE apart from the processor cost is just Rs. 3000.

Therefore, maximum social welfare (selling value minus production costs) would be achieved if the transaction between Dintel and YECHEE is allowed. In other words, if Dintel is allowed to breach the contract with Denovo, subject of course on payment of damages, both Dintel and Denovo will be well-off. This is, in simple, what the efficient breach theory prescribes: it would be socially optimal for Dintel to breach the contract and allow Dintel to enter into a deal with YECHEE provided Denovo is compensated. It will be a win-win situation for the victim of breach, for the promisor, and for the third party, YECHEE. Hence ,there will be no point in awarding specific performance, as specific performance will lead to a lesser overall societal value and will result in two disappointed parties (Dintel and YECHEE) of the three. This is the basis for the rule that specific performance will not be awarded where damages would adequately compensate the victim of breach. 

A Case for Specific Performance in the Above Scenario: Readers may recollect the assumption above that If Dintel breaches the contract, Denovo can procure the equivalent processors from another manufacturer, CMD at, say, around the same rate and without much delay. What if this assumption is not there? What if, owing to Dintel's breach, Denovo will not be able to supply laptops to its long-term customers, and which will lead to loss of reputation and a huge loss in market share such that the said losses would mean Denovo losing crores of rupees. Would breach still be allowed? In this situation, the breach would make Denovo seriously worse off, and would be a situation where damages would not adequately compensate Denovo. Therefore, specific performance would have to be ordered.

This is, in simple, the efficient breach theory.

Criticisms of the Efficient Breach Theory

So much was the theory’s influence that in 1983 Restatement (Second) of Contracts, the theory received a tentative endorsement” in the Introductory Note on Remedies with a caveat, which represents two broad strands of criticism- morally repugnant and reliance on false assumptions. In view of the criticisms, it appears that the theory was further refined but certain criticisms continued to be unsatisfactorily answered by the theory. 

Moral Repugnancy: This strand of criticism stems for the contract as a promise theory. 

• The efficient breach theory encourages parties to a conduct (breaching the contract) which laws should condemn.
• The theory allocates all gains from the wrong (breach) to the wrong-doer while affords no-loss-no-gain to the original buyer.
• Critiques ask what will happen to the market and the sanctity of bargains if the chain goes on?

False Assumptions: Critiques argue that the theory is based upon several false assumptions.

• It largely ignores transaction costs. It offers no account of how the breaching parties come to pay expectation damages- litigation will consumer lot of judicial and party resources which may even lead to huge costs making the transaction socially inefficient.
• What happens especially in a situation like in India where it takes several years to award damages and to recover it, especially where the promisor refuses to pay damages?
• The theory assumes perfect information. In actual world, damages measure and the calculations on profit/ overall welfare are complicated and unpredictable. Further, many meritorious cases fail due to lack of evidence or negligence of counsel/ parties.
• The theory wholly ignores market reputation and repeat play, especially in long-term scenarios. Parties may not be cold-blooded and self-interested in such cases.

Despite the serious criticisms that the theory faces, the theory presents a power justification for the rule that specific performance should be the exception and damages should be the default remedy.

More on this topic in another post. 

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

We did a small post on the Specific Relief (Amendment) Bill, 2018 on 28 March 2018.  The Bill has been passed by Lok Sabha on 15.03.2018 (as usual, without discussions). This post is in continuance of the said post on the topic and discusses the proposed amendments to the Specific Relief Act, 1963 making specific performance as the default remedy and damages as the exception.

Proposed Amendment

The Statement of Objects and Reasons to the 2018 Bill states, among other things, that the Specific Relief Act, 1963 confers wide discretionary powers on courts to decree specific performance due to which awarding damages is the general rule and granting specific performance is the exception, that by enacting the 2018 Bill it is proposed to do away with the discretion so as to make specific performance as the default/ general remedy and that the alternative remedy of performance through third party would be the exception. The relevant portions of the Statement of Objects and Reasons for the 2018 Bill are extracted below:

"[The 1963 Act] also confers wide discretionary powers upon the courts to decree specific performance and to refuse injunction, etc. As a result of wide discretionary powers, the courts in majority of cases award damages as a general rule and grant specific performance as an exception... In view of the above, it is proposed to do away with the wider discretion of courts to grant specific performance and to make specific performance of contract a general rule than exception subject to certain limited grounds. Further, it is proposed to provide for substituted performance of contracts, where a contract is broken, the party who suffers would be entitled to get the contract performed by a third party or by his own agency and to recover expenses and costs, including compensation from the party who failed to perform his part of contract. This would be an alternative remedy at the option of the party who suffers the broken contract."

For the aforesaid purposes, the following amendments are proposed to be made in the Specific Relief Act, 1963:

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.”

Section 11 relates to contracts where the act agreed to be done is in the performance of a trust. Section  11(1) is sought to be amended to substitute the phrase “contract may, in the discretion of the court” with "contract shall". After the amendment, Section 11(1) will read: "11... (1) Except as otherwise provided in this Act, specific performance of a contract shall be enforced when the act agreed to be done is in the performance wholly or partly or a trust."

Section 14 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 viz., contracts where compensation for breach is an adequate remedy, and contracts running into minute or numerous details. The new ground sought to be amended, that is, contracts where the victim of breach has obtained substituted performance is the subject of the amendment proposed to Section 20 of the 1963 Act.

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 proposed reads as under:

“20. Substituted performance of contract- (1) Without prejudice to the generality of the provisions contained in the Indian Contract Act, 1872, and, except as otherwise agreed upon by the parties, where the contract is broken due to non-performance of promise by any party, the party who suffers by such breach shall have the option of substituted performance through a third party or by his own agency, and, recover the expenses and other costs actually incurred, spent or suffered by him, from the party committing such breach. 
(2) No substituted performance of contract under sub-section (1) shall be undertaken unless the party who suffers such breach has given a notice in writing, of not less than thirty days, to the party in breach calling upon him to perform the contract within such time as specified in the notice, and on his refusal or failure to do so, he may get the same performed by a third party or by his own agency: 
Provided that the party who suffers such breach shall not be entitled to recover the expenses and costs under sub-section (1) unless he has got the contract performed through a third party or by his own agency. 
(3) Where the party suffering breach of contract has got the contract performed through a third party or by his own agency after giving notice under sub-section (1), he shall not be entitled to claim relief of specific performance against the party in breach. 
(4) Nothing in this section shall prevent the party who has suffered breach of contract from claiming compensation from the party in breach."

Section 16 deals with cases where specific performance of a contract cannot be enforced in favour of a person. Section 16(a), which "(a) who would not be entitled to recover compensation for breach" is proposed to be replaced with "(a) who has obtained substituted performance of contract under section 20" in line with the aforesaid amendments.

Section 16(c) provides that specific performance cannot be enforced in favour of a person who fails to aver in the pleadings and prove that he has performed or always has been reading and willing to perform the essential terms of the contract which are to be performed by him. The requirement of averment is sought to be removed. The same change is proposed in Explanation (ii) to Section 16(c). After the amendment, Section 16(c) with its explanations will look like this:

"Specific performance of a contract cannot be enforced in favour of a person-
...
(c) who fails to aver and prove that he has performed or has always been ready and willing to perform the essential terms of the contract which are to be performed by him, other than terms the performance of which has been prevented or waived by the defendant. 
Explanation.—For the purposes of clause (c),—
(i) where a contract involves the payment of money, it is not essential for the plaintiff to actually tender to the defendant or to deposit in court any money except when so directed by the court;
(ii) the plaintiff must aver prove performance of, or readiness and willingness to perform, the contract according to its true construction."

Comments 

The proposed set of amendments seek to do away with the general rule in contract law that damages will be the default remedy and specific performance will be the exception. In our earlier post, we had suggested that the amendments sought to be made are far-reaching. We reiterate the view because the 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 will look at the theoretical arguments for and against the above-discussed proposal in the 2018 Bill in another post.  

Sasan Power v North American Coal: Part I

Many initial news reports about Sasan Power Ltd. v. North American Coal Corporation India Private Limited said that Supreme Court allowed Indian parties to contract out Indian law or that Indian parties could agree to a foreign seat. Later reports make a little more sense in reporting what the judgement actually meant. Had there not been much publicity about the Madhya Pradesh judgement which preceded the Supreme Court decision, we do not think that the Supreme Court's decision would have surprised (disappointed?) many. There are two judgements in the case- the lead judgement by Chemaleswar, J. and the concurring judgement by AM Sapre, J.  

A crucial question was involved in the case: whether two Indian parties could contract out Indian law? Note that Section 28 of the Arbitration and Conciliation Act, 1996 provides that "Where the place of arbitration is situate in India, a) in an arbitration other than an international commercial arbitration, the arbitral tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India..." Note also that Section 28 is in the context of arbitration law. Before this, the facts.

An Indian Company ("Sasan Power Ltd." or "Sasan") and an American company ("North American Coal Corp." or "NACC" or "American Coal") entered into an Agreement in January 2009 for mine development. Let's call this agreement "Agreement I" (as the Supreme Court did). Article XII of the Agreement provided that the Governing Law would be the laws of the United Kingdom" (whatever it meant!- England & Wales, North Ireland or Scotland?) and that dispute resolution would be by ICC Arbitration in London as seat. American Coal established a full owned Indian subsidiary which, for the sake of convenience can be referred to as "American Indian".

Now, Sasan, American Coal and American Indian entered into an Agreement ("Agreement II") whereby North American purported to assign all its rights and obligations with the consent of Sasan to American Indian. Agreement II also provided that American Coal was not relieved of its obligations and liabilities although Sason agreed to the transfer and assignment of the rights of American Coal to American Indian.

Disputes arose. American Coal wrote to Sasan terminating Agreement I and sought to refer the dispute to arbitration. Sasan, interestingly, approached the relevant District Court seeking several reliefs against American Indian (not American Coal, it may be noted). Sasan sought the relief of declaration holding Article XII of the Agreement as null, void, inoperative and unenforceable. Again, interestingly, there was absolutely no relief claimed in respect of Agreement II. 

Eventually, the suit was dismissed. On appeal, the Madhya Pradesh High Court held that where parties decided to resolve their disputes by arbitration in a seat outside India, Part I of the Act would not apply. On this basis, the MP HC held that if the agreement satisfied the requirements of Part II, Part II would apply, in which case the parties have to be referred to arbitration as per Section 45. The Court therefore dismissed the appeal. 

While summarising the MP HC decision, the Supreme Court made an interesting observation (See, para 11 of the SC judgement). The SC acknowledged that one of the grounds of appeal to the SC was that the HC erroneously rejected the contention that two Indian parties could not agree to have their arbitration seated outside India. But the SC stated: "We do not find from the impugned judgement anything to indicate that such a submission was made before the High Court." In other words, the Supreme Court clarified that although the MP HC held valid and enforceable an agreement whereby two Indian parties could agree to a foreign arbitral seat, such a submission was seemingly never made by the parties before the HC (at least from the decision of the HC)! It appears that the counsel of American Coal clarified before the Supreme Court that he was not making that submission. 

Wow! What was happening? Did the Madhya Pradesh High Court draw a rabbit out of the hat?!

In any case, the Supreme Court in Sasan did not decide on whether two Indian parties could agree to a foreign seat, in opposition to the Supreme Court's judgement in TDM Infrastructure. As the Supreme Court clarified in para 12 of its judgement in Sasan, the court confined itself to deciding whether two Indian companies could contract out Indian substantive law.

More on the interesting case in the next post. 

Breaking (!) Ban on Penalty Clauses Survives! UK SC in Cavendish Square Holding v Talal El Makdessi

Regular readers of this Blog would be aware of the recent post on the UK Supreme Court's case of Cavendish Square Holding BV v Talal El Makdessi (Earlier posts on case in this blog can be accessed from here and here.). The issues involved in this case are:

1. Whether the rule against penalties applies to commercial contracts between sophisticated parties.
2. If the rule does apply to such contracts, whether clauses 5.1 and 5.6 are within the scope of the rule.
3. If the clauses are within the scope of the rule against penalties, whether the Court of Appeal was wrong to conclude that they were penal and therefore unenforceable.

In this case, it was contended  by one of the parties that the rule against penalties should go as a whole irrespective of whether the contract was a commercial contract. The UK SC would be authoritatively ruling on the rule against penalties which, rudimentarily put, restricts damages to the actual losses suffered and has been established for more than two centuries.

The Supreme Court has decided the case today (04.11.2015). Following is a summary of conclusions of the court on the rule against penalties (as taken from the UK SC Press Release):

1) The penalty rule is an “ancient, haphazardly constructed edifice which has not weathered well” but has stood the test of time. Similar rules exists in all all other developed systems of law.

2) Therefore, it should not therefore be abolished. At the same time, it should not also be extended unnecessarily.

3) Penalty clauses not merely apply to clauses relating to money penalties but also to obligations to transfer assets, or clauses where one party forfeits a deposit following its’ breach of contract.

4) The concepts of ‘deterrence’ and “genuine pre-estimate of loss” in determining whether a clause is a penalty or not are not relevant.

5) The true test, according to Lord Mance, is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.

6) The method of applying this test is as follows:

a) The first step is to consider whether any (and if so what) legitimate business interest is served and protected by the clause, and if so,

b) whether the provision made for that interest is extravagant, exorbitant or unconscionable.

7) The test to determine penalty clauses, according to Lord Hodge, is whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party’s interest in the performance of the contract. A clause, according to Lord Hodge, fixing a level of damages payable on breach will be a penalty if there is an extravagant disproportion between the stipulated sum and the highest level of damages that could possibly arise from the breach.

The judgement can be accessed from here. The Press Summary of the UK Supreme Court can be accessed from here. More on this judgement and the Bunge SA judgement in the next few posts in this blog.

Judgement Cavendish Square Holding BV v Talal El Makdessi to be Delivered Tomorrow

Early August, we had blogged about the case of Cavendish Square Holding BV v Talal El Makdess pending before the UK Supreme Court. We had stated that the decisions would have huge ramifications on international commerce. For the issues involved, see the linked post. UK SC blog reports that the judgements would be delivered tomorrow. We will keep readers posted on this case.

We would also like to draw the attention of the readers to a recent decision, again, of the UK SC which deals with determination of market price for damages in cases of anticipatory breach. A prima facie reading of this judgement [Bunge SA v Nidera BV [2015] UKSC 43] indicates that the decision may provide a restatement of the legal basis of risk purchase/ risk and cost contracts and is therefore worth noting. The case comment of the decision in Bunge v. Nidera can be accessed from here.

Arbitration and Contract Law: Some Judgements & Links

Contract Law Theory:

Contracts Profs blog calls these set of podcasts the hottest download ever. Check out the post in Contracts Prof that gives links to papers relating to Contract Law Theory. Contract Law Theory lovers would definitely enjoy these.Some of the podcasts are available as papers in SSRN and can be accessed from here.

Randy Barnett (Georgetown), "Contract is Not Promise; Contract is Consent"

Jean Braucher (Arizona), "The Sacred and the Profane Contract Machine: The Complex Morality of Contract Law in Action"

Gregory Klass (Georgetown), “Promises, Etc.”

Avery W. Katz (Columbia), "Virtue Ethics and Efficient Breach"

Juliet Kostritsky (Case Western), "The Promise Principle and Contract Interpretation"

Tenancy Agreements:

Mohamad Ahmed v Atma Ram Chauhan (MANU/SC/0614/2011) is an important decision on Lease Agreements. The decision starts off with a statement made by Deepak Verma, J:, which reads:

"One half of the lis between landlord and tenant would not reach courts, if tenant agrees to pay the present prevalent market rate of rent of the tenanted premises to the landlord."

Empirical legal scholarship aficionados might get upset for the fact that the judge's number is just an estimate and is not backed by data. But the judge is probably right in opining that it is not right on the part of the tenant in paying a rent that was fixed quarter of a century ago. The court stated that "majority" of the cases were filed by landlords because they did not get fair rent from the tenants. So the court, in the guise of laying down some guidelines "for such type of litigation" introduced judiciary made legislation (what are the state legislatures doing?).

The first guideline is in the form of a default rule. According to the Supreme Court, if parties have not agreed for any escalation in their agreement, the default escalation rate would be 10% every three years. The first guideline is in the form of a direction to the authority deciding on fair rent under the Rent legislation to go by a valuation report or on the basis of reliable estimates of building materials in surrounding ares let out on recent in the recent past.

The second guideline is akin to Section 64A of the Sale of Goods Act, 1930 which reads:

"(1) Unless a different intention appears from the terms of the contract, in the event of any tax of the nature described in sub-section (2) being imposed, increased, decreased or remitted in respect of any goods after the making of any contract for the sale or purchase of such goods without stipulations as to the payment of tax where tax was not chargeable at the time of the making of the contract, or for the sale or purchase of such good tax- paid where tax was chargeable at that time.-

(a) if such imposition or increase so takes effect that the tax or increased tax, as the case may be, or any part of such tax is paid or is payable, the seller may add so much to the contract price as will be equivalent to the amount paid or payable in respect of such tax or increase of tax, and he shall be entitled to be paid and to sue for and recover such addition, and

(b) if such decrease or remission so takes effect that the decreased tax only, or no tax, as the case may be, is paid or is payable, the buyer made deduct so much from the contract price as will be equivalent to the decrease of tax or remitted tax, and he shall not be liable to pay, or be sued for, or in respect of, such deduction."

The second guideline states that

1. property tax, water tax, maintenance charges, electricity charges would be borne by the tenant and
2. any enhancement in the rates of the above would be borne by the tenant alone.

The purpose of giving this guideline seems to give the landlord a rent free from any deduction. While this guideline is in accord with the standard practices, the issue is whether this rule is a mandatory rule or a default rule (that is, subject to agreement between the parties). According to this blawgger, this should be subject to an agreement to the contrary.

The third and the fourth guidelines allocate the responsibility of maintenance between the tenant and the landlord. Major repairs is the responsibility of the landlord and the usual maintenance is the responsibility of the tenant. In case the tenant wants to do major repairs, he is to seek written permission from the landlord and both of them should agree on the modalities of cost-sharing. 

Another radical guideline is that in case the tenant pays market rate as rent, he cannot be evicted for at least five years. Now, what if the landlord wants to get the tenanted premises for his own purpose? This might cause major hardships to the landlord.Two more guidelines deal with the determination of rent.

This blawgger is of the opinion that some of these guidelines seem to take a wrong approach. The five year immunity guideline is an example.

Class Action Waivers, the Canadian and the American Supreme Courts:

What is with phone services companies and class action waivers? The Canadian and the Supreme Courts had to decide validity of class action waivers in arbitration clauses contained in phone services contracts. The Canadian Supreme Court held in Michelle Siedel v. TELUS Communications Inc. that the Consumer Protection Law (CPL) of the province allowed a "public interest plaintiff" to sue to enforce the CPL's standards. Therefore, class action waivers in such cases are, according to the Canadian Supreme Court, not valid. (Link to the Judgement)

The United States Supreme Court had to consider in AT & T v Concepcion if class action waivers in arbitration clauses were valid. Like the Canadian case, this case was also against a phone services company. The arbitration clause provided that the customer was deemed to have his right to invoke arbitration against AT&T only under his individual capacity and not as a representative of any class action. The Supreme Court had to decide whether such a clause was valid. The Court held, to the consternation of many consumer rights activists, that a class action waiver was valid and enforceable. We had analysed the Court of Appeal judgement in an earlier post. Access it from here. The Supreme Court's decision can be downloaded from here.

Booz Allen:

In Booz Allen Hamilton v SBI Home Finance, the court held that a suit for enforcement of a mortgage by sale is not arbitrable. The court also stated some general rules to decide on questions pertaining to non-arbitrability. We'll deal with this case in a detailed post. Apart from arbitrability, this judgement is also interesting for one another issue. In this case, the Supreme Court held:

"While considering an application under section 11 of the Act, the Chief Justice or his designate would not embark upon an examination of the issue of `arbitrability' or appropriateness of adjudication by a private forum, once he finds that there was an arbitration agreement between or among the parties, and would leave the issue of arbitrability for the decision of the arbitral Tribunal."

Thus, according to the court, arbitrability questions would only be decided by the arbitral tribunal under Section 11. This, on the face of it, appears to be contrary to the justifications given in SBP  Co. v. Patel Engineering. We will have a small series of posts on the decision. For now, check out Lex Arbitri Blog's descriptive comment on the case.