An Era of Performance Ushered in Enforcement of Contract

World Bank’s The Ease of Doing Business rankings; an annual release ranks India at 163 at the moment in enforcing contracts. The current Indian administration has been focusing on the performance of enforceable contracts in view of the fact that India’s overall contract performance has been deplorable lately the government is compelled to undertake several initiatives in the area of contract enforcement in particular.

The Indian Contract Act, 1872 (Contract Act) and the Specific Relief Act, 1963 (Act) are legislative watchdogs overseeing the implementation of contracts amongst parties. Although the Contract Act mentions the overall principles of contract administration and damages levied for violations thereof, it provides for awarding specific relief through the specific performance of contracts.

The common law position of the Act originally provided for specific performance as relief granted at the discretion of the Courts once the inadequacy test results are satisfactory which means that the damages would not adequately compensate the breach. Claiming damages continued to be the usual, natural, and normal remedy for breached contracts and could be paid in lieu of, or even as an add-on to the execution of the contract.

Change is needed

Compensating damages is the general rule except for telltale evidence of specific performance in one-of cases, is a situation where the vast majority of occurrences of contractual breaches led to or resulted in lawsuits to compute the damages in total.

With the pandora’s box open, it's not surprising that adjudication of similar breaches should take years, as India’s rankings reflect in the World Bank report. As a remedial measure, an Expert Committee was formed for analyzing the alterations required in the Act for enhancement of contract enforcement in India and as a result, enhance India’s position as a destination that is inviting to investors.

Through an Amendment of the law the concept of the substituted performance was introduced, commonly known as the right to cover, which the unsuspecting party has the option of arranging for execution of third party contract and recover from the defaulter to mitigate the damage hardwired in the Contract Act. Substituted performance, would enable claiming losses only after the execution of the contract by a third party or by the agency of the innocent party. The maneuver is aimed at ensuring that execution of civil/commercial contracts is not suspect, rather, execution of the contract is compelling in most cases, a usage predominant in civil law systems.

Besides, the Amendment’s emphasis is the completion of public utility projects on time and without any stumbling blocks to granting injunctions in infrastructure project contracts including transport, energy, water, sanitation, and social infrastructure sectors. The Amendment has been musing on establishing special courts for adjudication of similar matters.

Weighing the options

The change brought about by the Amendment for common law jurisdictions is a commendable maneuver towards instilling a culture of execution of contracts. As specific performance is mandatory, parties will not have as many reasons for the breach of contracts resulting in settlement of disputes in court.

The Amendment also steers clear of the associated risks of compensating more or less than the losses incurred owing to contract breaches. The fact that the execution of contracts is a top priority is further emphasized through substituted performance.

Awarding compensation for damages even when there have been proven acts of specific performance acts as a deterrent in cases of breaches. An innocent party is protected by the Contract Act while claiming damages. However, if specific performance is prayed then the applicable provisions would be effective.

Besides, the focus being on timely completion of contracts in regards to a public utility is a step in the right direction where numerous infrastructure projects remain in limbo as a result of long drawn litigation.

Granting specific performance may be severely restricted by the courts owing to the Amendment if the instances are (a) substituted performance has been granted by the courts (b) contracts in relation to court’s unsupervised performance of continuous duties (c) contracts that depend on the parties personal qualifications so on and so forth.

Although the Amendment has effectively limited instances of parties reneging on the performance of contracts, the Amendment, does not consider unforeseeable hardship as a possibility in driving specific performance. Another concern that persists is applying the amendment to current contracts.

While remedies can be found in the amendments, it neither declares nor clarifies any particular stance in the matter. On the contrary, the amendments change the substantive entitlements of the remedies as a recourse for contractual breach. Typically, the right of seeking remedies comes into play as and when the breach occurs. Hence, the execution of the contract may occur before the Amendment, however, the breach may occur after the amendments, and therefore the Amendment would be applicable to those contracts.

M&A Contracts

In the M&A domain, the courts’ emphasis on specific performance of contracts is notable; those that involve acquisitions or investments in particular. Often damages as a remedy in case of breach of such contracts are inadequate. Hence, since time immemorial, the vast majority of M&A contracts specifically declare that damages, as a remedy would be inadequate, for any breach and the specific contract would be enforceable, replacing the historical requirement for evidence that damages are inadequate.

With the complexities surrounding investments involving time sensitivity, personal qualifications of the parties, and so on, it remains to be seen how specific performance can be enforced in M&A contracts.

Yet another area of concern is applying the new concept of substituted performance of statutory M&A contracts. As M&A contracts are specific to a  party, the feasibility of substituted performance as an alternative may be irrelevant, but ought to be explored for each contract.

Besides, its the Court’s prerogative for refusal of specific performance on the plea that the contract, for example, in relation to a joint-venture agreement, requires the party performing duties continuously, without the Court’s supervision, results in impediments.

It's truly a relief that the amended Act permits damages beyond enforcement specifically for preventing losses as a result of time passing by, as the resolution of the dispute within a stipulated timescale, may prove to be delayed action in specific circumstances.

Conclusion

The Act threw light on the financial situation of the defaulter, who has only one thing to consider and that is the cost of performance of the contract as opposed to non-performance. On the whole, the amendments seem to be focusing on the effective performance of the contract aimed at improving how business is conducted in India.

While industries across the board are impacted by the amendments, the heightened focus on infrastructure will act as an impetus to enhancing India’s widespread development goals. Furthermore, it's in the infrastructure sector that damages usually turn out to be an insufficient remedy. Once specific and substituted performance are Implemented by the judiciary, in regards to M&A contracts, and its acceptance and actual dependence by parties to the contract, however, is yet to be witnessed.

Call 7604047601 for consultation with registered expert Government Contracts Lawyers on Vidhikarya.