Judicial discretion to enforce contracts in India curtailed: Effect on post-COVID litigation

A statutory amendment that was made in 2018 to Section 10 of the Specific Relief Act, 1963 has significantly curtailed the power of the courts to refuse specific performance of a contract, especially when the terms of the contract clearly warrant it. This has put a huge onus on all entities entering into commercial contracts to expend more time and attention while negotiating and entering into such contracts.

Gone are the days when parties could leave it to some undefined sense of justice of the presiding officer of a court to use his discretion and decide whether specific performance of a contract should be granted or not. Save for certain minimal exceptions, all business contracts would now bind parties and enforce performance.

This leads us to question why these powers were given to courts in the first place, and why Parliament decided to change this long-held legal position in recent years.

Traditionally in India, the sovereign rarely donned the robes of a commercial entity. This was the case since ancient India, during the medieval period and also throughout Islamic rule. However, when the British set foot in India, they did so primarily for trade and business and then annexed territories. And so, while establishing territorial rights, they simultaneously protected their commercial interests through contracts and caveats. Concepts such as ‘Caveat Emptor’ (let the buyer be aware) came into existence to give them a general level of legal protection.

Strictly speaking, since the principle of separation of powers between the ruler and the judiciary did not apply in India at the time, they felt that even if their representatives or agents erred while executing contracts or could not fulfil their obligations, a sympathetic judge would save them from economic hardship.

This trend unfortunately continued even after independence and affected our ranking in the World Bank’s global index of enforcement of contracts over the years. With the intention of improving India’s performance in “ease of doing business”, especially in terms of “enforcement of contracts”, the 2018 amendment to Section 10 of the Specific Relief Act was enacted. The real significance and impact of the amendment stems from the fact that it has made the specific performance of contracts the (general) rule rather than an optional remedy.

Prior to the amendment, Section 10 of the Act stated that "the specific performance of any contract may, in the discretion of the court, be enforced" since the legislative intention at the time of the enactment of the Act was to give full judicial discretion to the courts to direct/enforce or not to direct/enforce the specific performance of a contract.

Post the amendment, the Section reads that "the specific performance of a contract shall be enforced by the court subject to the provisions contained in Section 11(2), Section 14 and Section 16 of the Act." This clearly shows the change in the approach of the legislature to limit or restrict the judiciary’s wide discretionary powers qua specific performance of contracts.

This has gained more significance in litigation post-COVID, since parties to a contract will now need to exercise a higher degree of care while drafting the terms of the contract, particularly those that entail specific performance.

It is well-established under contract law that with respect to the interpretation of contracts, the doctrine of contra proferentum applies against the party which drafted the terms of the contract or imposed any specific conditions therein in that any ambiguity in the contract will be construed against the party that drafted the contract. This holds good irrespective of the nature of the contract or the bargaining power/position of the parties.

Though it was held by the Supreme Court in the case of United India Insurance Co Ltd v. Kiran Combers & Spinners as well as Bank of India v. K Mohan Das that the contra proferentum principle applied only in the presence of an ambiguity in an exemption clause, we are of the view that the parties to any commercial contract or negotiated contract must bear in mind both Section 10 of the Specific Relief Act as well as contra proferentum while negotiating and drafting their terms or obligations will have a bearing on their legitimate expectations of performance in case of a future dispute and must therefore, aim for utmost clarity.

It is also noteworthy that in a recent judgment of the Supreme Court in Santoshamma versus Sarala - which made it clear that enforcing specific performance of contracts under the Specific Relief Act is no longer a matter of discretion but a matter of obligation for the courts subject to certain limitations) - the Supreme Court had taken note of the significant amendments to Section 10 and 12 of the Act. Along with Section 12 of the Act which carves out the exceptions in which the courts may direct specific performance in the case of partly performed contracts, the amended Section 10 has, to a reasonable extent, shifted the risk of non-performance on the parties themselves. This is quite significant since it brings contract law jurisprudence in India at par with other common law countries including the US and Canada, which recognise a general obligation of good faith in contract performance.

For instance, according to the Supreme Court of Canada and the Court of Appeals of New York, “the duty of good faith contractual performance is not an implied term, but rather a general doctrine of contract law that imposes as a contractual duty a minimum standard of performance. This applies to all contracts and parties are not free to exclude it from their contracts, though they can modify it to some extent depending on the circumstances.”

Although in India, the enforcement of contractual rights and duties have been subject to substantial judicial scrutiny in recent years, prior to this amendment, the courts had been granted absolute discretion (subject to the judicial limits of reason and non-arbitrariness) to determine the intention as well as the capacity of the parties to perform their contractual obligations. The entire objective behind the amendment to Section 10 seems to be stricter enforcement of performance of contracts.

In our view, it will make businesses and companies post-COVID assume a far higher level of responsibility for the terms and conditions, both express and implied, that they legally bind themselves to when they enter into contracts based on mutual consent. And so, it is advisable that the parties to a contract exercise as much due diligence and take as much care as possible in order to ensure that the terms of its performance is also based on their freedom to agree based on the fundamental legal principle of consensus ad idem.

NL Rajah is a Senior Advocate practicing at the Madras High Court. Aparna Raman is a corporate lawyer, former banker and a qualified chartered accountant.