Contract enforcement during COVID-19: India should brace itself for tackling the amended Specific Relief Act

In nine months, COVID-19 has turned the world on its head and devastatingly impacted almost every aspect of human life. Naturally, contractual relations have also not escaped the impact, and lawyers across the globe are grappling with the legal implications of COVID-19 and its effect on contractual performance..When one thinks about the impact of COVID-19 on contractual performance, what inevitably comes to the mind is the implication of a force majeure clause and the law of impossibility/frustration. Deliberations amongst the legal community have largely been focused on interpretation of these two concepts. But what happens if the facts of a particular case do not meet the threshold for force majeure or frustration?.Should a party-in-default be then declared as having breached the contract and be forced to perform? Would enforcing performance constitute an appropriate relief given that the pandemic may have made performance of contractual obligations difficult or unreasonably burdensome, if not impossible? These aspects need serious consideration, especially in India, where the law on specific performance has undergone sweeping changes in the recent past. Thus, while navigating through the legal quagmire created by the pandemic, the Indian legal community will have to simultaneously face yet another demon. That of the amended Specific Relief Act, 1963..This post seeks to bring into focus a few key amendments to the Specific Relief Act and the effect these may have on shaping contractual remedies available to parties in these extremely trying circumstances..Specific Relief Act: The inevitable fallback.The possibility that a party-in-default would be dragged to courts/arbitral tribunals for breach due to inability to perform in these circumstances is very real..While in most cases, the party-in-default would attempt to set up a defense based on force majeure clauses or the law of frustration under Section 56 of the Indian Contract Act, 1872, these could prove difficult to sustain. The contract would not be discharged by invocation of these defenses merely because its performance, under the changed circumstances, is onerous/burdensome or more expensive for the party-in-default. It has to be shown that fundamental basis of the contract itself is dislodged. The threshold for these defenses is, therefore, high and may not necessarily be met in the facts and circumstances of each case. Should that happen, a party-in-default is staring at a possible declaration of breach which inevitably would be coupled with a direction for specific performance and/or payment of damages. Courts/arbitral tribunals would then have to necessarily fall back on the provisions of Specific Relief Act for appropriate remedies..It is possible that courts may, in certain situations, find it more equitable to direct payment of damages as opposed to granting specific relief. Unfortunately, with the amendments to Specific Relief Act, courts barely have any discretion in the matter..Specific Performance: no longer an exceptional or discretionary remedy.The Specific Relief (Amendment) Act, 2018 was formally notified on August 1, 2018 and it came into force on October 1, 2018..Prior to the Amendment Act, specific performance was an exceptional remedy that could only be granted when actual damages caused by non-performance could not be ascertained or would not afford adequate relief. This restriction has been removed. Specific performance is now available as a remedy by choice. The non-defaulting party can, therefore, claim specific performance without having to demonstrate the inadequacy of damages.Moreover, the wide discretionary powers to refuse specific relief enjoyed by courts under the unamended Specific Relief Act have been taken away..These amendments were aimed at improving contracting culture in India by encouraging performance by a contracting party. The intention is indeed laudable. However, the manner in which it has been effectuated in the Amendment Act is disquieting..Exclusion of safeguards: an inexplicable deviation.The Amendment Act followed an Expert Committee Report that was submitted to the government in June 2016, but not made available in public domain. The Expert Committee had inter alia suggested two significant changes:(i) Specific performance and injunction for breach of contract should no longer be exceptional remedies but remedies by choice;(ii) Specific performance should no longer be a discretionary remedy and courts would be able to refuse these remedies only on stated grounds. For that purpose, the grounds contained in Sections 14 and 20 of the unamended Specific Relief Act should be merged into one section viz. Section 14..Thus, while proposing availability of specific performance as a remedy by choice, the Expert Committee was conscious that specific relief (like damages) should not be an absolute remedy and must be subjected to certain restrictions. To that end, the Expert Committee had proposed inclusion of a single provision viz. the proposed Section 14, containing an exhaustive list of all negative grounds or exceptions based on which specific relief could be denied. Some of the proposed negative grounds were already provided in Section 14 and Section 20 of the unamended Specific Relief Act. Others were based on international conventions such as Principles of European Contract Law and UNIDROIT principles of International Commercial Contracts..These negative grounds/exceptions were intended to be the necessary safeguards that would ensure that grant of specific relief does not result in an inequitable situation. The proposed negative grounds included cases where:(i) Performance would be unlawful or impossible; or(ii) Performance (or enforcement) would involve some unforeseen hardship on the party-in-default/defendant or would be unreasonably burdensome or expensive; whereas non-performance would involve no such hardship on the non-defaulting/aggrieved party; or(iii) Non-defaulting/aggrieved party could reasonably obtain performance from another source; or(iv) Specific performance of a contract would unduly prejudice the rights of third parties..By the Amendment Act, the government accepted the Expert Committee’s proposal to make specific performance available as a remedy by choice without, however, incorporating the proposed necessary safeguards. In fact, the government went a step further and removed most of the safeguards that already existed in the unamended Specific Relief Act..The Expert Committee Report was followed by the Specific Relief (Amendment) Bill, 2017 (SRA Bill) which provided that specific relief could be denied only in four situations being where: (a) non-defaulting party has obtained substituted performance of contract; (b) the contract involves performance of a continuous duty which courts cannot supervise; (c) the contract is so dependent on the personal qualifications of the parties that the courts cannot enforce specific performance of its material terms; (d) the contract is in its nature determinable. The SRA Bill also provided for deletion of Section 20 of the unamended Specific Relief Act that contained some of the grounds/safeguards suggested by the Expert Committee..Neither the Statement of Objects and Reasons (that accompanied the SRA Bill) nor the subsequent parliamentary discussion in the Lok Sabha or the Rajya Sabha contain any guidance as to the reasons for such exclusion. In fact, the SRA Bill was approved and the Amendment Act was passed by both houses of Parliament without even considering these exclusions. While a few members of the opposition in the Rajya Sabha did express their concerns over complete exclusion of the courts' discretionary powers and potential implications of the proposed provisions, those concerns were not sufficiently addressed. The deviations, therefore, remained unexplained..No discretion with Courts to ensure equity.The deletion of Section 20 of the unamended Specific Relief Act and exclusion of safeguards proposed by the Expert Committee completely stripped away the courts' powers to refuse specific relief on equitable grounds. The language used in the Amendment Act is clear- “specific performance of a contract shall be enforced” subject to limited exceptions provided in the amended Specific Relief Act. That the relief of specific performance is no longer discretionary, and the courts are now obliged to allow specific performance subject to Section 11(2), Section 14 and Section 16 of the amended Specific Relief Act, has also been confirmed by the Supreme Court in B Santoshamma & Anr v. D Sarala & Anr. The limited exceptions provided in Section 11(2), Sections 14 and 16 cannot be stretched enough to accommodate the circumstances that the courts would have to now deal with due to COVID-19. To the contrary, under the amended scheme, the courts/tribunals would have to mandatorily enforce specific performance notwithstanding the fact that it would be inequitable. The party disabled from performing its contractual obligations for reasons completely beyond its control would be subjected to unforeseen and unreasonable hardship..It may be argued that courts can still exercise their extraordinary jurisdiction to do equity. But what about arbitral tribunals? These would be bound by strict provisions of the law which, in its present state, leaves no scope to give any consideration to the unique challenges that the contracting parties have been compelled to face due to the pandemic..The safeguards proposed by the Expert Committee would have undoubtedly given courts/tribunals the requisite flexibility to consider and balance the interests of all parties while determining a claim for specific performance. One may even argue that the earlier regime provided a more suitable remedy for the present circumstances..Conclusion.Most economic activities are based on commercial contracts. In the past few months, we have seen that every industry/business/company has faced and is continuing to face its own unique challenges due to COVID-19. It would be imprudent to think that issues faced by all could be addressed without granting any discretion to courts to equitably shape contractual remedies in the facts and circumstance of each case. The Expert Committee’s proposal to include negative grounds/safeguards was intended at addressing exactly such situations, but was inexplicably disregarded. This is a significant lacuna in the law which can only be addressed by timely legislative action. The government should, therefore, be proactive and take urgent steps to rectify the defects in the amended Specific Relief Act..Back in 2018, an esteemed member of the Expert Committee had opined, while highlighting the several shortcomings of the Amendment Act, that “this Amendment is likely to be yet another instance of ‘legislate in haste, amend at leisure'”..We are at the crossroads now; the clock is ticking and if the intention of the legislature was to eventually amend, the time to do that that would be now.