[By Aman Sadiwala]
The author is an associate at Rashmikant and Partners.
The contract enforcement mechanism of India has been subject to criticism for being inefficient. This was reflected in the World Bank’s Ease of Doing Business Report 2016 where India ranked 130th overall and 178th on contract enforcement (out of 189 countries).[1] This spurred the Government of India to constitute an Expert Committee to propose reforms to the Specific Relief Act, 1963 (“SRA”). The report of the Expert Committee (“Report”) resulted in the Specific Relief (Amendment) Act, 2018 (“2018 Amendment”).
Prior to 2018, the default remedy for the breach of contract was that of damages, which was governed by Sections 73 to 75 of the Indian Contract Act 1872 (“ICA”), with specific performance being the discretionary remedy.[2] The 2018 Amendment changed the position of law by giving primacy to specific performance over damages. It also introduced substituted performance as a remedy.[3] Post the 2018 Amendment, Section 20 of the SRA provides for substituted performance whereby the promisee, on the breach, has the option to obtain performance by a third party or its own agency and recover the costs and expenses of the same from the breaching promisor,[4] subject to certain conditions.[5] The promisee cannot claim the relief of specific performance after getting the contract performed through substituted performance.[6]
In this piece, the author argues that while the remedy of substituted performance is not truly a novel remedy, it does go beyond what was permissible under Sections 73 to 75 of the ICA in terms of making it easier for the promisee to recover the expenses and costs associated with the substituted performance.
While there are some advantages that a remedy like substituted performance has – like securing the expectation interests of parties (which damages might also secure), faster implementation of contractual terms and solidifying the claim that the promisee has, is this remedy one that did not exist before the 2018 Amendment?
The possibility of obtaining substituted performance and recovering the cost for it was possible even in the pre-2018 Amendment paradigm through Section 73 of the ICA. It states that a party suffering from a breach of contract can claim “compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach”.[7] This involves compensation for the “cost of cure” which is provided for in illustrations (f), (k), and (l) to Section 73.[8] Illustrations are parts of the section and help in elucidating its underlying principle.[9] Therefore, one can conclude with relative certainty that Section 73 of the ICA does, in a way, provide for compensation for substituted performance. Even Section 41 of the ICA talks about the “effect of accepting performance from third person” whereby the promisee cannot then enforce the performance as against the promisor.[10]
There are other instances where compensation for substituted performance was awarded. One situation relates to when the contractual framework allows the promisee to get the performance from a third party and recover the costs from the promisor.[11] This includes contracts with a “risk and cost” clause which allows the promisee to engage a third party to obtain performance and get compensated to that extent by the promisor.[12]
One must look at the Report to see why a specific amendment was added when substituted performance as a remedy existed in the pre-2018 Amendment regime as well. The Report assumes that in cases of breach of contract, a promisee will aim to complete its business and resort to substitutes if available.[13] It goes on to state that this must be encouraged as it allows the promisee to complete its task (and fulfill the expectation interest) while leaving open the option to claim compensation in case of a substantial loss.[14] The Report opines how the option of substituted performance can nearly achieve the same result as actual specific performance.[15] It recognizes how other jurisdictions[16] have allowed for substituted performance while Indian law does not provide for compensation for substituted performance as a substantive right.[17]
The explicit provision of substituted performance as a substantive right has important implications. Section 73 of the ICA provides that “[s]uch compensation is not to be given for any remote and indirect loss or damage”.[18] The award of compensation under Section 73 is governed by the principles of causation, foreseeability, and mitigation;[19] while Section 20 of the SRA does away with these factors by using the phrase “recover the expenses and other costs actually incurred, spent or suffered by him”.[20] This change was brought with the view that while a claim under Section 73 of the ICA might not give the promisee the entire extent of the amount it has spent on substituted performance, Section 20 of the SRA would do so.[21] It was also believed that this standard would give the promisee the benefit of having its contract fulfilled at the earliest, while also pushing the promisor itself to perform the contract.[22]
At the same time, the Expert Committee recognized that this situation might place a heavy burden on the promisor, especially when a promisee abuses its rights.[23] It provided for safeguards in the form of prior notice to the other party,[24] and providing proof of breach of contract,[25] the costs and expenses incurred in the suit,[26] and reasonability of the amount claimed.[27] In the opinion of the author, the threshold of the safeguards was significantly weakened when the Expert Committee also proposed that the amount claimed in the notice to the other party ought to be deemed reasonable if it had been actually spent or suffered.[28]
While the provision for notice has been retained by the legislature,[29] the other safeguards especially the one pertaining to the reasonableness of the amount claimed do not find mention in the 2018 Amendment. This issue has also been flagged by Professor Nilima Bhadbhade, who was a member of the Expert Committee.[30] This had led to a scenario where it is significantly easier for the promisee to recover the expenses and costs associated with the substituted performance but might lead to an unfair burden on the promisor in case of exaggerated and unreasonable claims.
In conclusion, the remedy of substituted performance was available prior to the 2018 Amendment, through Section 73 of the ICA. However, the 2018 Amendment has crystallized substituted performance in the Indian regime of contractual remedies and more importantly, has freed it from the constraints of causation, foreseeability, and mitigation. While this has made recovery of costs and expenses of substituted performance much easier for the promisee, the failure to incorporate some of the safeguards recommended by the Expert Committee has made it more onerous for the promisor to defend itself against unreasonable claims.
[1] Doing Business 2016: Measuring Regulatory Quality and Efficiency, p. 5.
[2] Specific Relief Act 1963, s 20(1) [prior to the 2018 Amendment].
[3] Specific Relief Act 1963, s 20.
[4] Specific Relief Act 1963, s 20(1).
[5] Specific Relief Act 1963, s 20(2).
[6] Specific Relief Act 1963, ss 14(a), 16(a), and 20(3).
[7] Indian Contract Act 1872, s 73.
[8] Indian Contract Act 1872, s 73 illustrations (f), (k) and (l).
[9] Dr. Mahesh Chand Sharma v Raj Kumari Sharma (smt) & ors (1996) 8 SCC 128, para 19; Muralidhar Chatterjee v International Film Company Limited 1942 SCC OnLine PC 35; Mahomed Syedol Ariffin bin Mahomed Ariff v Yeoh Ooi Gark 1916 SCC OnLine PC 52.
[10] Indian Contract Act 1872, s 41.
[11] Indian Oil Corporation Ltd v SPS Engineering Ltd AIR 2011 SC 987; Maharashtra State Electricity Board v Sterilite Industries (India) AIR 2001 SC 2933.
[12] Krishan Lal v Food Corporation of India 2012 4 SCC 786.
[13] Ministry of Law and Justice – Government of India, ‘Report of the Expert Committee on Specific Relief Act, 1963’ (May 2016) (“Expert Committee Report”), para 11.9.1.
[14] ibid.
[15] Expert Committee Report, para 11.12.1.
[16] The Spanish Civil Code, arts 1096 and 1098; The Ethiopian Civil Code, art 1778; The Quebec Civil Code, art 1602.
[17] Expert Committee Report, para 11.12.1.
[18] Indian Contract Act 1872, s 73.
[19] Nilima Bhadbhade, “The Specific Relief (Amendment) Act 2018: a Hurried Legislation” (Bar & Bench, 9 October 2018) <https://www.barandbench.com/columns/specific-relief-amendment-act-hurried-legislation> accessed 28 January 2022.
[20] Specific Relief Act 1963, s 20(1).
[21] Expert Committee Report, paras 11.12.2 and 11.12.3.
[22] Expert Committee Report, paras 11.12.3 and 11.12.4.
[23] Expert Committee Report, paras 11.12.2 and 11.12.5.
[24] Expert Committee Report, para 11.13(iv)(a).
[25] Expert Committee Report, para 11.13(iv)(c).
[26] Expert Committee Report, para 11.13(iv)(d).
[27] Expert Committee Report, para 11.13(iv)(e).
[28] Expert Committee Report, para 11.13(vi).
[29] Specific Relief Act 1963, s 20(2).
[30] Bhadbhade (n 19).