Specific or substituted performance

As with English law, specific performance of contracts in India had been reserved as a discretionary remedy that could be granted by the court to compel a party to perform its positive contractual obligations.

The 2018 Act does away with the discretionary element, and directs under section 10 that when compensation is clearly an inadequate remedy for losses due to non-performance of a contract, the court shall order specific performance of the contract (subject to the 2018 Act’s updated and minimal exceptions).

To provide equitable relief for both parties, the 2018 Act also introduces the concept of ‘substituted performance of contract’. A party suffering a breach of contract can use a third party (or their own agency) to complete the non-performance of the original contractual party, by way of substitution. The innocent party can then recover the costs and expenses actually incurred due to a party’s non-performance. The innocent party must give notice of performance, in writing, allowing the party in breach to remedy the non‑performance within 30 days.

The 2018 Act introduces checks and balances by stating that if the contract gets performed by a third party, then the innocent party will not be entitled to claim specific performance under the 2018 Act.

How will these amendments be interpreted for cross border transactions where contracts are governed by English law whilst the performance is based in India? It is not yet clear whether certain clauses will remain effective, for example, where there are specific clauses restricting rights of third parties (as in contractual boilerplate English law governed contracts) or where contracts specifically mandate specific performance when damages are an inadequate remedy (for instance under non-disclosure agreements substituted performance would be impossible).

Limited exceptions

The 2018 Act has removed the requirement that courts should only grant specific performance where monetary compensation was an inadequate remedy. The revised exceptions to the grant of specific performance are limited when:

  1. substituted performance (as discussed above) has been obtained by the innocent party;
  2. contractual performance involves a continuous duty which the courts cannot supervise. Supervision in this context means the continued involvement of the court in having to deal with applications and make rulings to ensure the execution of the order for specific performance. This exception is well accepted under English law, by way of example, specific performance was refused by English courts in the instance of a “keep open” clause of a leasehold covenant due to the continuous involvement required (the covenant was “to keep open the premises for retail trade during the usual hours of business” following the defendants’ closure of one of their loss-making retail stores).
  3. a contract is so dependent on the personal qualifications of the parties that the court cannot enforce specific performance of its material terms. This exception is similar to one in English law, where English courts have refused to grant specific performance of personal contracts, e.g. service contracts that are personal in nature, or contracts which cannot be performed due to a breakdown of trust and confidence; and
  4. a contract in its nature is determinable, i.e. contractually the parties have an option to terminate the contract with or without cause or upon the occurrence of certain trigger events (although Indian courts generally interpret the term “determinable” widely to provide a balanced view to both sides). Where a termination clause is well drafted, recourse is embodied in the contract. The remedy available to the non-terminating party would in such cases be to seek compensation for wrongful termination, instead of specific performance. This position is widely accepted under English law, where courts will not order specific performance of contracts terminable by the party against whom an order is sought.

Special provisions for contracts relating to infrastructure projects

The 2018 Act introduces special provisions for contracts relating to infrastructure projects.

The amendments under the new section 20A state that the courts cannot grant injunctions in proceedings concerning contracts related to infrastructure projects (which have been specifically categorised in the 2018 Act’s Schedule).

The 2018 Act has added provisions for specific courts to deal with infrastructure project cases and that such cases should be heard and decided in a time-bound manner. The designation of such courts will be decided by each State Government in consultation with the Chief Justice of the respective High Court (section 20B). The 2018 Act mandates the disposal of these cases by the designated courts within twelve months (extendable by a further period of six months) from the receipt of a summons by the other party (section 20C).

Other amendments

Under section 14A, the 2018 Act provides for engaging experts in proceedings where the courts may need expert opinion (such as in contracts involving technical expertise). The terms of engagement of such experts (including their fees) will be fixed by the courts and the costs will be borne by parties to the proceedings.

Pursuant to the Limited Liability of Partnership Act enacted in 2008, the 2018 Act has been amended to include limited liability partners (LLPs) among the persons who may seek specific performance or against whom specific performance may be sought.

Conclusion

The 2018 Act is one of many steps taken by India in its efforts to improve in the "ease of doing business" ranking. The amendments are expected to have an impact on large value contracts in the construction and infrastructure industries, where previously projects have stalled and contractual obligations left undelivered. The introduction of substituted performance allows commercial outcomes to be achieved with minimal legal involvement, and aims to cut down costs and court delays.