2018 amendment to Specific Relief Act helped in the ease of doing business

The Supreme Court Justice delivered the keynote address at the 3rd edition of the Law and Constitution Dialogue presented by Legally Speaking of the iTV Network.

The subject on which I wish to share my views today is the 2018 amendment to the Specific Relief Act and its potential implications for India’s future, both domestically and internationally. India’s evolving global positioning becomes particularly pertinent in this background, as it closely aligns with the modifications introduced by this Amendment and the overarching objectives it aims to fulfil.

SPECIFIC RELIEF ACT, 1963 AND ITS PITFALLS

When we speak of disputes arising from breach of contracts, the granting of remedies to aggrieved parties is rooted in the principle of ‘ubi jus ibi remedium’, which means that where there is a right, there is a remedy. The remedy of specific relief is treated differently across jurisdictions. For instance, civil law jurisdictions most commonly treat specific relief on the same level as a remedy for compensation or damages, whereas this is not so in common law countries.

India, being a common law country, has treated the remedy of specific relief for several decades as one steeped in the principle of equity but paradoxically, subject to judicial discretion. In this regard, the legal framework governing the remedy of specific relief in India was encapsulated in the Specific Relief Act, 1963 (Act).

The objective of this particular Statute is to essentially safeguard civil rights and provide remedies for people whose contractual rights have been infringed. The remedies traceable under the Act include recovery of possession of property, rectification of instruments, specific performance of contracts, injunctions, amongst others.

However, despite its wide import, this legislation was often perceived as rigid, primarily due to the imposition of the ‘Inadequacy Test’, which in turn is founded upon the notion of ‘Reversed Onus of Proof’. Under this test, an aggrieved party seeking the remedy of specific performance was required to demonstrate that ‘damages’ under Common Law was either unascertainable or an inadequate relief. This Test applied to suits for specific performance of contracts as well as to injunctions sought for enforcing contractual obligations.

Consequently, specific performance was treated as an exceptional remedy, granted only when the court was satisfied that alternative recourses were wholly deficient and its decree could be effectively enforced.

While Section 10 of the Act codified the inadequacy test, Sections 14 and 20 enumerated exceptions to the grant of specific performance, such as the availability of monetary compensation or the impracticality of enforcing contracts involving minute details.

With courts predominantly favouring the award of damages in cases of breach and specific performance being invoked only as an exceptional remedy, the efficacy of the Act was significantly undermined. The lack of mandate for specific performance of a contract, irrespective of mitigating circumstances exhibited by the losing party, substantially affected the sanctity of contractual obligations.

I believe that it is not uncommon for parties to breach their contractual obligations, as the damages awarded often prove to be less burdensome than the cost of performance. Promisors frequently resort to breach when the gains from such breach outweigh the damages assessed by the court. This phenomenon aligns with the ‘efficient breach’ theory in law and economics, which posits that voluntary breach of contract accompanied by the payment of damages can be economically justified. Proponents of this theory, contend that in certain instances, it is economically efficient for contracts to be breached.

By limiting remedies to monetary damages, the legal framework, arguably, incentivizes parties to breach contracts when the cost of performance exceeds its perceived value. This, to my mind, eventually derailed the aim of the Statute to provide ‘relief’ to parties and functioned almost as a sort of ancillary legislation, with not much application.

2016 EXPERT COMMITTEE AND ITS REPORT

That being the state of affairs, over time, it became evident that the existing framework under the Specific Relief Act, 1963, was increasingly unfeasible, and an Expert Committee was constituted to undertake its review. This decision was necessitated by the substantial developments that had occurred since the 1963 when the Act was enacted, particularly in the context of contemporary scenarios involving contract based infrastructure development, public private partnerships, and other public projects requiring abundant investments and enforceability of contracts. The review was also aimed at aligning the Act with the objective of ensuring the Ease of Doing Business. Notably, the Specific Relief Act had not undergone any amendments since its inception.

The Expert Committee, in its report, underscored that the Specific Relief Act, in its existing form, was inadequate to address the demands of India’s rapid economic growth and industrial expansion. It emphasized the need for extensive reforms to facilitate the enforcement of contracts and ensure timely dispute resolution, both of which are crucial to the creation of a business-friendly environment.

More specifically, the Committee highlighted the limitations of the ‘Inadequacy Test’, which restricted the remedy of specific performance to a narrow set of circumstances. It observed that, in many cases, plaintiffs were unable to fully substantiate the losses incurred due to a breach, nor were the claimed amounts consistently awarded. While damages might compensate the injured party, they fall short of fulfilling the contractual obligations that the remedy of specific performance is designed to achieve, often resulting in delays and additional costs.

If I were to express this analogy in my own words, denying specific performance in favour of awarding damages is comparable to refusing “indoor admission” to a critically ill patient and opting instead to administer only basic first aid. While the latter may provide some relief, it often falls short of addressing the underlying issue comprehensively, leaving the affected party inadequately remedied.

SPECIFIC RELIEF IN OTHER JURISDICTIONS

When we peek over the fence and look beyond our own legal system, the remedy of specific performance varies significantly across jurisdictions, reflecting diverse approaches to contract enforcement. Under Common Law Systems, specific performance is directed against the defendant personally, where the court requires the defendant to fulfil their contractual obligations or face consequences, such as being held in contempt.

In contrast, Civil Law Systems take a broader view. The remedy focuses on achieving the promised result for the promisee, rather than merely directing the debtor to act. This approach allows the promisee to have defects cured or substitutes obtained at the promisor’s expense.
In Common Law Nations [such as the United States of America], specific performance may be ordered if explicitly provided for within the agreement.6 However, the limitations remain the same i.e. specific performance is generally resorted to only when legal monetary damages are inadequate or an incomplete remedy for breach. Similar, is the situation in the United Kingdom where broad discretionary powers are granted to courts.

Even in Civil Law Jurisdictions, though the applicability of specific performance is propagated, nonetheless, actual performance of a contract is ordered only in exceptional cases. In countries like France and Germany the laws are quite wide and they allow substitute performance instead of actual performance, subject to the imposition of restrictions. For instance, German law grants specific performance as a matter of right but with limitations tied to the adequacy of compensation. Enforced performance is typically ordered only when monetary compensation is inadequate.

This includes situations where a profit-earning asset is damaged, and the loss of profits during the repair period cannot be adequately compensated. However, under Enforcement of specific performance in civil law countries: Denmark, Germany, France and the CISG, International Review of Law and Economics.

German law, if specific performance results in the promisee receiving a benefit greater than what was originally agreed upon, specific performance may be denied. Instead, the promisee would be entitled to compensation equivalent to the value agreed upon by the parties at the time of entering into the contract.

A common limitation across most of the jurisdictions pertains to personal contracts, particularly those requiring the promisor’s personal services. Courts generally and rightly so refrain from enforcing such promises, in light of potential infringements on personal freedom and liberty. Additionally, courts are often reluctant to oversee or evaluate the quality of personal service, which could involve significant judicial supervision. Lastly, all legal systems recognize the impossibility of enforcing specific performance where it is not feasible for the promisor or any third party to fulfil the promise. This principle underscores the practical limitations of the remedy across jurisdictions.

2018 AMENDMENT TO SPECIFIC RELIEF ACT, 1963

Reverting back to the recommendations of the 2016 Expert Committee, and the deficiencies pointed out in the Specific Relief Act, along with the transformation of the economic landscape, the 2018 Amendment came into existence. The 2018 Amendment indeed marked a significant shift, making specific performance available as a matter of right rather than an exception. This Amendment is a testament to the measures that India has effectuated, in comparison to other contemporary jurisdictions, to create a more streamlined framework which fosters predictability and certainty in commercial contracts.

One of the most crucial changes brought about by the 2018 Amendment, in my view, relates to the onus on the plaintiff to prove readiness and willingness to perform their contractual obligations. Under the earlier framework, the plaintiff was required to make an explicit averment to this effect in their pleadings.

The Amendment, though it retains the burden on the plaintiff to prove readiness and willingness, it does away with having to specifically make any averment to this end. Similarly, the Amendment removes the prohibition on enforcing contracts with arbitration clauses through specific performance, allowing for a more integrated and pragmatic approach to dispute resolution.

In contrast to the earlier provisions, which allowed compensation either as an alternative to or in substitution of specific performance, the Amendment enables plaintiffs to claim compensation as an additional relief alongside specific performance. This ensures that plaintiffs are adequately compensated for losses while also obtaining the performance of the contractual obligations. Moreover, courts are now empowered to appoint experts to examine the nature of commercial contracts, determine breaches, and assist in resolving complex issues. These experts may also be examined by the parties, subject to the court’s permission, which introduces a more informed and effective adjudication process.

The 2018 Amendment also brings to the fore the concept of substituted performance, allowing an aggrieved party to procure the performance of the contract from a third party or its own agency in the event of a breach. The expenses incurred for such substituted performance can be recovered from the defaulting party. Additionally, the Amendment includes provisions to allow third parties who have been conferred benefits under a contract to specifically enforce such agreements. This serves as an exception to the traditional doctrine of privity of contract, expanding the scope of enforcement in line with contemporary needs.

Recognizing the complexity and public interest involved in large-scale infrastructure projects, particularly those involving government agencies and public private partnerships, the Amendment places an embargo on granting injunctions that could delay or impede the completion of infrastructure-based projects. To further streamline this, the 2018 Amendment provides an exhaustive list of infrastructure projects covered under the statute, ensuring clarity and uniformity. Special Courts are also to be designated by State Governments to handle suits related to infrastructure contracts under this Act, enhancing efficiency in resolving disputes in such critical areas.

Lastly, to address delays in litigation, the Amendment mandates the expeditious disposal of all matters under the Act within 12 months from the date of service of summons to the defendants, with a maximum extension of six months. This time-bound resolution conforms with the overarching objective of facilitating an enterprise-friendly landscape and ensuring swift enforcement of contractual obligations.

When a law is enacted fixing timelines for expeditious disposal of cases, it is equally critical to conduct corresponding judicial impact assessments, while also making adequate provision for enhancing judicial infrastructure to meet such challenges.

INTERTWINED RELATIONSHIP BETWEEN 2018 AMENDMENT AND EASE OF DOING BUSINESS IN INDIA

These changes that I have highlighted are only a few instances amongst the many that seek to collectively modernize the Specific Relief Act, aligning it with India’s evolving economic topography and emphasizing timely, efficient, and effective resolution of contractual disputes.

Essentially, the amendments to the Specific Relief Act, 1963, aim to create a more pro business climate and secure setting by making specific performance the rule rather than the exception, with damages serving as an alternative remedy.

This shift reflects a stricter approach to enforcing promisors’ performance, acting as a deterrent against uncertain and undesirable contractual behaviour. Greater certainty in contract enforcement is expected to enhance India’s attractiveness as a destination for both foreign and domestic investments, which, would greatly contribute to economic growth.

The expanded availability of specific performance also offers notable efficient outputs, minimizes the risk of under compensation or the risk of over compensation; reduces reliance on liquidated damages clauses; limits strategic behaviour and mitigation challenges; and most importantly grants primacy to the moral obligation of honouring one’s promise. T

his provision has also successfully mixed moral science into the legal framework. What was earlier understood to be merely a moral obligation has now been made an enforceable obligation. Additionally, it simplifies the litigation process by avoiding the complexities associated with calculating damages.

In essence, the Amendment not only strengthens the enforceability of contracts but also the broader objectives of promoting economic stability and encouraging greater certitude among investors, ensuring that contractual obligations are met efficiently and equitably. It represents a key advancement towards addressing the uncertainties surrounding the execution of contracts in India.

MACROECONOMIC OUTCOMES

India is presently positioning itself as a global economic powerhouse, driven by comprehensive legal, policy, and judicial reforms aimed at boosting investor confidence and trade-enabling infrastructure. However, this was not always the case. Post-independence, India largely adopted a closed economy model, with limited trade and restricted access to its markets for foreign entities.

his approach was driven by a focus on self-reliance and protection of domestic industries. The transformative journey of India’s economic conditions was initiated through the pioneering reforms of 1991, defined by a total overhaul aimed at restructuring the economy.

The post-1991 era emerged as a definitive catalyst for Foreign Direct Investment (FDI) inflows, witnessing a remarkable surge propelled by regulatory reforms and the opening of India’s economy to global investors.

Transitioning from a modest annual growth rate of 23% during 1981- 1990, FDI experienced remarkable acceleration, soaring at an annual rate of 44%. I believe that India now asserts itself as an economic powerhouse having secured FDI of US$ 725.96 billion over the last ten years and Foreign Institutional Investment (FII) of US$ 38 billion, across sectors such as service, software, telecommunications, pharmaceuticals and automobiles, despite instabilities occurring throughout the world and overcoming the slowdown brought on by the Covid-19 pandemic.

I am also informed that as per the World Bank’s Ease of Doing Business Report (DBR) India has improved its position from 142nd in 2014 to 63rd in 2019, reflecting significant strides in regulatory and procedural efficiency. Additionally, there seem to be heightened efforts toward reducing over 39,000 compliances and decriminalize over 3,400 legal provisions, further enhancing ease of doing business.

In fact, judicial efficiency, which is a key component of the Ease of Doing Business index, has also received considerable attention. India’s lengthy dispute resolution process—averaging 1,445 days to resolve a commercial dispute, as per the 2018 DBR—prompted critical reforms. Establishing commercial courts at the High Court and District Court levels in 2015 has further streamlined the resolution of contract disputes, reducing delays and costs.

The judiciary has taken a pragmatic approach in interpreting commercial laws, instilling confidence among Foreign Investors and fostering domestic business growth. The repeal of laws like the Sick Industrial Companies Act of 1985, which previously served as a sanctuary for defaulters, has also contributed to reshaping the legal framework.

While it may be premature to place complete trust in quasi-judicial commercial tribunals such as NCLAT and NCLT, their potential for success lies in appointing subject specialists under secure and transparent service conditions. A fair and independent working environment for these Tribunals could mark a significant milestone in India’s progress.

Given this metamorphosis, the role played by the 2018 Amendment to the Act becomes especially focal, as it is vital in enhancing enforceability. The crux of this Amendment can be captured by the words of Sir Edward Fry, who in his epochal work ‘A Treatise on the Specific Performance of Contracts’ very poignantly said: “A perfect system of jurisprudence ought to enforce the actual performance of contracts of every kind and class, except only when there are circumstances which render such enforcement unnecessary or inexpedient, and that it ought to be assumed that every contract is specifically enforceable until the contrary be shown.”

CONCLUSION AND THE WAY FORWARD

What finally becomes apparent is that the 2018 Amendment is part of a larger strategy to ensure that India’s legal landscape is copacetic with the needs of international businesses, promoting trust and Ease of Doing Business programme, while also improving its own global economic standing.

However, it also highlights the ongoing need for further reforms to address existing gaps and complexities, particularly when viewed through the perspective of foreign investors.

I firmly believe that the time is ripe for engaging collaborative exchanges among jurisdictions, built on mutual understanding and respect for cross-border legal frameworks.

By creating an ecosystem where the sanctity of commercial laws in such countries, who believe in the Rule of Law, and is mutually recognized, we can pave the way for more seamless international trade and investment.

Such cooperation would not only strengthen global legal harmony but also inspire greater trust and confidence in transnational commercial dealings.

• Justice Surya Kant is Judge, Supreme Court of India.

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