Specific Performance in India: Need for Retrospective Shift – An Icing on the Cake for Commercial Contracts

The Hon’ble Supreme Court of India has reserved its judgment on the Review Petition challenging its 2022 judgement regarding the ‘Prospective Application’ of the 2018 amendment to the Specific Relief Act, 1963. If the review is successful and the amendment is applied retrospectively, it could have significant positive implications for existing Commercial Contracts in India that were entered into before the amendment’s effective date of October 1, 2018.

To fully comprehend the potential ramifications of this dispute, it is necessary to examine the current implications of the Specific Relief (Amendment) Act, 2018 and the 2022 judgment of Katta Sujatha Reddy v. Siddamsetty Infra Projects (P) Ltd., (2023) 1 SCC 355, regarding its prospective application. To understand the same, let’s understand Specific Performance first.

Historical Context of Specific Performance: Common Law vs. Civil Law Approach ??????:

In Common Law Jurisdictions (United States, Canada, India etc.), the primary remedy for a breach of contract is the right to monetary damages, with specific performance being an equitable relief granted at the discretion of the courts when monetary damages are unable to fully compensate the losses. In contrast, Civil Law Jurisdictions (England and Wales etc.) generally prioritize specific performance as the primary remedy, unless there are compelling equitable reasons to deny such relief.

Prior to the 2018 amendment, India, as a common law country, aligned with the traditional common law approach, considering the right to damages as the primary remedy for contractual breaches, with specific performance being an exceptional and discretionary equitable remedy. However, the 2018 amendment sought to rebalance the Indian legal framework, shifting the country’s stance closer to the civil law approach by elevating the status of specific performance as the preferred remedy.

The 2018 Amendment and its Implications ????:

The Specific Relief (Amendment) Act, 2018 in India has transformed specific performance from a discretionary equitable remedy, rarely exercised by the courts in exceptional circumstances, into a Statutory Right. Section 10 of the afore-mentioned Act now mandates the enforcement of specific performance of contracts, read in conjunction with Sections 11(2), 14, and 16, subject to certain exceptions, such as of substituted performance.

This shift has fundamentally altered the contractual landscape in India, elevating specific performance from an exceptional measure to a primary remedy. The amendment has reduced the courts’ discretion in granting such relief, instead establishing specific performance as a default entitlement for contractual parties, subject to the specified exemptions in the Act.

True meaning of Specific Performance ??????:

The right to specific performance arises from the principle of Pacta Sunt Servanda, which emphasizes the binding nature of a contract and the right to claim what was promised. Three essential facets of the right to specific performance include: (a) the requirement for the contract to be in existence, (b) the distinction between the substantive and procedural issues related to specific performance, and (c) the nature of the obligations, whether monetary or non-monetary.

Retrospective ?? Prospective Application:

After the 2018 amendment came into official gazette, dispute arise regarding the application of the 2018 amendment to the Specific Relief Act. The central issue is whether the amended provisions should be applied retrospectively to contracts entered into prior to the amendment or whether the application should be prospective, limited only to contracts formed after the amendment’s effective date. To illustrate, let’s say a contract was executed/entered in 2010 and the term of the contract is 50 years. Today, one of the parties to the contract deny to fulfil its obligations. Whether the remedy of the specific performance could be applied on the dispute considering the dispute arise after the 2018 amendment came into existence, on the contact that was entered in 2010.

This position was addressed by the Hon’ble Supreme Court in the 2022 case of Katta Sujatha Reddy v. Siddamsetty Infra Projects (P) Ltd., (2023) 1 SCC 355 (the case under review), where the Court held that the application of the amended Specific Relief Act should be prospective, commencing from the date of the contractual transaction, i.e., the date the contract is entered into as the new provision created new rights and hence it was a substantive provision.

If we apply this judgement to the afore-mentioned illustration, as the contract was entered in 2010, before the 2018 amendment, the remedy does not apply on the same. The Katta Sujatha case has now been under review by a 3-J Bench before the Hon’ble Supreme Court, arguments are concluded and reserved for judgement.

The Date-of-Contract Rule as given in 2022 judgement is a flawed one, going by the purpose of 2018 amendment, which was creating rights and preserving contractual obligations of the parties. Afore-mentioned judgement suggests, that the applicable legal framework governing a dispute is determined by the time when the transaction originally occurred, even if that date bears no relation to the actual breach that has since arisen. This is the basis for an action seeking specific performance. It is for this reason that the date of cause of action would be a more suitable and appropriate standard in determining the applicable legal regime. This approach would allow for greater uniformity in application and predictability of outcomes. Additionally, it would provide the promisor the flexibility to weigh the costs of breach against the costs of performance before making a commercially prudent decision - an underlying economic objective underpinning commercial contractual covenants.

Icing on the Cake for Commercial Contracts ????:

In the case of Long-Term Contract where the breach has occurred recently, the commercial entity should opt to seek specific performance of the contract rather than pursuing a straightforward breach of contract claim. This is because in long-term commercial contracts, the parties have often set specific targets and planned their future course of action, resource allocation, and engagements accordingly. Furthermore, there are matters of Corporate Finances for Commercials which are involved.

By pursuing specific performance as the primary remedy, the commercial entity can ensure that the original contractual obligations are fulfilled, thereby preserving the carefully laid plans and projections that were predicated on the successful execution of the long-term agreement. This approach is more aligned with the underlying commercial objectives and economic realities faced by the parties, as opposed to a narrow focus on the historical contract remedy for damages, which was the precise reason for the shift from common law to civil law jurisdictions.

Ultimately, the retrospective specific performance remedy provides a more practical and commercially sensible solution in scenarios where the contract’s duration and the parties’ reliance on its continued performance outweigh the strict temporal considerations of when the agreement was initially entered into.