Back‘Determinable’ or not: that’s the question in commercial contracts
‘Determinable’ or not: that’s the question in commercial contracts
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On an average day in the life of a growing economy such as India’s, joint venture relationships are forged by the dozen in diverse ways— through multimillion dollar investments in companies by business moguls, by sale or lease of immovable property, and by procurement of goods or services, to name a few.
The exit or termination mechanism is typically contained in the “termination clause" in most commercial contracts. While a termination clause may be drafted in several ways, broadly speaking, termination could occur “without cause" (that is, without assigning any reason) at the option of either party and/or the contract may also provide for the right of a non-defaulting party to terminate the contract on the occurrence of certain specified events. In case of wrongful termination of a contract, the party wronged by such breach can terminate the contract and ask for damages.
However, in many instances, the wronged party takes the position that damages would not suffice; rather, the other party should be compelled under law to keep its side of the bargain —in such cases, a wronged party would seek “specific performance" of the contract, that is, get an order of the court directing the other party to perform its obligations under the contract. While seeking specific performance, a party can also ask the court for interim relief by way of an injunction restraining the other party from committing breach of contract.
Under Indian law, the principles governing the grant of specific performance and injunctions are found under the Specific Relief Act of 1963. According to section 14(1)(d) of the Act, a contract which is in its nature “determinable" cannot be specifically enforced. Further, according to section 41(e) of the Act, an injunction cannot be granted to restrain a party from committing breach of a contract that cannot be specifically enforced.
Therefore, the question for a party claiming wrongful termination of contract and seeking specific performance and/or injunction against termination is whether the contract is “determinable" in nature and hence not specifically enforceable.
The Supreme Court has elaborated on “determinable" contracts in Indian Oil Corporation Ltd v. Amritsar Gas Service and Ors. (1991). In this case, the relevant contract was a distributorship agreement which contained a clause providing for termination on the happening of certain specified events and also contained a clause for terminating the agreement without specifying any reason by giving 30 days’ notice.
The Supreme Court held that a distributorship agreement which contained a clause that entitled either party to terminate the agreement with 30 days prior notice, and without assigning any reason, was “determinable" in nature and, hence, could not be specifically enforced. The only relief that could be granted, according to the Supreme Court, was compensation for the loss of earnings for the notice period. In other words, a party to the distributorship agreement could not obtain specific performance of the contract as a remedy because the contract was “determinable".
However, in later cases, the Delhi high court gave a broader interpretation to the term “determinable".
In Crompton Greaves Ltd v. Hyundai Electronics (1998), the contract in question was a joint venture agreement which contained a clause that each party could terminate the agreement if certain government approvals were not obtained within a given period. The presence of this clause prompted the Delhi high court to conclude the agreement was “determinable" and specific performance was denied.
In another case, Rajasthan Breweries v. Stroh Breweries (2000), the contract was a technical know-how agreement under which the defendant had a right to terminate the agreement on the happening of specified events. This contract was held by the Delhi high court to be “determinable" and an injunction restraining the respondent from terminating the agreement was denied.
The court observed that even in the absence of a specific clause enabling either party to terminate the agreement on the happening of the events specified therein, from the very nature of the agreement, which is private commercial transaction, the same could be terminated even without assigning any reason by serving a reasonable notice and that if such termination is found bad in law or contrary to the terms of the agreement, the remedy available to the non-terminating party would be to seek compensation for wrongful termination, but not a claim for specific performance.
In its 2006 decision of Turnaround Logistics (Pvt.) Ltd v. Jet Airways (India) Ltd, the Delhi high court held an agency contract to be determinable, stating that the term “determinable contract" means a contract that can be put to an end and, thus, all revocable deeds and voidable contracts would fall within this term.
A reading of these Delhi high court decisions suggests that the very existence of a termination clause in a commercial contract could lead to the contract being held as “determinable" and, hence, not specifically enforceable.
For contracts having clauses that entitle either party to terminate the contract without assigning any reason, the position of law has been settled by the apex court in the Amritsar Gas Service decision.
However, if one were to adopt the interpretation suggested by the Delhi high court in the cases discussed above, specific performance of commercial contracts would become an extremely difficult proposition, given that while there may not be a “without cause" termination clause in a contract, most commercial contracts contain termination clauses that entitle parties to terminate the contract on the happening of specified events.
The judicial position on this is expected to evolve further, but given the approach taken in judicial precedents so far, it appears that an order for specific performance would be difficult to obtain presently in a large number of commercial contracts, which would be considered determinable in nature.
This column is contributed by Ashima Obhan and Arvind Lakhawat of AZB & Partners, Advocates & Solicitors.
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