- Sanya Goel
Delhi High Court on Specific Performance of Determinable Contracts
[Sanya is a student at Jindal Global Law School.]
On 23 August 2022, the Delhi High Court passed its judgement in Royal Orchids v. Kulbir Singh Kohli and Another holding that a memorandum of understanding (MOU) in a commercial transaction between private parties is determinable by nature. Therefore, the court held that such a contract can be terminated in the absence of a termination clause. Alongside, it was held by the Single Judge Bench of Justice Mini Pushkarna that the party was not entitled to any interim relief under Section 9 of the Arbitration and Conciliation Act 1996 (A&C Act) since the MOU was not subject to specific performance owing to the statutory bar in Section 14(d) of the Specific Relief Act 1963 (SRA). This judgement provides for settlement of significant questions of the law pertaining to the perception of determinability in India along with eligibility for specific performance and termination in the absence of a termination clause.
In this post, the author seeks to analyze the judgement of the Delhi High Court in this case and examine the duality in perceiving determinability of contracts in India. Finally, this post seeks to clarify the standing of the courts in the present context.
The respondents are co-owners of the land who signed an MOU with the petitioner, Royal Orchids, wanting to engage with a reputable builder for their services whereby the latter agreed to undertake development of the aforementioned land. The MOU stated that to repay the loan taken by the respondents from Yes Bank against the security of the said property, the petitioner will initially pay INR 1,00,00,000 to the respondents out of the payable amount of INR 4,02,91,247.61. The petitioner used the arbitration clause following the MOU's termination by the respondents. The petitioner asked the Delhi High Court to issue an injunction prohibiting the defendants from sale, alienation, or establishment of any third-party interest in the subject land in a request for interim relief under Section 9 of the A&C Act.
Royal Orchids, the petitioner, argued in front of the court that it was entitled to an award ordering the said MOU's specific performance as well as an award ordering the defendants to fully uphold their MOU obligations. The petitioner continued by contending that the contract was not terminable at the respondents' discretion because the parties intended to grant the petitioner proprietary rights over the aforementioned real estate and that there was no clause in the contract that gave the respondents the right to do so. In order for the respondents to be able to pay off their loan, the respondent claimed that the petitioner had to deposit specific sums of money by the deadline laid out in the MOU. The respondent argued that the petitioner's failure to make the required payments constituted a serious breach of the MOU's terms by the petitioner. Therefore, he argued that the respondents had the right to terminate the agreement because time was of the essence and the petitioner had failed to fulfil its duties in accordance with the timelines stated in the MOU. It was further asserted by the respondent that the MOU was in the nature of a private commercial transaction because it involved a construction and renovation contract between two private parties. As a result, the MOU could be terminated at any time without providing reasoning for the same and even in the absence of a clause explicitly allowing either party to do so, the respondent argued.
The issue before the High Court of Delhi was whether an MOU of determinable nature is entitled to specific performance under Section 16 of the SRA and/or can be terminated in the absence of a termination clause.
Examining the MOU's terms, the High Court found that the respondents still held the entirety of the property's rights, including the right to sell it and the right to possess it, and that the petitioner's possession was only nominal for the purpose of developing the aforementioned property. The court noted that the mentioned MOU was solely a construction contract, pursuant to which the petitioner was not to obtain any ownership rights, and that the Supreme Court in Sushil Kumar Agarwal v. Meenakshi Sadhu and Others had made a similar observation and had ruled that courts typically do not order specific performance of a construction or repair contract. The court found that because time was of the essence in the parties' agreement, the petitioner was required to complete the payment within the allotted period. It held that the petitioner was guilty of failing to pay the necessary amounts within the time frame provided in the MOU. The Bench further stated that pursuant to Section 16(c) of the SRA, a person who fails to establish that he has performed, or that he has consistently been prepared and willing to perform, the material terms of the contract, which were required of him, will not be entitled to specific performance of the contract.
The court ruled that the MOU signed by the two private parties was a construction and re-development contract, that was within the nature of a private commercial transaction, rejecting the petitioner's argument that it was not a determinable contract. As a result, the court determined that the MOU was determinable by its very character, even though it did not incorporate a termination clause. As a result of the statutory bar in Section 14(d) of the SRA, the court ruled that the MOU could not be specifically performed. As a result, the petitioner was not eligible for any interim relief under Section 9 of the A&C Act because the petitioner was statutorily barred from requesting specific performance of the MOU. Thus, the petition was dismissed by the court.
India’s Binary Perception of Determinability
Contracts that are intrinsically determinable cannot be specifically performed under the SRA. However, neither the SRA nor the Indian Contract Act 1872, the two main statutes governing contractual dealings in India, provides any clarification on what precisely qualifies as determinability.
The Delhi High Court in Turnaround Logistics Limited v. Jet Airways Limited and Others stated that “determinable’ […] means a contract which can be put to an end.” Here, a contract's determinability is based solely on the idea of whether it can be terminated. To be fair, this comprehension seems excessively vague. Given that most contracts, if not all, can be terminated and that determinable contracts cannot be specifically enforced (Section 14, SRA), the court’s perception substantially impedes the enforcement of a majority of contracts and consequently, the convenience of conducting business in the Indian capital. Although the High Court in Madras shared a problematic viewpoint, later interpretation has been more attuned to commercial complexity. The court narrowed the definition of determinability in 2020, finding that only contracts that can be unilaterally terminated by parties, whether at will or without reason, are determinable.
In TO Abraham v. Jose Thomas, the Kerala High Court used a similar constrictive approach, finding that the absence of a showing of grounds for termination was what made a contract determinable. The court ruled that in order for a contract to be determinable, it had to be proven that either party might terminate it without giving a cause. Accordingly, a contract that can be terminated upon the incidence of an eventuality (such as insolvency or a breach of terms) would be determinable under common law, but not under the SRA; for that, it has to be terminable at will, not mandating an explanation to the opposite party. This conundrum is barely resolved by decisions made by the Bombay High Court. The simple fact that a contract had termination clauses was enough for the court to rule it as determinable which is quite contrary to the case in hand where the contract was considered determinable despite the absence of a termination clause.
Therefore, we identify two main conceptions of determinability under the SRA. One is the broad interpretation favoured in Delhi, which prevents specific performance under any terminable agreement, and the other is its commercially oriented subset, which is supported in Kerala and has lately gained support in Madras and Bombay. According to this subset, only contracts that can be terminated at any time cannot be specifically enforced.
On consideration of this, although a contract’s termination is not explicitly stated or when the obligations under an agreement seem to last forever, "forever" may actually turn out to be a very little time given that either party may end the contract at any point by providing the other party reasonable notice for any reason or no reason at all. It is simple to integrate this observation into India's binary interpretation of determinability. Contracts without termination clauses would be ‘inherently determinable’ under the SRA in light of their ability to be terminated at any time, taking into account the Delhi High Court's approach in context of the present case along with Delhi's previously inclusive approach and Kerala's restrictive approach. In India, therefore, specific performance of ad infinitum contracts is not possible. The only option for relief would be to file a claim for damages; an injunction would not be provided.