Determinability of Contracts without Termination Clauses under India’s Specific Relief Act
India’s Specific Relief Act, 1963 (SRA) bars the specific performance of contracts that are inherently determinable. And yet, no guidance as to what constitutes determinability is found either under the SRA or under the Indian Contract Act, 1872, that are the foremost statutes governing contractual relationships in India. In this opinion piece, I take cues from common law and endeavour to discover exactly what makes an agreement determinable, focussing on contracts that do not prescribe for termination. The bar on performance of determinable contracts and the validity of certain perpetual agreements, both being crystallised precepts (Indian Oil v. Amritsar Gas Service), are not questioned here. Instead, I probe whether and how contracts ad infinitum can be determined in India, which, surprisingly, is an issue yet to be settled by the Supreme Court.
Is termination determination?
Under common law, termination and determination are seemingly synonymous. Black’s Law (9th Ed) defines ‘determinable’ as ‘liable to end upon the happening of a contingency; terminable’ and Chitty on Contracts (30th Ed) cites several cases to exemplify how the said contingency may either be without the control of either party (like a force majeure event) or arise out of the parties’ actions (such as a breach of terms). The Indian context, however, is not so straightforward, with the apex court’s silence on the point exacerbating confusion.
In 2006, the Delhi High Court categorically stated that “‘determinable’ […] means a contract which can be put to an end.” Here, a contract’s determinability is founded simply on the notion of whether it can be ended, ie, whether it is terminable, which parallels the typical view endorsed under common law. To be fair, this understanding appears quite overbroad. Considering how determinable contracts cannot be specifically enforced (S 14, SRA) and that most—if not all—contracts can be ended, Delhi’s interpretation presents a significant hindrance to the enforcement of a vast majority of contracts and, consequently, to the ease of conducting commerce in the Indian capital, where this precedent was applied as recently as April 2021.
Though a similarly problematic view was echoed by the High Court in Madras, subsequent interpretation has been more attuned to commercial nuance. In 2020, the Court tightened the scope of determinability, deciding that the only determinable contracts would be those that can be terminated by parties unilaterally, either at will or without cause. An analogous, restrictive approach was adopted by the Kerala High Court in TO Abraham v. Jose Thomas, where, not having to show cause for termination was found to be the distinguishing factor of determinability. According to the Court, for a contract to be determinable, it must be demonstrated that the agreement may be ended by a party without assigning any reason. Thus, a contract that is terminable on the occurrence of an eventuality (like insolvency or a breach of terms) would be determinable under common law, but not under the SRA; for that, it must be terminable at will, requiring neither any junction with nor any justification to the other party.
Decisions of the Bombay High Court do little to resolve this quandary. In 2016, an agreement was found to be determinable merely because it contained termination clauses, but later in 2020, the Court diverged, holding that determinability arises solely from the ‘sweet will of a party’ and contemplates a unilateral right to terminate without reference to any eventuality, circumstance or reason.
We, therefore, find two principal views of determinability under the SRA. One is the expansive view advocated in Delhi that renders all terminable agreements incapable of specific performance. The other is its commercially progressive subset espoused in Kerala—and, recently, in Madras and Bombay—according to which, only agreements terminable at will cannot be enforced specifically. That said, before applying these principles to contracts without termination clauses, it is prerequisite to examine whether and how they may be ended in India.
(De)Termination of contracts without termination clauses
Typically, agreements set forth the ways in which they can be concluded—a termination clause in a contract may provide for it to be ended in any one or a combination of the following ways:
- upon the expiry of a specified period of time;
- on the occurrence of an eventuality, such as insolvency or a force majeure event;
- with cause (in the event of a breach);
- at will (by giving a reasonable notice for any or no reason).
Agreements executed for indefinite durations, such as for partnerships, employment, public leases, and perpetual licenses, often contain no meticulous clauses for their conclusion. Therefore, where there is no clear and unambiguous language prescribing a contract’s termination, or where such language is altogether absent, do the underlying obligations continue forever?
Common law is inclined to disagree. The purported interminability of such contracts is inflicted squarely by two trite principles, viz, the rule against perpetuities and the standard of reasonableness. That an obligation ‘without end of time’ cannot be tolerated or enforced by law has been recognised for over a hundred years. In the US, Echols v. New Orleans held an agreement to furnish or do something ‘without specification as to time’ to be ‘terminable at pleasure’ or as requiring performance within a reasonable time. Parallelly in the UK, in Postlethwaite v. Freeland, the House of Lords stood by the general rule of reasonableness, ruling that if there is no time prescribed in a contract, it must be performed within a reasonable period.
Accordingly, in the UK and the US, contracts without termination clauses are deemed terminable at will. Commercial agreements for sales commissions, agency, supply of goods, and software licenses into perpetuity have all been deemed terminable at any time by either party on submission of reasonable notice, with the exact duration of the ‘reasonable’ period being a question of fact contingent on the construction of each contract.
While the standard of reasonable performance is judicial doctrine even in India, the concomitant issue of terminating a contract of equivocal or unending duration is still not clear. The Delhi High Court has, nevertheless, consistently adjudicated perpetual contracts in lockstep with international common law standards. In Rajasthan Breweries v. Stroh Brewery, it was held that ‘even in the absence of a specific clause authorising and enabling either party to terminate the agreement […], the same could be terminated even without assigning any reason by serving a reasonable notice.’ Applied recently in 2020, the precedent holds good in the national capital, and in the absence of the apex court’s findings on the issue, it is relied upon by other appellate courts—for instance, in Madras and Bombay—as well.
On that account, even where a contract’s termination is not provided for, or where the obligations under an agreement purport to be endless, ‘forever’ can actually turn out to be no time at all; given that they may be concluded by either party at will by giving reasonable notice for any or no reason.
Plugging this finding into India’s binary perception of determinability (as noted earlier) is elementary. In view of being terminable at will, contracts without termination clauses would be ‘inherently determinable’ under the SRA through the lenses of both, Delhi’s inclusive approach and Kerala’s constrictive one. Hence, at any rate, indefinite or ad infinitum contracts are not capable of specific performance in India. At most, the remedy would be to seek damages, and no injunction could be granted.
Aniket Aggarwal is Counsel at AggarLaw, India.
YOU MAY ALSO BE INTERESTED IN