Indian Contract Act, 1872

Case Study 1: ‘Determinable’ or not: that’s the question in commercial contracts

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.

A variety of business relationships are created daily by individuals, private corporate entities and
public sector corporations through commercial contracts, which not only specify the rights and
obligations of the parties to the contract, but also the mechanism for exiting or terminating it.

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.

Legal Aspect of Business – Section A, B, C and D (2017-19) Page 1

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

Legal Aspect of Business – Section A, B, C and D (2017-19) Page 2

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.

Source : http://www.livemint.com/Companies/xPiP32ElcuTgcA7Ej7DY8O/8216Determinable8217-or-
not-that8217s-the-question.html

Case Study 2: Freedom of contract must yield to freedom of occupation

Any employee has a vital right to change employment for self-growth, which can neither be restricted nor
curtailed by anyone, even the employer. The recent Infosys move to curb employee exits by forcing them
to sign non-compete agreements has no legal validity, according to Mr H. L. Kumar, Supreme Court
Advocate and Chief Editor, Labour Law Reporter. In an e-mail interview to Business Line on the
legal implications of the company's move, Mr Kumar said: "Such contracts are unenforceable, void and
against the public policy. In fact, what is prohibited by law cannot be permitted by courts."

He added: "Any employee has a vital right to change employment for self-growth, which can neither be
restricted nor curtailed by anyone, even the employer."

No Restraint Possible

According to him, the Delhi High Court has reiterated that the negative covenant clause in the service and
employment contracts cannot be used against an employee. "No restraint can be imposed on any
employee after he has left the job or has been terminated, as it goes against the very grain of Section 27 of
the Indian Contract Act, 1872."

(The Infosys non-compete clause reportedly states that even after the employee quits the company, he/she
cannot work for any of its top competitors TCS, Accenture, IBM, CTS and Wipro. The clause also
disallows employees from taking up jobs with Infosys customers up to six months after quitting.)

The legal expert said that many employers stipulate in the appointment letters or employment agreements
that after leaving the job, the employee will not join a competitor or carry on similar business. "No
employee can be forced to remain fastened with the loyalty to the employer if it is not properly
enumerated in consonance with the existing Acts," he pointed out.

"If an employee gets a chance of better employment, he/she cannot be prevented from leaving the job on
the pretext that it would amount to huge benefit to a rival organisation at the cost of the company where
the employee got training and access to confidential information."

Legal Aspect of Business – Section A, B, C and D (2017-19) Page 3

Mr Kumar agrees that the employer may have bona fide intention to protect goodwill much more than the
confidential information and trade secrets. "Admittedly, both employee and employer enjoy certain rights,
but they can never be used against the detriment of any one."

Exhaustive Law

According to him, the Indian Contract Act is quite exhaustive "even if it may not be a complete code
dealing with all eventualities pertaining to contracts. Under Section 27 of the Act, a service covenant
extended beyond the termination of the service is void." The Section reads: "Every agreement by which
any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent
void."

Mr Kumar said that not a single Indian decision has been brought to the notice of the court where an
injunction has been granted against an employee after the termination of employment. In the garb of
confidentiality, an employer cannot be allowed to perpetuate forced employment, as it is hit by Section
27.

"The laws and judicial interpretations of other countries will hardly have any effect on Indian courts if the
statutory laws of this country are unambiguous."

Mr Kumar said that Section 27 is general in terms and unless a particular contract can be distinctly
brought within Exception 1, there is no escape from the prohibition. (Exception 1 states that one who sells
the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within
specified local limits, as long as the buyer, or any person deriving title to the goodwill from him, carries
on a like business therein, provided that such limits appear reasonable to the court, with regard to the
nature of the business.)

No time, area issues

"There is nothing in the wording of Section 27 to suggest that the principle stated therein does not apply
when the restraint is for a limited period only or is confined to a particular area. Such matters of partial
restriction have effect only when the facts fall within the exception to the Section."

He cited the case of Superintendence Company of India vs Krishan Murgai, wherein the Supreme Court
held that a contract, which had for its object a restraint of trade, was prima facie void. The company, with
head office at Kolkata and a branch in New Delhi, carried on business as valuers and surveyors. It had
established a reputation and goodwill in its business by developing its own techniques for quality testing
and control and possessed trade secrets in the form of these techniques and clientele.

Mr Murgai was manager of the New Delhi office. Clause (10) of the terms and conditions of employment
placed him under a post-service restraint that he would neither serve any other competitive firm nor carry
on business on his own in similar line for two years at the place of his last posting; and the restriction
would come into operation after he left the company.

Legal Aspect of Business – Section A, B, C and D (2017-19) Page 4

When he was terminated from service, the employee started a business on similar lines. When the matter
came for appeal, the Supreme Court held that under Section 27, a service covenant extended beyond the
termination of the service was void.

According to Mr Kumar, in view of a greater number of MNCs setting up shop in India, the provision
may need a relook. "But so long as it is not done, the big companies will have to endure with it, regardless
of the stiff competition they might have to face."

The expert also cited various instances where the court has upheld the employee's right to work after
termination. In a case that involved Pepsi and Coca-Cola, the Delhi High Court held that though the
service and employment contracts of the plaintiffs contained a negative covenant clause restraining an
employee from engaging or undertaking employment for 12 months after leaving service, it was well
settled that such post-termination restraint is in violation of Section 27.

"Such contracts are unenforceable, void and against the public policy as what is prohibited by law cannot
be permitted by the Court's injunction."

Source : http://www.thehindubusinessline.com/todays-paper/tp-opinion/press-note-1-an-act-
beyond-the-contract/article1662325.ece

Case Study 3: Unfair Terms in Contract and Legal Remedy Available in India

STANDARD FORM OF CONTRACTS AND THEIR NATURE

In an industrial society, whether advanced or developing, the individual craftsman, catering to the tastes
of individual customers, slowly fades out, giving place to mass production of standardized products. Such
standardization leads to standardized dealings with customers, that is, to standardized contracts with
customers. They are found in all areas where operations are on a large scale. In the case of large scale
organizations, which enter into innumerable contracts with individuals, it is very difficult for them to
draw up a separate contract with each individual. The advantages of such contracts are economy and
certainty. As Kessler puts it, “in so far as the reduction of costs of production and distribution thus
achieved is reflected in reduced prices, society as a whole ultimately benefits from the use of standard
contracts”.

In standardized form of contracts, a single will is exclusively pre-dominant, acting as a unilateral will,
which dictates its terms not to an individual but to an indeterminate collectivity. The standard terms and
conditions prepared by one party are offered to the other on a “take it or leave it” basis. The main terms
are put in large print, but the qualifications are buried in small print. The individual’s participation is
consists of mere adherence, often unknowing, to the document drafted unilaterally and insisted upon by
the powerful enterprise. The pen of the individual signing on the dotted line does not really represent his
substantial agreement with the terms in it, but creates a fiction that he has agreed to such terms. The
characteristics usually and traditionally associated with the contract, such as freedom to contract and
consensus, are absent from these so called contracts.

Legal Aspect of Business – Section A, B, C and D (2017-19) Page 5

THE PROBLEM ARISING FROM SUCH CONTRACTS

Apart from the fact that the abstract legal theory of a contract as an agreement arrived at through
discussion and negotiation is completely given the go-by, these contracts turn out to be a case of the big
business enterprises legislating in a substantially authoritarian manner. Such large scale business concerns
get expert advice and introduce terms, in the printed form, which are most favourable to themselves. They
contain many wide exclusion and exemption clauses favourable to large enterprise. The favourable terms
are often in small prints which the individual never reads since it is a laborious and profitless task to
discover what these terms are. The Calcutta High Court in Indian Airlines Corporation vs. Madhuri
Chaudhary had to deal with a case of a passenger traveling by air inside India. The plane crashed causing
death of passenger, and his widow sued for the damages. The air ticket exempted the carrier from liability
on account negligence of the carrier or of the pilot or of other staff. There was evidence that the
conditions exempting the carrier were duly brought to the notice of the passenger and that he had every
opportunity to know them. The High Court held that obligation imposed by the law upon common
carriers in India is not founded upon contract, but on the exercise of public employment for reward, that
is, by the Common Law of England governing the rights and liabilities of such Common Carriers. It is not
affected by the Indian Contract Act, 1872. It is a case, where the carrier said that he was prepared to take
passenger by air provided that passenger exempted him from liability due to negligence. The exemption
clause in the contract was good and valid and was a complete bar to the plaintiff’s claim.

In another case, Rajasthan High Court held that “where on the face of the goods ticket, words to the effect
“for conditions see the back” are printed, the person concerned is as a matter of law, held to be bound by
the conditions subject to which the ticket is issued., whether he takes care to read the conditions if printed
on the back or to ascertain them if it is stated on the back of the ticket where they are to be found. If,
however, the conditions are printed on the back of the ticket but there are no words at all on the face of it
to draw the attention of the person concerned to them, then it has been held that he is not bound by the
conditions.

The crucial question from the articles point of view is this: assuming that he knew the conditions, if he
wanted to change them, could he negotiate and do so? If he cannot, what does it matter, and how are the
courts to come to his rescue?

As early as 1909, Shankaran Nair. J. in Shaikh Mohd. Ravuther, in his dissenting judgment expressed the
opinion that section 23 of the Indian Contract Act hits such exemption clauses, but this view has been
rejected by the High Courts in the later decisions. There are few cases where the Courts have valiantly
tried to come to the rescue of the weaker party but the legal basis of such decisions is elusive. In Lily
White vs. R. Munuswamy, the laundry receipt of the appellant contained the condition that in the event of
loss of or damage to the article given for washing, the customer would be entitled to claim 50 per cent of
the market price or value of the article. The respondent’s new saree was lost. The court gave relief to the
customer, holding that condition would place a premium upon dishonest in as much as it would enable the
cleaner to purchase new garments at 50 per cent of the price and that would not be in the public interest.
In another case it was held that a condition that only 8 times the cost of cleaning the garment would be
payable in case of a loss was held to be unreasonable. In International Oil Co. vs. Indian Oil Company the
contract reserved the right to the defendant to cancel the plaintiff’s dealership at any time without

Legal Aspect of Business – Section A, B, C and D (2017-19) Page 6

assigning any reason. On cancellation by the defendant, the plaintiff filed a suit and the suit was decreed
on the ground that the term was an unfair term of the contract.

The entire basis of a contract, that it was freely and voluntarily entered into by the parties with equal
bargaining power, completely falls on the ground when it is practically impossible for one of the parties
not to accept the offered terms. In order to render freedom of contract a reality and particularly of one
whose bargaining power is less that of other party to the contract, various measures like labour legislation,
money laundering laws and rent Acts have been enacted, but there is no general provisions in the Contract
Act itself under which courts can give relief to the weaker party. The existing sections in the Contract Act
do not seem to be capable of meeting the mischief.

Section 16(3) of the Contract Act provides that, where a person, who is in a position to dominate the will
of another, enters into a contract with him, and transaction appears, on the face of it or on the evidence
adduced to be unconscionable, the burden of proving that such contract was not induced by undue
influence shall lie upon the person in position to dominate the will of the other. But this sub-section has
been interpreted as meaning that both the elements of having dominant position and the unconscionable
nature of the contract will have to be established, before the contract can be said to be brought about by
undue influence. This position, though established long ago, has not been departed from, with the result
that section 16(3) is not much of a relevance in the present context.

Section 23 of the Contract Act which provides that the consideration or object of an agreement is lawful,
unless the court regards it as immoral or opposed to public policy, is not of much use in meeting the
present situation, because courts have held that the heads of public policy cannot be extended to a new
ground in general, with certain exceptions, and that the term of a contract exempting one party from all
liability is not opposed to public policy. However lately Supreme Court in Central Inland Water Transport
Corporation Limited vs. Brojo Nath Ganguly held that an unfair or an unreasonable contract entered
between the parties of unequal bargaining power was void as unconscionable, u/s 23 of the Contract Act.
Thus Indian Courts have, since then, shown a marked willingness to interfere with the printed form
contracts where there is evidence of unequal bargaining power. It has been held that the courts would
relieve the weaker party to a contract from unconscionable, oppressive, unfair, unjust and unconstitutional
obligations in a standard form contract. The Supreme Court has held that a printed form contract was void
on grounds of coercion, where the parties had unequal bargaining powers. However barring few attempts,
the Indian Contract Act lacks teeth to prevent misuse of printed / standard form of contracts. Courts suo
motu have evolved and applied certain rules to protect the interest of the consumer, customer or
passenger, as the case may be upon whom standard form contracts or exemptions clauses are imposed,
like reasonable notice should be given, theory of fundamental breach, contra proferentem of the contract,
liability in tort etc.

Source : https://coporatelaws.wordpress.com/2010/05/13/unfair-terms-in-contract-and-legal-remedy-
available-in-india/

Legal Aspect of Business – Section A, B, C and D (2017-19) Page 7