INTRODUCTION
The principle of rule of law mandates that there is a laid down contract law that without any ambiguity defines the terms and conditions for enforceable contracts, lucidly explains the jurisdiction of contractual disputes, and lays down the roles and responsibilities of the legal authorities in terms of contract enforcement. The enforcement of contracts can be done through both public legal institutions like courts and tribunals and through private measures like posting bonds or ending commercial relationships and dispute resolution mechanisms like Mediation, Arbitration, and Conciliation.
In this article, I will critically examine the law around contract enforcement in India highlighting the problems associated with it, and will also suggest solutions through which the impediments to the enforcement of contracts can be addressed.
CONTRACT ENFORCEMENT IN INDIA
The Indian Contract Act 1872 and The Specific Relief Act 1963 are the two statutory legislations dealing with contract enforcement in India. The Indian Contract Act covers the general principles of contract law including damages and consequences in case of breach of contract. The Contract Act also provides for the exception of specific relief in form of specific performance of a contract which is primarily governed by the Specific Relief Act of 1963. The Ease of Doing Business Index which is released by the World Bank evaluates business regulations in a country on 10 indicators. Contract enforcement is one such indicator. Although India’s performance in the overall index has improved over the years the country’s performance under the specific head of contract enforcement continues to be poor. As per the 2020 index, India was ranked in the 163rd position under the contract enforcement head.[1]
There are various reasons which explain India’s contract enforcement problem. The first reason is the country’s slow and inefficient civil judicial system. The civil courts across the country are dealing with the problem of huge backlogs in terms of civil litigation. The problem was further exacerbated due to the shutting down of physical courts due to the Covid -19 pandemic and the court’s decision to hear only urgent proceedings. The judicial backlogs are a result of the incompetence of the judges to enforce contracts as per the statutory law provisions. The Indian Courts have been following the efficient breach of contract theory which had originally evolved in English Common Law. The theory states that the damages in case of breach of contract can be quantified and the courts hold the party liable for the breach to pay damages instead of asking for performance of a contract.[2]
This leads to a prolonged litigation process as it is very difficult to quantify damages in a country like India which does not have the luxury of possessing well-oiled judicial machinery. There also exist similar kinds of other procedural complexities which make the contract enforcement procedures costly both in terms of time and money. The judges in the lower- judiciary have not received adequate training in solving contractual disputes and a general lack of awareness about contractual terms among the contracting parties has all led to India’s dismal performance under the contract enforcement head. [3]
HOW CAN INDIA SOLVE THIS PROBLEM
A comprehensive change in the functioning of our courts is required to solve this problem. The Indian courts are overburdened with civil cases. To reduce the burden of cases the government enacted the Commercial Courts, Commercial Division, and Commercial Division of High Courts Act in 2015. The courts established through this act were to deal with commercial disputes of a specified value. The government should conduct a periodic review of the specified value and make the required changes to decrease the burden of the courts exercising civil jurisdiction. The central government should also encourage the establishment of these commercial courts in as many districts as possible through a collaborative effort with various state governments.[4]
The government should also investigate its pending litigations regarding contract enforcement. The State Governments in India avoid enforcement of contracts that were signed during the tenure of previous administrations. The central government by the way of legislation or through a general guideline should ensure that the state governments do not indulge in the practice of unilateral violation of contracts.[5]The onus of solving this problem along with the legislature and the executive also lies with the judiciary. The courts as a matter of practice should avoid coming up with creative interpretations of the provisions to deny enforcement of contracts.[6] The problem can also be solved with the help of private mechanisms of contract enforcement like the Alternate Dispute Mechanisms like Arbitration, Mediation, and Conciliation. These measures ensure enforcement of contracts in a short period unlike the long-haul litigation in civil jurisdictions.
Parliament to facilitate the practice of arbitration in India the Parliament passed the Arbitration and Conciliation Act in 1996. However, even after two and half decades of its enactment, the jurisprudence around arbitration in India has been vague and uncertain. Unlike other jurisdictions where the courts have taken a deferential approach in arbitration matters, the courts in India have regularly refused to accept foreign arbitral awards on grounds of public policy exceptions. The term ‘public policy has not been explicitly defined in the Act. The Supreme Court for the first time explored the scope of ‘public policy in the case of Renusagar Power Company Limited v. General Company Limited[7]. In this case, the court laid down the three grounds of public policy on basis of which a foreign award could be set aside by the court if it was in contravention of (i) fundamental policy of Indian Law or (ii) interests of India or (iii) justice or morality. The Supreme Court widened the meaning of public policy in the context of Section 34 of the Arbitration and Conciliation Act. After the 1994 judgment in Renusagar, the courts in various judgments set aside arbitral awards on the ground of erroneous application of the law by the tribunals by widely interpreting the term ‘public policy. The government therefore through the 2015 amendment to Section 34 of the Act limited the scope of public policy exception by stating that enforcement of the arbitral award should not be refused merely on the ground that the arbitrator has erroneously applied the law while examining the scope of the fundamental policy of Indian law aspect concerning ‘public policy exception.[8]The amendment has brought a very positive change in the Indian Arbitration jurisprudence. In this context, it is important to refer to two very recent judgments- Government of India v. Vedanta Limited[9]and Amazon v. Future Retail Group[10]. In Vedanta, the court has opined that erroneous interpretation by the tribunal of a contractual provision is not a ground for challenging the merits of an award, and in the case of Amazon v. Future Retail Group, it has upheld the validity of emergency arbitrators. These two judgments will go a long way in developing an arbitration-friendly jurisprudence where the courts would align their reasoning and judgments with the international practices in the area of international commercial arbitration which will in turn assure the foreign investors regarding contract enforcement.
CONCLUSION
The mere existence of statutory contract law is not sufficient to ensure effective contract enforcement. There is also the requirement of self-sufficient legal institutions and an independent judiciary that can facilitate contract enforcement in minimum time without exorbitant costs and at the same time protect the best interests of the contracting parties. The problem of India’s contract enforcement has its roots in a shambolic over-burdened judiciary which has continuously been involved in flawed interpretations of legal concepts relating to enforcement. The uncertainty regarding the enforcement of contracts is a major reason which stops international investors to invest in India and, therefore, impacts our image in the international business community. In a globalized and interconnected world India cannot afford to have such an approach to contract enforcement. The global pandemic also will only worsen matters as problems regarding the force majeure clause and frustration of contracts will arise. Therefore, I believe the suggestions offered in this article should be seriously considered by the stakeholders in India’s contract enforcement machinery.
Author(s) Name: Shrey Garg (National Law School of India University, Bengaluru)
References:
[1]Kavya Lalchandani, ‘Contract Enforcement: India’s key to doing well in Ease of Business Ranking Index’, Livemint.com<https://www.livemint.com/opinion/columns/opinion-contracts-enforcement-india-key-to-perform-well-in-ease-of-doing-business-index-11590311338929.html> last accessed 02 August 2022
[2] Ramanuj Mukherjee, ‘How Does India Plan On Solving its Crippling Contract Enforcement Problem? ‘ The Wire<https://thewire.in/business/how-does-india-plan-on-solving-its-crippling-contract-enforcement-problem> last accessed 02 August 2022
[3] Ibid
[4]Lalchandani n (1)
[5]Somya Luthra, ‘To Improve Ease of Doing Business in India, Enforcement of Contracts is a Must’ News18.com <https://www.news18.com/news/opinion/to-improve-ease-of-doing-business-in-india-enforcement-of-contracts-is-a-must-3992873.html> last accessed 03 August 2022
[6]Richard E. Messick, ‘What the Governments Can Do To Facilitate The Enforcement Of Contracts’ <http://www.businessenvironment.org/dyn/be/docs/77/Session3.1MessickDoc.pdf> last accessed 03 August 2022
[7]Renusagar Power Company Limited v. General Company Limited, 1994 Supp (1) SCC 664
[8]The Arbitration and Conciliation (Amendment) Act, 2015 S. 18
[9]Government of India v. Vedanta Limited, CIVIL APPEAL NO. 3185 OF 2020
[10]Amazon v. Future Retail Group, Civil Appeal 4492-4493 of 2021
