RATIONALIZING NON-ENFORCEMENT OF CONTRACTS WITH UNILATERAL TERMINATION CLAUSES

Source : Cartoons by Ron Leishman

This article has been authored by Ayush Mishra, an alumnus of the NALSAR University of Law, Hyderabad and is currently working as an Advocate at the Hon’ble High Court of Allahabad

Introduction

A prima facie research with respect to unilateral termination of contract clauses would inevitably lead one to the doorsteps of the erstwhile section 14(1)(c) of the Specific Relief Act,1963 (hereinafter, referred to as “the Act”). This particular sub-section acts as a bar to the specific enforceability of such contracts which are “determinable” in nature. There has been a fair share of debate regarding what constitutes the “determinability”, but mostly the jurisprudence has now been concretized by the courts through a catena of cases.

According to this modern jurisprudence, a contract is said to be “determinable” if it can be “terminated”. Therefore, it is seen that all contracts which have a provision for unilateral termination of itself by one party, fall under this category and consequently, are not specifically enforceable. This blog post would attempt to make a doctrinal inquiry as to why and how does the presence of “an option to terminate”, take away from the plaintiff, all rights of specific performance of the said contract.

Rationale under Modern Jurisprudence

To understand this limitation placed by the Act, it is essential to examine the justifications that forms a part of the modern jurisprudence vis-a-vis such limitation. The Court in Rajasthan Breweries Ltd. vs The Stroh Brewery Company expounded on this rationale in these words:

“....the principle on which specific performance of such an agreement would not be granted is that the Court will not go through the idle ceremony of ordering the execution of a deed or instrument, which is revocable at the will of the executant.”

Evidently, the only reason provided is that, the Court will not allow specific performance of the contract, because even if it did, the other party might just terminate the contract so as to avoid the performance, which will make this entire process a futile exercise. However, the abovementioned reason does not do justice to the denial of a right of specific performance to a party of the contract as it lacks any doctrinal or theoretical foundation to justify its suitability. Ipso facto, it is necessary to turn to one of the earliest cases regarding unilateral termination of contracts in Common Law so as to uncover the theoretical reasons behind it.

Marble Co. vs. Ripply: Understanding “Lack of Mutuality” vis-à-vis Specific Performance

Marble Co. vs. Ripply (1870) is perhaps the first reported case which had this issue of denial of specific performance when the contract contained a termination clause. In the case, ‘A’ had to convey his land to ‘B’ and ‘B’ would do some service on the land for ‘A’. ‘A’ had the right to terminate the contract, giving one year’s notice. When a dispute occurred and ‘A’ went to the court to specifically enforce the contract, the court denied it. Interestingly, the court refused the bill for specific performance on grounds of inter alia, lack of mutuality. It held that, because ‘A’ had the right to terminate the contract at any point, any decree against ‘A’ in such a setting would be redundant as he has the power to nullify the court’s decree by exercising his right to terminate the contract. Therefore, equity would demand, that “when a particular contract is not capable of being enforced against one party, that particular party should be equally incapable of specifically enforcing it against the other party.”

Justice Lowell’s Criticism of Marble co. vs. Ripply

Justice Lowell in Singer Sewing Machine Co. vs. The Union Button Hole Co.(1873) expressed his disapproval of the interpretation of Marble co. vs Ripply and held that the Court in that case never “intended to announce any general proposition that they would never enforce a contract in which one party had a right to put an end to in a year”. He further opined, relying on old English cases of Hills vs. Croll and Rolfe vs. Rolfe, that just because the plaintiff possesses an option to terminate the contract, this per se, would not defeat the plaintiff’s right to specific performance if he would be otherwise entitled thereto. However, it is pertinent to note here that none of the two cases directly deal with the present question. In the first case, although the court did not grant specific performance, it did hold that the parties were bound to the contract and that one of them could not, within the four corners of the terms of the contract, end his obligations. The latter case, however, presented a more interesting argument. The court in that case held that it would regard the contract presented before it as “divisible” and then it refused, in express terms, to even consider before them the part of the contract in which the plaintiff seemed to have his option of terminating his obligations. Moreover, while discussing this particular “power to terminate”, scholars have argued that it must not be understood in the conventional sense of being empowered by the contract to do so, but in the manner that a court of equity will not be able to compel the plaintiff if he decided to not fulfil his obligations.

In discussing the thread of divergence from Marble Co. v. Ripply, it becomes imperative to mention Franklin Telegraph Co. vs. Harrison(1892), in which the Supreme Court of the United States is believed to have unconsciously reversed the holding of Marble Co. v. Ripply. The Supreme Court herein, affirmed the decree passed by the District Court, wherein it allowed specific performance at the instance of a plaintiff who had an option to terminate the contract at a year’s notice. Interestingly, even though it came after 22 years of Marble Co. v. Ripply, neither the court, nor the counsel, said a word about “lack of mutuality” in the contract because of the existence of such an option to terminate. Surprisingly, this decree was affirmed by the Supreme Court.

The Principle of Rust vs. Conard

An alteration in the approach was made by Rust vs. Conard where the court did agree to the fact that it is not wise for the court to grant specific performance in cases wherein the other party possess the legal means to nullify the courts decree. However, after conceding to this, the court went on to limit the application of this rule. It categorically held that, this rule, would not apply in cases wherein the option that the plaintiff has vis-à-vis terminating the contract is so limited, that even after the plaintiff serves the notice of termination, there still exists a possibility that the defendant can bring in a bill of specific performance to compel the plaintiff to perform his obligations ‘up to the time the contract comes to an end’ because of the plaintiffs notice.

Application of the Principle of Rust vs. Conard on the Fact Pattern of Marble Co. vs. Ripply: Fulfilment of ‘Unexecuted Covenants’

Both these cases denied specific performance on the ground of lack of mutuality. However, if one applies the reasoning vis-a-vis “limited option of termination” that Rust vs Conard propounded, on the facts of Marble co. vs Ripply, the outcome shall be totally different. It must be recalled, that the contract had given Ripply a very limited option to terminate it i.e. he could simply not terminate it as and when he pleased. The contract would be terminated after a year from when he expressed his intentions to terminate the same. Therefore, scholars have argued that the proposition by the court that it could not specifically enforce the contract because the plaintiff had with him the power to terminate the contract at any time he wanted, is not strictly accurate. Legally, the plaintiff was bound to the contract for at least another year, even after serving a notice of termination of the contract. This gives rise to the concept of ‘unexecuted covenants’. Therefore, on application of the principle given by Rust vs Conard, it can be said that the termination option was so limited that it could have allowed specific performance of the unexecuted covenants of the parties till the time the contract effectively came to an end.

Lack of mutuality ‘in the Remedy’ vs. ‘Infirmity’ in the contract

Although both of them do share similar colours, the defence of lack of mutuality in the remedy is not identical to the defence that the court will not grant specific performance because the plaintiff could terminate the contract. In the former, the plaintiff is denied relief because if the courts compel the defendant to perform his promise, they could not then turn around to and make the plaintiff perform his part, and such is the case, not because there does not exist any unexecuted covenant to perform, but because of the nature of the acts that he has to perform. For instance- Y contracts to convey his land to X, and X in return for this will perform some personal service for Y. Now, X cannot specifically enforce Y to convey his land owing to lack of mutuality in the remedy. This is because even if the court compels Y to give his land, they cannot, if after the conveyance X refuses to do his part, compel X to perform his services to Y.

However, where there exists a provision to end the contract on no notice (or for that matter- a short notice) then the courts agree not to provide relief to the defendant because it assumes that the parties had themselves, agreed on this condition that upon the serving of the notice of termination, the contract should cease to exist between them. Consequently, the courts do not enforce any contract because none exists. This phenomenon could be termed as an “infirmity” in the contract itself and hence, it is probable that the defence flack of mutuality may never be raised in a situation involving power to terminate the contract.

Textual interpretation vs Contextual Interpretation

Extending the example taken in the previous section of Y conveying his land to X, if the court forces Y to convey his land to X, the court will just be enforcing a fair contract. No injustice is seem to be done because had he been an honest man and lived up to his promise, he would already have been under this situation in which the court is placing him now. Therefore, the question is that why should the court hesitate to put the delinquent defendant in a position, in which he expressly agreed to place himself under the contract?

This argument has received criticism where authors have said that it is forcible and shallow because it limits itself to the text of the contract rather than considering the situation as a whole when there is a dispute. The future considerations for the defendant should be kept in mind by the court because even though the defendant has willingly broken the contract, he must not be treated like an outlaw who has forfeited all claims to justice. Therefore, there exists an element of hardship in forcing the defendant to live up to the terms of the bargain without assuring him performance from the plaintiff’s side and in some cases, this hardship is so severe, that it even justifies denial of specific performance.

Changing conceptions of Mutuality

The modern conception of mutuality starkly differs from the manner in which the theory of mutuality has been talked about in these 18th & 19th centaury judgements. Such judgements have employed the term “want of mutuality” to give us the sense of the ‘inequitableness’ involved, which could be traced back to two primary reasons viz. a) perpetual nature of the defendant obligation as he is obliged to provide his services till the plaintiff choses to accept and b) the power of the plaintiff to terminate the contract. Contrary to this, the modern understanding of principle of mutuality concerns itself with mutual performance of mutual obligations and talks nothing about equality of remedy or inequitableness of the bargain.

Conclusion

Contemporary scholarship has suggested that the doctrine of mutuality has the character of a sanctuary for contract breakers. However, as it has been demonstrated, that the entire scheme of things is not as simple as it is stated to be. There are layers of complexities involved which pose fundamental questions at many levels; want of mutuality, execution of unexecuted covenants, infirmity in the contract etc. The application of the principle of Rust vs Conard also makes the situation complex by specifically performing a contract which has a termination clause. The courts should consider these alternative possibilities while handling such cases rather than turning a blind eye to them and repeatedly reject specific performance claims only because the contract had a termination clause. Courts need to go beyond this and test the equities of the parties. It is conceded that not doing so gives certainty to the decisions, but then in words of Justice Christiancy, “Certainty, it is true, will thus be attained, but it would be a certainty of injustice”. Therefore, though the alternative arguments may be vague and uncertain in some cases, but when certainty demands the elimination of flexibility and discretion from equitable remedies, the price one has to pay for it is far too great.