MARATHWADA MITRA MANDAL’S

SHANKARRAO CHAVAN LAW COLLEGE, PUNE

Law of Contract – General Principals

SUBMISSION OF SEMINAR PAPER

(LL.M. 1ST YEAR)

SEMESTER – II

TITLE

TITLE OF THE TOPIC :- SUBSTITUTED PERFORMANCE IN CONTRACT LAW:

AN ANALYSIS

SUBMITTED TO :-

Dr. Nalini Ambad

Faculty In-Charge

SUBMITTED BY :-

Adv. Jigar Ranjit Jadav

Roll No. 61

Savitribai Phule Pune University, Pune – 411007.

1|Page
 Abstract
“A 'performance' specification is one that focuses on the function of the product or service
required”
One of the most prominent clauses in Government contracts is the risk purchase or the risk
and cost clause. This authorises the promisee to get the promise fulfilled either by itself or
through a third person in case of the promisor’s default and allows the promisee to be
compensated for the increased costs and effort. Till now, the legal framework of such risk
and cost contracting was not clear, leading to difference in decisions in courts and arbitral
tribunals on various aspects of risk and cost contracting. Now, the Parliament has attempted
to lay down the framework for such risk and cost contracting under the rubric of “substituted
performance” by enacting the Specific Relief (Amendment) Act, 2018. This paper analyses
the law on the subject and evaluates the provisions in the said Act. It concludes by providing
suggestions to contract drafters on how to modify their existing risk and cost contracting
clauses and to courts on how best to construe Section 20 to ensure consonance with the
salutary objectives behind enactment of the amendments.
Key Words :- Promise, Promisee, Contract, Specific Relief, Amendments.

Introduction
Risk and cost clauses in contracts are in use in India for a long time. This clauses enables the
promisee to complete the complete the contractual obligations left unfulfilled by the promisor
and entitles the promisee to claim the increase in cost of such completion from the promisor.
Till now, the statutory framework of such risk and cost contracting was not clear, leading to
difference in decisions in courts and arbitral tribunals on various aspects of risk and cost
contracting. Further, the absence of risk and cost contracting or substituted performance as a
substantive right meant that the promisee could undertake it only as a matter of contract.
Substituted performance offers two benefits to the promisee. It puts the promisee in a position
as if the contract is performed. This is the objective of awarding damages under contract law.
The second benefit is that it provides a concrete method to compute losses suffered owing to
non-performance or failure by the promisor to perform the contract. Instead of proving the
market price as on the date of breach, the damages is computed as the cost and expenses
incurred in completing the contract over and above the costs and expenses that the promisee
would have incurred had the promisor duly performed the contract.
It is therefore a right move on the part of the Government to introduce these amendments.
However, the amendment does not address all issues relating to substituted performance nor
does it clarify the law or make it more certain. This short paper discusses the newly
introduced provisions on substituted performance and its implications. It concludes by
providing suggestions to contract drafters on how to modify their existing risk and cost
contracting clauses and to courts on how best to construe Section 20 to ensure consonance
with the salutary objectives behind enactment of the amendments.

2|Page
Report of the Expert Committee
The Government of India constituted a committee of experts 1 (Expert Committee) to
recommend reforms to the Specific Relief Act, 1963 (Specific Relief Act) with a view to
bring the law to the present scenario2. The Expert Committee submitted its report in May
2016 suggesting a slew of amendments to the Specific Relief Act.3 The Committee advised
introducing a new section on substituted performance. The Committee’s recommendations as
regards substituted performance are summarised below:

 The law should encourage the victim to complete the unfulfilled contract by
completing it leaving him free to claim compensation for losses suffered. Substituted
performance, that is, performance through a third party, will achieve nearly the same
result as specific performance.
 Substituted performance, or the right to cover, is recognised by some systems of law
expressly while in India, it is a matter of contract. Substituted performance should be
recognised as a substantive right.
 In India, the promisee is not prohibited from recovering compensation for the excess
costs incurred under Section 73. In such cases, the cost of curing defects or failures by
the perpetrator is also recoverable. Parties can also agree to a “risk and cost” clause.
However, these are subject to the principles of foreseeability and mitigation and
therefore the promisee may not be able to be compensated for the losses incurred.
 If there is an express right recognised, the promisee will be able to obtain cover and
complete the contract with confidence. Instead of suing the perpetrator for specific
performance and wait till the decree, he can get the contract performed through
substituted performance.
 If such a right exists, the promisor will himself perform the contract. But since there is
a possibility of abuse by the promisee of this provision, the promisor may be afforded
an opportunity by the promisee to cure the breaches through a notice about the cost of
substituted performance that the promisor might have to bear. The notice period will
also allow the parties to attempt to renegotiate the contract to their mutual advantage,
which will prevent litigation and complete the contract.


1
The Expert Committee consisted of (1) Mr. Anand Desai, Managing Partner, DSK Legal, New Delhi -Chairperson; (2) Mr. Amit Kapur,
Senior Partner, J. Sagar Associates, New Delhi - Member; (3) Mr. Akshay Chudasama, Managing Partner - West, Shardul Amarchand
Mangaldas & Co., New Delhi - Member; (4) Dr. Arghya Sengupta, Vidhi Centre for Legal Policy, New Delhi - Member; (5) Dr. Nilima
Bhadbhade, Associate Professor, ILS Law College, Pune- Member; and (6) Dr. Mukulita Vijayawargiya, Additional Secretary, Legislative
Department, Ministry of Law and Justice – Member Secretary. This paper was presented in the 4th International Conference on International
and Domestic Arbitration: Current Scenario and Way Ahead (Chennai, India, 26-27 October 2018).

2
The Law Commission of India had suggested reforms to the said Act previously in the Law Commission’s 147th Report. See,
Commission of India, One Hundred & Forty Seventh Report on the Specific Relief Act, 1963 (1993), available at

3
Government of India: Ministry of Law & Justice, Report of the Expert Committee on Specific Relief Act, 1963 (26 May 2016), available
at https://drive.google.com/file/d/0B-ZUXtJuPbi3ak0wbENVdUdjQTZWcTNQSW5vNWpUSWVNYnc0/view?usp=sharing (accessed on
25 August 2018).

3|Page
  The victim shall issue notice to the perpetrator and calling upon him to complete
performance and about the cost or expenses for getting it done from a third party. In
case of failure by the perpetrator, the victim has to complete the contracts, prove the
contractual breach, the expenses and costs incurred and reasonableness of such
amounts.
 Once such a notice is given the amount claimed in the notice would be deemed to be
reasonable if actually spent or suffered. One who seeks compensation for substituted
performance cannot claim specific performance or injunction.
 Based on the above, the Committee recommended insertion of Section 20A to the
Specific Relief Act, 1963. The following are the features of the proposed Section
20A:
 The victim of the breach shall be entitled to substituted performance without court
intervention and to recover the additional cost and expense on substituted
performance from the perpetrator.
 This shall be subject to the terms of the contract but shall be irrespective of the
provisions in the Indian Contract Act, 1872 (“Contract Act”).
 In order to exercise the right, the victim has to give a reasonable notice in writing to
the perpetrator to perform the contract.
 The victim has to perform the contract by himself or through another person within
reasonable time after notice and the expenses and costs incurred to complete the
contract should be reasonable.
 If the estimate of expenses and costs for completing the contract is specified in the
notice to be given to the perpetrator, the said amount to the extent actually incurred
shall be presumed to be reasonable.
 The right to recover expenses and costs from substituted performance shall be in
addition to the right to compensation the loss as provided in Section 21 of the Specific
Relief Act and in the Contract Act.
 A party who has exercised the right of substituted performance shall not be entitled to
specific performance or injunction for the performance of the contract.

Thereafter, the Government introduced the Specific Relief (Amendment) Bill, 2018 in the
Lok Sabha on 22.12.2017. It was passed in the Lok Sabha on 15.03.2018 and in the Rajya
Sabha on 23.07.2018. The Bill was assented to on 01.08.2018 and published in the Official
Gazette.

The Specific Relief (Amendment) Act, 2018

The Statement of Objects & Reasons to the Bill introduced to amend the Specific Relief Act
stated that the Bill proposed that substituted performance was to be an alternative to the
victim of the breach and did not prohibit receipt of compensation from the perpetrator. On
Section 10 of the Specific Relief (Amendment) Act, 2018 substitutes the existing Section 20
with a new Section 20 containing four sub-sections. Section 20 is titled “Substituted
performance of contract”. Section 20(1) states that where the contract is broken due to non-
performance of promise by any party, the victim of the breach shall have the option of
4|Page
substituted performance through a third party or by the victim’s own agency. It further states
that the victim can recover the expenses and other costs actually incurred, spent or suffered
by him, from the party committing such breach.
Section 20(2) proscribes substituted performance without complying with the below
conditions:
 The victim has to give a written notice of a minimum of thirty days to the perpetrator
of breach.
 The notice should call upon the perpetrator to perform the contract within time
specified in the notice, which shall not be less than thirty days.
 The perpetrator should have refused or failed to perform the contract within such time

On satisfaction of the above conditions, the victim can get the contract performed through a
third party or by his own agency. The proviso to Section 20(2) clarifies that unless the
contract is performed through a third party or by his own agency, the victim will not be
entitled to recover the expenses and costs mentioned in Section 20(1). Section 20(3) talks
about events happening after the completion of the work by the third party or by the victim. It
states that once this happens, the victim cannot claim specific performance. Section 20(4)
states that the right of substituted performance will not prevent the victim from claiming
compensation from the perpetrator for loss caused to the breach. The mitigation obligation is
not an affirmative defence of the perpetrator against the claim of damages but is only a
ground to seek lesser damages than what the promisee would otherwise be entitled to. 4

Absence of Presumption of Reasonableness

A comparison of the provisions in the Expert Committee Report and the amended Section 20
show many variations in the latter. The Report recommended that if the victim stated the
estimated costs and expenses for completing the contract, the court shall be obligated to draw
a presumption of reasonableness if the said estimate is actually incurred. This provision has
not been retained in the Act. Therefore, if the perpetrator of breach disputes the amount, the
victim has to prove that the costs and expenses were actually incurred by the victim.
The amended Section 20 does not speak of reasonableness. Considering the context, that is,
the Expert Committee’s recommendation of reasonableness, the reasonableness requirement
is conspicuous by its absence. Does it mean that the reasonableness requirement does not
exist anymore? For instance, if the cost of completing the unfinished work as on 1 September
2018 is Rs. 1 crore, can the victim award a contract on 1 August 2020 on a third party to
complete the unfinished work for Rs. 4 crores? The new Section 20 does not provide direct
answers to these aspects.
Nevertheless, Section 20(1) begins with the phrase “without prejudice to the generality of the
provisions contained in the Indian Contract Act, 1872”. This means that the Contract Act,
including Section 73 thereof would apply unless excluded by the provision. The costs and
expenses that Section 73 talk of are nothing but species of “losses” contemplated by Section
73. Explanation to Section 73 of the Contract Act reads: “In estimating the loss or damage

4
See, M Lachia Setty v. The Coffee Board Bangalore AIR 1981 SC 162

5|Page
arising from a breach of contract, the means which existed of remedying the inconvenience
caused by the non-performance of the contract must be taken into account.” A combined
reading of all these aspects would go to show that substituted performance should be done in
a reasonable time. Therefore the jurisprudence regarding mitigation obligations in risk and
cost contracting / risk purchase would continue to apply.

Time Limits
The above conclusion that the jurisprudence pertaining to mitigation obligations as per
Section 73 would apply to substituted performance necessary means that the substituted
performance has to be within a reasonable time.5 What is reasonable time may differ from
case-to-case and may depend on many factors such as the time required for measurement of
works completed, the nature of the promisee- government or otherwise, etc. In case the
promisee is a government entity, public auction is the norm and therefore reasonable time
might imply that the government organisation takes time to invite tenders. It should also be
borne in mind that the government entity might invite bids even before the expiry of the thirty
day period. This should not be construed as a premature action disentitling substituted
performance. What is material is whether the contract pursuant to the notice inviting tender is
awarded or not. Therefore, it would be permissible for the government entity to invite tenders
for substituted performance even before the cure period. If the promisee performs the contract
within the cure period, the government entity can cancel the tendering process. This will have
the advantage of saving time for the government entity and will only be advantageous to the
perpetrator as the cost of performance might be relatively lesser than if it is performed
subsequently. However, the time limit should not be unreasonable.

The relevant time periods are the end of the 30 days’ cure period as provided in Section 20(2)
and the finalisation of prices for the substituted contract. It is of course true that the costs and
expenses that can be recovered would be those finalised at the beginning of the substituted
contract but the right to recover would accrue only on the completion of the contract, as per
proviso to Section 20(2). This might have an impact on the limitation period, which will
begin to run from the date of completion of the contract, if not from the date on which the
promisee incurred the last expense/ cost for completing the contract.

Equivalence of Terms, Quantities, and Specifications

Substituted performance necessarily means that the victim either performs the contract
(usually in services) or obtains performance through third parties. This entails performance of
the unfinished work or supply, as the case may be. In case of private entities, they could
simply call upon another contractor to get the job done. The situation gets complicated where
a government entity is involved, where awarding contracts through public action is the norm.
In those cases, government entities should take care in ensuring that tenders are called for the

5
See, for instance, Delhi State Civil Supplies Corp. Ltd. v. Union of India MANU/DE/6423/2012; Union of India v. The People
Engineering and Motors Works MANU/DE/0178/2010.

6|Page
unfinished work and the cost of completion is precisely known. The jurisprudence regarding
the necessity of equivalence or substantial equivalence would still hold good. 6 6

The equivalence must not just be of form but must be of substance and must be of substantial
effect. For instance, a claim of substituted performance cannot be rejected merely if the
victim of breach changes the terms regarding dispute resolution or such other terms, which
may not have direct effect on the price. Equivalence means that the terms that may have a
direct effect on price should be similar. Sometimes it is argued that if the original contract
was awarded on a particular tendering methodology, the substituted performance should also
be as per the same methodology. This is stretching the mitigation requirement to an
unreasonable level. It is possible that necessity might dictate that the contract must be
completed and therefore the victim might go for a limited tender or even a single tender. In
such cases, it would be the onus of the victim to establish urgency and the court or the
tribunal cannot strike down the claim merely because of the change in methodology of
awarding the contract. Once the promisee shows urgency, the onus would shift on the
perpetrator to show that there was no urgency and that the change in methodology would
have made a difference.

Notice Requirement
Section 20 mandates that a thirty days’ notice is required to enforce the remedy. The Expert
Committee did not recommend this requirement but provided only for “reasonable” notice.
While the thirty days’ cure period in Section 20 might work in contracts of longer duration,
these would not work in short-duration contracts. If the duration of the contract, especially in
case of sale of goods and procurement in the spot market, is short, waiting for thirty days to
exercise this remedy simply does not make commercial sense. Therefore, in cases where the
duration of the contract is three months or less, the time limit should ideally be seven days to
fourteen days. Businesses these days try to follow procurement management techniques like
Just-in-Time and lean inventory. The amended law pegging the cure period at thirty days
does not comport well with these management principles.

6
See, for instance, Union of India v. The People Engineering and Motors Works MANU/DE/0178/2010.; St Gites Company v. Union of
India 59 (1995) DLT 735 MANU/DE/0343/1995; Union of India v. Daisy Trading Corporation 130 (2006) DLT 471:
MANU/DE/8691/2006; Union of India v. Kundra Shoes 2007(2) Arb LR 471 (Delhi): MANU/DE/1457/2007

7|Page
Conclusion
It is expected that questions might arise as to whether Section 20 is a default rule, that is,
whether it can be contracted around, altered or even deleted in an agreement between parties.
There is no reason why Section 20 should be considered as a mandatory rule like, say,
Section 23 of the Contract Act which prohibits agreements with unlawful consideration.
Therefore, such rules should be considered as default rules which parties can contract around,
alter, or even delete in the context of an agreement.
This interpretation is also supported by construing Section 20. Section 20(1) contains the
phrase “except as otherwise agreed upon by the parties”, thereby permitting contractual
alteration. Further, sub-sections (2), (3) and (4) relate expressly or by necessary implication
to the default rule contained in Section 20(1). Even the proviso in Section 20(2) expressly
links it to Section 20(1). Therefore, Section 20 as a whole can be considered as a default rule
and parties can contract around it the way they want to.

Given that Section 20 is a default rule, parties to a contract could agree on a time limit within
which the victim would be entitled to go for substituted performance. This will provide a
definitive dead line for the promisee to enter into the substituted contract and will also protect
the promisor by capping the time lag between the promisor’s refusal and the promisee’s act
of awarding the contract on a third party. The parties could also agree on supervision charges
at 5 to 15% of the value of the substituted contract. 7 While going for substituted performance,
the promisee, especially if it is a government entity, should separately place the notice
inviting bids for substituted performance. Even if the notice is combined with other works or
purchases, the price bid should have a separate column/ entry for price of the substituted
work so that the price for completion thereof is precisely known. As stated before, the
government entity can even invite bids for substituted performance before the expiry of the
cure period but can award the contract only on expiry of the period or refusal by the
perpetrator to perform the contract.

Even if Section 20 can be regarded as a default rule, what is the extent to which the provision
can be contracted around? For instance, can the notice requirement be done away with
completely? Section 20 cannot be construed to afford such an interpretation, unless party
autonomy coupled with necessity clearly convey that parties intended to do away with the
cure period requirement. Take a case where the promisee engages a contractor to complete a
contract within a week with the view to avoid imposition of liquidated damages by the
promisee’s customer. The thirty day cure period requirement in Section 20 would amount to
an infringement on party autonomy, especially in the example discussed above. Courts should
be conscious of this infraction and construe the provision from the perspective of business
efficacy. It is recommended that courts construe the thirty day cure period as directory and
not mandatory in short term contracts (six months and below), where the cure period should
ideally be seven to fourteen days.

7
See, for instance Indian Oil Corporation Limited v. SPS Engineering AIR 2011 SC 987, where the contract provided for 15% as
supervision charges.

8|Page