WHAT IS A CONTRACT?
A Contract has been defined under Section 2(h)[1] of the Indian Contract Act, 1872. A contract is an oral or written agreement enforceable by law. Two necessary conditions are that there should be anofferby one party and itsacceptanceby others.
WHAT IS AN AGREEMENT?
An Agreement is an arrangement between the parties which are negotiated and are typically enforceable. All Contracts are Agreements, but all Agreements are not contracts. Agreements are defined under Section 2(e)[2] of the Indian Contract Act, 1872.
In a contract, rights and duties of the parties are determined, duration of the contract, compensation to parties in case of default or breach, jurisdiction, arbitration clause and termination of the contract etc. are some of the main clauses mentioned. A termination clause is very important in a contract as it states the circ*mstances under which a contract can be terminated thereby reducing the risk of arbitrary termination. Usually, a contract can be terminated on the occurrence of a particular event like a breach of any of the clauses or termination without giving any reason.
PERPETUAL CONTRACT
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These are contracts which do not specify the date when the contract will come to an end. Contracts wherein the duration is not specified or is indefinite are those wherein the life of a contract cannot be calculated. It should indicate that both parties are ready to establish a contractual relationship for a long time. Certain examples of contract which do not have a definite duration are contracts for employment, contracts relating to industrial use etc.
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The contract, however:
· Contains certain provisions which are designated "essential terms"
· Includes certain clauses that are expressed as "of the essence"
· States that breach of certain provisions constitutes a repudiation of the agreement
These clauses trigger what is known as "common law rights" pertaining specifically tocontract termination. It can be argued, therefore, that clauses of this nature define the contract's term, even though a term has not been explicitly defined. In this case, the contract is not considered a perpetual contract, even though no term has been specified and it does not specifically outline rights pertaining to termination.
On the other hand, if an agreement specifically defines an initial term but then states the contract will renew automatically at the end of the initial term unless one or more of the involved parties gives a non-renewal notice before the term expires, it would constitute aperpetual contract. In scenarios such as this, unless a non-renewal notice is provided by at least one party within the time frame of the initial term, the contract becomes perpetual at the end of the contract's initial term.
A contract will not be considered as a perpetual contract if there is any clause mentioning the mode of terminating the contract. Even though a contract does not specify when the contract will end but if certain terms in the agreement are considered as ‘essential’which means that performance of the contract is based on these terms, the contract is not considered as perpetual. A contract can be perpetual if the agreement includes a clause regarding renewal of a particular term but after that, if a renewal notice is not given it ceases to be perpetual.
A contract can also be refused to be enforced by the government or Courts if they are against public policy. Even the terms of the contract have been agreed upon by both parties still they would not be enforced if the terms are not reasonable and opposed to public policy and merely because they were printed on the reverse of a bill or a receipt or have been expressly or impliedly agreed upon between the parties.
WHEN CAN PERPETUAL CONTRACTS BE TERMINATED?
When a contract can be considered perpetual, whether it can be terminated on the basis of notice depends on whether the contract contains any kind of implied term pertaining to termination. This requires the subject matter included in the contract to be closely examined, including the circ*mstances under which the agreement was made and any provisions to which the involved parties did or didn't agree. In most cases, because of thefreedom of contract, the courts are reluctant to imply terms into an agreement based on their views regarding what the involved parties should or should not have considered when the contract was originally created.
If the contract in question, however, is a commercial agreement, courts are normally compelled to conclude that all involved parties must have had the intention that the agreement is terminable because of the nature of the business relationship to which the contract pertains. Accordingly, the courts are normally going to imply rights of termination if a notice is given. The basis for implying these rights, however, might not arise until the contract has been in existence for what can be considered a "reasonable period of time."
Generally speaking, if the parties involved are in the beginning stages of forming an agreement and one or more parties has invested time or money in efforts that support the development of a business, it stands to reason that both parties have a reasonable expectation for the contract to continue for at least as long as it would typically take for the investing party to recoup his or her investment. Once a business has existed for what can be considered a reasonable amount of time, the lack of ability to profit from investments of this nature may be considered a business risk as it relates to entering contracts that carry implied termination rights.
This means, in simple terms, that once a contract has existed for a reasonable amount of time, any party who wishes to terminate is entitled to do so, as long as he or she provides proper notice to the other parties involved in the agreement. However, whether the contract in question is required to have continued for a reasonable amount of time is a matter that needs to be determined regarding the context of the contract.
ENFORCEABILITY
According toSection 14(1)(d)[3] of Specific Relief Act 1963, a contract which is capable of being ended under given conditions cannot be specifically enforced. Further, section 41 (e)[4] of the Specific Relief Act 1963 specifies that temporary restrained on a contract cannot be granted on the contract which is not specifically enforced.
· InIndian Oil Corporation Ltd v. Amritsar Gas Service and Ors[5]. the Supreme Court has widened the term “determinable”. The Supreme Court, in this case, held that terms of the contract are such which is determinable, therefore the party cannot claim specific relief.
· In another case,Rajasthan Breweries v. Stroh Breweries[6](2000), the Delhi High Court states that the contract can be terminated if there is any clause mentioned, specifying the termination and also the contract can be terminated by given notice. If the contract is contrary to the law then the only way left to the party affected is to get compensation.
· In the case ofTurnaround Logistics (Pvt.) Ltd v. Jet Airways[7](2006)the Delhi Court held that the term “determinable” also means that the contract can be terminated.
LEASE: WHETHER A PERPETUAL CONTRACT OR NOT?
A perpetual lease is an agreement where the land is allotted to a person over state land. A person who is holding the property is responsible for the terms and conditions laid down under the deed, failing which amounts its termination from the land.
Perpetual leases are always issued for some defining purpose laid down is basically issued for the agricultural or commercial purpose. The perpetual lease can also be issued for some other purposes required the sign of other authorities and the person taking perpetual lease disclosed the purpose he wants to issue for.
Case Laws
(a) State of U.P. & Ors Vs. Lalji Tandon[8] -In this case,the land which is in question in the suit was given on 50 years lease. The terms of the lease are such contains the clause for renewal of the lease for another 50 years with the same conditions and terms. The High Court in instant took a reference of Purushottam Das Tandon & Ors[9]., in which Purushottam Das was holding the Lease on the same terms and conditions as held by Respondent. The High Court, in that case, held that State Government of UP was bound to renew the leasehold Purushottam Das in accordance with the Covenant for renewal. The Division Bench also laid down following proposition –
(1st) In India, there is no law which prohibits a perpetual lease, the language of the terms plays an important part on this point.
(2nd) to find an answer to the question whether a covenant for renewal contained in the lease deed construed properly and in its real context, entitles the tenant to continue as long as he chooses by exercising the option of renewal at the end of each successive period of 5 years subject to the same terms and conditions depends on the deed of lease being read as a whole and an effort made to ascertain the intention of the parties while entering into the contract. No single clause or term should be read in isolation so as to defeat other clauses. The interpretation must be reasonable, harmonious and be deduced from the language of the document.
(3rd) If there is a clause specified for the renewal of the lease then the lease will get renewed, but it cannot be renewed for the second or the third time.
(b) Sh. Mohinder Pal Singh Khurana & … vs M/S. Modi Alkalies & Chemicals[10] … In this case, Observing that absence of a specified period of time in the lease deed cannot be termed as ‘perpetual’ (permanent) tenancy,JusticeManmohan Singhsaid that even if no right is mentioned in a deed for terminating the deed, such a right has existed in the hands of landlord. This does not the lease is a perpetual in nature it can be terminated.Referring the provisions given in Transfer of Property Act[11], the court said: “Unless there is a contract to the which specifically mentioned that the Lessor (owner) has no right to terminate the tenancy, the Lessor has a right to terminate any tenancy and such a right is given by the Law”
Case Laws on Public Policy
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Central Inland Water Transport Corporation Ltd. V Brojo Nath[12]
The contract of employment had a clause that the employee’s services can be terminated by giving 3 month’s salary or a 3 months’ notice. The employment of the respondent Brojo Nath was terminated by giving him 3 months’ salary along with a notice. The Supreme Court found this clause to be unreasonable and that this clause which was under Rule 9 of Service Discipline and Appeals 1979, was against public policy as there was inequality in the bargaining power between parties. Certain contracts which are illegal are those which prejudice public safety, administration of justice, defraud the revenue, leads to corruption etc.
Also section 14[13] of the Transfer of Property Act, 1882 deals with the concept of Rule against Perpetuity.
The reason for such a rule is that it allows the property to circulate which is beneficial to both trade and property. The property remains attached for generations in one family which is not beneficial as the profits on that property can’t be realised and so it also a loss to the society. Free and frequent circulation is important and the policy of the law is to prevent the creation of such perpetuity.
But this rule is not applicable to agreements which are personal i.e. those agreements in which there is no creation of interest in the property. The rule against perpetuities is, not concerned with contracts as such or with contractual rights and obligations as such. Thus a contract to pay money to a person, his heirs or, legal representatives upon a future contingency, which may happen beyond the period prescribed would be perfectly valid.
Rajasthan Breweries v. Stroh Breweries[14]
In this case, the High Court of Delhi held that even if there is no termination clause present, as nature of private commercial transactions and therefore the same can be terminated even without assigning any reason and serving a reasonable notice. If the termination is against the law or the terms in the agreement then compensation can be claimed by the non-terminating party.
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COMMERCIAL CONTRACTS CAN NEVER BE IN PERPETUITY
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M/s. Unikal Bottlers Ltd.v. M/s. Dhillon Kool Drinks[15]
In this case, there was an important interpretation made about the termination clause in the contract. The matter was left open because in that case, parties had entered into a supplemental agreement superseding the original agreement. Moreover, the term of the supplemental agreement was about to expire. In this case, it was also observed that the franchise cannot be made to stick to a party which does not come up to its standard and in the process ruin its goodwill and brand name. For these reasons commercial contracts can never be in perpetuity and even if in a contract there is no termination clause, the contract will be allowed to be terminated through a reasonable notice if the power to terminate is sought to be exercised bonafide.
Taneja Bibi V. Barjul Sheikh[16]
In this case, it was held that a Muslim Marriage is a contract and therefore considered as a perpetual contract. Muslim marriage being a contract entered by both the parties is a perpetual contract subject to certain conditions like in Shia law, if a man marries a woman undergoing Iddat, the marriage would be void according to the provisions but at the same instance if sexual intercourse has taken place, there would be perpetual prohibition between the parties.
Lease
A lease is a contract whereby one party gives (gives on rent) any property, land or services to another party for a specified time in return of payment. The agreement can also be terminated for any breach or default in the terms and conditions in the deed. Basically, it is given for agricultural and commercial purposes but permission is required for acquiring the perpetual lease for any other purposes.
State of U.P. amp; Ors Vs. Lalji Tandon[17]
In this case, the land which is in question in the suit was given on 50 years lease. The terms of the lease are such contains the clause for renewal of the lease for another 50 years with the same conditions and terms. Therefore, referring the case ofState of. U.P. & Ors. Vs.Purshottam Das Tandon & Ors[18], the division bench held that: There is no prohibition for a perpetual lease. It depends upon the language of the clause. No single clause or term should be read in isolation so as to defeat other clauses. The interpretation must be reasonable, harmonious and be deduced from the language of the document. If there is a clause specified for the renewal of the lease then the lease will get renewed, but it cannot be renewed for the second or the third time.
People can also get confused between perpetual Lease and Sale. In the perpetual Lease, the ownership of property is with the person giving the property on the lease (lessor) but the right of renewal is with the person taking lease (lessee). While in sale the ownership is transferred from the seller to the buyer. Therefore the buyer can do anything with the property but in the Perpetual Lease, the lessee can make certain modifications in the property but cannot sell it.
CONCLUSION
Whether a contract is perpetual or not depends upon the clauses therein and differs from contract to contract. The term perpetuity does not have a perfect definition with respect to contracts. It can be for a definite period as well.
Therefore, it is clear from the above case laws and provisions that the contract entered between the parties has an expiry time limit, it cannot be for a longer duration.
It can be concluded that the perpetuity does not find its place in its literal meaning. A person can enter a perpetuity contract, not for his course of life only for, some specified and reasonable time period. All Contracts entered by the parties i.e. Commercial contract, Rent agreement, lease agreement etc. However, Muslim marriage being a contract entered by the both parties is a perpetual contract subject to certain conditions.
Therefore, it is clear from the above case laws and provisions that the contract entered between the parties has an expiry time limit, it cannot be for a longer duration.
Perpetual contracts are not considered as legal when it comes to the Transfer of Property Law but they are legal for lease agreements.
[1]An agreement enforceable by law is a contract;
[2]Every promise and every set of promises, forming the consideration for each other, is an agreement;
[3] Contracts not specifically enforceable.—
(1) The following contracts cannot be specifically enforced, namely:—
(a) a contract for the non-performance of which compensation in money is an adequate relief
(b) a contract which runs into such minute or numerous details or which is so dependent on the personal qualifications or volition of the parties, or otherwise from its nature is such, that the court cannot enforce specific performance of its material terms
(c) a contract which is in its nature determinable
(d) a contract the performance of which involves the performance of a continuous duty which the court cannot supervise.
(2) Save as provided by the Arbitration Act, 1940 (10 of 1940), no contract to refer present or future differences to arbitration shall be specifically enforced; but if any person who has made such a contract (other than an arbitration agreement to which the provisions of the said Act apply) and has refused to perform it, sues in respect of any subject which he has contracted to refer, the existence of such contract shall bar the suit.
(3) Notwithstanding anything contained in clause (a) or clause (c) or clause (d) of sub-section (1), the court may enforce specific performance in the following cases:—
(a) where the suit is for the enforcement of a contract,—
(i) to execute a mortgage or furnish any other security for securing the repayment of any loan which the borrower is not willing to repay at once: Provided that where only a part of the loan has been advanced the lendor is willing to advance the remaining part of the loan in terms of the contract; or
(ii) to take up and pay for any debentures of a company;
(b) where the suit is for,—
(i) the execution of a formal deed of partnership, the parties having commenced to carry on the business of the partnership; or
(ii) the purchase of a share of a partner in a firm;
(c) where the suit is for the enforcement of a contract for the construction of any building or the execution of any other work on land: Provided that the following conditions are fulfilled, namely:—
(i) the building or other work is described in the contract in terms sufficiently precise to enable the court to determine the exact nature of the building or work;
(ii) the plaintiff has a substantial interest in the performance of the contract and the interest is of such a nature that compensation in money for non-performance of the contract is not an adequate relief; and
(iii) the defendant has, in pursuance of the contract, obtained possession of the whole or any part of the land on which the building is to be constructed or other work is to be executed.
[4]Injunction when refused.—An injunction cannot be granted—
(a) to restrain any person from prosecuting a judicial proceeding pending at the institution of the suit in which the injunction is sought, unless such restraint is necessary to prevent a multiplicity of proceedings;
(b) to restrain any person from instituting or prosecuting any proceeding in a court not subordinate to that from which the injunction is sought;
(c) to restrain any person from applying to any legislative body;
(d) to restrain any person from instituting or prosecuting any proceeding in a criminal matter;
(e) to prevent the breach of a contract the performance of which would not be specifically enforced;
(f) to prevent, on the ground of nuisance, an act of which it is not reasonably clear that it will be a nuisance;
(g) to prevent a continuing breach in which the plaintiff has acquiesced;
(h) when equally efficacious relief can certainly be obtained by any other usual mode of proceeding except in case of breach of trust;
(ha) if it would impede or delay the progress or completion of any infrastructure project or interfere with the continued provision of relevant facility related thereto or services being the subject matter of such project.
(i) when the conduct of the plaintiff or his agents has been such as to disentitle him to be the assistance of the court;
(j) when the plaintiff has no personal interest in the matter.
[5] 1990 SCR, Supl. (3) 196 1991 SCC (1) 533
[6] AIR 2000 Delhi 450, 2000 (3) ARBLR 509 Delhi, 2000 (55) DRJ 68
[7]CS(OS) 574/2006
[8] [20 03] Insc 548 (3 November 2003)
[9] AIR 1987 Allahabad HC
[10]CS (OS) No. 131/2005 [11] Section 106 of the Transfer of Property Act - Duration of certain leases in absence of written contract or local usage.—
(1) In the absence of a contract or local law or usage to the contrary, a lease of immovable property for agricultural or manufacturing purposes shall be deemed to be a lease from year to year, terminable, on the part of either lessor or lessee, by six months' notice; and a lease of immovable property for any other purpose shall be deemed to be a lease from month to month, terminable, on the part of either lessor or lessee, by fifteen days' notice.
(2) Notwithstanding anything contained in any other law for the time being in force, the period mentioned in sub-section (1) shall commence from the date of receipt of notice.
(3) A notice under sub-section (1) shall not be deemed to be invalid merely because the period mentioned therein falls short of the period specified under that sub-section, where a suit or proceeding is filed after the expiry of the period mentioned in that sub-section.
(4) Every notice under sub-section (1) must be in writing, signed by or on behalf of the person giving it, and either be sent by post to the party who is intended to be bound by it or be tendered or delivered personally to such party, or to one of his family or servants at his residence, or (if such tender or delivery is not practicable) affixed to a conspicuous part of the property.
[12] A.I.R 1986 S.C 1571
[13] Rule against, perpetuity - No transfer of property can operate to create an interest which is to take effect after the lifetime of one or more persons living at the date of such transfer, and the minority of some person who shall be in existence at the expiration of that period, and to whom, if he attains full age, the interest created is to belong.
[14] AIR 2000 Delhi 452
[15]AIR 1995 Del 25
[16] LAWS (CAL) – 1986 – 7 – 71
[17] [20 03] Insc 548 (3 November 2003)
[18] 1989 Supp.(2). SCC 412
