This article is written by Shayoni Mehta, pursuing Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com. Here she discusses perpetual contract in India.
What is a Contract?
A Contract has been defined under Section 2(h) 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 an offer by one party and its acceptance by 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) 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 circumstances 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.
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.
For example, for an Athlete, an indefinite duration contract might be considered valid so long as the Athlete is healthy and of the age and condition that is reasonable for their sport. Thus, it usually depends on each individual agreement as to how a court will interpret its actual duration.
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.
Case Laws on Public Policy
Central Inland Water Transport Corporation Ltd. V Brojo Nath
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 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
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.
Commercial Contracts can never be in Perpetuity
M/s. Unikal Bottlers Ltd.v. M/s. Dhillon Kool Drinks
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.“
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 land is given to a person in accordance with the provisions of the Urban Land Ceiling & Regulation Act, 1976. 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. & Ors Vs. Lalji Tandon
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 of Purushottam Das Tandon & Ors., 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.
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.
Taneja Bibi V. Barjul Sheikh
In this case, it was held that a Muslim Marriage is considered to be 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.
Perpetual contracts are not considered as legal when it comes to the Transfer of Property Law but they are legal for lease agreements.
- LaMance, K. (2018, May 06). Contracts for Indefinite Duration. Retrieved from https://www.legalmatch.com/law-library/article/contracts-for-indefinite-duration.html
- Public Policy In Contracts: Recent Trends. (2015, January 30). Retrieved from https://www.lawctopus.com/academike/public-policy-contracts-recent-trends/
- A.I.R 1986 S.C 1571.
- Retrieved June 28, 2019, from http://www.legalservicesindia.com/article/2477/Rule-Against-Perpetuity.html
- AIR 2000 Delhi 452
- Retrieved from https://indiankanoon.org/doc/1029735/
- [20 03] Insc 548 (3 November 2003).
- Monika. (2019, April 10). What is Perpetual Contract? Retrieved from https://blog.ipleaders.in/perpetual-contract/
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