One of the most prominent clauses in Government contracts in India 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. This presentation was made in the 4th International Conference on International & Domestic Arbitration: Current Scenario & Way Ahead, Chennai, 26-27 October 2018.

1. Substituted
Performance in
Contract Law: An
Analysis
S. Badrinath, LL.M., F.I.I.I., M.C.I.Arb.
Sr. Executive (Law), Bharat Heavy Electricals Ltd.
www.practicalacademic.blogspot.in
lawbadri@gmail.com

2. Synopsis
• What is Substituted Performance?
• Expert Committee on Reforming Specific Relief Act, 1963
• Recommendations on Substituted Performance
• Section 20 as Enacted in the 2018 Amendments
• Issues with Section 20
• Is Section 20 a default rule?
• Conclusion

3. What is Substituted
Performance?
• Fundamental contractual breach
o Abject breach by the Contractor/
o Failure to complete the supply / service
• Victim can get the supply or service completed by a third
party or through own efforts
• Increased costs and expenses suffered can be recovered
• Government contracts: Risk & Cost contracting or risk
purchase.
• Advantages:
o Puts the promisee in a position as if contract is performed
o Ease of assessing losses

4. Expert Committee on
Reforming Specific Relief Act
• Constituted in January 2016 by the Ministry of Law &
Justice
• Consisted of practitioners & academicians
• Submitted Report in May 2016
• Primary aim: to enhance contract enforceability and
World Bank rankings on Ease of Doing Business

5. Committee Recommendations
on Substituted Performance
• Law should encourage victim to complete the contract
breached
• Substituted performance will virtually achieve the same
end as specific performance: put the promisee (victim) in
a position as if contract is performed
• Substituted performance is a matter of contract but
substantive right should be recognised: will enable
victims complete the contract with confidence of
recovery of increased costs

6. Committee Recommendations
on Substituted Performance II
• Safeguards are necessary:
o Perpetrator to be afforded opportunity to cure the breaches
o An estimate of amount to complete should be provided in the notice
calling upon perpetrator to cure
o Amount should be reasonable and can only be claimed after the
completion of contract.
• Specific Relief (Amendment) Act, 2018 came into force
on 1 October 2018
• Section 20 deals with substituted performance

7. Ingredients of Section 20
• Contractual breach due to non-performance
• Victim can complete the contract through his own agency
or through third party
• Victim is entitled to recover expenses and other costs
actually incurred from the perpetrator.
• 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

8. Issues with Section 20
• Section 20 talks of breach due to non-performance. What
about fundamental breach?
• Reasonableness
o Committee Recommendation: likely expenditure to be spelt out in the
notice calling for cure & such estimate was presumed reasonable if
incurred
o Not retained in the 2018 Amendment.
o Does this mean there is no reasonableness requirement?
o No, Section 20 begins with the phrase “without prejudice to the
generality of the provisions contained in the Indian Contract Act, 1872”
o Implications- jurisprudence regarding mitigation obligations and
reasonableness in risk and cost contracting / risk purchase under 1872
Act would apply

9. Issues with Section 20 (II)
• Time limit within which substituted performance is to be
completed
o Not spelt out clearly
o In respect of government entities, public auction is the norm & might
take time
o Reasonable time jurisprudence under the 1872 Act would apply
o Government contracts: Notice inviting tenders can for substituted
performance can be commenced but should not be finalised-
• Saves time
• Is in the interests of the perpetrator.

10. Issues with Section 20 (III)
• 30 Day Cure period
o What about short-term contracts?
o Urgency cases?
o Cure period can be shorter in deserving cases- urgency
• Equivalence of Terms
o jurisprudence regarding equivalence or substantial equivalence would
still hold good
o But equivalence should not be of form but of substantive effect
o Merely if peripheral/ collateral conditions such as dispute resolution are
changed does not mean non-equivalance
o Due to urgency, can adopt a methodology different from original
contract for awarding contracts

11. Whether Section 20 is a
default rule?
• Yes it is: Section 20(1) contains the phrase “except as
otherwise agreed upon by the parties”: implies that
parties can contract around this provision
• Section 20(2), (3) and (4) all relate to 20(1): these
provisions are also default rules
• Issues noted before can be addressed/ clarified in the
contract

12. Conclusion
• Tips while drafting substituted performance clauses
• Time limit for substituted performance
• Administrative/ supervision charges (5 to 15%)
• Notice for cure:
o 14 days in contracts that are between one and six months
o 7 days in contracts whose duration is one month or lesser
• Urgency: lesser time limits
• Mode of recovery

13. Thank you