Restrictive Covenants: The Lack of an Effective Remedy in India

Abstract

Grant of damages in case of restrictive covenants is an important issue plaguing commercial contracts in India. This paper attempts to explore the best possible practices to resolve this issue, through a detailed analysis of various Indian and Foreign case laws. Various sections of the Specific Relief Act 1963, deal with the necessary remedies to protect parties against contractual breaches such as section 38, which allows for Specific Performance and section 42 for Injunctions in the case of Negative Covenants, it curiously excludes the latter from eligibility for damages under section 40 of the Act. This has led to a scenario wherein, while breach of positive covenants (“agreement to do something or perform an obligation”) are remedied through grant of damages; negative (restrictive) covenants (“agreement not to do something”) have no similar remedy, leaving parties only entitled to nominal damages. The argument supporting this discrimination is that damages cannot be quantified in the case of breach of negative covenants, however, developments in the common law jurisprudence have found a unique solution. The landmark decision of the House of Lords in the Wrotham Park case, supported by subsequent decisions has crystallized certain principles to be followed in this regard. It is time India also adopted these changes to adhere to International best practices, given our recent push towards foreign investment.