Corporate Law Dossier

Limitation of Liability

This article looks at some of the key differences between contracts made under Indian law and those made under English law. The articles assume that the reader is familiar with the principles of English contract law, and so in explaining the differences the focus is on the position under Indian law.

This article highlights a number of key differences between specific contract provisions.

Limitations on Liability

A limitation of liability clause is generally valid and enforceable under Indian law, except that limitations on liability arising by reason of death or personal injury, fraud or gross negligence are not enforceable. Additionally the limitation of liability provision must be reasonable and not amount to a penalty to be enforceable. The position is therefore similar to English law.

The ability of a party to claim damages for breach of contract is limited to the actual damages or losses suffered by that party arising from the breach. Section 73 of the Indian Contract Act provides that, in order to recover for breach of contract, the aggrieved party must show that such damage naturally arose in the usual course of things from the breach, or was damage which the parties knew would be likely to result when they made the contract.

However, Section 73 also provides that compensation for loss or damage caused by breach of contract is not to be given for any remote and indirect loss or damage sustained by reason of the breach.
This is different from English law where, although we have the same two types of loss that can be recovered (the two limbs in the case of Hadley –v- Baxendale) we do not have any statutory prohibition on the ability of a party to recover for indirect loss. English law simply relies on the application of the rules of remoteness.

Under English law we are used to describing the second limb of Hadley –v- Baxendale – loss which does not arise naturally from the breach but which must still have been within the reasonable contemplation of the parties when the contract was made – as ‘indirect loss’, but under Indian law it is better not to use that expression in order to avoid classifying the loss as an irrecoverable loss under Section 73, unless that is positively what is intended.

It is worthwhile also reminding ourselves that, under English law, per the British Sugar case, “consequential loss” does not mean loss flowing naturally as a consequence of a breach, which might seem the obvious meaning, but loss ‘over and above that which arises as a direct result of the breach’ (in other words a form of indirect loss), and Indian law views consequential loss in the same way.

Liquidated Damages

Section 74 of the ICA provides that “when a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract ‘reasonable compensation’ not exceeding the amount so named or, as the case may be, the penalty stipulated for.”

As under English law, if the parties have agreed that the sum is a genuine pre-estimate of the loss or damage likely to be suffered then that sum is generally awarded, and the Act is clear that the plaintiff does not have to lead with evidence to prove his actual loss. However, the plaintiff does have to show some legal injury and it is open to the defendant to contend that the reasonable compensation to which the claimant is entitled should be less than the stated amount, which is most likely to be considered by the Courts when it is difficult to show the actual damage suffered by the claimant.

This means that there are circumstances where a liquidated damages provision may be treated as valid, but where the plaintiff still might not recover the specified amount but may instead receive a level of reasonable compensation as determined by the Courts not exceeding the stated liquidated damages.

Note that Indian law does not draw the same distinction as English law between a valid liquidated damages provision and an invalid penalty clause. Indeed, Section 74 refers to both “a sum named in the contract as the amount to be paid in case of such breach”, and “any other stipulation by way of penalty” and says that they are both to be treated in the same way, the exercise in each case being to determine the reasonable compensation entitlement. Under English law, of course, we would avoid any use of the expression ‘penalty clause’ in our drafting for fear of invalidity.

The leading cases on the principles of liquidated damages are Maula Bux –v – Union of India (1969) and Oil & Natural Gas Corporation –v- Saw Pipes (2003), and from those cases it at least seems clear that liquidated damages provisions must be clearly drafted, any calculation of the liquidated damages should be easy to follow, and the claimant ought to be prepared to demonstrate that the amount was a genuine pre-estimate of the loss or damage likely to be suffered if he is not to be at risk of the Court determining a level of reasonable compensation below the stated liquidated damages.

Restrictive Covenants

The ICA provides that a contract will not be enforceable to the extent that it restrains a person from exercising a lawful profession, trade or business. Non-compete and non-solicitation provisions can both fall into this category. There is an exception under the Act, however, for non-compete provisions that reasonably protect a party’s proprietary or commercial interests in relation to its acquisition of the goodwill of a business.

In addition cases have shown that, in certain circumstances, Indian courts will enforce a restrictive covenant which does not constitute an unlawful restraint of trade, in other words a covenant which does place some restraints on a person but meets a “reasonableness” test.

For example, a restrictive covenant which applies during the period of employment is more likely to be upheld then a covenant which operates after the termination of the employment. In Niranjan Shankar Golikari v Centre for Spinning and Manufacturing Company Limited, the Supreme Court of India upheld a restrictive covenant in an employment contract under which the employee was not to reveal or misuse any trade secrets that the employee had learned during the period of his employment; but in Krishna Murgai –v- Superintendence Company of India (1979) it was held that a restraint imposed on the employee to operate after the expiry of his period of service was prima facie void.

Note that this means that non-compete provisions in contracts for the sale of a business or franchise benefit from the statutory exception, but non-compete provisions in contracts for the provision of services are subject to the “reasonableness” test applied by the Indian courts, so that the drafting of those provisions in long term service contracts, such as outsourcing contracts, will be an important task.

Data Protection

Currently, there is no data protection legislation in India. This means that from an Indian legal perspective there is no requirement for a contract under which personal data will be processed in any manner to address that processing, and equally means that if the contract does not include any such provisions then there will be no obligations on the parties akin to the EU’s data protection principles. This is a ‘hot topic’, particularly for businesses in Europe subject to the Data Protection Directive, and even for companies from countries such as the US – which lack a statutory framework for data protection but nevertheless expect standards of data security to be met.

Whilst the Government of India is presently considering enacting data protection legislation, or amending the Information Technology Act, based on industry feedback and a draft data protection law drawn up by a Government taskforce, until that legislation is in place it is necessary to protect personal data by imposing contractual obligations on the contracting parties – and at least the good news is that Indian law does not prohibit the imposition of such obligations.

The common law principles of confidentiality may at least apply to provide some safeguards for personal data. There is also the Indian Penal Code 1860 which prohibits theft of data, and the Information Technology Act 2000 which prohibits computer hacking.

So, where protection of data is relevant, there should be a data policy that regulates the sharing of that data, and express contract provisions dealing with all aspects of the processing of the data and the consequences for breach of those processing obligations. The data should also be expressly categorized as confidential information.

Lokesh Rajpal
advocate_lokesh@yahoo.co.in
+919036033535

PRODUCT LIABILITY LAW IN INDIA

LIABILITY FOR MANUFACTURING OR DISTRIBUTING A DEFECTIVE PRODUCT IN INDIA

In India, Product liability law, also called “products liability”, governs the liability of manufacturers, wholesalers, distributors, and vendors for injury to a person or property caused by dangerous or defective products. The goal of product liability laws is to help protect consumers from dangerous or defective products, while holding manufacturers, distributors, and retailers responsible for putting into the market place products that they knew or should have known were dangerous or defective.
Civil Product liability in India is, essentially, governed by

a) The Consumer Protection Act, 1986

b) The Sales of Goods Act, 1930

c) The Monopolies and Restrictive Trade Practices Act, 1969 (hereinafter referred to as the “MRTP Act”)

d) The law of Torts.

e) special statues pertaining to specific goods

The laws relating to product liability, in India, have been constantly evolving, by way of judicial interpretations and amendments, to become one of the most important socio-economic legislations for the protection of consumers. The legislation, in respect of product liability in India, though was enacted to protect the interest of consumers but the same was, earlier, construed narrowly, thereby frustrating the object sought to be achieved. The trend, however, has changed in the recent times with the Courts adopting a pro-consumer approach. The Courts, in India, have now started awarding compensation and damages which are more punitive than compensatory in nature.

In Wheels World vs. Pradeep Kumar Khurana the complainant, a doctor by profession, complained to the respondent about deficiency in service in not repairing, free of charge, a technical fault, which occurred during warranty period, in his new car and then not delivering the same for a period of 4 years. A sum of Rs. 30, 000/- with interest @ 18% per annum from 2/7/1988 to 7/5/1992, was awarded as compensation, in favour of the complainant for his suffering, both professionally and otherwise, on account of non availability of car for a period of 4 years. Further interest, at the same rate for the same period, was also awarded on an amount of Rs. 82, 000/-, being the price of the car as well as an amount of Rs. 55, 00/- towards costs and, last but not the least, an amount of Rs. 50,000/-, which was deposited by the Respondent on account of stay of imprisonment, was also awarded to the petitioner.

The product liability law, in India, apart from the civil liability, also imposes criminal liability in case of non-compliance with the provisions of each of the below mentioned Acts. The said Acts are in addition to and not in derogation of any other laws in force, which implies that an action imposing penal liability can be simultaneously initiated along with a claim under civil law. Some of these are special Acts pertaining to sale of specific goods such as food, drugs, cosmetics etc.. The provisions of these enactments are preventive in form, though the relief envisaged is an action for breach in civil or criminal court.

• The Foods Adulteration Act, 1954

• The Food Safety and Standards Act, 2006

• The Drug & Cosmetics Act, 1940

• The Indian Penal Code, 1860

• The Standards of Weights and Measures Act, 1956

• The Agricultural Produce (Grading and Marking) Act, 1937 for marking and grading of commodities like vegetables, butter, etc.

• The Indian Standards Institution (Certification Marks) Act , 1952 to formulate a number of standards for different products by ISI

• The Bureau of Indian Standards Act , 1986

Each of the aforesaid Acts provides for imposition of fine and/or imprisonment in case of supply of defective products or adulterated consumables.

The Food Safety and Standards Act, 2006 is the most recent legislation which comprehensively deals with food and safety standards which are to be complied with by manufacturers and producers, non-compliance of which imposes a liability, upon defaulters, of fine, extending upto Rs. Ten Lakhs and/or imprisonment.

The provisions of Indian Penal Code (IPC), on the other hand, in respect of product liability, are attracted when the element of cheating and fraud can be attributed to such defects. For example, in the case of Smt. Uma Deepak v. Maruti Udyog Ltd Ors (2003) CPJ 90(MRTP) the Complainant alleged that the car sold by the opposite party was not only accidental but the price, for the same, was also overcharged. The Court, in response to the allegations made by the complainant, directed arrest of the Directors as well as the manager of the dealers/agents who sold the said defective car to the complainant and remanded them to judicial custody. Subsequent thereto, the said officers of the opposite party were released on bail and were directed to replace the disputed car with a new car.

Provisions of IPC are also attracted to provide punishment to offenders for false weights and measures , adulteration of goods ( food, drugs etc -6 months imprisonment, fine of 1000 rupees or both), and false property marks (one year imprisonment, fine or both). The period of limitation as per Section 468 of the Criminal Procedure Code is 6 months if offence is punishable with fine only, and one year if offence is punishable with upto one year imprisonment and three years if offence is punishable with imprisonment of above one year and upto three years.

The provisions of the Standards of Weights and Measures Act, 1976 are attracted in case of any false packaging, weight or measure which does not conform to the standards established by or under the said Act and breaches the mandatory declaratory requirements on a package. If any mandatory declaration is found missing on the package a fine of upto 2000 rupees shall be levied as per Rule 39 of the Standards of weights and measures packaged commodity rules.

The Drugs and Cosmetic Act, 1940 also provides for criminal liability for manufacturers and producers of medicinal products or cosmetics etc, which do not adhere to the prescribed standards.

Lokesh Rajpal
+91 9036033535

HIRE AND FIRE AT WILL IN CONTEXT TO INDIA

THE EMPLOYER EMPLOYEE RELATIONSHIP – AN EVOLUTION

Times have changed in every respect and this change is more discernible in the economic and industrial fields. The concept of traditional animosity between the two classes of employers and employees has also undergone change beyond recognition. Animosity has given way to co-operation and hatred to loyalty. It is incentive that works better than disciplining. Trust not mistrust has injected a sense of responsibility among employees. The change is certainly a welcome sign for establishing a cordial and congenial atmosphere between the employers and employees.

For determination of the concept of employment, the essential ingredients are:

– Employer – one who employs i.e. engages the services of others;
– Employee – one who works for other for hire;
– Contract of Employment – the contract of service between the employer and employee where under the employee agrees to serve the employer subject to his control and supervision.
In determining whether one acting for another is a servant or an independent contractor, the following matters of facts, among others are considered:
(a) The extent and control which, by the agreement the master may exercise over the details of the work;

(b) Whether or not the one employee is engaged in a distinct occupation or business;

(c) The kind of occupation with reference to whether, in the locality, the work is usually done under the direction of the employer or by specialist without supervision;

(d) The skill required in the particular occupation;

(e) Whether the employer or the workmen supplies the instrumentalities, tools and the place of work for the person doing the work;

(f) The length of time for which the person is employed;

(g) The method of payment, whether by the time or by the job;

(h) Whether or not the work performed is a part of the regular business of the employer; and

(i) Whether or not the parties believe that they are creating the relationship of master and servant;

GOOD EMPLOYEE IS AN ASSET
Few years ago if you would have asked the senior executives what their company’s most valuable assets were, chances are they would have talked about the brand, goodwill, plant and machinery and so on. But ask them this question today, and ‘people’ will most likely figure in the list. As organisation is made up of competencies which we can loosely call ‘capital’. Its components are ‘customer capital’, structural capital’ and ‘human capital’.
Globalisation has certainly thrown new challenges before HR persons as they have to prepare employees to meet the challenges of knowledge based economy and to respond to the dynamics of work environment with technological skill and a high level of thinking. Just as it is vital for every establishment to attract the right talent, it is equally important for them to retain that talent. Today’s situation is such that companies are constantly vying with each other to offer better perks to their employees. While the nature of these perks may differ across levels, companies are offering incentives something beyond just pay packages. It is a fact that no employer will dismiss or terminate or retrench an employee unless he is compelled to do so. An employer is always interested in production, rendering of services and performance of duties as assigned to an employee. An employee is also bound to maintain discipline and perform duties diligently and efficiently.
If, however, any employee becomes incorrigible, the law provides ways and means to an employer to dismiss, discharge or retrench him/her. However while doing so employer will have to observe certain procedure and his action should never smack of mala fide intention, otherwise that will not stand the scrutiny of the court. It must be noted that labour laws in India are codified and they have been further expanded by judicial interpretation and verdicts.
The traditional right of an employer to hire and fire his workmen at his will has been subjected to may restraints. Industrial tribunals can by their award make a contract which is binding on both the parties creating a new right and imposing new obligations arising out of award. There is no question of the employer agreeing to the new contract; it is binding even though it is unacceptable to him. The creation of new obligations is not by the parties themselves. Either or both of them may be opposed to it, nevertheless it binds them. An employer has the freedom to select anybody according to his requirements but he does not have the liberty to fire the workman / employee as per his will. Legislations like Industrial Disputes Act (in case of workman) and Shops and Commercial Establishments Act (in case of an employee) has made it difficult for an employer to dismiss / discharge / retrench an employee by employer at his free will.
Dismissal / Discharge of Employee
DISMISSAL
Dismissal of an employee is the biggest punishment which an employer can give to an employee. It is the termination of services by way of punishment for some misconduct or for unauthorised and prolonged absence from duty. There is a vital difference between dismissal and discharge. Discharge is a termination of a contract by notice or payment of wages / salary in lieu of notice, whereas dismissal implies not merely termination without notice or payment, but essentially indicates a measure of punishment. The dismissal of an employee is easier said than done. The employer is bound to give an opportunity to explain the conduct and show cause why he should not be dismissed. The general rule is that in this process, there should be no violation of what is known as the principles of natural justice, which ensures that punishment is not out of all proportions to the offence, misconduct or negligence alleged. In fact, there is no provision for summary dismissal. Before dismissal the employee may be placed under suspension and a proper inquiry is conducted to enquire about the misconduct of the employee. During the suspension the employee receives a subsistence allowance. The management’s action must not suffer from vindictiveness and capricious attitude. In case of dismissal for misconduct the tribunal / court do not, however, act as a court of appeal and substitute its own judgement for that of the management, it will interfere-
a) When there is want of good faith;
b) When there is victimisation or unfair labour practices;
c) When the management has been guilty of a basic error or violation of the principles of natural justice;
d) When on the material the finding is baseless or perverse.
These are basic four exceptions which confer jurisdiction on industrial tribunals to interfere with the managerial discretion and apply with equal force to the determination of the question of the quantum of the punishment.
DISCHARGE
Discharge is a permanent separation of an employee from the pay-roll for violation of company rules or for inadequate performance. A discharge becomes necessary:
i) When the volume of business does not justify the continuing employment of the person(s) involved;
ii) When a person fails to work according to the requirements of the job either because of incapacity or because he has deliberately slowed down work, or because there is no suitable place where he can be transferred;
iii) When he forfeits his right to a job because of his violation of a basic policy often involving the safety of others, the morale and discipline of a group.
Causes of Discharge
A discharge seldom arises suddenly or from a single impulsive act. Many causes account for it. Some of these are:
a) Frequent causes: Inefficiency, dishonesty, drunkenness, carelessness or indifference, violation of rules;
b) Infrequent causes: Accidents, insubordination, personal conduct, uncleanliness, infraction of rules, destructive negligence, wastefulness and physical unfitness.
c) Other causes: Carelessness, lack of co-operation, laziness, tardiness in starting work, frequent absence without leave, dishonesty, lack of specific skill, preventing promotion, adverse attitude towards organisation.
Discharge Procedure
To avoid unnecessary grievances arising from discharges, proper rules should be framed to govern them. To demonstrate that a discharge is justified and does not arise out of unfair discrimination or personal prejudice of the supervisor, following evidence needs to be produced:
(1) Permanent records of all merit ratings made by supervisors;

(2) Permanent records of ratings of the employee’s traits;

(3) A memorandum bearing an efforts made by the management to help the employee to overcome his weakness;

(4) A copy of any warning that has been sent to him;

(5) The letter of discharge, especially, if the letter states the cause of discharge;

(6) Discharge should always be made in accordance with the procedure stated or specified in the code of conduct / service rules. If there are no service rules / code of conduct, then the management needs to reflect that their conduct is not arbitrary and against the principles of natural justice. Further such service rules / code of conduct and amendments thereto should have been communicated to employee at appropriate time;

(7) The action of discharge should be bona fide and should neither be a punitive measure nor a case of victimisation;

(8) The reasons of discharge should be clearly communicated;

(9) The individual concerned should be adequately informed about the reasons for his discharge;

(10) The supervisor, in charge for initiating the action should be fully conversant with rules and regulations of the organisation;

(11) The facts regarding the violation of rules and regulations should be carefully analysed;

(12) Adequate provisions should exist for review of the discharged employee’s case;

(13) A discharged employee needs a reasonable notice or an equivalent pay in lieu of notice. It carries with it certain penalties, such as difficulty of re-employment, loss of benefits and, in certain cases, loss of a part of provident fund.

CONCLUSION
Although good management generally does not opt for adopting deterrent methods to curb and control indiscipline and misconduct of employees, yet many a times it becomes necessary to take recourse to harsh methods. Modern management believes more in motivation, co-operation and incentives than rigours of discipline, confrontation and distraction. However, it is absolutely necessary for a personnel manager or person in charge of employee issues to know the basics of labour laws to deal with contingencies.

CONTACT INFORMATION

LOKESH RAJPAL
advocate_lokesh@yahoo.co.in
+919036033535

STANDARD FORM OF CONTRACTS AND THEIR NATURE

In an industrial society, whether advanced or developing, the individual craftsman, catering to the tastes of individual customers, slowly fades out, giving place to mass production of standardized products. Such standardization leads to standardized dealings with customers, that is, to standardized contracts with customers. They are found in all areas where operations are on a large scale. In the case of large scale organizations, which enter into innumerable contracts with individuals, it is very difficult for them to draw up a separate contract with each individual. The advantages of such contracts are economy and certainty. As Kessler puts it, “in so far as the reduction of costs of production and distribution thus achieved is reflected in reduced prices, society as a whole ultimately benefits from the use of standard contracts”.

In standardized form of contracts, a single will is exclusively pre-dominant, acting as a unilateral will, which dictates its terms not to an individual but to an indeterminate collectivity. The standard terms and conditions prepared by one party are offered to the other on a “take it or leave it” basis. The main terms are put in large print, but the qualifications are buried in small print. The individual’s participation is consists of mere adherence, often unknowing, to the document drafted unilaterally and insisted upon by the powerful enterprise. The pen of the individual signing on the dotted line does not really represent his substantial agreement with the terms in it, but creates a fiction that he has agreed to such terms. The characteristics usually and traditionally associated with the contract, such as freedom to contract and consensus, are absent from these so called contracts.

THE PROBLEM ARISING FROM SUCH CONTRACTS

Apart from the fact that the abstract legal theory of a contract as an agreement arrived at through discussion and negotiation is completely given the go-by, these contracts turn out to be a case of the big business enterprises legislating in a substantially authoritarian manner. Such large scale business concerns get expert advice and introduce terms, in the printed form, which are most favourable to themselves. They contain many wide exclusion and exemption clauses favourable to large enterprise. The favourable terms are often in small prints which the individual never reads since it is a laborious and profitless task to discover what these terms are. The Calcutta High Court in Indian Airlines Corporation vs. Madhuri Chaudhary had to deal with a case of a passenger traveling by air inside India. The plane crashed causing death of passenger, and his widow sued for the damages. The air ticket exempted the carrier from liability on account negligence of the carrier or of the pilot or of other staff. There was evidence that the conditions exempting the carrier were duly brought to the notice of the passenger and that he had every opportunity to know them. The High Court held that obligation imposed by the law upon common carriers in India is not founded upon contract, but on the exercise of public employment for reward, that is, by the Common Law of England governing the rights and liabilities of such Common Carriers. It is not affected by the Indian Contract Act, 1872. It is a case, where the carrier said that he was prepared to take passenger by air provided that passenger exempted him from liability due to negligence. The exemption clause in the contract was good and valid and was a complete bar to the plaintiff’s claim.

In another case, Rajasthan High Court held that “where on the face of the goods ticket, words to the effect “for conditions see the back” are printed, the person concerned is as a matter of law, held to be bound by the conditions subject to which the ticket is issued., whether he takes care to read the conditions if printed on the back or to ascertain them if it is stated on the back of the ticket where they are to be found. If, however, the conditions are printed on the back of the ticket but there are no words at all on the face of it to draw the attention of the person concerned tot hem, then it has been held that he is not bound by the conditions.

The crucial question from the articles point of view is this: assuming that he knew the conditions, if he wanted to change them, could he negotiate and do so? If he cannot, what does it matter, and how are the courts to come to his rescue?

As early as 1909, Shankaran Nair. J. in Shaikh Mohd. Ravuther, in his dissenting judgment expressed the opinion that section 23 of the Indian Contract Act hits such exemption clauses, but this view has been rejected by the High Courts in the later decisions. There are few cases where the Courts have valiantly tried to come to the rescue of the weaker party but the legal basis of such decisions is elusive. In Lily White vs. R. Munuswamy, the laundry receipt of the appellant contained the condition that in the event of loss of or damage to the article given for washing, the customer would be entitled to claim 50 per cent of the market price or value of the article. The respondent’s new saree was lost. The court gave relief to the customer, holding that condition would place a premium upon dishonest in as much as it would enable the cleaner to purchase new garments at 50 per cent of the price and that would not be in the public interest. In another case it was held that a condition that only 8 times the cost of cleaning the garment would be payable in case of a loss was held to be unreasonable. In International Oil Co. vs. Indian Oil Company the contract reserved the right to the defendant to cancel the plaintiff’s dealership at any time without assigning any reason. On cancellation by the defendant, the plaintiff filed a suit and the suit was decreed on the ground that the term was an unfair term of the contract.

The entire basis of a contract, that it was freely and voluntarily entered into by the parties with equal bargaining power, completely falls on the ground when it is practically impossible for one of the parties not to accept the offered terms. In order to render freedom of contract a reality and particularly of one whose bargaining power is less that of other party to the contract, various measures like labour legislation, money laundering laws and rent Acts have been enacted, but there is no general provisions in the Contract Act itself under which courts can give relief to the weaker party. The existing sections in the Contract Act do not seem to be capable of meeting the mischief.

Section 16(3) of the Contract Act provides that, where a person, who is in a position to dominate the will of another, enters into a contract with him, and transaction appears, on the face of it or on the evidence adduced to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in position to dominate the will of the other. But this sub-section has been interpreted as meaning that both the elements of having dominant position and the unconscionable nature of the contract will have to be established, before the contract can be said to be brought about by undue influence. This position, though established long ago, has not been departed from, with the result that section 16(3) is not much of a relevance in the present context.

Section 23 of the Contract Act which provides that the consideration or object of an agreement is lawful, unless the court regards it as immoral or opposed to public policy, is not of much use in meeting the present situation, because courts have held that the heads of public policy cannot be extended to a new ground in general, with certain exceptions, and that the term of a contract exempting one party from all liability is not opposed to public policy. However lately Supreme Court in Central Inland Water Transport Corporation Limited vs. Brojo Nath Ganguly held that an unfair or an unreasonable contract entered between the parties of unequal bargaining power was void as unconscionable, u/s 23 of the Contract Act. Thus Indian Courts have, since then, shown a marked willingness to interfere with the printed form contracts where there is evidence of unequal bargaining power. It has been held that the courts would relieve the weaker party to a contract from unconscionable, oppressive, unfair, unjust and unconstitutional obligations in a standard form contract. The Supreme Court has held that a printed form contract was void on grounds of coercion, where the parties had unequal bargaining powers. However barring few attempts, the Indian Contract Act lacks teeth to prevent misuse of printed / standard form of contracts. Courts suo motu have evolved and applied certain rules to protect the interest of the consumer, customer or passenger, as the case may be upon whom standard form contracts or exemptions clauses are imposed, like reasonable notice should be given, theory of fundamental breach, contra proferentem of the contract, liability in tort etc.

EXPERIENCE IN OTHER COUNTRIES

United Kingdom

In the United Kingdom various legal principles based upon the fundamental concept enunciated by Denning LJ that there is a vigilance of the common law which while allowing freedom of contract watches to see that it is not abused, have been utilized. These principles are:

(a) That there should be reasonable notice to other party of the conditions;

(b) That the notice should be contemporaneous with the contract;

(c) That there should be no fundamental breach of the contract;

(d) That the contract should be strictly construed as against the bigger organization and in favour of weaker party; and

(e) That the terms of the contract should not be unreasonable on the face of it;

However in 1977, the British parliament passed the Unfair Contract Terms Act. The Act clearly provides that any clause in the contract which excludes or restricts liability for death or personal injury resulting from negligence shall be absolutely void. In regard to other types of loss, not being death or physical injury, any restriction or excluding clause shall also be void unless it satisfies the requirement of reasonableness. The Act also provides that a person who deals with the consumer on standard terms will not be allowed to claim the protection of any clause restricting or excluding liability if he himself commits breach. Nor can he claim a substantially different performance from that which the consumer or customer reasonably expected from the contract as equivalent performance.

United States of America

The position in United States is stated in Section 575 of the Restatement of Law of Contracts thus:

(1) A bargain for exemption from liability for the consequences of a willful breach of duty is illegal, and a bargain from exemption of liability or the consequence of negligence is illegal, if:

a. The parties are employer and employee and the bargain relates to negligent injury of the employee in the course of employment;

b. One of the parties is charged with a duty of public service, and the bargain relates to negligence in the performance of any part of its duty to the public, for which it has received or been promised compensation;

Further Section 2.302 of the Uniform Commercial Code of the United States also provides, if Court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract or it may enforce the remainder of the contract without the unconscionable clause is or it may so limit the application of unconscionable clause as to avoid any unconscionable result.

CONTACT INFORMATION

LOKESH RAJPAL

advocate_lokesh@yahoo.co.in

+919036033535

CAN PUBLIC SECTOR UNDERTAKINGS / COMPANIES BE CONSTRUED AS STATE UNDER ARTICLE 12 OF CONSTITUTION OF INDIA?

This article deals with the question whether public sector undertakings can be considered as State under Article 12 of the Constitution of India? If yes what are the implications of the same?

Article 12 of the Constitution defines the expression “State” as including, for the purpose of Part III of the Constitution (Fundamental Rights), all local or other authorities within the territory of India or under the control of Government of India. Article 12 thus reads as under:

“12. In this Part unless the context otherwise requires, ‘the state’ includes the Government and Parliament of India and the Government and the Legislature of each of the States and all local or other authorities within the territory of India or under the Control of the Government of India”

It will be noticed that Article 12 does not, in so many words, provide that undertakings / companies in the public sector fall within the definition of “State”. The Supreme Court of India has held in number of decisions that Public Corporations and Undertakings fall within the inclusive definition of “State”. Therefore these corporation and undertakings are subject to Part – III of the Constitution. Consequently the Supreme Court and High Courts have power of judicial review under Article 32 and 226 of the Constitution. The Supreme Court has interfered with the orders of Public Corporations and Undertakings in relation to service matters and also with regard to commercial transactions.

Generally the expansive interpretation of Article 12 is taken to have begun with a judgment holding that Rajasthan State Electricity Board falls within “State”. In coming to this conclusion, the Supreme Court emphasized the fact that such authorities are constitutional or statutory authorities and that they exercised powers conferred by law. It may be mentioned that State Electricity Boards are constituted under electricity (Supply) Act, 1948. The ingredient of ‘authority’ (apart from other additional factors) seemed to have weighed with the courts in coming to this conclusion. In order to analyze the link between the State and the undertaking in question, it was necessary to evolve some formula and that has been the principal approach adopted by Supreme Court in its well known judgment relating to International Airport Authority. In the case of R D Shetty vs. International Airport Authority of India, International Airport Authority is a body corporate constituted under International Airport Authority Act, 1971. The director of authority had issued a notice, inviting tenders for putting up and running a second class restaurant and two snack bars at the International Airport at Bombay. Tenders were received in response to the notice. Shri R.D Shetty, the appellant, who was not a tenderer, filed a writ petition which was rejected by the Bombay High Court. He urged that the notice inviting tenders by the Airport Authority had stipulated a condition of eligibility, but subsequently the same was charged without any rational justification, as a result of which he could not submit his tender. It was further urged before the Supreme Court that the International Airport Authority, being a “State” within the meaning of Article 12 of the Constitution, was bound to give effect to the condition of eligibility set by it and not entitled to depart from it at its own sweet will without rational justification.

Supreme Court held that “where the Government is dealing with the public, whether by way of giving jobs or entering into contracts or issuing quotas or licenses or granting any other form of largesse, the Government cannot act arbitrarily at its sweet will and like a private individual deal with any person it pleases, but its action must be in conformity with a standard or norm which is not arbitrary, irrational or irrelevant. The power or discretion of the government in the matter of grant of largesse including award of jobs, contracts, quotas, licenses etc. must be confined and structured by rational, relevant and non-discriminatory standards or norms and if the Government departs from such standard or norm in any particular case or cases, the action of the Government would be liable to be struck down, unless it can be shown by the Government that the departure was not arbitrary, but was based on some valid principle which in itself is not irrational, unreasonable or discriminatory.” After making aforesaid observations, the Supreme Court further held that Corporations established by statute or incorporated under law are an instrumentality or agency of the Government, it they satisfy certain tests which may be summed up as under:

(i) The source of the share capital;

(ii) The extent of State Control over the Corporation and whether it is “deep and pervasive”;

(iii) Whether the functions of the Corporation has a monopoly status;

(iv) Whether the functions of Corporation are of public importance and closely related to governmental functions; and

(v) Whether, what belonged to a Government Department formerly was transferred to the Corporation.

After laying down the aforesaid tests, the Supreme Court observed that the list is not exhaustive and by its very nature, it cannot be, because, with increasing assumption of new tasks, growing complexities of management and administration and the necessity of continuing adjustment in relations between the Corporation and Government, calling for flexibility, adaptability and innovative skills, it is not possible to make an exhaustive enumeration of the tests which would invariably and in all cases provide an unfailing answer to the question whether a Corporation is a Governmental instrumentality or agency. The court observed that no one single factor will yield a satisfactory answer to the question and the court will have to consider cumulative effect of these factors, in arriving at its decision on the basis of facts and circumstances of each case.

Government Companies

One consequence of the broader test of ‘agency or instrumentality’ that came to be laid down (as stated above) was that Government Companies as defined in section 617 of Companies Act, 1956 came to be included within the concept of ‘State’, for the purpose of Article 12 of the Constitution. This, the Bharat Petroleum Corporation was held to fall within its ambit. Comparatively, recently, the Indian Oil Corporation has also been held to fall within the ambit of Article 12. Accordingly, the sudden stoppage of supply of lubricants to the petitioner firm by the Indian Oil Corporation, without notice, was held to be violative of Article 14 of the Constitution as arbitrary, against natural justice and fair play and unreasonable and practically amounting to black listing the petitioner firm. It may be mentioned that Government Companies are not created directly by statute, but like any other company, is / are incorporated under statute.

Statutory and Non-Statutory Status

To state the position broadly, it became possible for courts to hold an entity to be ‘State’, even if it did not have a direct statutory origin. No doubt, if it is a statutory undertaking vested with the functions analogous to those of the Government, it would be falling within the ambit of ‘state’. But the absence of direct statutory origin may not be material, if the entity in question is an agency or instrumentality of the state. This was illustrated in Ajay Hasia vs. Khalid Mujib. This case involved a society registered under the Jammu and Kashmir Registration of Societies Act, running the Regional Engineering College at Srinagar, sponsored by the Government of India. The ingredients which weighed with the Supreme Court in holding this society to be a ‘State’ – to mention the principal characteristics – were the following –

(i) The composition of society is dominated by the representatives of the Government;
(ii) The expenses of the society are entirely provided by the Central Government;
(iii) The rules made by the society require prior sanction of the Government;
(iv) The society is required to comply with all the directives of the Government;
(v) Government can appoint and remove members from the society;
(vi) Thus an overall control is exercised by the Government;

Tests not exhaustive

It could be pointed out at this stage, that none of the tests which have come up for consideration in the decision of the Supreme Court mentioned is conclusive in itself, nor is the enumeration exhaustive. The financial contribution of the Government, its deep and pervasive control, the nature of the functions performed by the Corporation, the monopolistic status of the corporation and other relevant factors may make a difference. Sometimes one or the other factor may come to be emphasized but essentially, it is the totality of the circumstances which would be taken into account.

Effect of being regarded as ‘State” or its instrumentalities

– If a corporation is regarded as ‘State’, all actions, deed, conducts etc of the Corporation must not adversely affect the fundamental rights of the citizens of India;
– Corporation cannot act arbitrarily, irrationally or in utter disregard to the rights of the citizens of India or its employees;
– Corporation shall be subject to writ jurisdictions under Article 32 & 226 of the Constitution of India.

Contact Information

Lokesh Rajpal
advocate_lokesh@yahoo.co.in
+919036033535

Issues faced by Companies under Standards of Weights and Measures Act

Indian retail sector has been facing phenomenal growth during the past 10 years which has resulted in increased consumption, employment opportunities and government revenue through increased tax collections. The organized retail market is currently pegged at around $ 350 billion in India retail sector accounts for roughly 12% of national GDP. Without about more than 25 million people employed in Indian retail sector, Indian retail sector is second largest employer after agriculture in the country. According to a recent report by ICRIER, the organized retail industry which is merely 4% of total retail industry is likely to grown much faster pace due to increased consumption, changing consumer behaviour and higher disposable incomes in the hands of Indian consumer.

To allow Indian retail sector to grow and achieve its full potential, some of the existing laws needs to be modified and brought in line with changed requirements. One of such law is Standards of Weight and Measures Act and provisions thereof.

Standards of Weights and Measures Act

In the past few years there has been great expansion in the quantity of goods that are being sold in packaged form. As per the prevailing law, all the pre-packaged goods should conform to the following below mentioned legislations:

• The Standards of Weights and Measures Act, 1976 as amended from time to time

• The Standards of Weights and Measures (Packaged Commodity) Rules, 1977

• The Standards of Weights and Measures (Enforcement) Act, 1985

As per provisions of Standards of Weights and Measures Act 1976 read along with the rules thereof, every package should bear the following mandatory declarations as given below:

1. Name & address of the “Manufacturer” and Name and address of the “Packer”. Further the qualifying words “Manufactured By” and “Packed By” should be mentioned separately if the manufacturer is not the packer;

2. In case of imported products, Name of Importer also needs to be mentioned;

3. The common name of the commodity i.e. the generic name of the product in pack should also be mentioned;

4. The month and year in which commodity is manufactured / packed / imported needs to be mentioned;

5. MRP (inclusive of all taxes) without any overwriting;

6. Name, postal address with PIN No., telephone number of the office which can be contacted, in case of consumer complaints.

Specific issues faced by retailed in compliance of Standards and Weights and Measures Act and rules thereof

1. Under the applicable provisions if an offence is committed by a company, every person who, at the time of offence was committed was in charge of, and was responsible to the company for the conduct of the business of the company as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. However authorities under the Act, initiate legal action against all the directors of the company without confirming the director who was in charge for the affairs of the business, thereby implicating entire board in the prosecution.

2. Section 63 of the Act provides that any commodity in a packaged form which does not conform to the provisions of this Act or any rule made there under, shall be punished with the fine which may extend to five thousand rupees and for the second or subsequent offence, with a imprisonment for a term which may extend to five years and also with fine. Rule 39 of the Standards of Weights and Measures (Packaged Commodity) Rule provides that if any person contravenes the provision of Rule 6 or tampers with or obliterates or alters any declaration made on any package in accordance with these rules, he shall be punishable with fine, which may extend to two thousand rupees. Thus there is an anomaly in the maximum amount of fine prescribed under the Act and the Rules and authorities are always inclined to levy maximum fine provided in the Act.

The authorities do not take cognizance of a circular issued by the Ministry of Consumer Affairs. Ministry of Corporate Affairs in 1992 has issued a Circular No. WM – 10(8)/92 dated 26th February 1992 issued by the Government of India to the Controllers of Legal Metrology of all states and union territories directing that: “Any actions for non-compliance in the provisions of the Act and the rules made there under are to be taken against the Manufacturer / Packer / Importer and not against the retailer / wholesaler from whom the products have been found / seized. Wholesale / retail dealer from whom goods have been found could be made co-accused or witness so as to establish the case against the Manufacturer / Packer / Importer. Similarly action against the wholesaler / retailer could be taken only for overcharging and not displaying rates of local taxes only.” Accordingly it is the responsibility of manufacturer / packer to comply with the provisions of the Act and Packaged Commodity rules framed there under.

3. Garment retailer or retailers of like products should not be included in the definition of Pre-packed commodity. With reference to the case law of Subhash Arjandas vs. State of Maharashtra and others, petitioner had a counter at Globus Stores Private Limited, Bandra and subsequently their products (sun glasses) were seized, the learned judge of Mumbai High Court held “The sunglasses are tested by the buyer for his suitability. We are, therefore of considered opinion that sun glasses whether it is a frame or glass is not a pre-packed under rule 2(1) of the rules.” Based on the above judgment, in my opinion garments or the like products, where products are tested before consumer purchases the same, should not be considered as “pre-packed” commodity. Since at times garments or other such products are packed only to keep them dust free or to avoid any damage to such products.

4. It must be noted in case of food items and items such as medicines or other drugs covered under Drugs and Cosmetics Act, there are additional declarations which are required to be made which in turn make the entire process as cumbersome and confusing which further needs to be simplified.

Contact Information

advocate_lokesh@yahoo.co.in
+919036033535

IMPORTANT POINTS TO REMEMBER WHILE NEGOTIATING AND ENTERING JOINT VENTURE AGREEMENTS

With the increased globalization, more and more Joint Venture Agreements are being signed by many multi national corporations across the geography. The need for such joint venture agreement arises from multifarious factors. Some of those factors are listed below:

1. At times joint venture agreement is necessitated due to statutory regulations prevailing in a particular geography which calls for local joint venture partner for certain activities to be commercially pursued in said geography;

2. Though there may be no such statutory restrictions but corporations prefer to have a local joint venture partner who has a better understanding of the market and consumers thereof;

3. At times joint venture agreement is pursued since the geography is more of a security concerns and it is advisable to have a local partner;

The above mentioned list of reasons are merely indicative and not exhaustive and needless to say there may be other reasons / consideration that weigh upon the mind of a corporation to pursue a commercial venture through a joint venture route rather than taking a solo aim at a geography. Whatever be the reasons or motives behind the decisions of having a joint venture agreement and whatever be the activities of a joint venture, broadly the bare shell form of all the joint venture agreements must have following clauses / features incorporated in the agreement:

1. Joint Venture Party: Before a joint venture is formed, it is important for every corporation to make a standard due diligence about the local partner. Such due diligence may cover aspects such as financial standing of the partner, key business strengths of partner especially in a area of operations, ethical practices of local partner, influence it garners in the local market, reputation of local partner among rival business houses and government circles etc. It is important to mention the right name and credentials of a local joint venture partner in the agreement;

2. Conditions Precedents: Joint venture agreement should clearly spell out the detailed conditions precedents for respective obligations spelled out in the agreement to be consummated between the parties to the agreement. For example, it must be clearly spelled the time frame in which respective parties are required to complete certain acts before the subject joint venture agreement becomes binding between the parties. Another example can be that respective parties shall take all government approvals before joint venture agreement comes into operation and become biding upon the parties.

3. Share Capital: Joint venture agreement should clearly state the amount and nature of capital that shall be provided by each of the party to the agreement. Further the ratio of shareholding should be made specific in order to avoid any controversies at a later stage.

4. Business Plan: A detailed, clear cut business plan for foreseeable terms and capital required thereof should be clearly specified in the agreement itself, if possible or else the same should be duly signed by the parties to the agreement and must be made part and parcel of the agreement;

5. Business and Operation of Joint Venture Company: Joint ventures agreement needs to detail out the area of business which a joint venture company shall operate into. Further a detailed procedure should be specified if any deviation or any additional activities needs to be pursued in near or far future. Though the detailed area of activity is always contained in charter of the company, but it shall be apt if the same is also detailed in a joint venture agreement as well so as to ensure clarity on the object of joint venture agreement.

6. Management of operations of the Joint Venture entity: Joint venture agreement can partake many characters wherein a joint venture partner may come is as strategic investor or merely as a financial investor. Whatever may be the case, it is very important to mention as to how the management of the joint venture company shall be conducted. Specific issues pertaining to day to day management of activities of the company, no of seat each party shall hold in the board of directors, voting rights at the board and resolution mechanism thereof in case of any conflict needs to be categorically dealt at an outset.

7. Representation and Warranties from each partner: Representation and warranties of each party needs to be specified under this head and the same needs to be specified separately for the sake of clarity.

8. Call and Put Option: At times, as noted above, joint venture agreements are entered by the parties because of statutory restrictions applicable in a particular geography. However one must be mindful of the fact that such statutory restriction may be removed by political establishments in future. To take care of such future eventualities, one must include call and put options in the agreement. Such call and put option must define the manner and pre-defined rate at which in which such options shall be exercised by the party to the agreement.

9. Right of Pre-emption: Most of the times there is an initial euphoria while entering into joint venture agreements between the parties. Such euphoria fizzles out after a certain time period due to overestimation of the opportunity by the parties, discord between the parties, day to day management issues and the reasons can be endless. Or it may be the case that one partner wants to cash in the investment which it made in the joint venture and now wants to en-cash the fruits of investment made by it. In such an event, there should be a clause in the agreement wherein the other partner has the right of pre-emption and purchase the stake of other partner. It is imperative to define the pre-agreed formula for arriving at a pricing of such stake and purchase thereof. In the event no such formula is defined by the agreement, the purchase can be made at market price or the best offer which the selling party can fetch from the market. Whatever may be the case, right of pre-emption being an important right for both the joint venture partners such right should find an appropriate place in the agreement.

10. Covenant not to Compete: When the joint venture parties enter into an agreement, it should be made appropriately clear that none of the joint venture parties shall form another joint venture or pursue independent business interest (excluding those already established and running) outside the joint venture in order to avoid any conflict of interest.

11. Confidentiality: Joint venture agreement should have an appropriate confidentiality clause in the agreement so as ensure that the terms and conditions of the agreement are not made public unless requested by the statutory authorities concerned.

It must be emphasized that the above list is merely indicative and not exhaustive and the details of each joint venture agreement shall differ based on the facts and circumstances of each transaction, nature of activities and such like factors. However above said points generally shall be applicable to most of the joint venture agreement. Further joint venture agreements are generally accompanied by other agreements such a Shareholders Agreement, Franchise Agreement, Supply Agreements, Know-how Agreements etc. and the joint venture agreement may vary in totality of circumstances.

Contact Information

Lokesh Rajpal

advocate_lokesh@yahoo.co.in

+919036033535

CONCEPT OF LEAVE AND LICENSE AGREEMENT UNDER INDIAN LAW

WHAT IS A LICENSE?

A license is a personal right granted to a person to do something upon immovable property of the grantor and does not amount to the creation of interest in the property itself. It is purely a permissive right and is personal to the grantee. It creates no duties and obligations upon the persons making the grant and is, therefore, revocable except in certain circumstances expressly provided for in the Act itself. The license, when granted, has not other effect to confer liberty upon the licensee to go upon the land which would otherwise be lawful.

Section 52 of Indian Easement Act, 1882 defines License as under:

“Where one person grants to another, or to a definite number of other persons, a right to do or continue to do, in or upon immovable property of the grantor, something which would, in the absence of such rights, be unlawful, and such right does not amount to an easement or an interest in the property, the right is called a license.”

Decisions of the Supreme Court in Associated Hotels of India Ltd. vs. R.N. Kapoor [AIR 1959 SC 1262] summed the concept of License as under:

“… Under the aforesaid section, if a document gives only a right to use the property in particular way or under certain terms while it remains in the possession and control of the owner thereof, it will be a license. The legal possession, thereof, continues to be with the owner of the property, but the licensee is permitted to make use of the premises for a particular purpose. But for the permission, his occupation would be unlawful. It does not create in his favour any estate or interest in the property.”

It important to take note of essential features of license as under:

1. A license is not connected with the ownership of land / property but creates only a personal right or obligation;

2. A license cannot be transferred or assigned;

3. License is purely permissive right arising only by permission, express or implied, and not by adverse exercise or in any other way;

4. It only legalize a certain act which would otherwise be unlawful and does not confer any interest in the property itself in or upon or over which such act is allowed to be done;

DISTINCTION BETWEEEN LEASE AND LICENSE

The main test for deciding whether a person is a licensee of a property or a lessee is that of exclusive possession, though it may not be the only test. If the right granted conveys to the grantee an exclusive right of possession, though subject to certain reservations, if shall be a lease as opposed to license. But where the grantee can only use the property in a certain way and on certain terms while the property remains in the possession and control of the owner, the right granted shall be a license.

1. A lease gives an exclusive interest in the property whereas license does not;

2. A lease can be assigned to a third person, while a license being a personal right cannot be so assigned / transferred;

3. A lessee can bring an action for trespass in his own name but a licensee cannot do the same. He must do so in the name of the licensor after obtaining his permission.

4. A lease is not revocable whereas a license is revocable except in two case mentioned in Section 60 of Indian Easement Act, 1882 (We shall de discussing this aspect of license later in the post).

In the case of B.M. Lall vs. M/s Dunlop Rubber Co. [AIR 1968 SC 175] summed up the distinction between license and lease as under:

“… A lease is the transfer of right to enjoy the premises whereas as license is a privilege to do something on the premises which otherwise would be unlawful. If the agreement is in writing it is question of construction of the agreement having regard to its terms and where its language is ambiguous, having regard to its object, and other circumstances under which it was executed whether the rights of the occupier are those of a lessee or licensee. The transaction is a lease if it grants an interest in the land; it is a license if it gives personal privilege with no interest in the land. The question is not of words but of substance and the label which parties chose to put upon the transaction though relevant is not, decisive. The test of exclusive possession is not conclusive though, it is very important indication in favour of tenancy.”

IS LICENSE ALWAYS EXCLUSIVE?

As discussed above, a license is a personal right granted to a person to do something upon immovable property of the grantor and does not amount to the creation of interest in the property itself. Now the very important question arises that by virtue of grant of license, is it implied that licensor intends to grant an exclusive license to licensee? An exclusive license is leave to do a thing coupled with a contract not give license to anybody else to do the same thing. But it is equally important to have it expressly stated in agreement that the license granted is an exclusive license. Such a right should be conferred by means of a clear and explicit language and in the absence of such a right it cannot be presumed or inferred from a mere leave to do a thing. So grant of liberty mines is not the grant of an exclusive right to work on them. The incidents of an exclusive license in no way differ from those of an ordinary license except that the violation of the contract not to give license to anybody else do the same thing would give the licensee a right of action against the licensor.

TRANSFERABILITY OF LICENSE

Section 54 of the Indian Easements Act, 1882 is the relevant section. Section 54 read thus:

“Unless a different intention is expressed or necessarily implied, a license to attend a place of public entertainment may be transferred by the licensee; but, save as aforesaid, a license cannot be transferred by the licensee or exercised by his servants or agents.

If Section 52 has to interpreted, it is amply clear that a license cannot be transferred by the licensee or exercised by his servants or agents. The only exception has been made in the case of a license to attend a place of a public entertainment. In this case a license may be transferred unless a different intention appears i.e. a contract may put a negative restriction as to transferability of license. In other words unless a different intention is expressed or implied, a license other than a license to attend a place of public entertainment cannot be transferred by the licensee or by his servants or agents.

IMPLICATIONS OF SALE OF LICENSE PROPERTY BY LICENSOR

Section 59 of Indian Easements Act, 1882 provides that when a grantor of a license transfers property affected thereby, the transferee is as such bound by the license. In other words, in the event licensor sells his property in which he has granted a license in favour of licensee, transferee shall not be bound by such license. However it has been held that if the license has become irrevocable in the time of the licensor, the mere fact that the licensor transfers his interest in the land would not extinguish the license.

LICENSE IS REVOCABLE AT WILL

As general rule, License is always revocable at will of licensor. However Section 60 of Indian Easements Act, 1882 places two restrictions on this general rule:

a. If the license is coupled with a transfer of property and such transfer is in force;

b. If the licensee acting upon the license, has executed a work of permanent character and incurred expenses in the execution.

The fact that the license was granted for a consideration or for an agreed term cannot affect the revocability of bare license. In such cases the licensee can claim compensation for breach of contract. Further a license granted by all the co-shares can be revoked by all of them and not by one of them alone unless a co-sharer is acting for himself and for all others.

Clause a: A bare license is something different from a license coupled with the transfer of property and when such license exists in a valid form, it operates as a contract, or a gift or a grant and becomes irrevocable. Where a person allows another person to come to his park to hunt there and to take away the game. If the owner of the park merely allowed another person to enter the park and to do something there, namely, to hunt in the park, it would be a case of bare license. However if he allowed him not only to hunt in the park but also to take away the game then it cannot be said to be a case of bare license. The license in such a case would be coupled with a transfer of property, viz., the game hunted.

Clause b: The prohibition against the revocation of a license as contained in Section 60 becomes applicable when a licensee “acting upon the license” makes constructions. This means where a license is granted for building purposes necessary for the enjoyment of the license, the license becomes irrevocable when constructions are made in pursuance thereof. But this does not mean that if a person is permitted to visit a place just to learn wrestling, he can put up a building and claim that license which was confined to his visiting the place for wrestling, entitled him to make constructions thereon and has become irrevocable. Now the term ‘work of permanent character’ shall denote some work which is not merely temporary nature. It is also not necessary to prove that a large sum of money was spent on the construction.

LICENSEE’s REMEDY AGAINST IMPROPER REVOCATION

A bare license may be revoked at the instance of licensor at any time he likes and it is true that there is no provision under the law for issue of any notice, as in the case of leases, before a license can be revoked. But the licensee, should in proper cases, have reasonable notice of such revocation and after revocation he must have reasonable time quit the land and remove his chattels which he has been licenses to put there. If he is thrust off without such notice or before such reasonable time though he is not entitled to an injunction restraining the licensor from adopting such improper course, yet he may get such damages as may have been caused to him thereby. Similarly where a license is granted valuable consideration and before the licensee has had full enjoyment of it, it is revoked in breach of an express or implied contract the licensee’s remedy lies only in an action for damages for breach of contract or implied covenant not to revoke.

IMPORTANT CLAUSES IN LEAVE AND LICENSE AGREEMENT AND THEIR VALIDITY

Most of the leave and license agreement that I have come across have following under mentioned clauses in the leave and license agreement. Now let us examine the validity, legality and enforceability of these clauses.

1. Possession: Most of the leave and license agreement suggest that possession during the entire term of this agreement shall remain with Licensor. This is perfect with the nature and spirit of the agreement since exclusive possession is key element to determine as whether the transaction is in the nature of license or a lease. However two points needs to be noted that agreement should also clearly specify that there is no intention to transfer any right or interest in the property per se. Further from the licensee perspective, it is important to mention that the license being granted to licensee is an exclusive license or else it may be construed as bare license.

2. Lock in period: Most of the leave and license agreement suggest that both licensor and licensee shall be locked in for a certain term of license agreement. As noted above, license is always terminable at will. Any form of lock being imposed in the agreement may not hold water in the court since it goes against the very logic of license. Further by granting a license, Licensor is merely granting a permissive right to licensee and is not intending to create an interest in the property. Even if such lock in clause is held to be valid, licensor can still revoke the license and be liable for damages. Further in such an event since the possession is always with Licensor, there cannot be any claims on part of licensee as to illegal eviction. In my opinion, such lock in clauses may not hold water in the court and can be held illegal and void ab initio. In such an event, there can be two possibilities:

– If such clause is held to be legal and perfectly valid within the realms of law, licensee shall be entitled to merely damages for illegal revocation / termination of license;

– If such clause is held to be illegal and invalid, doctrine of severability shall come into play and court shall read the entire document as if the lock in clause was incorporated in the agreement. In such an event, there can be no question of damages as well.

3. Improvement of permanent character: Let us exemplify this situation for the sale of clarity. If a mall owner gives a property to a retailer vide a leave and license agreement, wherein a retailer is permitted to carry out its fit out activities in the premises so as to enjoy the permission granted to a retailer. In course of such fit outs, retailer carries out improvements which are of permanent in nature (such as erection of false ceiling, installation of lifts / escalators etc.), what shall be the effect of such improvement on the overall nature of transaction i.e. leave and license agreement. Since Section 60 of the Act clearly states that where licensee acting upon the license, has executed a work of permanent character and incurred expenses in the execution, license become irrevocable. In my opinion, even in such cases the license is terminable at will and the only remedy available to Licensee for such improper revocation shall be claim for damages and compensation for the improvements so made.

4. Exclusive Possession: Most of the leave and license agreements fail on this count. It is imperative for the retailer that agreement clearly and unequivocally states that licensor is granting and licensee is entitled to exclusive license for the property. It must be noted that there is clear cut distinction between exclusive license and exclusive possession. There may be an exclusive license being granted to licensee, but the fact remain that the exclusive possession is always with the Licensor and for want of which it shall be very strong indicator of the instrument being lease with nomenclature being used as license.

5. Notice: As noted above, though there is not statutory requirement for a licensor to give notice to licensee while revoking the license, but the principles of natural justice demands that such notice should be given by the licensor. Further there is no bar in law wherein both licensee and licensor agrees to certain form notice to be given by licensor to licensee before any kind of revocation of license by the licensee. In the event such provision of notice is agreed, it shall be contractual obligation of Licensor to provide such notice to licensee.

6. Keys and Locks with the Licensor: It is often written in the leave and license agreement that keys and locks of the premises shall for all purposes will be with licensor. This just reinforces the fact that the possession at all times is with licensor and licensor has granted merely permissive rights to the licensee. But from the licensee perspective it is important to have sufficient protection in the agreement that in the event there is any theft or loss or damage of the chattels belonging to licensee during the access made by licensor in the absence of licensee, licensor shall be liable for the same and licensee shall duly indemnified in this regard.

7. Assignment to licensee’s group / associate companies: Often Licensee’s insist for a clause where they are entitled to assign the leave and license rights to their group / associate / sister companies. More often than not such a clause is merely copied in ditto from the lease formats and pasted in the leave and license agreement. However in view of express provisions under the law relating to non-transferability of license rights and license rights being personal in nature, such a clause shall not hold valid in court of law. In fact licensee is suggested to incorporate a suitable clause wherein licensor is under an obligation to execute a fresh license in favour of group / associate / sister companies if and when desired by the licensee. In such a way, it is not the licensee who is transferring and licensor shall be the one who shall be creating a fresh license.

CONCLUSION

A license is a personal right granted to a person to do something upon immovable property of the grantor and does not amount to the creation of interest in the property itself. It is purely a permissive right and is personal to the grantee. The normal clauses in lease agreements, if incorporated in the leave and license agreement, shall not hold good in the eyes of law unless some specific structuring is done to ensure the validity of such clauses.

CONTACT INFORMATION

LOKESH RAJPAL

advocate_lokesh@yahoo.co.in

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POINTS TO REMEMBER WHILE ACQUIRING PROPERTY FROM VARIOUS SOURCES

Acquiring a land/property warrants a proper due diligence on numerous issues, especially in geography like India where property laws are cumbersome, manually kept in various state jurisdictions and there can be multiple litigations pending against the property in question. Further the nature of such due diligence shall vary from transaction to transaction and shall be dependent on numerous factors including but not limited to source from which the land/property is being acquired, purpose for which the land/property is being acquired, tenure of the lease (in case of leasing transaction) and so on. Also the degree of detailed due diligence shall also vary from transaction to transaction. In this article, I shall describe the nature of due diligence which a company should do before acquiring the land/property. The check list presented below is not exhaustive and merely indicative since the same shall depend on multiple factors which may be known at the start of due diligence and the entire process of due diligence should be flexible enough to care of any unforeseen eventualities. Having said that, one needs to bear in mind that essence of all the legal due diligence shall be same irrespective of the transaction and the outcome desired to be achieved by entire exercise of due diligence shall be to have a clear picture as to title of the land/property, land/property usage restrictions and other miscellaneous restrictions / hurdles present in acquiring the land/property and ways and means to overcome such hurdles. Further to this due diligence report shall also propose the ways and means to structure the transaction in a manner that the incidence of taxes (stamp duty, registration charges etc.) are minimal to the organization.

There can be numerous sources from where the property can be acquired by the company. Some of the major sources are listed below.

Sources from which Land may be Acquired

1. Government/Government Companies/Instrumentalities of State covered under Article 12 of Constitution;

2. Companies/Co-Operative Societies/Other Artificial Persons (hereinafter mentioned as ‘Company’);

3. Partnership Firms/Proprietorship Firms (hereinafter referred to as ‘Firm’);

4. Individuals;

5. Complex Issues

Legal Due Diligence aspects with respect to each of the above listed sources are discussed in detail in following pages.

1. Government / Government Companies / Instrumentalities of State covered under Article 12 of Constitution;

Government or its instrumentalities can partake many forms such as Central Government/Federal Government or State Government or Instrumentalities of Government such as Government Companies, Government Corporations or Public Sector Undertaking. Following check list needs to be adhered to while purchasing land from the government:

(a) Check whether the land is a vested land in the government vide some Land Revenue Act or has been acquired under Land Acquisition Act or any other State Land Acquisition Act;

 If under Land Revenue/Land Reforms Act, Check —

o Concerned Land Revenue Act;

o If there is any Instrument/Order/Notification vide which such land was vested in the government and conditions attached to such instrument / order / notification;

o Whether under the said notification/instrument/order, the land was acquired for some larger objective or specific purpose. If yes, what was the objective or purpose?

o Whether that objective or purpose fits into the objective or purpose for which organization are acquiring the land;

o If no, whether the larger objective/specific purpose can be changed and government can sell/transfer/convey the land to us for our specific purpose?

o If the purpose can be changed, whether such change requires any notification from government or any special authorization from the concerned?

o Generally the disposition of land by Government or its instrumentalities require certain procedure to be followed. Check if there is any such prescribed procedure and same is being followed?

o Whether the process of vestation has gone through any litigation?

o If yes, relevant papers of that litigation needs to be looked into;

o If yes, whether there has been any adverse orders against the government;

o Whether there is any other kind of dispute with respect to the Land in question;

o Whether the land falls in abadi or is arable land?

o If yes, whether such land can be utilized for our purpose at all in view of Land revenue Act;

 If under Land Acquisition Act, Check:

o Land Acquisition Act along with State Amendments;

o Whether the land was acquired under Part II or Part VII of Land Acquisition Act;

o If under Part II of Land Acquisition Act; Check:

• Whether it was for some government department or for a government company;

• Public Purpose or Purpose for which the land was acquired;

• Do the purchase of land fits into the purpose for which land was acquired;

• If No, Whether the law, under given facts and circumstances, permits the change of public purpose to the purpose it is sought to be applied;

• Whether the acquisition proceedings have gone through litigation;

• If so, from what corners the litigation came?

• Whether the litigation is still pending or has been finally decided;

• Check the relevant papers pertaining to the litigation along with the court orders;

• If the litigation has been finalized, what are all probabilities that exist which can lead into the litigation on purchase of property;

• Whether the government has some concrete plans regarding the utilization/area adjoining the property in question;

• If yes, what are those plans;

• If the property can be sold to us by the government, what all formalities, modalities or permissions government needs to do to sell the property;

• Is there any need to structure the transaction on the part of government so as to sell/lease the property;

o If under Part VII of the Land Acquisition Act; check:

• What is the status of company for which property has been acquired;

• Whether it is the government company formed under Companies Act, 1956 or Government Company enacted under special statute;

• If it is a special company enacted under some statute, then check the charter of the company and whether such charter permits the sale of property to private company;

• Whether the company for which the property is acquired under this chapter, can sell the property to us;

(b) Check with the government authorities whether the property in question can be put to commercial / desired use.

(c) If not, check the restrictions that are placed for conversion;

(d) It is advisable that govt. should in principally agree that it will allow the conversion of Property to commercial use.

2. Companies/Co-Operative Societies/Other Artificial Persons (‘hereinafter mentioned as company’)

(a) Check as to how the Company acquired the property;

(b) Whether it was allotted to the company or company purchased the same from Third Party;

(c) In case of original allotment, Check

– Concerned Authority who allotted the property;

– Letter of allotment and conveyance / perpetual lease deed thereto;

– Whether the allotment is made for any specific purpose;

– If yes, what is the purpose and whether the property can be utilized for any other purpose;

– Check the letter of allotment or conveyance deed, especially as to whether there is any restriction on selling/transferring of property;

– Whether there is any other terms and condition which restrains the company from selling the property.

(d) In case the company acquired the property from third party, for verification of title, check:

– Pass book incase of Agricultural Lands-as per State laws;

– Khata (Municipal Certificate)/and or similar certificate as per State laws;

– Encumbrance Certificate – Last 30 years – Verification of charges – Search in Registrar of companies – Form 13 ( Registration of Charges), Form 17 (Satisfaction/Modification of Charges);

– Verification of Kharab Land;

– Obtain necessary documents from Revenue Office;

– Obtaining Urban Land Ceiling Clearance Certificate, if any and if applicable;

– Making a survey of Property if necessary by proper authorities;

– Property tax Assessment Orders/tax paid receipts for the Last 5/10 years;

– Verification of current & Earlier registered sale deeds / gift deeds / conveyance deeds (Link Documents) (Check all the originals)

– Necessary transfer entries in respect of linked revenue records i.e. pass books, EC, etc.

(e) Check Memorandum & Articles of Association of Company

(f) Balance Sheet & Profit & Loss Accounts for all years. Study notes and contingent liabilities for details of claims in relation to property, dues of labour, statutory dues, secured loans etc;

(g) Board Minutes;

(h) Get an independent search and status report from ROC Records for charges, if any;

(i) Security/Guarantee given by the company – implication on the property in question – take proper indemnifications;

(j) Verify the pending winding up petition(s) or any other court cases impacting the properties;

(k) BIFR, proceedings, if any and their status;

(l) Any labour related problems under various Labour Act and their impact on properties;

(m) Financial institution involved in hypothecation and verification of agreements thereto;

(n) Check whether there are any acquisition proceedings pending or liable to be initiated by the government with respect the property in question;

(o) Check whether there are any Govt. dues with regard to property in question.

(p) Apart from the points stated above, it is important to verify as to how any co-operative institution or public institution acquired the property and documents thereto. If there was a grant of property from government, generally non-transferability to third party is a pre-condition for such grant. If it is so, then one needs to take approval from the granting authority and pre-check the feasibility of such approval.

3. Partnership Firms/Proprietorship Firms (hereinafter referred to as ‘Firm’)

(a) Check, whether the firm is a registered partnership or not;

(b) Check as to how the firm acquired the land/property;

(c) Whether it was allotted to the firm or firm purchased the same from Third Party;

(d) In case of original allotment, Check

a. Concerned authority who allotted the land;

b. Letter of allotment and conveyance deed thereto;

c. Whether the allotment is made for any specific purpose;

d. If yes, what is the purpose and whether the land can be utilized for any other purpose;

e. Check the letter of allotment or conveyance deed, especially as to whether there is any restriction on selling/transferring of land;

f. Whether there is any other terms and condition which restrains the firm from selling the land;

(e) In case the firm acquired the land from third party, for verification of title, check:

a. Pass book incase of Agricultural Lands-as per State laws;

b. Khata and/or similar certificate as per State laws;

c. Encumbrance Certificate – Last 30 years – Verification of charges – Register of Mortgages in case of other than Equitable Mortgages – Check the records of Concerned Sub-Registrar

d. Verification of Kharab Land;

e. Obtaining necessary documents from Mandal Revenue Office;

f. Obtaining Urban Land Ceiling Clearance Certificate, if any;

g. Making a survey of Land if necessary by proper authorities;

h. Property tax assessment orders/tax paid receipts for the last 5/10 years;

i. Verification of current & earlier registered sale deeds/gift deeds/ conveyance deeds (Link Documents) (Check all the originals)

j. Necessary transfer entries in respect of linked revenue records i.e. pass books, EC, etc.

(f) Check Partnership deed and as to whom all are the partners therein. Further check whether there has been any change in constitution of firm and any partners are admitted or have resigned thereto. In case of proprietorship concern, verify as to who is the proprietor of the firm and look for the documents establishing the same;

(g) In case of partnership concern check, as to who all partners are authorized to execute the property sale documents;

(h) Ensure, all the partners execute the property documents since single partner has no implied authority/powers to sign the documents;

(i) Check, if any of the partners are minor;

(j) Balance Sheet & Profit & Loss Accounts for all years. Study notes and contingent liabilities for details of claims in relation to property, dues of labour, statutory dues, secured loans etc;

(k) Get an independent search and status report from the office of Sub-Registrar;

(l) Security/Guarantee given by the firm – implication on the property in question;

(m) Verify the pending dissolution petition by any of the partners/ex-partners or any other court cases impacting the properties;

(n) Check if there are any insolvency proceeding pending in the Court;

(o) Any labour related problems under various labour Acts and their impact on properties;

(p) Financial institution involved in hypothecation and verification of agreements thereto;

(q) Check if, there is any acquisition proceedings pending or liable to be initiated by the government with respect the property in question;
(r) Check if, there are any Govt. dues with regard to property in question.

4. Individuals/HUF

Hindu

1. Check as to how an individual acquired the property;

2. Whether a self acquired property or ancestral property;

3. Check whether the property belongs to HUF

4. Title documents of the property;

5. Check the zoning of Land i.e. whether the land can be used for the desired purposes if presently not allowed to be used for the same or there is any absolute prohibition for use of land/property for desired purpose from environmental authorities – relevant document shall be current master plan applicable for the city / town;

6. Check if the land/property has been mortgaged or hypothecated by the company with any person or any financial institution;

Muslims

1. Check the status of Muslim individual, if one is from Shia or Sunni sect;

2. Check as to how an he acquired the land/property i.e. by inheritance, testamentary disposition, gift or third party acquisition;

3. Title document of the property;

4. Check the zoning of land i.e. whether the land can be used for the desired purposes if presently not allowed to be used for the same or there is any absolute prohibition for use of land/property for desired purpose from environmental authorities – relevant document shall be current master plan applicable for the city/town and rules applicable from environment department;

5. Check if the land/property has been mortgaged or hypothecated by the company with any person or any financial institution;

5. COMPLEX ISSUES

(a) Company under Restructuring / Bankruptcy – (Since it is a Company, all the steps listed above under the heading Companies should also be followed in addition to what is stated herein below).

Situation 1: Where the Company is in troubled waters.

Risk Involved

(i) Claims may come in future from unknown corners;

(ii) And if such claims come, organization may not have any recourse against the company since it is already in troubled waters.

Process

(i) Due Diligence;

(ii) Seek indemnities from the company so as to secure the future liabilities and consideration already paid by the Organization;

(iii) Watertight agreement

Steps to Ensure Mitigation of Risk

(i) Invite objections to the sale of land/property by giving public notice in news paper having wide coverage so as to bridge the gap that may not be discovered in due diligence process;

(ii) Consideration money to be deposited in escrow account for a certain fixed period;

(iii) Seek NOC from lenders/workers so as to minimize the claims in near future and to ensure the smooth transfer and occupation of land;

(b) Company under restructuring / bankruptcy – (Since it is a company, all the steps listed above under the heading companies should also be followed in addition to what is stated herein below).

Situation 2: Where the Company has approached the BIFR for declaring it as sick company or where a winding up petition is filed before the court and is still pending before the court.

Risk Involved

(i) If the company has not been declared as sick company and is declared sick after organization purchases the land from company or during the course of such purchase then Doctrine of Lis Pendens will apply.

(ii) If ultimately organization purchases the land with the permission of BIFR, organization will have no further recourse or indemnity in case the land/property happens to be a polluted one or in any such other exigency.

Process

(i) Due Diligence;

(ii) Understanding the status of BIFR process. In other words whether the company has made only reference for it being admitted as sick company or it has been declared as sick company.

(ii) Permission from BIFR/court for purchasing the Land/property.

– Organization may have to involve the creditors in process of negotiations and work out with creditors

Steps to Ensure Mitigation of Risk

(i) Money may be kept in escrow account for certain fixed period or till the final order of BIFR is pronounced.

(ii) Purchase may be made subject to final order of BIFR;

(iii) Comprehensive pollution check of property may be done before entering into purchase agreement instead of sample check.

(c) Situation 3: Where a final order for restructuring or dissolution has been made by BIFR or an order of winding up has been made by the court and the assets of the company are being disposed of by official liquidator or by creditor with due permission of the court.

Risk Involved

(i) If ultimately organization purchase the land/property with the permission of BIFR / Court, organization shall have no further recourse or indemnity in case the property happens to be a polluted one or in any such other exigency.

Process

(i) In this situation, sale can be made by public auction as well as private treaty. However it is advisable, that land should be purchased by public auction route, since Courts have not viewed the private treaty route with much favour;

(ii) Whether it be by private treaty or public auction, adequacy of consideration will be the test for upholding the sale;

(ii) Generally, in such cases, it is official liquidator who is authorized to sell the property. However court can in its discretion may grant permission to creditor to sell the land;

(iii) If organization is purchasing from secured creditor, official liquidator must always be kept in the loop and informed;

(iv) Sale is only complete after the confirmation from the court;

(v) Once the sale is confirmed, it is unlikely that the sale would be challenged on any ground other than inadequacy of consideration.

Steps to Ensure Mitigation of Risk

(i) Consideration needs to be adequate;

(ii) Comprehensive pollution check of land may be done before entering into purchase agreement instead of sample check.

(B) Government Land vis-à-vis Public Purpose & Public Auction
Situation 1 – Where the land is acquired for Public Purpose and is sought to be given to organization vide private treaty

Risk Involved

(i) Sale may be invalidated due to non-transparency in sale of property and consideration amount paid may get struck;

(ii) Sale may be questioned in the court on the ground of public purpose or inadequacy of consideration;

Process

(i) Due Diligence

Steps to Ensure Mitigation of Risk

(i) Application of mind by the government in selling the land/property to organization;

(ii) Due recording of reason at each and every stage of the proceedings as to why government wants to sell land/property to organization;

(ii) Before purchasing the land, government should invite public objections to the sale of land through public notice;

(iii) In such cases decision should be taken by a high level committee.

(iv) It is advisable, that public auction route should be followed to avoid any controversy.

(v) Consideration needs to be adequate so as to reflect the market value of the property.

(vi) Initial payment should be in an escrow account and organization should give a wide publicity of acquiring the land vide public notice in newspaper.

(vii) There shall be a cooling period of 2-3 months before organization start constructing on the property.

(B) Government Land vis-à-vis Public Purpose & Public Auction

Situation 2 – Where the land is acquired specifically for organization.

Risk Involved

(i) Acquisition necessarily to be in public interest though it may be for acquisition of organization.

(ii) Risk of public interest litigation challenging the acquisition proceedings.

Process

(i) Due Diligence

Steps to Ensure Mitigation of Risk

(i) Govt. should take an in principle policy decision and classify the business of organization as public purpose and a purpose useful to public at large;

(ii) Acquisition notice at all stages to clearly specify the purpose of acquisition for organization;

Note:

1. Some of the above points may not be applicable in case of leasing transaction generally;

2. Built to Suit transactions can also have different requirements and the agreement needs to be structured depending upon the specific requirement of transaction;

3. Responsibility/obligation of obtaining regulatory approvals may vary depending upon the nature of transaction. For eg. In leasing transaction, generally all the regulatory approvals pertaining to property should be on Lessor/Landlord/Developer. Similarly, in a sale transaction, an obligation can be casted upon to seller to obtain regulatory approval such as land conversion etc though the cost can be borne by the organization. However all the operational clearances shall be the responsibility of purchaser in case of sale transaction.

4. Legal due diligence shall also lay emphasis on all the regulatory clearances which may be required for operating from the property so far as purchaser is concerned and the risks in obtaining such clearances must be adequately highlighted in legal due diligence.

5. FCPA/anti bribery issues should be dealt/handled properly at all stages of due diligence and the entire process of due diligence needs to be transparent enough to avoid any controversies at a later stage.

Contact Information

advocate_lokesh@yahoo.co.in
+9619047279

ENFORCEMENT OF ARBITRATION AWARDS IN INDIA

INTRODUCTION

A jurisdiction’s credibility as an arbitration friendly one rests primarily on the efficiency and efficacy of its award enforcement regime.

This article examines the award enforcement regime in India.

OLD LAW

Prior to January 1996, the law of enforcement of arbitration awards in India was spread between three enactments. Enforcement of domestic awards was dealt under Arbitration Act, 1940. Enforcement of foreign awards was divided between two statutes – Arbitration (Protocol & Convention) Act, 1937 to give effect to Geneva Convention awards and the Foreign Awards (Recognition & Enforcement) Act, 1961 to give effect to the New York Convention awards. As the Geneva Convention became virtually obsolete (by reason of Article VII of the New York Convention), enforcement of foreign awards, for all practical purposes, came under the 1961 Act and domestic awards came under 1940 Act. The enforcement regime between these two statutes was, however, quite distinct. The 1961 Act confined challenge to an arbitral award only on limited grounds permitted under the New York Convention. The scope of challenge to domestic awards under the 1940 Act was much wider. This Act permitted judicial scrutiny, inter alia, on the ground that the arbitrator has “misconducted” himself or the proceedings – an expression which came to be widely interpreted and awards were interfered with, inter alia, on the ground of fundamental errors of law apparent on the face of the record. However even under this wide judicial scrutiny regime, courts restrained themselves and interfered only when the error was grave and the judicial conscience was shocked. It may be worthwhile to cite a couple of illustrative cases.

In the case of State of Rajasthan vs. Puri Construction Co. Ltd, (1994) 6 SCC 485, the Supreme Court held that:

“…… over the decades, judicial decisions have indicated the parameters of such challenge consistent with the provisions of the Arbitration Act. By and large the courts have disfavored interference with the arbitration awards on account of error of law and fact on the score of mis-appreciation and misreading of materials on record and have shown definite inclination to preserve the award as far as possible. The court held that the court does not sit in appeal over the award and review the reasons. The court can set aside the award only if it is apparent from the award that there is no evidence to support the conclusions or if the award is based upon legal proposition which is erroneous.”

In the case of State of UP vs. Allied Constructions, (2003) 7 SCC 396, the Supreme Court held that:

….. the arbitrator is a judge chosen by the parties and his decision is final. The court is precluded from reappraising the evidence. Even in a case where the award contains reasons, the interference therewith would still not be available within the jurisdiction of courts unless, of course, the reasons are totally perverse or the judgment is based on wrong proposition of law. Once, it is found that the view of the arbitrator is a plausible one, the court will refrain itself from interfering.”

NEW REGIME

In January 1996, India enacted a new Arbitration Act called Arbitration and Conciliation Act, 1996. This Act repealed all the three previous statutes. The new Act has two significant parts. Part I provides for any arbitration conducted in India (whether domestic or international) and enforcement of awards there under. Part II provides for enforcement of foreign awards to which New York Convention or the Geneva Convention applies, is governed by Part II of the Act.

DOMESTIC AWARDS

1. Grounds of setting aside

Part of 1996 Act is modeled on the UNCITRAL Model law and the UNCITRAL Arbitration Rules with few departures. The relevant provisions are briefly outlined below.

Section 13 of the 1996 Act provides for the challenge to an arbitrator on the ground of lack of independence or impartiality or lack of qualification. In the first instance the challenge is to be made before the arbitral tribunal itself. If the challenge is rejected, the tribunal shall continue with the arbitration proceedings and make an award. Where the arbitral tribunal overrules the challenge and proceed with the arbitration, the party challenging the arbitration may make an application for setting aside the arbitral award under Section 34 of 1996 Act. Hence the approach to the court is only at the post award stage. This is departure from Model law which provides an approach to the court within 30 days of the arbitral tribunal rejecting the challenge.

The second departure from the Model law (relevant to enforcement) is to be found in Section 16 of the 1996 Act. Section 16 enables the arbitral tribunal to rule on its jurisdiction, including with respect to the existence or validity of the arbitration agreement, it shall continue with the arbitral proceedings and make an award. Section 16 provides that a party aggrieved by such award may make an application for setting aside the same in accordance with Section 34 of the Act. Model Law in contrast provides that where the arbitral tribunal overrules any objection to its jurisdiction, the party aggrieved with such decision may approach court for resolution within 30 days. The Indian Act permits approach to the court only at the award stage.

Hence Section 13 and 16 of Indian Act furnish two additional grounds for the challenge of an arbitral award (over an above the ones stipulated in Section 34 of the Act).

Section 34 of the 1996 Act contains the main grounds for setting aside the award. It provides that the ground contained therein are the “only” grounds on which award may be set aside. However, in the Indian context the word “only” prefixing the grounds is bit of misleading as two additional grounds have been created by the Act itself as mentioned above. Besides, another ground, is to be found in ‘Explanation’ to the public policy in Section 34. The same read as follows:

[1] it is hereby declared, for avoidance of doubt, than an award is in conflict with the public policy of India if the making of award is induced or affected by fraud or corruption or was in violation of Section 75 or Section 81.

Section 75 referred to above is a part of conciliation scheme under the Act and states that the conciliator and parties shall keep confidential all matters relating to the conciliation proceedings. Section 81 prohibits any reference is the arbitral or judicial proceedings to views, suggestions, admissions or proposals, etc. made during the conciliation proceedings.

Save for the exception, referred to above, Section 34 of the 1996 Act is a faithful reproduction of Art 34 of the Model Law.

2. New grounds for challenge to award through Judge made Law

To the above mentioned legislatively stipulated grounds, came to be added a new “judge made” ground. This came about in the Supreme Court decision of Oil and Natural Gas Corp vs. Saw Pipes Ltd. (2003 (5) SCC 705 (‘Saw Pipes’). The issue here was whether an award could be set aside on the ground that the arbitral tribunal had incorrectly applied the law of liquidated damages to the case. The question turned around the scope of Section 34 of the 1996 Act (which on plain reading does not permit a challenge on merits).

The Supreme Court in Saw Pipes came to the conclusion that the impugned award was legally flawed in so far as it allowed liquidated damages on an incorrect view of the law. In the process it held, that an award can also be challenged on the ground that it contravenes “the provisions of the Act (i.e. Arbitration Act) or any other substantive law governing the parties or is against the terms of the contract”. Further the judgment expanded the scope of public policy to add that the award would be contrary to public policy if it is ‘patently illegal’. The Supreme Court in Saw Pipes confined the expansion of public policy to domestic awards alone.

The Saw Pipes judgment has come in for some sharp criticism from several quarters. Read literally, the judgment sets the clock back to old position where the award could be challenged on merits and indeed renders the court as a court of appeal. Some judicial decisions have tried to reign in the effect of Saw Pipes judgment and one instance of this is the Supreme Court decision in the case of McDermott International Inc vs. Burn Standard Co. Ltd. (2006 (11) SCC 181 at 208, where it was held:

“…… The 1996 Act makes provision for the supervisory role of the courts, for the review of the arbitral award only to ensure fairness. Intervention of the court is envisaged in few circumstances only. The court cannot correct the errors of arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. So, the scheme of the provisions aims at keeping the supervisory role of the court to the minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court’s jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it.”

The Saw Pipes judgment has been rightly criticized. To begin with it is contrary to the plain language of the 1996 Act and indeed also the spirit of the law. To permit the challenge on merits would considerable delay the enforcement proceedings. Majority of parties opting for arbitration do so to avoid court delays and legal niceties. To engage them back into the same system at the enforcement stage would be ironic and unwarranted. An unfortunate side effect of this decision is that it has become a ground for the parties to shift the venue of arbitration outside India (since arbitration in India renders the award more vulnerable to judicial review and delays enforcement).

3. Miscellaneous and Procedural Aspects

a) Steps for Enforcement

One of the declared objectives of the 1996 Act is that every final award ‘is enforced in the same manner as if it were a decree of the Court’. Hence the scheme of the Act is that it is up to the losing party to object to the award and petition the court for setting it aside. The wining party has to make procedural move. If the objections to the award are not sustained (or of there are no objections within the time allowed) the award itself becomes enforceable as if it were a decree of the court.

b) The Relevant Court

For the purpose of the 1996 Act, ‘Court’ means the Principal Civil Court having original jurisdiction to decide the question forming the subject matter of the arbitration, if the same were a subject matter of a suit. The aggrieved party can thus bring its application to set aside the award before the court where a successful party has its office or where the cause of action in whole or in part arose or where the arbitration took place.

c) Time Limit

Any application for setting aside the award must be made within three months from the receipt of the same. This period can be extended by the court by a further period of 30 days on sufficient cause being shown – ‘but not thereafter’.

FOREIGN AWARDS

We may now come to enforcement of foreign awards. This is covered by Part II of the 1996 Act. The provisions of Part II of the Act give effect to the New York Convention and the Geneva Convention. Since the Geneva Convention provisions are now redundant, we shall discuss only provisions dealing with enforcement of New York Convention awards.

1. Conditions for Enforcement

In order to be considered as a foreign award under the Act, the same must fulfill two conditions. First it must deal with differences arising out of legal relationship (whether contractual or not) considered as commercial under the laws in force in India. The expression ‘commercial relationship’ has been widely interpreted by Indian Courts. The Supreme Court in the case of RM Investments Trading Co Pvt. Ltd & Anor (1994 (4) SCC 541) while construing the expression ‘commercial relationship’ held:

“…… The term ‘commercial’ should be given wide interpretation so as to cover matters arising from all relationships of commercial nature, whether contractual or not.”

The second requirement is more significant and that is that the country where the award has been issued must be a country notified by the Indian government to be a country to which New York convention applies. The countries which have been notified are:

“Austria, Belgium, Botswana, Bulgaria, Central African Republic, Chile, Cuba, Czechoslovak Socialist Republic, Denmark, Ecuador, Arab republic of Egypt, Finland, France, German Democratic Republic, Federal republic of Germany, Ghana, Greece, Hungary, Italy, Japan, Kuwait, Republic of Korea, Malagasy Republic, Mexico, Morocco, Nigeria, The Netherlands, Norway, Philippines, Poland, Romania, San Marino, Spain, Sweden, Switzerland, Syrian Arab Republic, Thailand, Trinidad and Tobago, Tunisia, Union of Soviet Socialist Republics, United Kingdom, United Republic of Tanzania and United States of America.

An interesting issue came up before the Supreme Court as to what would happen in a case where the country has been notified but subsequently it divides or disintegrates into separate political entities. In Transocean Shipping Agency Pvt. Ltd vs. Black Sea Shipping & Ors (1998 (2) SCC 281) the venue of arbitration was Ukraine which was then part of the USSR – a country recognised and notified by the Government of India as one to which New York Convention would apply. However, by the time disputes arose between the parties the USSR has disintegrated and the dispute came to be arbitrated in Ukraine (which was not notified). The question arose whether an award rendered in Ukraine would be enforceable in India. It was held that the creation of new political entity would not make any difference to the enforceability of the award rendered in a territory which was initially part of notified territory. The decision demonstrates the willingness of Indian courts to overcome the technicalities and lean in favour of enforcement.

2. Conditions of Enforcement

The conditions for enforcement of a foreign award are as per New York Convention. The only addition being an ‘Explanation’ to the ground of public policy which states that an award shall be deemed to be in conflict with the public policy of India if it was induced or affected by fraud or corruption.

Indian courts have narrowly construed the ground of public policy in relation to foreign awards (unlike domestic awards where Saw Pipes case has construed it widely.

3. Judicially created new procedure and new ground for challenge to Foreign awards

There is no statutory provision to set aside the foreign award under the 1996 Act. Foreign awards may be set aside or suspended in the country in which or under the laws of which the award was made. This fundamental distinction between domestic award and foreign award has been obliterated by the Supreme Court in recent case of Venture Global. Supreme Court held that even though there was no provision in Part II of the 1996 Act providing for challenge to a foreign award, a petition to set aside the same would lie under Section 34 of the Act. The court held that property in question (shares of Indian Company) are situated in India and necessarily Indian law would need to be followed to execute the award. In such a situation award needs to be validated on touch stone of Public Policy in India and Indian public policy cannot be given go by through the device of the award being enforced on foreign shores. Going further court held that a challenge to a foreign award in India would have tom meet the expanded scope of public policy as laid down in Saw Pipes.

4. Procedural Requirement

A party applying for enforcement of foreign award is required to produce before the court:

(a) The original award or a copy thereof, duly authenticated in the manner required by the law of the country in which it was made;
(b) The original agreement for arbitration or a duly certified copy thereof;
(c) Such evidence as may be necessary to prove that award is a foreign award;

(a) Relevant Court

The Indian Supreme Court has accepted the principle that enforcement proceedings can be brought wherever the property of losing party may be situated

(b) Time Limit

The 1996 Act does not prescribe any time limit within which a foreign award must be applied to be enforced. However, various High Courts have held that the period of limitation would be governed by the residual provisions under The Limitation Act, 1963, i.e. the period would be three years from the date when the right to apply for enforcement accrues. The High Court of Bombay has held that the right to apply would accrue when the award is received by the applicant.

(c) Post enforcement formalities

Once the court determines that foreign award is enforceable it can straightaway be executed as a decree. In other words, no other application is required to covert the arbitral award into decree. One interesting feature of enforcement of a foreign award is that there is no statutory appeal provided against any decision of the court rejecting objections to the award. An appeal shall lie only if the court holds the award to be non-enforceable. Hence a decision upholding the award cannot be appealed against. However a discretionary appeal would lie to Supreme Court of India under Art 136 of the Constitution of India. Such appeals are entertained only if the court feels that they raise a question of fundamental importance or public interest. Further Art 136 of the constitution provides a constitutional right and cannot be abridged by any statute or legislation.

(d) Conclusion

However one must say that barring few minor blips here and there, Indian courts have distinctly leaned in favour of enforcement and save for a lone case, foreign awards have invariably been upheld and enforced. Viewed in totality, India does not come across as a jurisdiction which carries an anti arbitration bias or more significantly which carries anti foreigner bias. Notwithstanding the interventional instincts and expanded judicial review, Indian courts do restrain themselves from interfering with arbitral awards.

CONTACT INFORMATION

LOKESH RAJPAL
advocate_lokesh@yahoo.co.in
+919036033535