Contract Act

Case BriefsSupreme Court

Supreme Court: The bench of MR Shah and Sanjiv Khanna*, JJ has held that mere exercise of the right by the pawnee to record himself as the ‘beneficial owner’, which is a necessary precondition before the pawnee can exercise his right to sell, is not ‘actual sale’ and would not affect the rights of the pawnor of redemption under Section 177 of the Contract Act.

The Court observed,

“Every transfer or sale is not ‘actual sale’ for the purpose of Section 177 of the Contract Act. To equate ‘sale’ with ‘actual sale’ would negate the legislative intent.”

The Court was deciding the question as to whether the Depositories Act, 1996 read with the Regulation 58 of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 has the legal effect of overwriting the provisions relating to the contracts of pledge under the Contract Act, 1872 and the common law as applicable in India.

The Court, in a 86-pages-long verdict, explained that the Depositories Act distinguishes between the ‘registered owner’ and the ‘beneficial owner’, i.e., the de facto owner, but this does not in any manner contradict or lay down a rule which is contrary to the provisions of Sections 176 and 177 of the Contract Act. These sections, given the objective and purpose behind them, would still apply to any pledge deed and do not get diluted or overridden by the provisions or requirements of the Depositories Act. Section 10, a non obstante provision, which prevails over existing enactments by law, treats the ‘depository’ as the ‘registered owner’ and the shareholder/holder as a ‘beneficial owner’. It does not undermine or rewrite the provisions of the law of pledge and mutual obligations and rights of the pawnee and pawnor.

Further, the non-obstante part of sub-regulation (8) to Regulation 58 serves a limited objective and purpose: the pawnee must record itself as a ‘beneficial owner’ before he proceeds to sell the pledged securities. Without the pawnee being accorded the status of a ‘beneficial owner’, a pawnee cannot proceed to sell the pledged dematerialized securities. A contractual term cannot overwrite the requirement of Sections 7 and 10 of the Depositories Act, which is reflected in sub-regulation (8) to Regulation 58 as pe which the pawnee must be recorded as the ‘beneficial owner’ before the pledged dematerialized securities are sold.

“This requirement of sub-regulation (8) to Regulation 58 does not circumscribe or limit the contractual rights and obligations agreed upon between the parties on the agreed terms, including the pawnee’s right to sell the pawned goods. While the contractual terms are fundamental and determine the rights and obligations inter se the parties including when the pawnee would be entitled to get his name substituted as a ‘beneficial owner’ under the 1996 Regulations, however, the contractual terms are not permitted to override the Contract Act as explained above in so far as it regulates the rights and obligations of the pawnee and pawnor, and the requirement of compliance with Regulation 58(8).”

The Court noted that it is absolutely necessary that the pawnee must be accorded status of ‘beneficial owner’ to enable him to exercise his right to sell the pledged dematerialized securities. The object is to ensure compliance with the procedure prescribed for the sale of dematerialised securities and not to interfere with the freedom to contract as long as they comply with the Contract Act and other laws. Further, if the terms of the pledge document violate Regulation 58(8), the pledge is not rendered void or illegal, albeit enforcement of the pledge viz. the dematerialised securities will be rendered unattainable unless steps are taken to act in accordance with the procedure prescribed by the 1996 Regulations. The pawnee would be entitled to sue the pawnor for recovery of money, breach of contract and may even apply for injunction/restrain on sale of dematerialised securities. However, third-party rights on transfer of the dematerialized securities, unless injuncted by a prior court order, would not be affected as long as the transfers are in terms of the Depositories Act and the 1996 Regulations.

Stating that while interpretating the law relating to commercial matters and commerce the court must consider the real-world impact and consequences, the Court held that the expression ‘actual sale’ in Section 176 read in the context of the Depositories Act and the 1996 Regulations have to be given a meaning. The expression ‘actual sale’ used in Section 177 should be read as ‘the sale by the pawnee to a third person made in accordance with the Depositories Act and applicable by-laws and rules’. It also means and requires compliance with Section 176 of the Contract Act.

The reasoning that prior notice under Section 176 of the Contract Act would interfere with transparency and certainty in the securities market and render fatal blow to the Depositories Act and the 1996 Regulations is farfetched as it fails to notice that the right of the pawnee is to realise money on sale of the security. The objective of the pledge is not to purchase the security. Purchase by self is conversion and does not extinguish the pledge or right of the pawnor to redeem the pledge.

Hence, the Court did not find any derogation or conflict between Section 176 of the Contract Act and sub-regulations (8) and (9) of Regulation 58. Regulation 58(8) entitles the pawnee to record himself as a ‘beneficial owner’ in place of the pawnor. This does not result in an ‘actual sale’. The pawnee does not receive any money from such registration which he can adjust against the debt due. The pledge creates special rights including the right to sell the pawn to a third party and adjust the sale proceeds towards the debt in terms of Section 176 of the Contract Act.

[PTC INDIA FINANCIAL SERVICES LIMITED v. VENKATESWARLU KARI, 2022 SCC OnLine SC 608, decided on 12.05.2022]

*Judgment by: Justice Sanjiv Khanna

Case BriefsSupreme Court

Supreme Court: The 3-Judge Bench comprising of Dr. Dhananjaya Y Chandrachud*, Surya Kant and Vikram Nath, JJ., affirmed the impugned order of the Telecom Disputes Settlement and Appellate Tribunal whereby the Tribunal had dismissed appellant’s claim for refund of Rs 1454.94 crores Entry Fee paid by it for 2G licences. The Bench stated,

“…as a beneficiary and confederate of fraud, the appellant could not be lent the assistance of this Court for obtaining the refund of the Entry Fee.”

The instant appeals were filed under Section 18 of the Telecom Regulatory Authority of India Act 1997 against the judgments of the Telecom Disputes Settlement and Appellate Tribunal (TDSAT). The appellant claimed a refund of Rs 1454.94 crores Entry Fee paid by it for 2G licences for twenty-one service areas.

Noticeably, the Supreme Court by its judgment in Centre for Public Interest Litigation v. Union of India, (2012) 3 SCC 1 (CPIL), had quashed 2G licences granted by the Union of India, including to the appellant. The Court had declared that the policy of the Union government for allocation of 2G spectrum on a ―First Come First Serve‖ basis was illegal.

Decision of TDSAT

As a consequence, the appellant approached the TDSAT to claim refund of its Entry Fee on the principles of civil, contractual and constitutional law which was dismissed by the TDSAT holding that the quashing of the appellant’s licences by the Supreme Court in its judgment in CPIL could not be equated with the Unified Access Service Licences (UASL) agreements becoming void within the meaning of Section 65 of the Indian Contract Act 1872.

The appellant then instituted another petition before the TDSAT7 raising the issue of a refund of the Entry Fee, on the ground that it had been exonerated by the Special Judge, CBI for charges under Section 120-B and 420 of the Indian Penal Code 1860 in a case relating to the grant of UASLs. However, it met with the same fate as the TDSAT dismissed the second petition noting that the appellant had made a second attempt for claiming the same relief which had been sought earlier in the First Telecom Petition.

Contention of the Appellant

It was against the impugned judgment of the TDSAT that the appellant had approached the Supreme Court contending that the fraud in the First Come First Serve policy for 2G spectrum allotment existed at the doorstep of the Union government alone and that the appellant was free from taint or wrong doing.

The CPIL Judgment

In CPIL, the Supreme Court had held that that the First Come First Serve policy was writ large with arbitrariness, and was intended to favour certain specific entities at a grave detriment to the public exchequer as the then Minister of Communications and Information Technology wanted to favour some companies and that as a matter of fact the entire process was stage-managed to favour those who had access to the nitty-gritties of the policy in advance. The Bench had observed,

“Undoubtedly, the authors of the ―First Come First Serve policy were the official actors comprised within the Union government. But equally, the decision did not exculpate the private business entities who obtained UASLs and became the beneficiaries of their decision.

Noticing that the appellant was amongst the four licensees who were directed to pay a cost of Rs 50 lakhs each because they too had been benefited by the wholly arbitrary and unconstitutional exercise undertaken by Department of Telecommunication (DoT) for grant of UASL and allocation of spectrum of 2G band, the Bench opined that the appellant was also complicit in the illegal exercise of obtaining favours by the indulgence of those in power. Thus, the the appellant was held to be in pari delicto along with the Union government.

Whether the Entry Fee was Refundable?

Clause 619 of the UASL Guidelines issued by the DoT required each applicant seeking a UASL for a given service area to deposit a non-refundable entry fee. Accordingly, the appellant paid paid the amount of Rs 1454.94 crores as entry fee and it was only upon the payment of Entry Fee the appellant became eligible to be issued UASLs in the twenty-one service areas. Additionally, Clause 18.121 of the UASL agreement acknowledged the payment of a onetime non-refundable entry fee prior to the signing of the agreement.

Thus, the Bench noted that the Entry Fee was a onetime non-refundable fee payable by an applicant for participating in the process of obtaining the UASL and was distinguishable from the licence fee under Clause 10.122, which was relatable to the actual operation of the licence.

Doctrine of frustration and restitution

The appellant had relied on the provisions of Sections 56 and 65 of the Contract Act to claim benefits of restitution and frustration contending that when a licence is granted under the proviso to Section (4)(1) of the Telegraph Act, the licence is in the nature of a contract between the government and licensee, thus bringing it within the ambit of the Indian Contract Act.

The Bench referred to Graham Virgo’s, “The Principles of Law of Restitution”, to observed that all claims for restitution are subject to a defence of illegality. The genesis of which is in the legal maxim ex turpi causa non oritur actio (no action can arise from a bad cause). Further, that a court will not assist those who aim to perpetuate illegality.

Thus, relying on the principle that when the party claiming restitution is equally or more responsible for the illegality of a contract, they are considered in pari delicto, the Bench held that unless the party claiming restitution participated in the illegal act involuntarily or the rule of law offers them protection against the defendant, they would be held to be in pari delicto and therefore, their claim for restitution will fail. The Bench expressed,

“If the party claiming restitution was equally or more responsible for the illegality (in comparison to the defendant), there shall be no cause for restitution.”

Verdict

Consequently, the Bench concluded that the appellant was in pari delicto with DoT and the then officials of the Union government. Hence, as a beneficiary and confederate of fraud, the appellant could not be lent the assistance of this Court for obtaining the refund of the Entry Fee. Accordingly, the appeal was dismissed.

[Loop Telecom & Trading Ltd. v. Union of India, 2022 SCC OnLine SC 260, decided on 03-03-2022]

*Judgment by: Justice Dhananjaya Y Chandrachud

Appearance by:

For the Appellant: A M Singhvi and Huzefa A Ahmadi, Senior Advocates

For the Union of India: Vikramjit Banerjee, Additional Solicitor General

Kamini Sharma, Editorial Assistant has put this report together 

Case BriefsSupreme Court

Supreme Court: In a case where the Division Bench comprising of Uday Umesh Lalit and S. Ravindra Bhat*, JJ., was to answer whether absence of express provision prohibiting the pharmaceutical companies from providing freebies to the medical practitioners be considered prohibited by law when acceptance of freebies by medical practitioners is expressly made an offence, answering in affirmative, the Bench observed,

“…the cold letter of the law is not an abstract exercise in semantics which practitioners are wont to indulge in. So viewed the law has birthed various ideas such as implied conditions, unspelt but entirely logical and reasonable obligations, implied limitations etc.”

The genesis of the issue was that Apex Laboratories Pvt. Ltd., a pharmaceutical company was issued a notice under Section 142(1) of the Income Tax (IT) Act, 1961 to explain why the expenditure of Rs. 4,72,91,159 incurred towards gifting freebies such as hospitality, conference fees, gold coins, LCD TVs, fridges, laptops, etc. to medical practitioners for creating awareness about the health supplement ‘Zincovit’, should not be added back to the total income of Apex.

Noticeably, an amendment to the Medical Council Act, 1956 through the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 published in the Official Gazette on 14-12-2009, disallowed medical practitioners from accepting emoluments in the form of inter alia gifts, travel facilities, hospitality, cash or monetary grants. Consequently, on 01-08-2012, the Central Board of Direct Taxes issued a circular, which clarified that expenses incurred by pharmaceutical and allied health sector industries for distribution of incentives (i.e., “freebies”) to medical practitioners are ineligible for the benefit of Explanation 1 to Section 37(1), which denies the application of the benefit for any purpose which is an ‘offence’ or ‘prohibited by law’.

Findings of the Courts Below

Therefore, CIT(A) had held that the amounts spend by Apex for distribution of freebies would not classify as ‘business expenditure’ under Section 37(1) of the IT Act, 1961. The order of CIT was concurrently upheld by the Income Tax Appellate Tribunal and the High Court. Relying on the Regulations, 2002, the High Court further held that only the expenses incurred till 14-12-2009 were eligible for the benefit of Section 37(1), and not for the entirety of the Assessment Year 2010-2011, as claimed by Apex.

Contentions of the Parties

The Apex contended that while medical practitioners were expressly prohibited from accepting freebies, no corresponding prohibition in the form of any binding norm was imposed on the pharmaceutical companies gifting them. In the absence of any express prohibition by law, Apex could not be denied the benefit of seeking exclusion of the expenditure incurred on supply of such freebies under Section 37(1).

On the contrary, the State submitted that Parliament’s intention to disincentivize the practice of receiving extravagant freebies in exchange for prescribing expensive branded medication over its equally effective generic counterparts, thereby burdening patients with unnecessary costs, was apparent from the amended Regulations, 2002 and the menace of prescribing expensive branded medication as a quid pro quo arrangement had a direct bearing on public policy, which was implicit in the Regulations, 2002.

Observations and Analysis

Section 37 of the IT Act is a residuary provision which states that any business or professional expenditure which does not ordinarily fall under Sections 30-36, and which are not in the nature of capital expenditure or personal expenses, can claim the benefit of exemption. But the exemption is not absolute and Explanation 1, restricts the application of such exemption for “any purpose which is an offence or which is prohibited by law”.

Doubting the position as had been laid down in CIT 8(2) v. PHL Pharma P. Ltd. (ITA No. 4605/Mum/2014, dated 12.01.2017), that the 2002 Regulations were inapplicable to pharmaceutical companies, and there was no enabling provision to allow the CBDT to bring pharmaceutical companies within the fold of the 2002 Regulations, and even if such an act were to be permitted, it could be only be done so prospectively, the Bench opined,

“Such a narrow interpretation of Explanation 1 to Section 37(1) defeats the purpose for which it was inserted, i.e., to disallow an assessee from claiming a tax benefit for its participation in an illegal activity.”

The Bench observed,

“It is but logical that when acceptance of freebies is punishable by the MCI, pharmaceutical companies cannot be granted the tax benefit for providing such freebies, and thereby (actively and with full knowledge) enabling the commission of the act which attracts such opprobrium.”

Thus, the Bench noted that acceptance of freebies given by pharmaceutical companies is clearly an offence on part of the medical practitioner, punishable with varying consequences which falls within the purview of “prohibited by law” in Explanation 1 to Section 37(1).

Findings

Emphasising on the principle of law that no court will lend its aid to a party that roots its cause of action in an immoral or illegal act, the Bench opined that none should be allowed to profit from any wrongdoing coupled with the fact that statutory regimes should be coherent and not self-defeating. Observing that a doctor’s prescription is considered the final word on the medication to be availed by the patient, even if the cost of such medication is unaffordable or barely within the economic reach of the patient, the Bench noted,

“…it is a matter of great public importance and concern, when it is demonstrated that a doctor’s prescription can be manipulated, and driven by the motive to avail the freebies offered to them by pharmaceutical companies, ranging from gifts such as gold coins, fridges and LCD TVs to funding international trips for vacations or to attend medical conferences.”

The Bench noted that these freebies are technically not ‘free’ – the cost of supplying such freebies is usually factored into the drug, driving prices up, thus creating a perpetual publicly injurious cycle due to prescribing medication that is significantly marked up, over effective generic counterparts in lieu of such a quid pro quo exchange. Further, the agreement between the pharmaceutical companies and the medical practitioners in gifting freebies for boosting sales of prescription drugs was also held to be violative of Section 23 of the Contract Act, 1872 as Pharmaceutical companies misuse a legislative gap to actively perpetuate the commission of an offence.

Conclusion

In the instant case, the freebies given by Apex, to the doctors had a direct result of exposing the recipients to the odium of sanctions, leading to a ban on their practice of medicine. Therefore, the Bench held that the medical practitioners being forbidden from accepting such gifts, or “freebies” was no less a prohibition on the part of their giver, or donor, i.e., Apex. Hence, the appeal was dismissed.

[Apex Laboratories Pvt. Ltd. v. CIT, 2022 SCC OnLine SC 221, decided on 22-02-2022]

*Judgment by: Justice S. Ravindra Bhat

Appearance by:

For the Appellant: S. Ganesh, Senior Advocate

For the Respondents: Sanjay Jain, ASG

Kamini Sharma, Editorial Assistant has put this report together 

 

Case BriefsHigh Courts

Kerala High Court: The Division Bench of P.B. Suresh Kumar and C.S. Sudha, JJ., expressed that,

“…compensation payable under Sections 73, 74 as also under Section 75 is only for loss or damage caused by the breach and not account of the mere act of breach. If in any case the breach has not resulted in or caused any loss or damage to a party, person concerned cannot claim compensation.”

The words ‘loss or damage’ in the Sections 73 and 74 would necessarily indicate that the party who complains of breach must have really suffered some loss or damage apart from being faced with the mere act of breach of contract. That is because every breach of every contract need not necessarily result in actual loss or damage.

An appeal was filed under Section 37 of the Arbitration and Conciliation Act, 1996 against the District Court’s Order.

Appellant was the petitioner before the lower court and the claimant before the Arbitral Tribunal.

Respondent warded the work of ‘doubling of track between Shornur and Mangalore, Cannanore-Uppala section: collection and stacking of 50mm size machine crushed hard stone ballast alongside the alignment/station yards/on top of the new formation between Kottikulam and Kasaragod stations to the claimant for a value of Rs 1,19,39,274. The work had to be completed within a period of 9 months, alleging the breach by claimant, the contract was terminated by the respondent.

In view of the above, disputes arose between the parties and arbitration proceedings were initiated.

Aggrieved with the order of the arbitral tribunal, the claimant/contractor took up the matter before the District Court. The said application which was filed under Section 34 was dismissed by the impugned order.

Analysis, Law and Decision

Firstly, the High Court referred to Sections 73 and 74 of the Indian Contract Act, 1872.

Bench noted that for a case coming under Section 74, it is not necessary for the party claiming compensation under this Section to prove that actual damage or loss has been caused.

Whether even in the absence of legal injury, compensation is liable to be paid for breach simplicitor?

The Court stated that whether it is a case of liquidated damages or penalty, what the party faced with the breach gets is only reasonable compensation, subject to the limit of the amount stipulated in the contract itself. Section 74 dispenses with proof of the extent of real or actual or factual loss or damage, but provides for grant of reasonable compensation, subject to the condition that it shall not exceed the sum stipulated as penalty in the contract.

Adding to the above, Bench expressed that the proof of the extent of loss or damage suffered in fact, i.e., proof of the extent of actual damage or loss suffered is dispensed within Section 74. This would not mean that there need not be any loss or damage. What is meant is only that proof of actual damage or loss is not necessary.

In Court’s opinion, Section 74 could not be invoked in the present matter because the Award did not say that any sum had been named in the contract as the amount to be paid in case of breach.

“Parties had never made a genuine pre-estimate of the amount to be paid in the event of any damage or loss likely to be caused by the breach or that there is any clause relating to liquidated damages in the contract.”

Elaborating further, the Bench stated that compensation payable under Sections 73, 74 as also under Section 75 is only for loss or damage caused by the breach and not account of the mere act of breach. If in any case the breach has not resulted in or caused any loss or damage to a party, person concerned cannot claim compensation.

In the Supreme Court decision of Union of India v. Rampur Distillery and Chemical Co. Ltd., (1973) 1 SCC 649, it was held that a party to a contract taking security deposit from the other party to ensure due performance of the contract, is not entitled to forfeit the deposit on the ground of default when no loss was caused to him in consequence of such default.

If the party complaining is in a position to adduce evidence whereby the court can assess reasonable compensation, then without proof of actual loss, damages will not be awarded and amount mentioned by the contract will be penalty. In such circumstances, it has been held that the security amount is liable to be forfeited.

The Award in the present matter clearly did not say that any loss or damage had been caused to the respondent, hence neither the provisions of Sections 73,74 or 75 could have been invoked nor the said sections are applicable in the present case.

In view of the above discussion, Arbitral Tribunal was certainly wrong in rejecting the claim of the claimant for release of the amount of security deposit of Rs 3 lakhs.

Arbitral Tribunal’s finding of the provisions of Section 73 to 75 of the Contract Act, was certainly in contravention of the fundamental policy of Indian Law as contemplated in Section 34(2)(b)(ii) of the Act.

Concluding the matter, High Court allowed the appeal and set aside the impugned order. [Devchand Construction v. Union of India, 2022 SCC OnLine Ker 826, decided on 16-2-2022]

Advocates before the Court:

For the Appellant:

Santha Varghese, Ranjith Varghese and Rahul Varghese, Advocates

For the Respondent:

Sri. S. Ananthakrishnan, SC, Railways

Case BriefsSupreme Court

Supreme Court: In an issue relating to the alleged gift deed by an old illiterate woman, the bench of MR Shah and Sanjiv Khanna*, JJ has held that when a person obtains any benefit from another, the court would call upon the person who wishes to maintain the right to gift to discharge the burden of proving that he exerted no influence for the purpose of obtaining the document. While the corollary to this principle finds recognition under sub-section (3) to Section 16 of the Contract Act, 1872 which relates to pardanashin ladies, the courts can apply it to old, illiterate, ailing or infirm persons who may be unable to comprehend the nature of document or contents thereof.

Factual Background

The dispute relates to land owned by Hardei, who died issueless in 1991. Gian Chand is the son of Hardei’s brother, whereas Keshav is her sister’s son. Gian Chand and Dhanbir, contended that late Hardei had gifted the land to them during her lifetime vide gift deed dated 23rd December 1985.

Keshav, on the other hand, claimed that he was a tenant in occupancy of the land for over 15 years, a fact admitted by Hardei before the revenue authorities. Keshav had therefore acquired rights over the land. Hardei, during her lifetime, had denied execution of the gift deed and opposed the request of mutation of the land in favour of Gian Chand and Dhanbir, which request for mutation was rejected in 1989.

Both the Trial Court and the first appellate court decided in favour of Keshav to hold that the execution of the gift deed by Hardei in favour of the plaintiffs was a delusion, bease on the following facts:

Hardei was an old illiterate lady who used to live in a village with her sister’s son Keshav. The gift deed statedly executed on 23rd December 1985 and registered on 1st January 1986, was not produced for mutation till 1989, where also, Hardei had opposed the mutation and denied execution of gift deed in favour of the plaintiffs. She had stated before the revenue authority that Keshav was in possession of the land in dispute for about the last 15 years. Further, there was ample evidence to show that Keshav was looking after Hardei and taking care of her needs. Therefore, there was no reason for Hardei to execute a gift deed favouring the plaintiffs. The plaintiffs were never in possession of the suit land even for the period after execution of gift deed in 1986, and till the institution of the suit in 1991. The revenue entries for the said period did not support the plaintiffs.

The Himachal Pradesh High Court, however, reversed the concurrent findings on the ground that the trial court and the first appellate court had misread and misinterpreted the documentary and oral evidence.

Analysis

The Court noticed that the concurrent findings of the lower courts delve into the context and factual aspects surrounding the primary evidence viz., gift deed, to conclude that the plaintiffs case lacks base for a bona fide claim for decree of declaration. Appreciation of evidence is an exercise based on facts and circumstances where the preponderance of probability can take varying form and configurations. What facts and circumstances have to be established to prove the execution of a document depends on the pleas put forward. Ordinarily, no one is expected to sign or execute a document without knowing its contents, but if it is pleaded that the party executing the document did not know the contents thereof then it may, in certain circumstances, be necessary for the party seeking to prove the document to place material before the court to satisfy it that the party who executed the document had the knowledge of its contents.

When a person obtains any benefit from another, the court would call upon the person who wishes to maintain the right to gift to discharge the burden of proving that he exerted no influence for the purpose of obtaining the document. Corollary to this principle finds recognition in sub-section (3) to Section 16 of the Contract Act, 1872 which relates to pardanashin ladies. The courts can apply this principle to old, illiterate, ailing or infirm persons who may be unable to comprehend the nature of document or contents thereof.

Equally, one who bargains in the matter of advantage with a person who places confidence in him is bound to show that a proper and reasonable use has been made of that confidence. The burden of establishing perfect fairness, adequacy and equity is cast upon the person in whom the confidence has been reposed. Therefore, in cases of fiduciary relationships when validity of the transaction is in question it is relevant to see whether the person conferring the benefit on the other had competent and independent advice.

The question whether a person was in a position to dominate the will of the other and procure a certain deed by undue influence is a question of fact, and a finding thereon is a finding of fact, and if arrived at fairly in accordance with the procedure prescribed, it is not liable to be reopened in second appeal.

Ruling on facts

Considering that the very origin of the gift deed was disputed by the executant during her lifetime, the lower courts were right in weighing the evidence of the gift deed on the touchstone of its validity first, rather than its form and content.

The fact in issue in the present case is the voluntariness and animus necessary for the execution of a valid gift deed, which is to be examined on the basis of evidence led by the parties who could depose for the truth of this fact in issue. Decision and determination of the fact in issue is by examination of the oral evidence of those persons who can vouchsafe for the truth of the facts in issue.

The impugned judgment in the second appeal by the High Court, unfortunately, chose to ignore and not deal with the fact in issue in the background of the case, but was completely influenced by the evidence led to support execution and registration of the document, and not whether execution was voluntary and in exercise of unfettered will to effect gratuitous transfer of land in favour of the plaintiffs.

Concurrent findings of facts arrived at in the present case were based upon a holistic examination of the entire evidence relating to execution and validity of the gift deed. The lower courts did not adopt a legalistic approach but took into account not one but several factual facets to accept the version given by Keshav that the gift deed was not a valid document.

“These concurrent findings are not perverse but rather good findings based upon cogent and relevant material and evidence on record. These findings of the facts can be interfered in the second appeal only if they are perverse or some gross illegalities have been committed in arriving at such findings. To reverse the findings is not only to assess errors but also deal with the reasons given by the court below and record findings and grounds for upsetting the conclusion.”

The Court hence held that the views and findings recorded by the lower courts are well reasoned and have taken into account several factors that repel and contradict the claim of a valid execution of the gift deed by Hardei favouring the plaintiffs. Hence, the impugned judgment of the High Court was set aside.

[Keshav v. Gian Chand, 2022 SCC OnLine SC 81, decided on 24.01.2022]

*Judgment by: Justice Sanjiv Khanna

Case BriefsDistrict Court

Dwarka Court, New Delhi: Shipra Dhankar, MM (NI Act) on noting that the dishonour of cheque occurred in consequence of an illegal and void agreement, dismissed the complaint under Section 138 of the Negotiable Instrument Act, 1881.

What are we dealing with in the present matter?

The Complainant was approached by the accused with the proposal that, in return for a commission/liaison fee, the accused can obtain in the complainant’s favour a tender issued by the NTPC where the accused enjoys “good links” with the higher authorities.

Thereafter, the complainant, after having applied for the said tender and paid the amount demanded from him, received from the accused a tender award letter, however, the said letter was later found to be forged.

In view of the above incident, the complainant demanded his money back from the accused, pursuant to which certain cheques were drawn in his favour out of which one got dishonoured.

Complainant approached the Court due to the dishonour of the above-said one cheque.

Analysis, Law and Decision

Section 138 NI Act clarifies that “debt or other liability” means a legally enforceable debt or other liability. The said legal position was fortified by the decision of Delhi High Court in Virender Singh v. Laxmi Narain, 2006 SCC OnLine Del 1328 wherein it was found that if the consideration or object of an agreement is unlawful, illegal or against the public policy, the agreement itself is void and legally unenforceable, as a result of this, any cheque issued in discharge of a liability under such a void agreement, cannot be said to be issued in discharge of a legally enforceable debt o liability.

The Bench also relied on Section 23 of the Indian Contract Act to see whether the agreement entered into by both the parties was for a lawful consideration/object or not.

Court on noting the fact that the sole purpose of the agreement was to obtain a tender in favour of the complainant, not on the basis of its intrinsic merit, but on the basis of “good links” of the accused with the NTPC higher authorities. Such agreements are expressly rendered void and of no legal consequence by virtue of Section 23 of the Indian Contract Act.

Hence the agreement was illegal and void.

In the present matter, presumption stood rebutted by the Complainant’s own version. The complainant’s own depiction of the transaction disclosed that the same was legally unenforceable and void.

Lastly, the Court referred to the maxim “in pari delicito portior est conditio defendantis”, which embodies the principle: “the Courts will refuse to enforce an illegal agreement at the instance of a person who is himself a party to a illegality or fraud”.

In light of the above discussion, the cognizance in the present complaint was declined and the complaint was dismissed. [Virender Dahiya v. Keshav Kumar, CC No. 11747 of 2021, decided on 10-1-2022]

Case BriefsHigh Courts

Delhi High Court: “It is the consideration which puts enforceability in the agreements to make promises legally binding”, Asha Menon, J., stated that the importance of ‘consideration’ cannot be belittled.

Background

Instant suit was filed to seek specific performance of a Collaboration Agreement for granting of a permanent and mandatory injunction against the defendant. Damages to the tune of Rs 2,10,00,000 were claimed against the defendant for attempting to cancel the said Collaboration Agreement.

Defendant was stated to be having 75% share in the said property and in actual, physical possession of his share, while his brother had 25% share in the said property, which the wife of the plaintiff claimed to have purchased through an Agreement to Sell from him for a sum of Rs 3,23,00,000, Rs 30,00,000 having been paid towards earnest money.

Contentions

Kishore M. Gajaria, Plaintiff’s counsel submitted that a Collaboration Agreement was entered into between the plaintiff and the defendant for re-development of the property and the same had been duly signed by the defendant. However, subsequently, a notice was issued to the plaintiff stating that the said agreement was an invalid document as it lacked in ‘consideration’ and had been forced upon the defendant, taking advantage of his age.

There were WhatsApp communications and talks on the phone between the parties, but the defendant claimed he was being prevented from acting on the Collaboration Agreement by his son and daughter-in-law.

Due to the defendant’s conduct, plaintiff suffered a loss as he had raised huge loans from the market and had purchased building materials worth Rs 10,00,000 too.

Further, the counsel submitted that the Collaboration Agreement contained reciprocal promises, plaintiff had undertaken to construct the property and the defendant did not have to spend any money, in return the defendant had to transfer two floors and 25% of the stilt parking to the plaintiff.

Hence consideration was the amount to be spent on construction and each party’s promise was the consideration for the reciprocal promise. Since the said promise of constructing two floors and handing over the same to the defendant was “valuable”, it satisfied the definition of ‘consideration’ under Section 2(d) of the Indian Contract Act, 1872.

Further, the counsel relied on the Supreme Court decisions in Union of India v. Chaman Lal Loona, 1957 SCR 1039 and Chidambara Iyer v. P.S. Renga Iyer, (1966) 1 SCR 168, and urged that what was “valuable” was determinable also by the Court and therefore, this Court may accept that consideration had passed, even if not in money.

Analysis, Law and Decision

High Court expressed that the reliance on Chidambara Iyer v. P.S. Renga Iyer, (1966) 1 SCR 168 was misplaced.

Question:

Whether the Collaboration Agreement contains promises that are valid and are binding?

Bench noted that there was no reference in the Collaboration Agreement to the consideration being paid for the transfer of the property by the defendant to the plaintiff, there was also no undertaking mentioned in the agreement as to the liability of the plaintiff to meet the construction cost and finally, not even an estimate of the construction cost was mentioned, though there was some reference to the quality of construction being ‘good’.

What all reciprocal promises made, and constituted consideration were not revealed or explained.

Bench also expressed that another significant fact was that the reply to the Legal Notice recorded that the conversion from leasehold to freehold did not take place. In fact, the said reply also revealed that the Agreement to Sell with the brother of the defendant was also dependent on the said conversion and as per the WhatsApp communication placed on record, the plaintiff’s wife seemed to have called off that deal too.

Court stated that in any event, payment of Rs 30,00,000 to the brother of the defendant can, by no means, be read as ‘consideration’ being paid to the defendant.

Elaborating further, WhatsApp communication addressed to the brother of the defendant which was sent by the plaintiff and his wife affirmed the position and because of the inability to convert the property, had requested that the Agreement to Sell between them be treated as cancelled. Hence, the refund of entire amount paid to him was also called for.

“Importance of ‘consideration’ cannot be belittled.” 

“Even where the ‘promisor’ intends to bind himself by the promise, ‘consideration’ is essential to make the promise binding and enforceable.”

Bench held that the agreement was completely silent on the value of the property, now belonging to the defendant, and the estimated cost of construction.

The Court opined that the ‘Agreement’ seemed to be more in the nature of a note of assurances and not a ‘concluded’ contract.

Further, the averments in the plaint and the documents filed by the plaintiff did not disclose any cause of action. Supreme Court in T. Arivandandam v. T.V. Satyapal, (1977) 4 SCC 467 has held that

while considering an application under Order VII Rule 11 CPC, what is required to be decided is whether the plaint discloses a “real cause of action” or something “purely illusory”. If, on a meaningful and not a mere formal reading of the plaint, it appears to be manifestly vexatious and meritless and fails to disclose a clear right to sue, but through clever drafting creates an illusion of a cause of action, the court being guided by the mandatory provisions of Order VII Rule 11 CPC should not hesitate to exercise powers vested in it to “nip it in the bud”.

In view of the above discussion, the plaint was rejected under Order VII Rule 11 (a) CPC. [Sameer Madan v. Ashok Kumar Kapoor, 2021 SCC OnLine Del 5290, decided on 15-12-2021]

Advocates before the Court:

For the plaintiff: Kishore M. Gajaria and Aayush Paranjpe, Advocates

Case BriefsHigh Courts

Chhattisgarh High Court: Rajendra Chandra Singh Samant, J., dismissed the petition being devoid of merits.

The facts of the case are such that the petitioner and respondent 5 are husband and wife who are unhappy together and want no reconciliation. An FIR has been lodged against the petitioner alleging the commission of offences under Sections 498A, 377, 323, 34 of IPC and Sections 3 and 4 of Dowry Prohibition Act. The instant petition was filed under Article 226 of Constitution of India seeking quashing the said FIR.

Counsel for the petitioners submitted that subsequent to lodging of FIR, the petitioner and respondent negotiated a compromise through a certain amount to be given to respondent 5 as there is no possibility of reconciliation and a petition for divorce will be filed and the cases will be withdrawn. It was further submitted that as the agreement still exists it is a fit case in which the FIR with respect to offences under Section 498A, 377, 323 and 34 of IPC and Section 3 and 4 of Dowry Prohibition Act is liable to be quashed.

Counsel for the State submitted that a prima-facie case is made out, which reflects the commission of offences registered against them. The offences under Section 498A, 377, 323 and 34 of IPC and Section 4 and 6 of Dowry Prohibition Act are not compoundable. There may be an agreement between the parties for settlement of the disputes, but that cannot be made a ground for quashment of the FIR against the petitioner.

Section 24 of the Contracts Act provides as follows:-

“24. Agreements void, if considerations and objects unlawful in part. —If any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void.”

The Court observed that in view of the provision under Section 24 of the Contracts Act one of the terms of the agreement was that the Respondent 5 wants to withdraw the criminal complaint against the petitioner after receiving payment for the same, which cannot be regarded as any lawful term as the agreement cannot be enforced under any law.

The Court relied on Gian Singh v. State of Punjab, (2012) 10 SCC 303. and observed that “In respect of serious offences like murder, rape, dacoity, etc; or other offences of mental depravity under IPC or offences of moral turpitude under special statutes, like Prevention of Corruption Act or the offences committed by public servants while working in that capacity, the settlement between offender and victim can have no legal sanction at all. However, certain offences which overwhelmingly and predominantly bear civil flavour having arisen out of civil, mercantile, commercial, financial, partnership or such like transactions or the offences arising out of matrimony, particularly relating to dowry, etc. or the family dispute, where the wrong is basically to victim and the offender and victim have settled all disputes between them amicably, irrespective of the fact that such offences have not been made compoundable, the High Court may within the framework of its inherent power, quash the criminal proceeding or criminal complaint or F.I.R if it is satisfied that on the face of such settlement, there is hardly any likelihood of offender being convicted and by not quashing the criminal proceedings, justice shall be casualty and ends of justice shall be defeated.”

 The Court observed that the terms of agreement in the compromise may be a ground of defence for the petitioner, but that cannot be a ground for quashment of the whole criminal case against them. Without there being any reason to believe that the settlement is complete between the parties, this Court cannot hold that the continuation of proceedings will be an exercise in futility, as the respondent No.5 is intent in prosecute the petitioner and others on the basis of a complaint against them

The Court thus held that one of the charges against the petitioner is the charge under Section 377 of I.P.C. regarding commission of unnatural sexual intercourse with the respondent 5, which is a ground connected with the offence under Section 498 (A) of I.P.C. regarding imparting cruel treatment to the respondent 5 by the petitioner, therefore, after overall consideration of the facts and circumstances and the case law cited, I am of this view that this is not a fit case, in which the petitioner can be granted relief as prayed by him, therefore, this petition is dismissed and disposed off.

[Nimish Agrawal v. State of Chhattisgarh, 2021 SCC OnLine Chh 3202, decided on 25-10-2021]

Arunima Bose, Editorial Assistant has reported this brief.

Appearances

For Petitioner: Mr. Manoj Paranjpe

For respondent 01 to 04: Mrs. Hamida Siddiqui.

For respondent 05: Mr. Jaydeep Singh Yadav

Case BriefsDistrict Court

Additional Chief Metropolitan Magistrate, Mayo Hall Unit, Bengaluru: Vani A. Shetty, XVII Additional Judge, Court of Small Causes & ACMM, addressed a matter with respect to the liability of the accused in a case of dishonour of cheque under Section 138 of the Negotiable Instruments Act, 1881.

In the present case, the accused was tried for the offence punishable under Section 138 of the Negotiable Instruments Act.

Factual Background

Complainant with an intention to have a South Africa trip paid Rs 24 lakhs to the accused to book the tickets. But the accused failed to book the tickets and repaid a sum of Rs 14.5 lakhs to the complainant and sought time for the payment of balance amount of Rs 9.5 lakhs. Towards the discharge of the said liability, the accused issued a cheque for Rs 4,50,000 assuring that the cheque would be honoured if presented for payment.

But the cheque came to be dishonoured on the grounds of ‘payment stopped by drawer’. Thereafter the complainant got issued a legal notice demanding repayment of the cheque amount within 15 days. Due to no response from the accused, an instant complaint was filed.

In view of sufficient ground to proceed further, a criminal case was registered against the accused, and she was summoned.

Question for Consideration:

Whether the complainant proved that the accused has committed an offence punishable under Section 138 of the NI Act, 1881?

Analysis, Law and Decision

While analyzing the matter, Bench stated that in order to constitute an offence under Section 138 NI Act, the cheque shall be presented to the bank within a period of 3 months from its date. On dishonour of cheque, the drawer or holder of the cheque may cause demand notice within 30 days from the date of dishonour, demanding to repay within 15 days from the date of service of the notice.

“If the drawer of the cheque fails to repay the amount within 15 days from the date of service of notice, the cause of action arises for filing the complaint.”

In the present matter, the complainant had complied with all the mandatory requirements of Section 138 and 142 of the NI Act.

Section 118 of the NI Act lays down that until the contrary Is proved, it shall be presumed that every Negotiable Instrument was made or drawn for consideration.

Section 139 NI Act contemplated that unless the contrary is proved, it shall be presumed that the holder of the cheque received the cheque of the nature referred to in Section 138 for the discharge, in whole of any debt or liability.

In a catena of decisions, it has been repeatedly observed that in the proceeding under Section 138 of NI Act, the complainant is not required to establish either the legality or the enforceability of the debt or liability since he can avail the benefit of presumption under Sections 118 and 139 of the NI Act in his favour.

Further, it was observed that by virtue of the presumptions, accused had to establish that the cheque in question was not issued towards any legally enforceable debt or liability.

Later in the year 2006, the Supreme Court in the decision of M.S. Narayan Menon v. State of Kerala, (2006 SAR Crl. 616), has held that the presumption available under Section 118 and 139 of N.I. Act can be rebutted by raising a probable defence and the onus cast upon the accused is not as heavy as that of the prosecution.

Further, in the Supreme Court decision of Krishna Janarshana Bhat v. Dattatreya G. Hegde, (2008 Vo.II SCC Crl.166), the Supreme Court held that the existence of legally recoverable debt was not a presumption under Section 138 NI Act and the accused has a constitutional right to maintain silence and therefore, the doctrine of reverse burden introduced by Section 139 of the NI Act should be delicately balanced.

Bench, in conclusion, observed that the presumption mandated by Section 139 of NI Act does indeed include the existence of legally enforceable debt or liability, it is a rebuttable presumption, open to the accused to raise defence wherein the existence of the legally enforceable debt or liability can be contested.

If the accused is able to raise a probable defence, which creates doubt about the existence of legally enforceable debt or liability, the onus shifts back to the complainant.

Court stated that if the accused was able to probabalise that the disputed cheque was issued due to the intervention and pressure of the police, it may not be justified to draw the presumption contemplated under Section 139 NI Act.

It was added that if the police would have really interfered, the accused could have produced some evidence to show the intervention of the police. But there was absolutely no evidence on record to show that cheque was issued either due to pressure of police or due to some other compulsion.

In Court’s opinion, the Court was required to draw the presumption under Section 139 NI Act in favour of the complainant.

Court noted that in the present matter, accused at no point in time asked the complainant to pay the balance amount. Instead, she had kept quiet by enjoying the huge amount of Rs 24 lakhs which clearly indicated that the non-purchase of the ticket was not on account of the non-payment of the remaining amount. Further, there was no forfeiture clause.

For the above, Bench stated that in the absence of the forfeiture clause, the accused could not have retained the amount of the complainant with her, the said was barred by the doctrine of unlawful enrichment under Section 70 of the Indian Contract Act, 1872.

Hence, even if it was held that the complainant was a defaulter in respect of the payment of the remaining amount, the accused was legally liable to repay the amount received by her from the complainant.

In view of the above reasons, guilt of the accused was proved under Section 138 NI Act. [Srinivas Builders and Developers v. Shyalaja, CC No. 57792 of 2018, decided on 13-10-201]

Advocates before the Court:

For the Complainant: V.N.R., Advocate

For the Accused: J.R., Advocate

Case BriefsHigh Courts

Delhi High Court: Jayant Nath, J., held that,

Exception 3 to Section 28 of the Contract Act deals with curtailment of the period for the creditor to approach the court/tribunal to enforce his rights. It does not in any manner deal with the claim period within which the beneficiary is entitled to lodge his claim with the bank/guarantor.

In the present petition, the dispute centred around the interpretation of Section 28 of the Indian Contract Act, 1872.

Petitioner submitted that based on an erroneous interpretation of Section 28 of the Indian Contract Act, 1872 respondent bank forced a mandatory and unalterable claim period of a minimum of 12 months for the bank guarantee.

Further, it was stated that the claim period is a time period contractually agreed upon between the creditor and principal debtor, which provided a grace period beyond the validity period of the guarantee to make a demand on the bank for a default, which occurred during the validity period. Adding to the said, it was stated that the said claim period may or may not even exist in a bank guarantee.

As per respondent PNB, a claim period in a bank guarantee which was less than 12 months would render the claim period void and would effectively increase the claim period under the bank guarantee to 3 years under the Limitation Act, 1963.

Respondent 2 stated that it would be open for the banks to stipulate as a condition precedent that if the claim was not lodged before a stipulated time, the bank guarantee shall be revoked or terminated but the stipulated date cannot be less than one year in any event.

Petitioner 1’s case was that it had a number of contracts with Government Bodies and Public Sector Undertakings. Petitioner used to normally issue ‘Performance Bank Guarantee’ or ‘Advance Bank Guarantee’ in the course of performance of the contract.

It was pleaded that on a complete misinterpretation of Section 28 of the Contract Act, respondent 1 bank insisted that the claim period should be 12 months. Adverse fallout for the petitioner of such interpretation was that the petitioner was unnecessarily made liable to pay commission charges for such extended bank guarantee when as per the contract between the principal debtor and the creditor, the claim period would be much shorter.

The extended claim period affected the petitioners’ capability to do business by entering into new contracts and affected the fundamental rights of the petitioners under Article 19(1)(g) of the Constitution of India. 

Analysis, Law and Decision

Bench stated that under Article 226 (2) of the Constitution of India, order or writ can be issued by a High Court in relation to territories within which the cause of action wholly or in part arises.

Whether a high court has territorial jurisdiction to entertain a writ petition? 

Court stated that while entertaining a writ petition, the doctrine of forum convenience and nature of the cause of action are also required to be scrutinized by the High Court.

Since the part of the cause of action arose within the territory of this Court, it would have territorial jurisdiction to adjudicate the instant petition.

High Court held that limiting the time within which the rights are to be enforced is void provided the rights to be enforced under the Contract continue to exist even beyond the shorter agreed period for enforcing the rights.

Further, the Court added that, if beyond the shorter period agreed between the parties, the rights under the contract are not kept alive, no limiting of the time to enforce the rights under the contract arises and such an agreement putting a time limit to sue will not be hit by Section 28 of the Act.

Section 28 prior to the amendment

Bench noted that Section 28 of the Contract Act prior to the amendment provided that a clause limiting the time within which the rights are to be enforced, is void, if the right to be enforced under the Contract continued to exist even beyond the shorter period agreed for enforcing the rights.

If beyond the shorter period agreed between the parties for enforcing the rights, the rights under the contract are not kept alive, then such an agreement putting a time limit to sue was not hit by Section 28 of the Contract Act. 

Why was the newly added Section 28 of the Contract Act enacted?

The said was enacted to do away with the earlier distinction between remedy and rights i.e., a clause barring the remedy only was void but a clause extinguishing a right was valid.

Adding to the above, Bench stated that the said clause now provides that the beneficiary of the bank guarantee i.e. creditor would have time to approach the appropriate court for enforcement of his rights under the bank guarantee in terms of the provision of the Limitation Act i.e. 3 years for private parties and 30 years for government parties.

Later, the T.R. Andhyarujina Committee recommended that the said period be reduced to one year for enforcing the rights under the bank guarantee. Thereafter, Exception 3 to Section 28 of the Contract was added in 2013.

Hence,

Exception 3 to section 28 of the Contact Act deals with the rights of a creditor to enforce his rights under the bank guarantee after happening of a specified event. 

Respondent in its counter-affidavit admitted that, Exception 3 to section 28 of the Contract Act deals with a clause in a bank guarantee to the effect that in case no claim is filed before the court of law within a period which is not less than 12 months from the date of occurring or non- occurring of the specified event, the liability of the bank shall get extinguished. Such a term is not contrary to law.

While concluding the matter, the Court stated that respondent 1 erred in taking the view that they were in law mandated to stipulate a claim period of 12 months in the bank guarantee failing which the clause shall be void under Section 28 of the Contract Act.

Section 28 deals with right of the creditor to enforce his rights under the bank guarantee in case of refusal by the guarantor to pay before an appropriate court or tribunal.

Therefore, all the communications issued by respondent 1 reproduced erroneous interpretation of Exception 3 to Section 28 of the Contract Act and were clearly vitiated.

Issue of prescribing the bank charges and the period for retention of security

Court held that the above-stated issue were matters of contract and this Court cannot interfere in such contractual matters.

In view of the above discussion, petition was disposed of. [Larsen & Toubro Limited v. Punjab and National Bank, 2021 SCC OnLine Del 3827, decided on 28-07-2021]

Advocates before the Court:

For the Petitioners: Mr Neeraj Kishan Kaul, Sr. Adv. with Mr Rishi Agrawala, Mr Karan Luthra, Ms Megha Bengani, Mr Deepak Joshi and Mr Aakash Lamba, Advs.

For the Respondents: Mr Dhruv Mehta, Sr. Adv. with Mr Rajesh Gautam, Mr Anant Gautam and Mr Nipun Sharma, Advs. for R-1/PNB.

Dr Lalit Bhasin, Ms Nina Gupta, Ms Ananya Marwah, Ms Ruchika Joshi and Mr Ajay Pratap Singh, Advs. for R- 2/IBA.

Mr Ramesh Babu, Ms Nisha Sharma and Ms Tanya Chowdhary, Advocates for RBI/R-3

Case BriefsHigh Courts

Delhi High Court: The Division Bench of Rajiv Sahai Endlaw and Asha Menon, JJ., held that the pawnor, merely by his act of delivering his own goods to a creditor in consideration of a credit facility granted to the debtor/borrower, by legal fiction becomes liable for the entire debt, would be detrimental to trade and commerce, with borrowings becoming difficult to obtain owing to persons not agreeing to make a pledge of their goods for credit to another, for the fear of becoming liable for more than the value of goods.

Legal Question for Consideration

Whether by virtue of Section 176 of the Indian Contract Act, 1872, the pawnor, even if different from borrower or the principal debtor, becomes liable for payment of the entire debt, even if has not furnished any guarantee for repayment of the entire debt i.e. over and above the value of the pawned goods?

Facts pertinent to the matter

Respondent 1 had filed the original application before the Debt Recovery Tribunal, Delhi under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 along with pendente lite and future interest, jointly and severally from respondent 2 and petitioner.

Aggrieved from the order of DRAT, of dismissal of his appeal, the petitioner filed the instant petition.

Analysis, Law, Decision

It was noted that the counsel for respondent 1 Bank had fairly admitted that there was no document whereunder the petitioner had undertaken liability as a borrower, in his personal capacity or as a guarantor for repayment of the dues of respondent 2 Company to the respondent 1 Bank.

Bench on an interpretation of Clause 2.1 of the Share Pledge Agreement was unable to agree with the contention of respondent 1 Bank that the petitioner became liable for the entire debt.

Further, it was stated that,

In the Share Pledge Agreement,

  • while the respondent 1 Bank is described as the Bank, the respondent 2 Company is described as the Borrower and the petitioner is described as the Pledgor; the same is indicative of the role of the petitioner in the agreement being confined to that of a pledgor/pawnor, as distinct from a borrower; had the intent been, of the petitioner along with the respondent 2 Company borrowing the monies and being liable for repayment thereof, the petitioner, besides as a pledgor, would also have been described as a borrower;
  • Clause 2.1 merely notes the agreement to be for the benefit of the respondent 1 Bank; merely by stating so, the petitioner did not and could not in law have become liable for more than that for which he expressly became liable under the Share Pledge Agreement; the pledge made by the petitioner under the agreement was also for the benefit of the respondent 1 Bank and thus merely from the statement that the agreement was for the benefit of the respondent 1 Bank, it does not follow that the benefit to the respondent 1 Bank flowing from the petitioner was more than that undertaken by the petitioner or provided in the agreement;
  • the petitioner pledged his shares as security for due discharge and repayment of Obligations under the Finance Documents; it is not the case that under the Finance Documents the petitioner is personally liable; and,
  • the parties expressly agreed that in the event of any default by the borrower, the respondent 1 Bank would be entitled to transfer or register in its name the pledged shares and to receive all amounts payable with respect thereto and to sell the same; there is no clause, that on any default or breach by the respondent 2 Company as borrower, the petitioner would become personally liable for the borrowings of respondent 2 Company.

Supreme Court, in State of Maharashtra v. M.N. Kaul, AIR 1967 SC 1634, while answering the question of whether the guarantee subject matter thereof was enforceable, held, “That depends upon the terms under which the guarantor bound himself. Under the law he cannot be made liable for more than he has undertaken”

In Central Bank of India v. Virudhunagar Steel Rolling Mills Ltd., (2015) 16 SCC 207, held that,

“…had the intent been to make the directors personally liable for the outstanding liabilities of the company also, it could have been so provided in the letter of guarantee and the directors were thus not personally liable for the dues of prior to the date they signed the letter of guarantee. It was further held that since the deed of guarantee was drafted by the bank, in case of doubt, had to be read against the bank.”

In the instant matter, High Court dismissed the contention of the respondent 1 Bank that the petitioner admitted his liability before the Recovery Officer.

Court stated that banks are also known to, besides the borrower, make others also on whose surety/guarantee the said credit facilities are extended to the borrower, sign a plethora of documents, again in their standard form. From the conduct of the respondent 1 Bank not making the petitioner sign any such documents, the only inference is that the petitioner was not intended to be liable for dues of respondent 2 Company save to the extent of the value of the shares pledged by the respondent 2 Company.

Moving, further, with the analysis, Bench elaborated that Section 172 provides bailment of goods as security for payment of a debt is called a “pledge” and the bailor is called the “pawnor” and the bailee, the “pawnee”.

In Court’s opinion, none of the provisions preceding or following Section 176 provide for the pawnor, by virtue of the pledge, even if not otherwise liable for the payment of debt, by a legal fiction becoming so liable for payment for debt, even beyond the value of the pawned goods.

“…we hesitate to, merely on the basis of Section 176 hold that a pawnee can recover from the pawnor anything beyond the value of the goods which the pawnor has pledged, unless the pawnor has separately from the pledge also made himself liable for the debt.”

Therefore, Bench decided that under Section 176 of the Contract Act, the pawnor, if not otherwise liable for the debt as a borrower or as a guarantor or otherwise, does not merely from the act of making a pledge, become liable to the creditor/pawnee, for anything more than the value of the goods pledged.

Hence, DRAT erred in holding the petitioner as a pawnor become liable for the entire debt for which pledge was made even without being a borrower and even in the absence of having promised so.

In view of the above discussion, a petition was disposed of. [Ajoy Khanderia v. Barclays Bank, 2021 SCC OnLine Del 3740, decided on 20-07-2021]

Advocates before the Court:

For the Petitioner:

Mr Rajeeve Mehra, Sr. Adv. with Mr Kanishk Ahuja and Ms Neha Bhatia, Advs

For the Respondent:

Mr R.P. Aggarwal and Ms Manisha Agrawal, Advs.

Additional Read:

“Section 176 – Pawnee’s right where pawnor makes default. – If the pawnor makes default in payment of the debt, or performance, at the stipulated time of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale.

If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor.”

Case BriefsHigh Courts

Delhi High Court: The Division Bench of Manmohan and Asha Menon, JJ., remarked that the present case reflected the bane of the Indian Judicial System, namely, that there is no finality attached to any judicial proceeding.

Instant appeal was filed challenging the judgment and decree dated 18-11-2013 passed by a Single Judge of this Court accompanied by an application seeking condonation of delay under Section 14 of the Limitation Act.

As per the appellant the Single judge had failed to consider that the appellant was not a party to the compromise on the basis of which the civil suit was decreed and thus the finding of the Court that ‘the parties have settled the matter on the following terms’ did not apply to the appellant.

Further, it was added that the handwritten statements on the Index of the Compromise Application stating that ‘This is a joint application by all parties. They are duly served’ were false, as at no juncture, a copy of the said application had been served on the appellant and therefore, on this short score, the impugned judgment was liable to be set aside.

Single Judge had failed to consider that an application for compromise under Order XXIII Rule 3 of the Code of Civil Procedure, 1908 without the signatures/consent of all parties to the lis could not be allowed against all parties to the lis and be converted into a decree of the Court.

Lastly, the appellant contended that the Single Judge had failed to appreciate that it is settled law that a self-acquired property could not be partitioned during the lifetime of the owner. He contended that the Trial Court had failed to consider that the plaint was a collusive action filed by the respondents in order to lay a concocted claim whereby the plaintiff and his brothers allocated lion’s share of the said property to each other.

High Court’s reasoning

A consent decree is a contract with the imprimatur of the courts superadded.  ‘Lawful Compromise’ means that the agreement or compromise must not be unlawful by the nature of its terms or on the face of it.

‘Consent decree’ is something more than a mere contract and has elements of both command and contract. ‘Lawful Compromise’ would be unlawful if the consideration or the object of the agreement is forbidden by law or is of such a nature that if permitted it would defeat the provision of any law, or is fraudulent or the court regards it as immoral or opposed to the public policy as provided by Section 23 of the Contract Act.

High Court found that the present appeal had been preferred after a delay of over two thousand three hundred and thirty-one days. Appellant voluntarily chose not to enter appearance and therefore she was proceeded ex-parte. Consequently, the limitation for filing the present appeal shall commence from the date of the impugned judgment and order and not from the date of alleged knowledge of the judgment and decree.

Court stated that the appellant would not be entitled to the benefit of Section 14 of the Limitation Act as even the prior proceeding initiated by the appellant had not been filed within limitation and also the said prior proceeding had not been filed due to defect of jurisdiction or other cause of like nature.

No prejudice had been caused to the appellant by the impugned judgment and decree dated 18th November, 2013 as the said decree recognises her share in the suit property as accepted by her in the Family Settlement dated 23rd December, 1999, especially in the absence of any challenge to the said family settlement.

 No prejudice was caused to the appellant.

Further, the submission of the counsel for the appellant that a self-acquired property could not be partitioned during the lifetime of the owner, in view of the Family Settlement dated 23rd December, 1999 duly executed and signed by the appellant is a mixed question of fact and law and it required the appellant to lead evidence.

On the basis of a bald averment in the appeal, the suit filed by the respondent cannot be held to be ex-facie barred in law.

The only remedy to the appellant in the present matter was to prefer an application under Order IX Rule 13, or under Section 114 CPC.

Not even a ‘modicum of explanation’ was offered during the hearing as to why the ex-parte order be recalled or set aside.

High Court expressed that the Additional District Judge had given a clear finding, which order had not been challenged in the present proceedings.

 Adding to the above, High Court elaborated that

There is no law which stipulates that a court is bound to serve any compromise application on a party who had willingly allowed it to be proceeded ex-parte.

To accept the submission of the appellant would amount to reading into the Statue a duty upon the Court to ‘run after a litigant’ who had voluntarily turned to its back to the legal system – a duty which is not provided in any statute.

A bare perusal of the Family Settlement reflects that the appellant had signed on each page of it and the same was based on mutual consent and agreement. In fact, the mutation was also carried out with respect to this 1/6th portion in accordance with the said Family Settlement.

Concluding the matter, Bench held that to now recall or vary the decree at the instance of the appellant who was negligent in defending her rights would amount to placing premium on ‘callousness’ and would place the parties who diligently pursued the litigation at all stages at a serious disadvantage.

Therefore, Court stated that any judicial system which does not provide finality to disputes, can never earn the trust, confidence and goodwill of the society.

Hence, present appeal was dismissed both as barred by limitation as well as on merits. [Deepshree Singh v. Rishi Pratap Singh, 2021 SCC OnLine Del 2348, decided on 20-05-2021]

Advocates before the Court:

For the appellant: Ankur Mahindro, Advocate with Rohan Taneja, Advocate.

For the Respondents: Kritika Bhardwaj, Advocate for R-1 to3 & 5 to 8.

Op EdsOP. ED.

“Law is the protector of the weak.”

–Frederick Schiller[1]

The ongoing months long farmers’ protests in several parts of Northern India have raised a demand of enacting a stringent special law mandating the Minimum Support Prices (MSP) for every crop in addition to the repeal of three farms Acts, namely, the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020[2], the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020[3] and the Essential Commodities (Amendment) Act, 2020[4]. The farmers have alleged that these farm laws would act as the death knell for the small and marginal farmers.  The issue that arises now is whether, if the Government maintains the status quo, the farmers would be protected under the ambit of the existing Indian laws against the abuse and unfair practices of the big corporates. The article analyses that how even if no law mandating the MSPs is enacted, the courts would not be deprived of the power to protect the farmers against the unfair trade practices by the corporates. The article analyses the provisions of existing Indian laws which can be used by the courts to impose the minimum prices to be paid by the corporates to the farmers for purchasing their crops.

The Contract Act, 1872[5] gives liberty to every person to come into a contract with the free consent of both the parties. However, the drafters of the Act had very aptly anticipated that there might be numerous situations where the big corporates having disproportionate and unequal bargaining power would endeavour to come into unfair bargains with the weaker section of the public. The Contract Act takes care of these situations by virtue of Section 19-A[6] read with the Section 16[7] of the Act.  Section 19-A of the Act gives the option to the weaker party in the contract to set aside the contract at his will if his consent was induced by “undue influence”. A consent is considered to be induced by “undue influence” if one of the parties to the contract is “in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other”[8]. The Supreme Court of India has observed in DTC v. DTC Mazdoor Congress[9] that the disparity in the economic strength of the contracting parties results in the unequal bargaining power and thus, leads to the abuse of weaker party by the stronger party. Sometimes, the weaker party is in a position in which it could obtain the means of livelihood only upon the terms imposed by the stronger party. It is obvious that the position of corporates, headed by billionaires and position of farmers, facing suicide crisis in India, cannot be compared. The corporates are per se the stronger parties and the farmers are per se the weaker parties. Thus, this clause perfectly applies to the situations where a stronger party buys a crop from a weaker party at a price below the Minimum Support Price (MSP).  Here the MSP should be considered as that threshold rate above which farmer would reap the profits. So, if the Court faces any dispute involving a transaction between a farmer and a buyer which per se indicates the unfair terms between the parties, such as buying a crop below its MSP rate, the consent of the farmer should be considered as consent induced under “undue influence”. The farmer should be then given the option to rescind the contract and simultaneously take compensation due to the loss incurred by that contract. However, here, the MSP would not be a price fixed by the Government on that particular crop. Rather, it would be that rate independently determined by the Court above which the farmer would reap the profits.

The question now arises is whether it is a matter of public policy and thus, a matter not to be decided by the courts. The public policy, as held by the Supreme Court of India[10], is not a policy of any particular Government. It is simply a matter which concerns the public good and the public interest. The principles governing public policy must be and are capable on proper occasion, of expansion or modification. If the conduct is against the public conscience, public good and public interest, then such conduct must be regulated by the courts. The Supreme Court of India has expressly held that “In any case which is not covered by authority, courts should be guided by Preamble to the Constitution[11] and the principles underlying the Fundamental Rights and the Directive Principles.” Thus, the courts as parens patriae cannot leave this matter as a matter to be decided only by Government even when there is no specific law on MSP. Thus, the courts are duty-bound to decide upon the transactions between corporates and farmers that are against the public policy.

Now, which constitutional principles compel the Court to secure the MSPs? It has been held several times that the “right to life” guaranteed under Article 21 of the Constitution[12] includes the “right to livelihood”[13].  It needs no proof that it has become extremely difficult for the farmers to earn their livelihood. Right to life means more than just physical existence. It takes within itself the bare necessities of life such as clothing, shelter, adequate nutrition, etc. Thus, forcing the farmer to sell below the MSPs leads to denial of their “right to livelihood” guaranteed under Article 21 of the Constitution. Further, Article 23 of the Constitution[14] protects the citizens against the exploitation from both State and private citizens.

In People’s Union for Democratic Rights v. Union of India[15], the Court held that the “force” means “not only the physical or legal force but also force arising from the compulsion of economic circumstances which leaves no choice of alternatives to a person in want and compels him to provide labour or service even though the remuneration received for it is less than the minimum wage”. Then Articles 38[16] and 39(c)[17], collectively known as principles of social security and social justice, direct the State to minimise the inequalities of justice, social and economic amongst its citizens. Article 43 of the Constitution[18] directs the State to secure the “living wage” to the farmers. These provisions when read collectively compel the Court to protect the right of the farmers to sell at a favourable price.

It is believed that it would be a perfect opportunity for the courts to determine the threshold rate and other guidelines after in-depth analysis and study of the risks and losses involved in the agriculture sector. If decided by constitutional courts, they would act as the binding guidelines on the future transactions between corporates and farmers. It is pertinent to note here that it would not be the first time when the constitutional courts would intervene to issue guidelines to protect the weaker section of the society.

The Supreme Court has held in Vishaka v. State of Rajasthan[19] that when conduct of one section of society results in the violation of fundamental rights of other section of the society and there is a legislative vacuum against that conduct then “an effective redressal requires that some guidelines should be laid down for the protection of these rights to fill the legislative vacuum”. It was held that the obligation of the courts for the enforcement of the fundamental rights in the absence of legislation must be viewed along with the role of judiciary envisaged in the Beijing Statement of Principles of the Independence of the Judiciary. It was held that it is the function of judiciary to ensure the observance and attainment of human rights. Further, it was held that the guidelines would be treated as the law declared by this Court under Article 141 of the Constitution[20].

Thus, the absence of a law mandating the MSPs for contracts between farmers and corporates does not mean that the corporates would be able to take advantage of distressed farmers. The courts are still not deprived of the powers granted to them under the Contract Act, 1872 and the Constitution to protect the farmers of their right to sell crops at their favourable prices.

*Advocate,  Delhi High Court.

**Final year law student (LLB), Campus Law Centre, Faculty of Law, University of Delhi.

[1] Gene Ligotti, Accomplice: … a Novel (2013), p. 202.

[2]  http://www.scconline.com/DocumentLink/wdP4LxVM.

[3] http://www.scconline.com/DocumentLink/s4WyG5Ra.

[4] http://www.scconline.com/DocumentLink/8F35O644.

[5] http://www.scconline.com/DocumentLink/xAi185p6.

[6] http://www.scconline.com/DocumentLink/K5XuGL0N.

[7] http://www.scconline.com/DocumentLink/37B4H2v8.

[8] See S. 16 of the Contract Act, 1872.

[9]1991 Supp (1) SCC 600.

[10] Ibid.

[11] http://www.scconline.com/DocumentLink/8bvjrn3W.

[12] http://www.scconline.com/DocumentLink/VN1u87S9.

[13] Olga Tellis v. Bombay Municipal Corpn.,(1985) 3 SCC 545.

[14] http://www.scconline.com/DocumentLink/1RoWjnWY.

[15] (1982) 3 SCC 235 .

[16] http://www.scconline.com/DocumentLink/pd9EUWHe.

[17] http://www.scconline.com/DocumentLink/HgecD61Z.

[18] http://www.scconline.com/DocumentLink/C86Lq30R.

[19] (1997) 6 SCC 241 .

[20] http://www.scconline.com/DocumentLink/42L90IU1.

Case BriefsHigh Courts

Punjab and Haryana High Court: Arvind Singh Sangwan, J., addressed the instant petition regarding a new concept of contractual Live-In-Relation wherein the petitioners had sought issuance of direction for the protection of their life and liberty.

Petitioner 1, namely Moyana Khatun was aged about 18 years, whereas, petitioner 2, namely Labh Singh was aged about 19 years and in pursuance to a deed of Live-In-Relationship dated 04-03-2021, which had been executed between the petitioners, wherein, petitioner 1 was referred to as the ‘Female Partner’ and petitioner 2 was referred to as the ‘Male Partner’. Certain terms and conditions had been settled in the said deed of live-in-relationship by way of mutual consent.

The contents of the deed were such that:

  • both the parties had agreed that their live-in-relationship was not ‘Marital Relationship’;
  • that the parties will fully cooperate with each other without any dispute and issue and will not claim anything against each other;
  • if any of the parties backs out from the aforesaid deed, the other party will have a right to approach a competent Court of law for implementation of the same.
  • that the parties are entitled and will be at liberty to terminate this deed any time after giving one month’s notice to other party.

However, it was also stated that on attaining marriageable age the parties were agree to solemnize the marriage. The petitioners contended that the live-in-relationship deed was executed between the parties at Patiala in presence of witnesses though neither the original deed was attached nor names of the witnesses were described; only a typed copy signed as a true copy by the counsel was attached.

Reliance was placed on Simran Kaur v. State of Punjab, 2018 SCC OnLine P&H 6710, wherein, the petition relating to live-in-relationship couples was disposed of with a direction to the Senior Superintendent of Police to provide protection to the couple.

Counsel for state, DAG Joginder Pal Ratra argued that such deed of live-in-relationship is impermissible in law when the parties had not attained marriageable age under Prohibition of Child Marriage Act, 2006. It also submitted that Section 5 (iii) of the Hindu Marriage Act, 1955 prohibits marriage of a girl below 18 years and boy below 21 years of age and prescribes punishment for two years for contravention of Section 5 (iii) of the Act.

It was also submitted by the state that Section 26 of the Indian Contract Act, 1872, also provides that an agreement in restraint of marriage is a void agreement and therefore, it cannot be enforced as per Section 14 of the Specific Relief Act, 1963. Thus, the Live-In-Relationship agreement set up by petitioners being void agreement could not be accepted.

The Bench opined that the deed being impermissible in law, no benefit could be claimed by the petitioners. Petitioner 2 was held to be incompetent to have a live-in-relationship since he had not attained marriageable age. The Bench held that the petition was without any merit as the terms and conditions of live-in-relationship relied upon, especially stating that it was not a ‘Marital Relationship’ was nothing but the misuse of the process of law as it could not be morally accepted in society. [Moyna Khatun v. State of Punjab, CRWP-2421-2021, decided on 10-03-2021]

Kamini Sharma, Editorial Assistant has reported this brief.

Appearance before the Court by:

For the Petitioner: Adv. Sushil K. Sharma,

For The Respondent: DAG Joginder Pal Ratra

Case BriefsHigh Courts

Delhi High Court: Rajiv Sahai EndLaw, J., while addressing a very significant issue revolving around ‘Will’ expressed that:

Litigation in a Court cannot be permitted to be played like a game of one-upmanship or by springing surprises or of ambush.

 Adding to the observations, Court in light of ‘unsoundness of mind’ expressed that:

 “…to prove unsoundness of mind, one would be required to prove consistent conduct to prove unsoundness of mind, even if medical records of unsoundness of mind are not available.”

Vide an order 25-11-2019, issues were framed in the Test. Cas.11/2018, wherein the second issue was :

“Whether the deceased Bhagwanti Devi, on 5th May, 1983, was not of sound disposing state of mind and thus the document even if executed by her, is not her Will? OP (Relatives 10,11&12)”

Further, the Senior Counsel’s contention that the onus for the said issue should be on the petitioner, was rejected with the reason that it is for the person disputing the soundness of mind to establish the same, with the petitioner having a right of rebuttal; else, the presumption is, of soundness of mind of a living person.

Relation No. 10 filed the instant application pleading the following:

(a) he had preferred a SLP(C) No. 5603-04/2020 challenging the order dated 25-11-2019, to the extent placing the onus of issue no.(ii) on him and which SLP was disposed of with liberty to him to make a formal application and request this Court to reformulate the issue no.(ii);

(b) this application is being filed in pursuance thereto;

(c) the onus to, in the first instance show that the testatrix was of a sound disposing mind i.e. had the testamentary capacity to execute the Will, is on the propounder of the document claimed to be the Will;

(d) only if the propounder of the document, claimed to be the Will, establishes the testamentary capacity of the testator/testatrix, does the document stand proved as the Will;

(e) the petitioner also in the issues proposed by him had placed onus of the said issue on himself; and,

(f) one who asserts has to prove and the other cannot be called upon to prove the negative.

Analysis, Law and Decision 

Section 59 of the Indian Succession Act, 1925 provides that every person of sound mind not being a minor may dispose of his property by Will.

 Explanation 1 thereto provides that a married woman may dispose by Will any property which she could alienate by her own act during her life.

Explanation 2 thereto provides that persons who are deaf or dumb or blind are not thereby incapacitated from making a Will if they are able to know what they do by it.

Explanation 3 thereto provides that a person who is ordinarily insane may make a Will during an interval in which he is of sound mind.

Explanation 4 thereto provides that no person can make a Will while he is in such a state of mind, whether arising from intoxication or from illness or from any other cause, that he does not know what he is doing.

 Section 12 of the Contract Act defines the ‘Soundness of mind’ with respect to the purpose of contracting and the said provision would have application in the matter of soundness of mind requisite for making of a ‘Will’ as well.

Bench stated that the above two provisions have a common thread.

Further, the Court added that when a document propounded as Will is contested, what would be required to be proved is only that what is in issue and only if the party disputing the document propounded as a Will disputes/controverts that the testator/testatrix, at the time of making the Will was of sound mind, would soundness of mind be in issue and required to be proved.

Bench elaborated in light of the Evidence Act that:

The common course of natural events and human conduct is of soundness of mind and unsoundness of mind an aberration. If a testator/testatrix has led a normal life, performed day to day functions in the normal course of human conduct, the presumption under Section 114 of the Evidence Act would be of soundness rather than unsoundness of mind.

In the present case, applicant/relation 10 is the son of the daughter of the deceased and with regard to his contention with regard to the denial of the soundness of mind of the deceased seems contradictory. Bench noted that, if the deceased was throughout her lifetime appending signatures and not putting her thumb impression as pleaded by Relation No. 10, the presumption is of her being of sound mind.

Another significant point noted was that the question of her being under influence of the petitioner would arise only if the deceased was in a position to be influenced i.e. of sound mind; if she was of unsound mind, the question of her being influenced would not arise.

Bench referred to its decision in Budh Singh v. Raghubir Singh, 2015 SCC OnLine Del 14528, wherein it was held that:

though the onus to prove the ‘Will’ may be on the propounder thereof but a challenger to the Will is required to, in the pleadings specifically plead the grounds on which a challenge is sought to be made to the Will so as to let the propounder of the Will know the grounds on which the Will is contested and that a challenger to the Will cannot be allowed to, without taking any pleading or any specific grounds of challenge spring surprises and at the stage of arguments contend that this has not been proved or that has not been proved.

With regard to the present matter, Court stated that Relation No. 10 cannot be permitted to taking advantage of having the onus of the issue as to the soundness of mind placed on the petitioner, steal a walkover by ultimately arguing that the petitioner has failed to prove soundness of mind.

The question of onus of proof as to facts in issue depends upon the facts, pleadings and documents in each case.

Before parting with the present order, Bench added a caveat: The Order/Judgment of a Court exercising testamentary jurisdiction, as this Court is exercising in the subject case, is a Judgment/Order in rem, which establishes a document propounded as a Will as the Will from the death of the testator and renders valid all intermediate acts of the executor as such.

A Testamentary Court is a Court of Conscience.

 Since the said judgment/order binds not only the parties to the proceeding but also others, the Court, in exercise of such jurisdiction, requires proof in accordance with the law of the document propounded as a Will, even if not opposed by the near relatives of the deceased.

However, when the near relatives have contested the document propounded as a Will and which contest is not a sham or make-belief, the Court can mould the trial by placing the onus appropriately in terms of the pleadings and the documents in a case.

Further, the High Court added that it is not the case of the applicant/Relation No.10 Arun Sood that he was not in a position to know about the soundness of mind of the testatrix or was far removed from the testatrix; on such pleading, it can perhaps be said that the petitioner should discharge the onus.

Bench also referred to the decision of Supreme Court in Surendra Pal v. Saraswati Arora (1974) 2 SCC 600.

Hence, in light of the above discussion, High Court held that in the absence of a suggestion that the testator was feeble-minded or so completely deprived of his power of independent thought and judgment, the presumption was drawn and the Will held to be genuine.

In Prem Singh v. Birbal, (2006) 5 SCC 353 presumption that a registered document is validly executed was drawn and it was held that the onus to prove would be on the person who rebuts the presumption.

In view of the above discussion, High Court found no ground for review of the order dated 25-11-2019 and hence dismissed the application. [Ashok Baury v. State, Test. Cas. 11 of 2018, decided on 15-01-2021]

Advocate who appeared before this Court:

For the Petitioner: Mr Prosenjeet Banerjee and Ms Shreya Singhal, Advs.

For the Respondent: Mr Atul Gupta and Mr Jayant Mehta, Advs.

Case BriefsHigh Courts

Delhi High Court: Jayant Nath, J., while addressing the matter stressed upon the essentiality of Novation and Arbitration Agreement.

Factual Matrix

The present application was filed under Section 8 of the Arbitration and Conciliation Act, 1996 read with Order 7 Rule 11 CPC for rejection of the plaint and referring the parties to the arbitration.

Plaintiff sought for the recovery of Rs 2,58,24,648 being refund of the available interest-free refundable security deposit. A decree of mandatory injunction was also sought to handover the movable of the plaintiff which has been stated to be illegally detained by the defendant.

Facts leading to the present matter

Vide a Lease Deed, the defendant leased to the plaintiff the office premises in Dehradun with 22 parking slots for 9 years. Simultaneously a maintenance agreement was also executed between the parties which was co-terminus with the lease deed for payment of fit out and maintenance charges for the said premises.

As per the deed, there was a lock-in period from 01-01-2017 to 31-12-2022.

Fresh Agreement

Further, as per the plaintiff, a fresh agreement was arrived at between the parties in respect of use and occupation of the said premises and maintenance.

Hence plaintiff’s case was that the Lease Deed and Maintenance Agreement stood substituted/novated on account of the said Fresh Agreement.

Later, plaintiff initiated negotiations with the defendant for a reduction of rentals and maintenance, however, the defendant did not budge. In fact, the defendant illegally disconnected the electricity connection of the rented premises as a means to coerce the plaintiff to make payments.

Termination of Fresh Agreement

In March 2020 the plaintiff sent out a legal notice to the defendant terminating the Fresh Agreement. The said legal notice also sought a grant of access to the authorised representative of the plaintiff to remove the movable and the server. Hence, the present suit was filed.

Analysis, Law and Decision

Bench noted that in the original lease deed and the maintenance agreement, the parties agreed to settle their disputes through arbitration.

Counsel for the plaintiff pointed out that the plaintiff and the defendant at the time of execution of the Lease Deed and the Maintenance Agreement were family-held companies. The family exited from the plaintiff company sometimes in September 2018 and new management took over charge of the plaintiff company. It was strongly urged that there was a novation of Agreement and the original Lease Deed and the Maintenance Agreement dated 21-02-2017 stood superseded and novated in view of the terms and conditions settled upon in the emails dated 26.09.2018 and 15.10.2018. In the novated contract, there was no arbitration agreement and hence, the present application is misplaced

Novation of Contract

Court observed that the correspondence exchanged between the parties on the basis of which it was pleaded by the plaintiff that there was a novation of a contract.

Now the question was, whether it could be said that on account of the exchange of the above-stated communication, the parties rescinded the old agreement being the registered Lease Deed and the Maintenance Agreement of the same and completely novated the contract.

In the above context, reference was made to Section 62 of the Contract Act:

“62. Effect of novation, rescission, and alteration of contract — If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.”

 Supreme Court’s decision in Lata Construction v. Dr Rameshchandra Ramnikalal Shah, (2000) 1 SCC 586 was also cited.

A Novation takes place only when there is a complete substitution of a new contract in place of the old.

 Bench further examined the scope of Section 8 of the Arbitration Act and referred to the Supreme Court decision in Vidya Drolia v. Durga Trading Corpn.,(2019) 20 SCC 406

 Bench noted that for rejection of a Section 8 application, a party has to make out a prima facie case of non-existence of valid arbitration agreement, by summarily portraying a strong case.  Court should refer the matter if the validity of the arbitration agreement cannot be determined on a prima facie basis.

Conclusion

High Court opined that in light of the facts and circumstances of the present case prima facie it could not be said that there was a completely new contract and the old registered lease deed read with Maintenance Agreement were novated and substituted by a completely new contract.

Defendant’s email did not specifically state that all the terms and conditions stood superseded or novated.

Hence, Court found that the present issue required deeper consideration and would be best left to the arbitral tribunal to adjudicate upon.

Court appointed Justice G.S. Sistani as the Sole Arbitrator to adjudicate the dispute between the parties. [Knowledge Podium Systems (P) Ltd. v. S.M. Professional Services (P) Ltd., 2021 SCC OnLine Del 136, decided on 25-01-2021]

Op EdsOP. ED.

The Indian Contract Act, 1872 (the Act) defines the term “contract” under Section 2(h) stating: “An agreement enforceable by law is a contract.” In other words, an agreement that the law will enforce is a contract[1]. Section 10 of the Act deals with enforceability. First part of Section 10 of the Act clearly states that “All agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object.” Offer and acceptance is not sufficient to constitute a contract. Thus, all agreements are contracts if they fulfil certain conditions of enforceability. These are the factors that must accompany an agreement to materialise into a contract. Whereas the second part of the section states that “and are not hereby expressly declared to be void”. The author discusses Sections 20, 26, 27, 28, 29, 30 and the first para of Section 56 in the light of this part of the provision.

Are void agreements said to be void ab initio?

The two terms void agreements and void ab initio should not be used interchangeably. Thus, the answer is in negative. The consequences of agreements that are void ab initio differ from void agreements. Void agreements are those agreements that are expressly declared to be void under Sections 24-30 of the Act under the heading “void agreements”.

The term “void” is given under Section 2(g) of the Act which states as follows: “An agreement not enforceable by law is said to be void.” A void agreement is not enforceable at the option of either party[2]. e.g., agreements which are only partly illegal/unlawful i.e., which is opposed to the law of the land, the court will enforce the part which is not illegal provided that it is severable from the rest of the agreement. In many cases of contracts relating to trade or legal proceedings, the court knock out the objectionable clause of the agreement and allow rest to be enforced. Another example of severance, Section 27 says that an agreement shall be void to that extent i.e., to the extent of unreasonable restraint[3]. Whereas agreements that are void ab initio may be avoided altogether and if any price is paid, it cannot be recovered.

Consequences of void agreements

Illegality of an agreement is also a void agreement[4], but it is not necessary that void agreement is always illegal. Sections 25 to 30 refer to cases in which agreement is only void, though the consideration is not necessarily unlawful. In respect to the main or the primary agreement nothing can be recovered under either kind of agreement and if something has been delivered or some payment made, it cannot be recovered back[5]. But we have seen above severance as an exception to the above rule under Sections 24-30 as it comes within the heading void agreements. Similarly, another exception to the above rule is in case of “collateral transactions”.

Collateral transactions as an exception

The only material difference between an illegal and void agreement relates to their effect upon collateral transactions. A collateral transaction means a transaction subsidiary to the main transaction. For example, where money is given to a person to enable him to pay a wagering debt, the wage is the main transaction and the loan subsidiary to it. If the main transaction is only void, its collateral transaction will remain enforceable. If the main transaction is illegal, for example, smuggling, a collateral transaction like money given to a person to smuggle, will also be tainted with the same illegality and the money will be irrevocable[6]. Thus, the first example points towards void agreements given under Sections 25-30 of the Act whereas the second example concerns those agreements that are void ab initio as given under Section 23 of the Act (unlawful consideration or object).

Whereas the first part of Section 10 dealing with void ab initio has been explained as follows:

Every contract is an agreement, but every agreement is not a contract. An agreement becomes a contract when following conditions are satisfied:

  • There is some lawful consideration for it.
  • The parties are competent to contract
  • Their consent is free.
  • The object is lawful.[7]

Why are those agreements whose consent is not freely obtained (except mistake) as given under Section 14 held to be voidable contracts? (This question has been answered under the heading voidable contracts). The author would like to point out Section 25 of the Act as well. Thus, agreement without consideration is held to be void agreement and not void ab initio. One of the ingredients of a valid contract is lawful consideration and not adequate consideration, the law recognises, with certain conditions, an agreement without consideration is a contract. But when an agreement the object and consideration of which is opposed to the law of the land, it is held to be void (although the word void ab initio is not expressly mentioned, the author expresses that these agreements are void ab initio). Parties are not, as a rule, so foolish as to commit themselves to an agreement to do anything obviously illegal, or at any rate to bring them into Court; so, the kind of question which arises in practice under this head is whether an act or some part of a series of acts, agreed upon between the parties does or does not contravene some legislative enactment or regulation made by lawful authority[8] (Thus, this is discussed under the heading “Agreements discovered to be void”).

Agreements discovered to be void

Section 65 of the Act deals with doctrine of restitution of any advantage received due to agreements discovered to be void and contracts that have become void. This type of validity is concerned with an agreement which never amounted to a contract. But the parties discovered this at a later stage. The effect of the principle laid down in the section is that when the parties have entered into an apparently valid contract and some benefits have been passed under it, and subsequently the contract is either discovered to be void or becomes void, the party who has received the benefits must restore them to the other. Thus, the section does not apply to a contract which the parties knew at the time of making it to be void.[9]

E.g., where parties discover their mistake as to a matter of fact essential to the agreement (under Section 20) or where a court of law holds it to be void under any of the Sections 23-30.

Unlawful object and doctrine of restitution

The concept of agreements whose object or consideration is unlawful in its entirety is based on the Latin term “in pari delicto“. The expression “discovered to be void” presents some difficulty as regards agreements which are void for unlawful consideration (Sections 23 and 24). It seems that the present section does not apply to agreements which are void under Section 24 by reason of an unlawful consideration or object. The reason being that if the illegal purpose or any material part of it has been carried out, the money paid cannot be recovered back, for the parties then are equally at fault, and in pari delicto melior est conditio possidentis[10]. But there is an exception to this rule:

Firstly, the contract is still executory and the rule of “in pari delicto”. Where the contract is still executory in the sense that no part of the illegal purpose has been carried into effect, the money paid or goods delivered under it may be recovered. “But if he fails till the illegal purpose is carried out, or if he seeks to enforce the illegal transaction, in neither case can he maintain an action”[11]. Secondly, the parties are not at equal fault. Where the parties are not at equal fault, the less guilty may recover anything that he has given to the other under contract[12].

Section 65 and mistake

Section 65 will cover cases of initial mistake[13]. Thus, the author at this point finds it appropriate to discuss the sections relating to “mistake” in the light of Section 13 dealing with the definition of “consent”. Thus, there may be an ambiguity or a fundamental error. Mistake may operate upon a contract in two ways. It may, firstly, defeat the consent altogether that the parties are supposed to have given, that is to say, the consent is unreal. Secondly, the mistake may mislead the parties as to the purpose which they contemplated. When a mistake does not defeat consent, but only misleads the parties, Section 20 of the Act shall apply[14].

Explaining the above points in the light of its validity:

  • Under Section 20 an agreement is void by reason of mistake when both parties are mistaken as to a matter of fact essential to the agreement. A mistake as to an existing fact renders the contract void ab initio, but if the mistake is as to some future event, it is a binding contract which may be avoided at some future date if the expected event does or does not occur[15]. Thus, in the light of Section 65 of the Act where, for example, money is paid for the sale of goods, which unknown to the parties, have already perished at the time, the money is refundable. The principle will apply whether the agreement is void by reason of law or by reason of facts[16].
  • Further Section 22 deals with agreements amounting to unilateral mistakes as to a matter of fact. These agreements are not held to be voidable contracts. Thus, the one party who was under mistake is not entitled to any relief. Also, no rectification is allowed and the person who was mistaken could not avoid the contract because it was his unilateral mistake[17].

Initial agreement to do an act impossible in itself

Consequences

Section 56 of the Act deals with initial impossibility and subsequent impossibility. The author will deal only with initial impossibility in this segment. The essence of agreements which come within the ambit of first para of Section 56 is found in and read with Section 10 of the Act. Section 37 is not applicable to the first para of section 56 of the Act. The reason being that performance of promises arises after the parties have entered into a valid contract and their performance is dispensed with or excused under the provision of the Act.

The proposal can be made for anything. Legal as well as physical impossibility too. Thus, if the parties purport to agree to do something which is obviously impossible it is deemed to be a case in which they are not interested in performing their respective obligations or they do not understand at all as to what they are agreeing for[18]. This pre-contractual pre-existing impossibility may be known or unknown to the parties at the time of making of contract. If the parties are aware of such impossibility these agreements do not come within the heading void agreements but are those agreements ‘expressly declared to be void’ as given under Section 10 of the Act. Example of an initial impossibility will be – A agrees with B to discover a treasure by magic, being impossible of performance, the agreement is void. In case of pre-existing legal impossibility rendering an agreement unlawful, such as if there is no possibility of performance of the contract because it would be unlawful to do that, the agreement is void, such cases would also fall within Section 23 of the Act which declares that every agreement of which the object or consideration is unlawful is void[19]. Also, there is a difference between impossibility and commercial hardships. Thus, where the performance is not practically cut-off but only rendered more difficult or costly such cases do not fall within the purview of Section 56 of the Act[20].

Contract becomes void        

And when an agreement fulfilling all the requirements including enforceability came to be called a contract but subsequently on it becoming a contract ceases to be enforceable by law, then such contracts “becomes void” only “when it ceases to be enforceable”. This has been dealt in Section 2(j) of the Act read along with Section 65 of the Act. Thus Section 2(j) in comparison to Section 2(g) deals with “unenforceable contract” rather than “not enforceable contract”. In other words, contract subsequently becomes unlawful or impossible of performance. Thus, the author uses the term “becomes void” rather than “void contracts”. This segment is to be read with Section 65 of the Act.

This segment will deal with:

  1. Contract to do an act impossible/contracts becoming unlawful/illegal
  2. Contingent contract becoming void
  3. Voidable contracts which have been avoided.
  4. Contract to do an act impossible

The essence of second para of Section 56 of the Act is found in Section 37 of the Act. The performance of agreements to do an act impossible in itself have been dispensed with or excused under the provisions of this Act. The parties need not perform their obligations. The parties are discharged from performing their obligations. There is an exception to this rule: when one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.

  1. Contingent contract

The section emphasises that the contingency contemplated by the contract must be collateral to the contract. Distinguishing between proposal, acceptance and performance; a conditional offer differs from a contract wherein the condition is of uncertain nature. Firstly, a contract has already risen or a subsisting contract is there, but its performance cannot be demanded unless the contemplated event happens or does not happen[21]. Further Sections 32 and 33 of the Act deals with where enforcement depends upon happening or non-happening of an event. Thus, in case of enforcement of a contract depending on happening of an event, once the event has happened, the contingent contract becomes enforceable and where the performance of a contract depends upon the non-happening of an event, the parties have to wait till the happening of the event becomes impossible[22].

Similar to the explanation given above, where enforcement of a contract under Section 32 depends on happening of a future uncertain condition and the event becomes impossible, such contract become void whereas Section 36 deals with contingent agreements is dependent on the occurrence of an impossible event such agreements are void from its very inception.

Thus, the applicability of the Sections 31-32 and 56 has been explained recently in National Agricultural Coop. Marketing Federation of India v. Alimenta SA[23]:

“47. Section 32 of the Contract Act applies in case the agreement itself provides for contingencies upon happening of which contract cannot be carried out and provide the consequences. To this case, provisions of Section 32 of the Contract Act is attracted and not Section 56. In case an act becomes impossible at a future date, and that exigency is not provided in the agreement on the happening of which exigency, impossible or unlawful, the promisor had no control which he could not have prevented, the contract becomes void as provided in Section 56.”

  1. Voidable contract which has been avoided

The expression “becomes void” is sufficient to cover the case of voidable contracts which has been avoided[24]. Thus Section 65 of the Act is applicable to voidable contracts that have been avoided as they become void under Section 2(j) of the Act.

Voidable Contracts

Mutuality of contract

In the Concise Law Dictionary, the term mutuality of contract has been defined as: the doctrine of mutuality means that the contract must be mutually enforceable by each party against the other. An exception to the mutuality rule is voidable contract. Section 2(i) defines voidable contract: an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract. Voidable contract under the Act can be divided into two groups, contracts voidable in their inception under Sections 19 (voidability of agreements without free consent) and 19-A (power to set aside contract induced by undue influence) and voidable by subsequent default of one party under Section 39 (refusal of party to perform promise wholly), Section 53 (impossibility created by act of the party) and Section 55 (failure to perform at time fixed, time being of essence)[25].

Unilateral promises and initial voidability

A unilateral promise is a promise from one side only and is intended to induce some action by the other party. The promisee is not bound to act, for he gives no promise from his side. But if he carries out the act desired by the promisor, he can hold the promisor of his promise[26]. Whereas voidable contracts are cases where lack of mutuality and obligation is due to some fact outside of the content of the bargain. These two classes of cases seem to be entirely distinguishable in principle. In the first, we have an entirely one-sided proposition. In the second, we have all of the affirmative elements of a valid contract, but the obligation of one of the parties is affected or taken away owing to the presence of some defence or negative element which does not affect the obligation of the other. Unilateral promises demand some mutuality or reciprocity of engagement as the basis of a contract in which one of the parties’ promises nothing definite in return [27].

Conclusion:

The consequence of agreements that are void ab initio and void agreements differ. Void implies those agreements which are not enforceable whereas contracts that become void are unenforceable contracts. Similarly contracts that become void are basically valid contract but have become unenforceable due to reasons such as subsequent impossibility or there is Section 32 of the Act dealing with contingent contracts becoming void if the event becomes impossible. Whereas agreements that are discovered to be void is basically pre-existence of something which is subsequently found out. Voidable contracts lack mutuality but the reason for doing so was the presence of negative element while bargaining terms.

† Advocate, BSL LLB, DES Law College and LLM, ILS Law College, Pune.

[1] Avtar Singh, Law of Contract, Eastern Book Company, 7th edn., p. 2.

[2] Id., 148.

[3] Id., 287.

[4] See S. 24 of the Indian Contract Act.

[5] Avtar Singh, Law of Contract, 281.

[6] Id., 286.

[7] Id., 3.

[8] Mulla, The Indian Contract Act, LexisNexis, 15th edn., p. 100.

[9] Avtar Singh, Law of Contracts, 342-343.

[10] Supra note 3 at 202.

[11] Avtar Singh, Law of Contracts, 282.

[12] Id., 345.

[13] Id., 343.

[14] Id., 190.

[15] Supra note 3 at 96.

[16] Avtar Singh, Law of Contracts, 343.

[17] Id., 213.

[18] Sankhyan, Amar Singh, “Study of Dimensions of Principle of Frustation in Indian Contract Law System”, Journal of the Indian Law Institute, Vol. 37, No. 4, 1995, pp. 442-456, Jstor <www.jstor.org/stable/43953245>. Accessed 25-11-2020.

[19] Ibid.

[20] Avtar Singh, Law of Contracts, 321.

[21] Id., 290.

[22] Id., 292-293.

[23]  2020 SCC OnLine SC 381

[24] Supra note 3 at 203.

[25] Supra note 3 at 21.

[26] Avtar Singh, Law of Contracts, 84.

[27] “Mutuality and Consideration”, Harvard Law Review, December 1914, <https://www.jstor.org/stable/pdf/1325997.pdf>.

Case BriefsSupreme Court

Supreme Court: The Bench of Navin Sinha and Indira Banerjee*, JJ., has held that when the acceptor puts in a new condition while accepting the contract already signed by the proposer, the contract is not complete until the proposer accepts that condition.

Setting aside the concurrent findings of the Trial Court and the High Court of Judicature at Hyderabad in a case relating to conclusiveness of the contract for supply of Wooden Sleepers, the bench said,

“Both the Trial Court and the High Court over-looked the main point.”

Background

On 17-7-1990, the respondent floated a tender for supply of Wooden Sleepers. The main dispute was related to Clauses 15 and 16 of the tender, which are extracted herein below:

“15. The purchaser will not pay separately for transit insurance and the supplier will be responsible till the entire stores contracted for arrive in good condition at destination. The consignee will as soon as but not later than 30 days of the date of arrival of stores at destination notify the supplier of any loss, or damage to the stores that may have occurred during transit.

16. In the event of the supplies being found defective in any matter the right to reject such materials and return the same to the supplier and recover the freight by the Port is reserved.”

Pursuant to the aforesaid tender, the appellant submitted its offer with a specific condition of the offer that inspection of the Sleepers, contrary to the requirement of the respondent, had to be conducted only at the depot of the appellant, thereby making a counter proposal. The appellant deposited Rs.75,000/- towards earnest deposit, along with its quotation while reiterating that if the respondent required inspection at the site of the respondent, the appellant would charge 24% above the rate quoted by him for the supply of goods. Though the respondent agreed that the goods would be inspected at the site of the appellant, a further condition was imposed that the final inspection would be made at the General Stores of the respondent and the respondent also requested to extend the delivery period of the sleepers until 15-11-1990. The Appellant rejected the proposal of the Respondent and requested that the deposited earnest money be returned to it.

The respondent contended that, by reason of refusal of the appellant to discharge its obligation of supplying the requisite number of sleepers, it had been constrained to invoke the risk purchase clause as contained in Paragraph 16 of the Special Conditions of purchase and had to purchase the wooden sleepers at a higher rate from a third party, incurring losses, for which the respondent was entitled to claim damages.

The Trial Court and the High Court held that since the appellant had committed breach of its obligations under a concluded contract; the respondent was entitled to damages.

Observations and Decision

Noticing that both the Trial Court and the High Court over-looked the question as to whether the acceptance of a conditional offer with a further condition results in a concluded contract, irrespective of whether the offeror accepts the further condition proposed by the acceptor, the Court observed that Section 7 of the Contract Act, 1872 which emphasises that acceptance must be absolute.

“It is a cardinal principle of the law of contract that the offer and acceptance of an offer must be absolute. It can give no room for doubt. The offer and acceptance must be based or founded on three components, that is, certainty, commitment and communication.”

However, when the acceptor puts in a new condition while accepting the contract already signed by the proposer, the contract is not complete until the proposer accepts that condition.

The Court cited Haridwar Singh v. Bagun Sumbrui (1973) 3 SCC 889, wherein it was held that an acceptance with a variation is no acceptance. It is, in effect and substance, simply a counter proposal which must be accepted fully by the original proposer, before a contract is made.

The Court further relied on Union of India v. Bhim Sen Walaiti Ram, (1969) 3 SCC 146, where a three-Judge Bench of this Court had held that, “acceptance of an offer may be either absolute or conditional. If the acceptance is conditional, offer can be withdrawn at any moment until absolute acceptance has taken place.”

It was, hence, held that the Trial Court and the High Court over-looked the main point that, in response to the tender floated by the respondent, the appellant had submitted its offer conditionally subject to inspection being held at the Depot of the Appellant and the said condition was not accepted by the respondent unconditionally. The respondent had agreed to inspection at the Depot of the appellant, but it imposed a further condition that the goods would be finally inspected at the showroom of the respondent. This Condition was not accepted by the Appellant.

It could not, therefore, be said that there was a concluded contract. Therefore, there could be no question of any breach on the part of the appellant or of damages or any risk purchase at the cost of the appellant.

The Court, while setting aside impugned judgments and orders held that the appellant was entitled to refund of earnest money deposited with the respondent within four weeks with interest at 6% per annum from the date of institution of suit No.450 of 1994 till the date of refund.

[Padia Timber Company (P) Ltd. v. Visakhapatnam Port Trust, 2021 SCC OnLine SC 1, decided on 05-01-2021]

*Justice Indira Banerjee has penned this judgment

Know Thy Judge| Justice Indira Banerjee

Case BriefsHigh Courts

Kerala High Court: R. Narayana Pisharadi, J., while observing the instant matter asked the trial court to reconsider the question whether the suit document is a bond or an agreement.

The instant suit was filed for the realisation of money and certain other reliefs. The claim for money was based on the document allegedly executed by the first defendant in favour of the plaintiff.

When the said document was tendered in evidence, the defendants raised an objection to the marking of the document on the ground that it is a bond and it is an insufficiently stamped document.

Trial Court in its decision had found that the suit document was only an agreement and not a bond.

Defendants had also raised an objection contending that the document was a mortgage deed and it should be compulsorily registrable.

Analysis

Section 2(a) of the Kerala Stamp Act, 1959 defined a bond as follows:

“(a) ‘bond’ includes —
(i) any instrument whereby a person

obliges himself to pay money to another, on condition that the obligation shall be void if a specified act is performed, or is not performed, as the case may be;

(ii) any instrument attested by a witness and not payable to order or bearer, whereby a person obliges himself to pay money to another; and

(iii) any instrument so attested, whereby a person obliges himself to deliver grain or other agricultural produce to another;”

It was observed that the above-stated definition is identical to the definition of bond in Section 2(5) of the Indian Stamp Act, 1899. The said definition includes all types of instruments.

Petitioner’s Senior Counsel submitted that the suit document comes under Clause (ii) mentioned above. But, learned counsel for the first respondent would contend that in order to attract Clause (ii) of Section 2(a) of the Act, the obligation created by the document shall be to pay a definite or specified amount and not something to be determined by the Court.

Further, it was submitted that in the instant case the document does not create an obligation to pay a definite or specified amount and therefore, it is not a bond but only agreement.

Suit document is styled as an agreement. But, for finding out the true character of the instrument, one has to read the instrument as a whole and then find out the dominant purpose. The test is not what the document calls itself or what form it adopts but what is the true meaning and effect of the terms contained therein.

Delhi High Court’s decision in Hamdard Dawakhana (Wakf),1967 SCC OnLine Del 36, the full bench of the court considered the distinction between the bond and an agreement. In this decision, it was observed that it is trite to say that every bond is an agreement and so is the case with a mortgage or sale or exchange but what the court has to see is whether that agreement has acquired the character of a “bond”.

Distinguishing Feature of a Bond

Bond has an obligation to pay money created by the instrument itself.

A document which evidences acknowledgement of an antecedent obligation or a pre-existing liability would not normally become a bond.

The real test to decide whether a particular document is a bond or not is to find out, after reading the document as a whole, whether an obligation is created by the document itself or whether it is merely an acknowledgment of a pre-existing liability.

Where the obligation is a pre-existing one, the subsequent document or the document executed subsequently, giving the nature of the obligation or the terms and conditions of the contract, shall be a mere agreement.

Trial Court failed to take into consideration the fact that, as per the terms of the document, a liability is created for a fixed amount, that is, the amount borrowed and 10% of that amount. Adding to this, it also did not consider whether the stipulation in the document is sufficient to treat it as a bond. Principles mentioned in the Supreme Court cases have also not been referred by the trial court.

High Court allowed the original petition and further stated that the trial court shall consider the question of whether the suit document is a bond or an agreement. [A.V. Ravi v. M.M. Abdulkhadar,  2020 SCC OnLine Ker 8185, decided on 01-12-2020]

Op EdsOP. ED.

1. That the era of modernisation has brought about a radical change in the manner of functioning of not only private undertakings but also the Government. The functions of modern Government extend much beyond the sovereign functions such as legislating, and now the Government is a key functionary in the commercial arena as well, primarily by delegating infrastructure development to private entities by floating tenders.

2. The Government has now started delegating the task of infrastructure development to private entities which work directly under the supervision of the Government Departments concerned or any instrumentality of State, which now forms an essential part of the trade and commerce activities carried out by the Government. The power of the Government to enter into contracts has been recognised under Article 299 of the Constitution, which states as under:

“299. Contracts.– (1) All contracts made in the exercise of the executive power of the Union or of a State shall be expressed to be made by the President, or by the Governor of the State, as the case may be, and all such contracts and assurances of property made in the exercise of that power shall be executed on behalf of the President or the Governor by such persons and in such manner as he may direct or authorise.

(2) Neither the President nor the Governor shall be personally liable in respect of any contract or assurance made or executed for the purposes of this Constitution, or for the purposes of any enactment relating to the Government of India heretofore in force, nor shall any person making or executing any such contract or assurance on behalf of any of them be personally liable in respect thereof.”

3. The above raises an important question as to whether the Government should be subjected to the same rigours as other individuals or does it have any special rights over and above the rights available with ordinary contracting parties under the Contract Act, 1872?

4. The State authorities which are then tasked with the responsibility of infrastructure development should be deemed to act reasonably even though they are acting in a private law capacity. The doctrine of arbitrariness should not only extend to testing the effect and enforcement of legislations but also to provisions of contracts, particularly, contracts whose enforcement is widespread.

5. It would also be relevant to point out here that most contracts entered into by government agencies are standard form contracts (typically referred to as General Conditions of Contract) which are completely non-negotiable, and contractors are required to sign the dotted line. Any subject-matter which is not covered under the provisions of the General Conditions of Contract, are then agreed upon in the form of an addendum typically referred to as the Additional Conditions of Contract or Special Conditions of Contract.

6. In this backdrop, the Supreme Court has set aside the arbitrary and one-sided provisions in several contracts, particularly Builder-Buyer Agreements. However, the contracts which are entered into by governmental agencies perhaps stand at a higher pedestal than those of private builders inasmuch as governmental contracts do not withstand the same level of scrutiny from our judiciary. Thus, for the purposes of this article, I would restrict the discussion to the following clauses which are commonly used in government infrastructure contracts:

  1. Escalation clauses
  2. Variation clauses vis-à-vis claims for loss of profit
  3. Extension of time and recovery clauses
  4. Dispute resolution clauses

Escalation Clause

7. In contracts involving large quantum of work, price escalation clauses are introduced to prevent increase of price during the fixed course of execution of the work entrusted to the contractor, on the ground that the price of the material or equipment being utilised has increased. In ordinary course, the duration of the contract increases much beyond the initial estimated duration (referred to as the ‘stipulated period of completion’) and often by several years. In these circumstances, where a tendered work is a fixed-price and fixed-time contract, the contractors cannot be bound to execute the work at the initial cost over a period which has increased multi-fold. The Supreme Court in Tarapore & Co. v. State of M. P.[1] has observed that “escalation is a normal incidence arising out of gap of time in this inflationary age”. The Court  further went on to hold that escalated rates could be awarded in arbitration even in the absence of any provision for escalation in the contract.

8. Further, the intent behind incorporating escalation clauses in infrastructure contracts is succinctly explained by the Delhi High Court in Deconar Services Pvt. Ltd. v. NTPC Ltd.[2], as under:

“9. …   A fixed price contract would be a fixed price contract only during the original period and surely it is an absurdity to suggest that irrespective of the extension of the contract well beyond the original stipulated date of completion and more so when the same is on account of breaches/ delays by the objector, yet in such a case it can be contended that still no escalation would be paid…”

9. The difficulty which arises in pressing these claims is that all the pronouncements give liberty to the arbitrator to determine a reasonable measure of compensation while deciding the claims, so even if the escalated amount of the claims are calculated as per the formula provided in the agreement between the parties, the Tribunal is free to reject the calculation and decide any amount which it considers to be reasonable. This again is an exception to the series of judgments which state that “The arbitrator, being the prisoner of the contract, is bound to remain within the four corners of the contract”[3]. On the other hand, if there is no escalation clause (and therefore, no formula for calculation), the Arbitral Tribunal is free to determine the amount to be paid towards escalation by any means which are ‘reasonable’. This results in a precarious position where the Arbitral Tribunal has the discretion to apply any method that it deems fit coupled with the varying levels of discretion that are appended to the term ‘reasonable’.

Variation clauses vis-à-vis claims for loss of profit

10. Variation clauses are inserted into the agreement for a prudent reason and fixing the price of the contract up to a reasonable limit. When the project which involves the use of large quantities of material and equipment, there might arise a situation that the quantity of some material differs from what had been mentioned in the Bill of Quantities/Schedule of Quantities. Thus, it is prudent to introduce and keep a variation clause in the agreement to deal with the exigent situation of difference in quantities which are actually utilised for execution of the project as compared to what was estimated in the Bill of Quantities. For ease of reference, Clause 12 of the General Conditions of Contract[4], published by the Central Public Works Department is being reproduced hereunder:

“The Engineer-in-Charge shall have the power (i) to make alteration in, omissions from, additions to, or substitutions for the original specifications, drawings, designs and instructions that may appear to him to be necessary or advisable during the progress of the work, and (ii) to omit a part of the works in case of non-availability of a portion of the site or for any other reasons and the contractor shall be bound to carry out the works in accordance with any instructions given to him in writing signed by the Engineer-in-Charge and such alterations, omissions, additions or substitutions shall form part of the contract as if originally provided therein and any altered, additional or substituted work which the contractor may be directed to do in the manner specified above as part of the works, shall be carried out by the contractor on the same conditions in all respects including price on which he agreed to do the main work except as hereafter provided.”

(emphasis supplied)

11. Per contra, in the event that the work is substantially curtailed from what had been originally awarded, the contractors are at liberty to raise a claim under the head ‘loss of profit’. This head of claim finds its inception in the judgment of the Supreme Court in T. Brij Paul Singh v. State of Gujarat[5] which has been reiterated several times and the judgment in Dwaraka Das v. State of M. P.[6] concisely elucidates the subject claim as under:

“9…. This Court in A. T. Brij Paul Singh v. State of Gujarat[7] while interpreting the provisions of Section 73 of the Contract  Act, 1872 has held that damages can be claimed by a contractor where the Government is proved to have committed breach by improperly rescinding the contract and for estimating the amount of damages, the Court should make a broad evaluation instead of going into minute details. It was specifically held that where in the works contract, the party entrusting the work committed breach of contract, the contractor is entitled to claim the damages for loss of profit which he expected to earn by undertaking the works contract. Claim of expected profits is legally admissible on proof of the breach of contract by the erring party.”

12. The question which frequently arises for consideration before the arbitrators is balancing the rights of the parties where one pleads loss of profit on account of curtailment of the scope of works after awarding the tender and the other takes a defence stating that the contract allows them to modify and amend the scope of work up to a certain extent while relying on the variation/deviation clause. The intent behind the variation/deviation provisions is to meet the exigencies which arise on account of some peculiar situations at the project work site and definitely not to cover up the mismanagement or lack of planning/decision-making on the part of the governmental agencies.

13. These clauses are being misused as a defence to contest claims for loss of profit and conceal the mismanagement on the part of the government agency, which is not considered by Arbitral Tribunals. The Arbitral Tribunals ought to consider the intent behind the provisions rather than mechanically applying them in the manner as is being contended by the government agency.

Extension of time and recovery clauses

14. The third area of friction which really comes up in infrastructural arbitrations is the fact of extension of time, which later becomes the basis for imposing a penalty on the contractors as well as making deductions from the sums due to the contractors as being liquidated damages.

15. The importance of the extension of time provisions in infrastructure contracts is based on the termination of contract (particularly, by efflux of time). Since, infrastructure projects contain a stipulated period for completion of the works, failing which penalty is imposed on the contractor by the State instrumentality. However, there are certain exceptions to extending the time without imposition of any penalty which stem from there being circumstances beyond the control of the parties due to which the project work could not be executed e.g. the nationwide lockdown. The same applies vice versa as well i.e. in the event, time for completion of the works is extended without imposition of any penalty, it is presumed that there was no breach of contract or non-performance on the part of the contractor. The High Court of Delhi in N. Kharbanda & Son v. Delhi Development Authority[8] has observed as under:

“9….However, it is not in dispute that the time period of the contract was extended by the respondent without any penalties on the petitioner and such an occasion would only arise if the fault was not attributable to the petitioner…”

16. However, one contentious issue which often arise for consideration is what is the consequence of non-extension of the time period for completion of the project? Ordinarily, the contract would be deemed to have been terminated by efflux of time, but if the parties continue to perform their obligations without any extension, the same should tantamount to it becoming a concluded contract in terms of Section 8 of the Contract Act, 1872.

17. What is even more intriguing in these matters is that the governmental agency in these contracts has conferred upon itself the power to impose penalty upon the contractor. Most government contracts confer upon a senior officer of its agency the power to determine whether the contractor is guilty of breach of contract and the power to impose penalty after determination of guilt. Even though, this issue has come before the Courts several times over, the Courts have not considered the factum that ultimately the official making the so-called analysis of guilt or innocence is an employee on the rolls of that very agency which would later become a party to that lis. In my opinion, the same falls foul of fundamental principles of natural justice, particularly, nemo judex in sua causa (no person shall be a Judge in his/her own cause). The Courts intervene to a limited extent by checking whether the contractor was given an opportunity to present its case before the appointed official.

18. Further, the same bears similarity to the provision contained in Article 371-D(5) of the Constitution, which was struck down by a Constitution Bench of the Supreme Court in Sambamurthy v. State of Andhra Pradesh [9] as being violative of the rule of law which is a part of the basic structure of the Constitution. It can be said that the powers conferred upon the official of the government agency to impose penalty should also be ultra vires as the agency itself, as a party to the lis, is then deciding the extent of breach by the other side and is empowered to effect a recovery without any adjudication whatsoever. Ordinarily, the agency ought to initiate a claim/counter-claim before the Arbitral Tribunal or the Court to decide the breach of contract and damages, rather than equipping its own self to pass a decision in a matter where it has economic interest. The said position of law was reiterated by the Supreme Court in Gangotri Enterprises Ltd. v. Union of India[10] where it was held that until the demand of the Government was crystallised or adjudicated upon, the Government cannot withhold the money of the contractor. However, in a recent decision in State of Gujarat   v. Amber Builders[11], the decision in Gangotri Enterprises has been declared per incuriam, but it has been reiterated that any recovery effected by the Government is subject to further adjudication by the Arbitral Tribunal, which would independently decide the merits of imposition of the financial penalty.

19. In ordinary commercial transactions, it has become trite law that one-sided or arbitrary provisions in agreements are struck down if they favour one-party or constitute an unfair trade practice, but it seems that perhaps because the Government is deemed to act in a reasonable and rational manner, that contracts entered into by governmental agencies do not bear similar scrutiny.

Dispute resolution clauses

20. Most contracts now contain a dispute resolution clause, whereby the parties are bound to refer any disputes arising out of the agreements, to arbitration. The primary reason for introduction of such clauses was the delay which comes about in the regular adjudicatory process before the Courts in India.

21. Government contracts in particular, contain a dispute resolution clause, which is not only limited to arbitration, but prescribes several pre-requisite measures to be adopted before a request for appointment of an arbitrator can be made before the appointing authority i.e. persona designata, who again is an official of the governmental agency itself. Most Government contracts provide for a proceeding before some senior officials akin to mediation of the disputes, and more often than not, such mediation fails simply because the presiding officer is an official of the government agency itself.

22. The Courts also refuse to entertain petitions for appointment of arbitrators in the event the party approaches the Court, primarily on the ground that the ‘mandatory pre-requisite’ conditions imposed by the Dispute Resolution Clause have not been complied with. This leaves aside all scope for claiming urgent relief against governmental agencies in infrastructure contracts[12].

23. The Supreme Court in Perkins Eastman Architects DPC v. HSCC (India) Ltd.[13] has held that a person who has an interest in the outcome or decision of the disputes must not have the power to appoint a sole arbitrator. In my opinion, the persona designata, who is mostly a senior employee of the same government agency would have an interest, albeit indirect, in the outcome of the dispute. To my utter dismay, even the latest edition of the General Conditions of Contract as formulated by the Central Public Works Department does not reflect this changed position of law and continues to have its own official as the persona designata.

24. The second problem which arises while complying with the myriad pre-requisites in these long-drawn arbitration clauses is the concept of delay in appointment of arbitrators. In certain situations, the persona designata has delayed the appointment of arbitrators so that the formalities for imposition of penalty can be completed by the agency and the Tribunal does not stay the imposition of the penalty under Section 17 of the Arbitration and Conciliation Act, 1996[14]. In certain situations, the persona designata, calls for the list of claims proposed to be raised by the contractor, and chooses to refer only a few of them rather than all claims, by virtue of which he has effectively usurped the powers of the Arbitral Tribunal and decided the claim on his own.[15]

Conclusion

25. What constitutes a major hitch for the parties presently, is the narrow scope of intervention by Courts in the arbitral process as well as in the awards. Particularly, the recent judgment of the Supreme Court in SsangYong Engineering & Construction Company Ltd. v. National Highways Authority of India[16] which has crystallised and narrowed down the scope of interference under Section 34 in light of the amendments made to the Act in 2015.

26. In view of all of the foregoing, though it can be said that the Courts have exercised their judicial powers to balance the equities between the parties, much is left to be desired in the judicial scrutiny of governmental contracts. Even though, the Government is obligated to act in a fair, non-arbitrary and reasonable manner even while acting in a private law capacity, the same remains to be mere sermons and directives in the law reports. Government contracts should not be protected from judicial scrutiny, particularly, when the Constituent Assembly chose to not grant any special protection or status to the contracts entered into by the Government under the Constitution. Moreover, now that the Supreme Court has propounded the doctrine of arbitrariness to test the validity of legislations[17], it is the appropriate time to apply the same to private law and test the validity of contractual provisions.

27. Therefore, it is optimal time that the judicial scrutiny of governmental contracts is done at par with private commercial contracts and the conduct of the Government is analysed objectively to determine the breach of contract and consequential damages.

*Advocate

[1] (1994) 3 SCC 521

[2] 2009 SCC OnLine Del 4108

[3] Republic Construction Co. v. Delhi Development Authority, 2009 SCC OnLine Del 1902

[4]Available at https://cpwd.gov.in/Publication/GCC_Constructions_works_2020.pdf, last accessed on 15.06.2020

[5] (1984) 4 SCC 59

[6] (1999) 3 SCC 500

[7] (1984) 4 SCC 59

[8] 2006 SCC OnLine Del 1871

[9] (1987) 1 SCC 362

[10] (2016) 11 SCC 720

[11] (2020) 2 SCC 540

[12] Although in exceptional situations, the Courts have intervened, in writ petitions where patent illegality can be seen on the face of the record

[13] 2019 SCC Online SC 1517

[14] The  Supreme Court in the celebrated judgment of J. G. Engineers v. Union of India,  (2011) 5 SCC 758, has clearly stated that decision of the Superintending Engineer imposing penalty on the contractors is not adjudication

[15] Earnest Builders (P) Ltd. v. Union of India, 2007 SCC OnLine Del 678; Rajeev Traders v.  South Central Railway, 2002 SCC OnLine AP 628

[16] (2019) 15 SCC 131

[17] Shayara Bano v. Union of India, (2017) 9 SCC 1