Case BriefsSupreme Court

Supreme Court: In an Insolvency and Bankruptcy case, the bench of Indira Banerjee* and JK Maheshwari, JJ has explained the difference between Contract of Indemnity and Contract of Guarantee and has explained that:

the contract of indemnity is a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person. In a contract of indemnity, a promisee acting within the scope of his authority is entitled to recover from the promisor all damages and all costs which he may incur.

a contract of guarantee, on the other hand, is a promise whereby the promisor promises to discharge the liability of a third person in case of his default. The person who gives the guarantee is called the surety. The person in respect of whose default, the guarantee is given is the principal debtor and the person to whom the guarantee is given is the creditor. Anything done or any promise made for the benefit of the principal debtor may be a sufficient consideration to the surety for giving the guarantee. On the other hand, the bailment of goods as security for payment of a debt or performance of a promise is a pledge.

The Court explained the distinction between the two forms of contracts in this case:

IBC| CIRP proceedings can be initiated against two Corporate Debtors but same amount cannot be realised from both: Supreme Court 

[Maitreya Doshi v. Anand Rathi Global Finance Limited, 2022 SCC OnLine SC 1276, decided on 22.09.2022]


*Judgment by: Justice Indira Banerjee

For Appellant: Senior Advocate KK Vishwanathan

For Respondent: Advocate Prateek Sakseria

Experts CornerTarun Jain (Tax Practitioner)

Introduction

The very fact that a tax is recognised as a transaction tax on a conceptual basis implies that there must be a transaction to begin with in order to levy such a tax. Admittedly goods and services tax (GST), introduced in India in 2017, is one such tax. It is hinged upon the existence of a supply which has been legislatively defined to essentially refer to a transaction between two persons. A key element for the levy of GST is existence of “consideration”. Albeit there are certain circumstances in which consideration is not necessary and by way of a legal fiction is “deemed” to exist. In all other cases, however, consideration must flow from the recipient of the supply to the supplier in order for the transaction to be exigible to tax. Thus is introduced within the GST realm an important aspect of the law of contract, the “privity of consideration” doctrine. This post examines the nuances of the doctrine to explore its interplay under the GST law and explore its increasing application to address intricate issues which may arise owing to the peculiarities of “consideration”.

Privity of consideration: Not a sine qua non for a valid contract unlike privity of contract

Under the law of contract, privity between parties to the contract (i.e. privity of contract) is a necessity. “It is an elementary principle of English law known as the ‘doctrine of privity’ that contractual rights and duties only affect the parties to a contract, and this principle is the distinguishing feature between the law of contract and the law of property.”1 The same legal position exists under the Contract Act, 1872 (ICA). Pollock & Mulla, describing this doctrine, state “a contract cannot confer rights or impose obligations arising under it on any person except the parties to it. No one but the parties to a contract can be entitled under it or bound by it. This principle is known as that of privity of contract”.2

By contrast, privity of consideration is not a requirement for valid contract. This is on account of the definition of “consideration” set out in Section 2(d) of the ICA which permits the consideration for a contract to flow from a third party. It states that “when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise”. In other words, for a contract to come into existence, it is not necessary that the consideration for the contract must necessarily come from the parties to the contract; the consideration can flow even from any other person. This aspect was resounded by the Delhi High Court, inter alia observing that “in India, whereas privity of contract is a must to create a jural relationship, privity of consideration is not essential and pertaining to a contract, consideration may flow to a contracting party from a third party, but at the instance of the other contracting party.”3

Even though there has been a proposal to amend this legal position,4 nonetheless “under the Act, the consideration for an agreement may proceed from a third party, but it does not follow that the third party can sue on the agreement”.5

Privity of consideration under GST laws: Exploring the interplay

The relevance of the aforesaid discussion under the law of contracts qua transaction taxes is brought out from the following consequences flowing from the privity doctrine:6

“The doctrine has two aspects. The first aspect is that no one but the parties to the contract are entitled under it. Contracting parties may confer rights or benefits upon a third party in the form of a promise to pay, or to perform a service, or a promise not to sue (at all or in circumstances covered by an exclusion or a limitation clause). But a third party on whom such right or benefit is conferred by contract can neither sue under it nor can rely on defences based on the contract.

The second aspect of the doctrine is that parties to a contract cannot impose liabilities on a third party. A person cannot be subject to the burden of a contract to which he is not a party. It is the counterpart of the proposition that a third person cannot acquire rights under a contract. This rule, for example also bars a person from being bound by an exemption clause contained in a contract to which it is not a party, so that a contract between A and B cannot impose a liability upon C.”

For our purpose, this summation of the legal position brings forth two aspects which may be relevant for transaction tax perspective. First, a contract between A and B can cause a benefit to flow from A to C. Second, in a contract between X and Y, the consideration to X can flow from Z (upon insistence of Y) even though Z is not a party to the contract. Let us exemplify these aspects in form of illustrations.

Illustration 1-A. A, a philanthropist executes a contract with B, a renowned NGO. Under the contract, B will carry out free evening teaching classes in identified areas to all daily wagers and their children, who are collectively referred as C. In turn, A shall compensate B for carrying out the teaching activity.

Having noted the contract law propositions, let us transpose them in transaction tax domain. For this purpose, it is imperative to take note of the legal provisions of the GST laws. The provisions of the Central Goods and Services Tax Act, 2017 (CGST Act) carry specific stipulations to this end. Section 2 of the CGST Act inter alia defines a “recipient” and “supplier” in the following terms:

(93) “recipient” of supply of goods or services or both, means — (a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration; (b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and (c) where no consideration is payable for the supply of a service, the person to whom the service is rendered, and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied;

* * *

(105) “supplier” in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied.

Let us apply the aforesaid statutory stipulations in the illustration. Theoretically, there can be two versions on its treatment under the GST law. The first version supports the view that there is only one supply in this situation. The second version, however, moots two supplies in this illustration.

  • In the first version, A will be the recipient, as A is liable to pay for the service which B is supplying and accordingly B will be the supplier. In this version, C is a third party to the contract and thus at best a beneficiary.

  • However, second version opines that there are two supplies; the first supply being between A and B and the second supply being occasioned when B undertakes teaching to C. Accordingly to this version, B is the supplier in both supplies. However, the recipient is A (who pays for the supply) in the first supply. In the second supply C is the recipient in terms of Section 2(93)(c) of the CGST Act, which specifically identifies “where no consideration is payable for the supply of a service, the person to whom the service is rendered” is construed as the recipient of the service.

The dichotomy in the two versions under the GST law is best reconciled when the privity of consideration doctrine from contract law perspective is introduced in this scenario. The doctrine of privity of consideration clearly demystifies that there is only one contract in this situation where only A and B are the parties to the contract. The doctrine of privity of consideration is clearly able to delineate that C, even though it gets benefit from the contract between A and B, is at best a third party and thus only a beneficiary which reveals that there is no second supply.

Illustration 1-B. Let us take another illustration on similar lines. Here, P is a pauper litigant. Q is a legal aid society which empanels counsels willing to act pro bono of which R is a member. In view of P approaching Q, R represents P before the court for which R is compensated by Q.

Even in this illustration, theoretically, there can be two versions on its treatment under the GST law. The first version supports the view that there is only one supply in this situation. The second version, however, moots two supplies in this illustration.

  • In the first version, R is the service provider (of legal services) and Q is the service recipient as Q is the person liable to pay for the service which R is supplying. In this version ,P is a third party to the contract, thus, at best a beneficiary.

  • However, second version opines that there are two supplies; the first supply being between R and Q and the second supply being occasioned when R undertakes to represent P. Accordingly to this version, R is the supplier in both supplies. However, the recipient is Q (who pays for the supply) in the first supply. In the second supply P is the recipient in terms of Section 2(93)(c) of the CGST Act, similar to Illustration 1-A.

Similar to Illustration 1-A, the dichotomy amongst the two versions under the GST law in this illustration is best reconciled by the doctrine of privity of consideration. Here R has agreed to represent P on account of the contract between R and Q in terms of which Q has recommended and paid for R to represent P. Thus, the contract is between R and Q and the doctrine of privity of consideration explains why R is representing P in this situation and there is no independent transaction between R and P and there is no separate supply by R to P.

Admittedly both the above illustrations are qua philanthropic activities. However, that fact alone does not take them out of the purview of tax legislations as it is now virtually well established that mere absence of profit motive is not sufficient to ward-off tax liability.7 In any case, there is nothing in these illustrations which cannot accommodate purely commercial transactions, and thus the relevance of doctrine of privity of consideration cannot be overemphasised in the realm of GST law.

Illustration 2. X is a start-up entity which has launched a new product. X is desirous of having a wide user base for its product. X contracts with Y, a marketing company, to make the product popular by getting at least 10,000 users sign up on X‘s website and order one product each. Y would charge marketing fee from X if Y is successful in this assignment. Through intensive marketing, Y is able to successfully get the requisite number of users sign up on X’s website and order the products. These users are collectively referred to as Z. Thus, Y charges the marketing fee from X.

Even though it may be fairly obvious as to who is the supplier and who is the recipient in this illustration from a GST perspective, the doctrine of privity of consideration nonetheless confirms the analysis. By applying the doctrine of privity of consideration, it is clear that the contract is between X and Y where the consideration to X flows from Z (through activities of Y) even though Z is not a party to the contract. Thus, X is the recipient and Y is the supplier. This is so, notwithstanding the conspicuous absence of “consideration” element in the definition of “supplier” under the CGST Act.

The aforesaid illustration has a real life parallel. In the year 2016, owing to demonetisation being announced by the Government, there were difficulties for certain users to carry the cash required to be paid, for crossing a toll bridge. In order to obviate such difficulties, the Ministry permitted users to cross the bridge without making any payment during a particular period. In lieu of the loss suffered by the toll operator on this account, the Ministry compensated the toll operator. The services by way of toll were specifically exempt under the service tax law. However, when the payments were made by the Ministry to the toll operator, certain tax officers sought to levy service tax on the payment made by the Ministry to the toll operator, on the premise that the payments represented an independent service by the toll operator to the Ministry. To address the issue, the Tax Board issued a circular8 clarifying that the activity carried out by the toll operator (i.e. allowing use of the road) remained the same and it was only because the toll operator received the consideration from the Ministry that it permitted the users to use the road without payment of the toll by them. Thus, there was no change in the contract (between the toll operator and user of road) and only the flow of consideration changed. Inter alia the following conclusions were drawn in the circular:

“The service that is provided by toll operators is that of access to a road or bridge, toll charges being merely a consideration for that service. On Ministry of Road Transport and Highways of India (MoRTH)/National Highways Authority of India (NHAI’s) instructions, for the period 8-11-2016 to 1-12-2016 this service of access to a road/bridge was continued to be provided without collection of consideration from the actual user of service. Consideration came from the project authority. The fact that for this period, for the same service, consideration came from a person other than the actual user of service, does not mean that the service has changed.”

Thus, even though the circular did not make specific reference to the doctrine of privity of consideration, it nonetheless gave effect to it in practice by (a) acknowledging that consideration can flow from a third person which is not a party to the contract; and (b) accepting that flow of consideration from a third party does not change the nature of transaction between the parties to a contract. The logic underlying this circular has been extended even to GST laws,9 which clearly reveals the importance of appreciating the finer nuance of doctrine in transaction tax space, including GST.

Conclusion

The aforesaid analysis has multiple implications. First, it reveals how tax law does not operate in isolation. Instead, the contours of tax law are intrinsically interwoven with many other laws, including the law of contract. Second, there can be innate difficulties in applying the tax law on a literal paradigm, which difficulties can be smoothened by taking recourse to relevant doctrines under other laws. Third, in the specific context of the privity of consideration paradigm, the discussion clearly highlights that under GST, determining the existence of a transaction on the basis of the flow of consideration may not reveal the correct legal position given the explicit recognition of third-party consideration under the Indian law. In such view of the matter, the doctrine of privity of consideration may be gainfully employed to decipher the real contracting parties (which often gets clouded when the appraisal is from the perspective of consideration flow), and thus GST can be levied on the correct transaction instead of chasing artificial constructs. The invocation of the substance of this doctrine, as illustrated by the circular, vindicates this analysis.


†Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics

1. P.S. Atiyah, Atiyah’s Introduction to the Law of Contracts, (3rd Edn., 1981) p. 265, as quoted in P. Ramanatha Aiyar’s, Advanced Law Lexicon, (5th Edn., 2017) p. 4077. The same Lexicon also quotes G.H. Treitel, The Law of Contract, (8th Edn., 1991) p. 538 to state “the doctrine of privity means that a person cannot acquire rights or be subject to liabilities arising under a contract to which he is not a party. It does not mean that a contract between A and B cannot affect the legal rights of C indirectly”.

2. Pollock & Mulla, Indian Contract & Specific Relief Act, (12th Edn., 2010) p. 102. Elaborating further, the authors state that the “doctrine of privity may involve any (or more) of the four questions: (i) can a person enforce a contract to which he is not a party? (ii) can a person set up a defence based on the terms of a contract to which he is not a party in order to answer a claim brought by a person who is a party to the relevant contract? (iii) can a contracting party set up a defence based on the terms of his own contract in order to answer a claim brought by a person who is not a party to the relevant contract? (iv) can a contracting party enforce his own contract against a person who is not a party to the relevant contract?”

3. Paam Antibiotics Ltd. v. Sudesh Madhok, 2011 SCC Online Del 4911: (2012) 186 DLT 652. See also, Krishna Devloor v. N. Madhavi, 2013 SCC Online AP 160: AIR 2013 AP 138: which inter alia explains this legal position in the following terms; “Mere payment of money by one individual to another, does not, by itself, bring about the transaction of a particular description. It is only when there exists unity of opinion, or what is commonly known in the realm of contracts, as consensus ad idem, that it can be treated as a consideration of the contract of a particular description. The money can certainly constitute the consideration, in a given transaction. However, it is only when it is paid by one, to another, with a specific understanding, that it is the consideration for a contract, that the contract can be said to have come into existence. The money paid for one purpose, cannot be treated as consideration for another. Even if a person pays the amount to another, with an idea that it is the consideration for purchase of an item of property, law would recognise such event, if only the person who paid the amount establishes that the one, who received it, was also of the same idea and understanding.”

4. See, 13th Report of the Law Commission of India (1958). In Para 16, the Law Commission had noted the following:

“That a rigid adherence to the doctrine of privity is bound to cause hardship is obvious. The present state of law in India is not quite uncertain and the particular exceptions which have been acknowledged by case law and statutes do not cover all cases of hardship and thus enhance the bewilderment of the layman. As we anticipated in our Report on the Specific Relief Act, the better course would be to adopt a general exception to cover all cases of contracts conferring benefit upon third parties and dispense with the particular instances where the rule of privity should not apply. We consider the recommendations of the Law Revision Committee best suited for the purpose, and recommend that a separate section be incorporated on the lines thereof.”

5. Pollock & Mulla, Indian Contract and Specific Relief Act, (12th Edn., 2010) p. 103. For English law on the subject, see Dunlop Pneumatic Tyre Co. v. Selfridge & Co., 1915 AC 847 inter alia observing that “My Lords, in the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio arising by way of contract. Such a right may be conferred by way of property, as, for example, under a trust, but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam. A second principle is that if a person with whom a contract not under seal has been made is to be able to enforce it consideration must have been given by him to the promisor or to some other person at the promisor’s request. These two principles are not recognised in the same fashion by the jurisprudence of certain continental countries or of Scotland, but here they are well established. A third proposition is that a principal not named in the contract may sue upon it if the promisee really contracted as his agent. But again, in order to entitle him so to sue, he must have given consideration either personally or through the promisee, acting as his agent in giving it.” (per Viscount Haldane L.C.) See also, Scruttons Ltd. v. Midland Silicons Ltd. 1962 AC 446: (1962) 2 WLR 186: (1962) 1 All ER 1, etc.

6. Pollock & Mulla, Indian Contract and Specific Relief Act, (12th Edn., 2010) p. 106.

7. See generally, State of T.N. v. Port of Madras, (1999) 4 SCC 630. In any case, in a transaction tax (unlike income tax), there would ordinarily be no difference between commercial activities and non-profit driven activities.

8. Circular No. 212/2/2019-Service Tax dated 21-5-2019.

9. Refer, Circular No. 178/10/2022-GST dated 3-8-2022, relevant at Paras 8-8.1.

Case BriefsSupreme Court

   

Supreme Court: In a suit for specific performance the Division Bench of Indira Banerjee* and Hrishikesh Roy, JJ., explained the terms willingness and readiness to pay. Reversing the concurrent orders of the Courts below, the Court held that the Respondent Plaintiff may have been willing to perform his part of the contract, it however appears that he was not ready with funds and was possibly trying to buy time to discharge his part of the contract. The Court noted,

“Making a subsequent deposit of balance consideration after lapse of seven years would not establish the Respondent Plaintiff's readiness to discharge his part of the contract.”

Background

The Respondent Plaintiff alleged that there was an agreement between him and the appellant to sell the disputed property for a consideration of Rs.15,10,000 out of which he had paid a sum of Rs.10,001 in advance. It was further agreed between the parties, that the Respondent Plaintiff would get the sale deed registered on or before 15-03-2003 upon payment of the full sale consideration.

The genesis of the case was that though the Respondent Plaintiff had approached the appellant with the balance consideration several times and requested to execute the sale deed in his favour, the appellant kept postponing the execution of the sale deed on one pretext or the other. On the contrary, the appellant contended that the Respondent Plaintiff was never ready or willing to perform his part of the contract.

Impugned Decision

The Trial Court found that the Respondent Plaintiff was ready and willing to perform his part of the contract, and thus entitled to the relief of specific performance. Therefore, the Trial Court decreed the suit and directed the appellant to receive the balance sale consideration of Rs.15 lakhs and execute the sale deed in favour of the Respondent Plaintiff. The Trial Court's decision was affirmed by the Madras High Court in appeal.

Willingness and Readiness to Pay

Section 16 (c) of the Specific Relief Act, 1963 (prior to amendment w.e.f. 01-10-2018) bars the relief of specific performance of a contract in favour of a person, who fails to aver and prove his readiness and willingness to perform his part of the contract.

The Court noted that to aver and prove readiness and willingness to perform an obligation to pay money, in terms of a contract, the plaintiff would have to make specific statements in the plaint and adduce evidence to show availability of funds to make payment in terms of the contract in time. In other words, the plaintiff would have to plead that he has sufficient funds or is in a position to raise funds in time to discharge his obligation under the contract.

Relying on Acharya Swami Ganesh Dassji v. Sita Ram Thapar, (1996) 4 SCC 526, the Court opined that there is a distinction between readiness and willingness to perform the contract and both ingredients are necessary for the relief of Specific Performance. While readiness means the capacity of the Plaintiff to perform the contract which would include his financial position, willingness relates to the conduct of the Plaintiff.

Considering that no evidence was adduced on behalf of the Respondent Plaintiff as to how he was in a position to pay or make arrangements for payment of the balance sale consideration within time; as his balance sheet dated 31-03-2003 revealed that he did not have sufficient funds to discharge his part of the contract, the Court held that the Courts below have erred in not adjudicating upon this vital issue except to make a sweeping observation that, given that the Respondent Plaintiff was a businessman he had sources to arrange the balance funds.

Limitation Period

Following the findings in Saradamani Kandappan v. S. Rajalakshmi, (2011) 12 SCC 18, the Court opined that while exercising discretion in suits for Specific Performance, the Courts should bear in mind that when the parties prescribed a time for taking certain steps or for completion of the transaction, that must have some significance and therefore time/period prescribed cannot be ignored. Similarly, every suit for Specific Performance need not be decreed merely because it is filed within the period of limitation, by ignoring time limits stipulated in the agreement.

Hence, the Court opined that the fact that the limitation is three years does not mean that a purchaser can wait for one or two years to file a suit and obtain Specific Performance. The Court observed that the three-year period is intended to assist the purchaser in special cases, i.e., where the major part of the consideration has been paid and possession has been delivered in part performance, where equity shifts in favour of the purchaser.

“The courts will also frown upon suits which are not filed immediately after the breach/refusal.”

Accordingly, the Court held that the fact that the suit had been filed after three years, just before expiry of the period of limitation, was also a ground to decline the Respondent Plaintiff the equitable relief of Specific Performance for purchase of the immovable property.

Additionally, the Court noted that the Court could not overlook the fact that the suit property is located in the industrial town of Hosur located about 30/40 kms. from Bengaluru and there is a phenomenal rise in the price of real estate in Hosur.

Conclusion

In view of the foregoing, the Court held that the Respondent Plaintiff was not entitled to the relief of specific performance. The appeal was allowed and the impugned judgment of the High Court, as well as the judgment and decree of the Trial Court, were set aside.

The appellant was directed to return the earnest money to the Respondent Plaintiff, within 4 weeks with interest at the rate of 7% per annum from the date of deposit of the same, till the date of refund.

[U.N. Krishnamurthy v. A.M. Krishnamurthy, 2022 SCC OnLine SC 840, decided on 12-07-2022]

*Judgment by: Justice Indira Banerjee


Advocates who appeared in this case :

Senior Advocate Krishnan Venugopal with AOR Mahesh Thakur, Advocates, for the Appellants;

N.D.B Raju with AOR M.A. Chinnasamy, Advocates, for the Respondent.


*Kamini Sharma, Editorial Assistant has put this report together.

Supreme Court of The United States
Case BriefsForeign Courts

Supreme Court of the United States (SCOTUS): In a 6-3 ruling, Court expressed that, Emotional distress damages are not recoverable in a private action to enforce either the Rehabilitation Act of 1973 or the Affordable Care Act, Roberts C.J., delivered the opinion of the Court, in which Thomas, Alito, Gorsuch, Kavanaugh and Barret, JJ., joined, whereas. Kavanaugh, J., filed a concurring opinion, in which Gorsuch, J., joined and Breyer, J., filed a dissenting opinion, in which Sotomayor and Kagan, JJ., joined.

Factual Background

Jane Cummings, who was deaf and legally blind, sought physical therapy services from Premier Rehab Keller and asked Premier Rehab to provide an American Sign Language interpreter for her sessions. Premier Rehab declined to do so, telling Cummings that the therapist could communicate with her through other means.

Later a lawsuit was filed seeking damages and other relief against Premier Rehab, alleging that its failure to provide an ASL interpreter constituted discrimination on the basis of disability in violation of the Rehabilitation Act of 1973 and the Affordable Care Act.

Premier Rehab was subject to the above statutes, which apply to entities that receive federal financial assistance, because it received reimbursement through Medicare and Medicaid for the provision of some of its services.

Further, the District Court determined that the only compensable injuries allegedly caused by Premier Rehab were emotional in nature. It held that damages for emotional harm are not recoverable in private actions brought to enforce either statute. The District Court thus dismissed the complaint, and the Fifth Circuit affirmed.

Whether emotional distress damages may be recovered under the Spending Clause statute?

Court noted that the statutes are silent with regard to the available remedies.

It was stated that there is no basis in contract law to maintain that emotional distress damages were “traditionally available in suits for breach of contract”.

Hence, emotional distress damages are not traditionally available in suits for breach of contract, for emotional distress, therefore, it was held that emotional distress damages are not recoverable under the Spending Clause anti-discrimination statutes.

None of the laws that protect against disability discrimination allows victims to recover for their emotional distress.

Concurring

Justice Kavanaugh and Justice Gorsuch said that the contract law analogy was imperfect and would reorient the inquiry to focus on a background interpretive principle rooted in the Constitution’s separation of powers.

Dissenting

Justice Breyer with whom Justice Sotomayor and Justice Kagan joined, with dissenting opinion that, compensatory damages under Civil Rights Act of 1964, Title VI, 42 U. S. C. §2000d; Education Amendments Act of 1972, Title IX, 20 U. S. C. §1681; Rehabilitation Act of 1973, §504, 29 U. S. C. §794; Patient Protection and Affordable Care Act (ACA), §1557, 42 U. S. C. §18116, cannot include compensation for emotional suffering.

Further, it was expressed that the Spending Clause statutes prohibit intentional invidious discrimination, and that kind of discrimination causes emotional disturbance. Hence, applying the contract analogy, victims of intentional violations of the anti-discrimination statutes can recover compensatory damages for emotional suffering.

Additionally, it was observed that the damages for emotional suffering have long been available as remedies for suits in breach of contract at least where the breach was particularly likely to cause suffering of that kind.

“Contract law treatises make clear that expected losses from the breach of a contract entered for nonpecuniary purposes might reasonably include nonpecuniary harms. So contract law traditionally does award damages for emotional distress “where other than pecuniary benefits [were] contracted for” or where the breach “was particularly likely to result in serious emotional disturbance.”

 [Cummings v. Premier Rehab Keller, 2022 SCC OnLine US SC 4, decided on 28-4-2022]

Case BriefsSupreme Court

Supreme Court: On the question as to ‘whether time is of the essence in a contract’, the bench of NV Ramana, CJ* and Surya Kant, J has held that merely having an explicit clause may not be sufficient to make time the essence of the contract. The same has to be culled out from the reading of the entire contract as well as the surrounding circumstances.

Factual Background

A global tender was floated by the ONGC for purchase of aggregate quantity of 3,93,297 metres of seamless steel casing pipes. Remi Metals was a successful bidder who had bid to supply pipes as a supplier on behalf of Volski Tube Mills, Russia. In furtherance of the same, 4 purchase orders (POs) No. 275, 276, 277 and 286 were issued.

During the execution of contract, there were certain delays in meeting the obligation as required under the contract. In this context, various extensions were given by the ONGC to fulfil their obligation.

The ONGC had deducted an aggregate amount of US $8,07,804.03 and Rs.1,05,367/- as liquidated damages from various bills submitted by the Remi Metals. There were other claims which were disputed by the Remi Metals which were claimed before a panel of arbitrators.

Arbitral Tribunal’s observations

The Arbitral Tribunal, at the outset, held that merely having a clause in the contract making time the essence of it would not be determinative; rather, an overall view having regard to all the terms of contract are to be taken into consideration. Further, contracts containing provision for extension of time or payment of penalty on default would dilute the obligation of timely performance and render the clauses imbuing time as essence of the contract ineffective. Additionally, the Arbitral Tribunal also noted that generally, under construction contracts, time is not the essence.

Basic principles to consider the relevancy of time conditioned obligations

  1. Subject to the nature of contract, general rule is that promisor is bound to complete the obligation by the date for completion stated in the contract. [Percy Bilton Ltd. v. Greater London Council, [1982] 1 WLR 794]
  2. That is subject to the exception that the promisee is not entitled to liquidated damages, if by his act or omissions he has prevented the promisor from completing the work by the completion date. [Holme v. Guppy, (1838) 3 M & W 387]
  3. These general principles may be amended by the express terms of the contract as stipulated in this case.

“‘Whether time is of the essence in a contract’, has to be culled out from the reading of the entire contract as well as the surrounding circumstances. Merely having an explicit clause may not be sufficient to make time the essence of the contract.”

Ruling on facts

Upholding the award of the Arbitral Tribunal, the Court noticed that as the contract was spread over a long tenure, the intention of the parties to provide for extensions surely reinforces the fact that timely performance was necessary. The fact that such extensions were granted indicates ONGC’s effort to uphold the integrity of the contract instead of repudiating the same. Further, Clause 9(i) of the Purchase Order reproduced made clear that time is the essence of the contract, subject to extension granted without prejudicing the right of ONGC to recover damages.

Applying the aforementioned principles and considering the facts of the case, the Court, hence, concluded that the Arbitral Tribunal’s interpretation of contractual clauses having extension procedure and imposition of liquidated damages, are good indicators that ‘time was not the essence of the contract’.

[Welspun Specialty Solutions Limited v. ONGC, 2021 SCC OnLine SC 1053, decided on 13.11.2021]


For Remi Metals: Senior Advocate Shyam Divan


*Judgment by: Chief Justice NV Ramana

COVID 19Op EdsOP. ED.

The financial stability of the aviation industry has been severely crippled due to COVID-19 pandemic. As the “big bird” is an expensive affair, most of the aviation industries resort to take aircrafts on lease rather than purchasing them. Across the globe, nearly 70% of the air fleets are grounded, which has hampered their ability to satisfy their obligations[1] and fulfil the requisites stipulated under aircraft lease agreements. Further, the decline in passenger revenue and demand which is also expected to mitigate by USD 8.8 billion and 36% respectively[2], together with various other taxes, levies and aeronautical charges, have created a burden on the lessee forcing them to file for bankruptcy. For escaping this liquidity crunch one may argue to bring in the “Force Majeure” or “Doctrine of Frustration” or “illegality clause”. But as far as the aviation industry is concerned, the above-mentioned tenets have a very little say. It is due to the general practice of incorporating “hell and high water clause” (herein referred to as ‘HOHW’) in aircraft lease agreements. The HOWH clause will play a pivotal role for understanding the implications of COVID-19 on the aviation industry as this clause renders the lessee unconditionally and entirely responsible for payment of the rent, irrespective of the unforeseen circumstances which have affected the airline’s operations. The authors in this article will ponder upon various facets of HOWH clause in tandem with other provisions of contract. Further, emphasis will be laid upon the extent to which the clause is enforceable. Lastly, suggestions and futuristic approach for the lessee will be dealt with.

 INTERPLAY BETWEEN VARIOUS TENETS OF CONTRACT LAW AND   HOWH CLAUSE

In India, most of the aircraft lease agreements are governed by common law. It is pretty evident to apply common law, especially, English Law, for regulating the lease agreement. The only thing worth noting is that the rights arising out of the lease, which the parties are trying to enforce through English Law should not be in derogation with the public policy or any other law of India[3]. As per the current standards, the lease agreements are characterised by two principal features. The first principle feature is the delivery of the aircraft in ‘as is, where is’ basis whereas the second feature relates to the ‘HOWH’. Both the features when clubbed together leave the lessee helpless in situations such as Covid-19, where the fulfilment of obligations is severely curtailed. However, there are certain tenets of contract which may act as a safe haven for the contracting parties.

Under the contract law, force majeure is a provision which makes the performance of a contract impossible and absolves the party from non-performance of contractual obligations which is caused by circumstances or events out of the parties’ control. If an aircraft lease has incorporated force majeure—which in itself would be rare—then the corona virus pandemic could eventually qualify as a force majeure event. It is important to note that the relevancy of this tenet is dependent upon its express mention in a lease agreement; no automatic or implied assumption of force majeure is permissible. Therefore, it is highly unlikely that a court would impliedly infer force majeure in an aircraft lease where the parties had not expressly provided for one. The aircraft leases are typically  HOWH agreements which further overshadow the invocation of force majeure making its imposition even less likely.

Alternatively the lessee can invoke the Doctrine of Frustration emphasising upon the fact that grounding of aircraft fleet due to the orders of the government has made the performance of the contract impossible. As per the doctrine, if some unforeseen circumstance occurs during the performance of a contract which makes it impossible to perform, in the way that the fundamental basis of the contract requires, it need not be further performed, as insisting upon such performance would be unjust [4].

The bar or the threshold for claiming Doctrine of Frustration has been kept very high which could be a problematic contention to make for the airlines, therefore the fact that COVID-19 has made a dent upon the stability of many business entities would not, by itself, frustrate a contract[5] to which that entity was a party.

Another potential alternative for the airline companies can be “price negotiation” clause or the “illegality event” clause. The former clause is not much in practice under the English Law governed contracts due to the general principle[6] that an agreement to agree is not enforceable. However, if the parties have included the price negotiation clause in their contract, then it can certainly be a relief for the airlines as a mishap of COVID-19 will definitely fall under it.

Under the latter clause, the illegality is occurred due to change in law or any scenario for that matter by the government intervention, which makes the performance of the contract impossible for the lessee. In the current scenario, the standard operation of flying aircraft has been changed due to the pandemic; the obligation of the lessee towards the lessor of paying rent has not been affected. Accordingly, this pandemic is, therefore, unlikely to fall under the definition of an “illegality event” or constitute a “change in law”.[7]

It is now pretty evident that the  HOWH is rigid, in comparison to other tenets of contract, leaving the lessee helpless.

ENFORCEABILITY OF THE HIGH AND HELL WATER CLAUSE

It is a well-confirmed postulation of common law that HOWH place an absolute, irrevocable and unconditional obligation on the lessee to make the necessary lease payments, notwithstanding the happening of any circumstance of any nature whatsoever[8]. In Olympic Airlines v. ACG[9], the rigidity of the clause was further strengthened by the court after stating that the risks which are inherent in the aircraft lease have to be borne by the lessee and the clause will forbid him to claim force majeure or frustration of contract.

The flexibility of the clause is not apparent prima facie, due to the rigid meaning to the clause. However, flexibility in the clause can be inferred from different views of courts wherein some have restricted the application of the clause whereas, some have sustained it. In Equitex, Inc. v. Ungar[10], the Court disregarded the HOWH and held that permitting the hindering party to benefit from its intentional or wilful wrongful act would violate public policy and thereby will be unenforceable.

On the other hand, the HOWH clause was enforced against a lessor of copiers whose equipment was damaged when Hurricane Sandy flooded FPL’s Long Island offices. The Court, in this case, rejected the argument that the lessee could not have assumed the risk of loss because Hurricane Sandy was not reasonably foreseeable, concluded that “the contract explicitly assigns to the assessed risk of loss from ‘any cause whatsoever’ and requires FPL to make monthly payments regardless of whether the copiers get damage.”[11]

SOLUTIONS TO THE PRESENT STATE OF AFFAIRS

It is well within the fundamental principle of contract to have an entitlement of being paid. However, if the liquidity of the lessee (airline) is crippled it will not be in the interest or favour of the lessor to drive them against the wall. It must be kept in mind that many other industries depend upon the aviation[12] industry for their survival like travel and tourism; the stubbornness of the  HOWH clause can lead to the liquidation of many airlines causing a ripple effect. There are two options left for the contracting parties, the first one is to allow the lessee to commit default where the lessor will assume the possession of the aircraft in ‘as is, where is’ basis, whereas the second option is to renegotiate the payment obligations disregarding the clause and deferring the entire payment including inter alia a standstill for an agreed period along with an agreed repayment plan.

THE WAY FORWARD

The risk allocation of the aircraft operating leases is asymmetric in nature due to the fact that the obligations of lessors are limited in comparison to lessee. The extensive obligations of lessee to meet the payment under any circumstance further refute the scope of “rental holiday” by virtue of “HOWH” clause. Post-pandemic crisis, the parties (especially the lessee) should bear in mind to have some mechanisms in place which can be of assistance during such unforeseen events. The operating lease should be drafted in such a manner which can allow the airline to implement a consensual restructuring at times of distress. It should involve the rescheduling the debt which will have the potential of alleviating the liquidity pressure at times such as COVID-19 through Scheme of Arrangement or Company Voluntary Arrangement[13]. Further, price negotiation clauses can also act as potential option which will allow the contractual parties to competently set some temporary standards of transactions. At last the aviation industry have to learn aftermath the pandemic, that whether championing an airline at times of perturbation will improve their financial stability post the crisis or whether the benevolence of giving room for the lessee to survive was futile and accordingly should revamp their future as well as present leases.


*4th Year Student, Institute of Law, Nirma University, Ahmedabad

**4th Year Student, Dr. Ram Manohar Lohiya National Law University, Lucknow

[1] Global COVID-19 Airport Status  

[2] Livemint , “Over 20 lakh jobs at risk in Indian aviation, dependent sectors: IATA”

[3]Chambers and Partners, “Aviation Finance & Leasing 2019”, Nitin Sarin, Syed Tamjeed Ahmad, Ritesh Agarwal https://practiceguides.chambers.com/practice-guides/aviation-finance-leasing-2019/india

[4] Taylor v. Caldwell, [1863] EWHC QB J1

[5] Dentons, “Dentons Aircraft Finance Briefing on COVID-19 related frustration and force majeure issues

[6] Lexology, “Force Majeure in Aviation Contracts”, Winston & Strawn LLP – Ben Bruton, Daniel R. Meagher, Mark Moody and Alison Weal

[7] Lexology, “Navigating the terms of an Aircraft lease agreement amidst the COVID-19 pandemic”, Tay & Partners – Yip Jia Hui and Michelle Pauline Lim

[8] Rhythm Hues, Inc. v. Terminal Marketing Company, Inc., 01 Civ 4697 (DAB) (GWG) (SDNY May 4, 2004).

[9] Olympic Airlines v. ACG, [2013] EWCA Civ 369.

[10] P.3d 746, 750 (Colo. App. 2002

[11] In General Electric Capital Corp. v. F.P.L. Services Corp., 986 F Supp 2d 1029, 1036 (ND Iowa, 2013).

[12] The Hindu,“Will the aviation industry recover from the pandemic?”, Murali N. Krishnaswamy 

[13] CMS Law-Now, “COVID-19 Challenges for the Aircraft Leasing Industry