From the archives: those of you who are interested in international environmental law, will find this post from 2011 intriguing.

This post contains the second installment of the introductory write up on International Environmental Law and framework by Preeta Dhar, a fourth-year student of National Law School, Bangalore. The first part is available here. Everyone else please bear with me as I alert the CLAT aspirants, this is super important legal GK for you. For the rest of us, this is a chance for comprehending a complex web of legal and diplomatic entanglements over climate change.

BALI ROADMAP

The 2007 United Nations Climate Change Conference took place at the Bali. The conference encompassed meetings of several bodies, including the 13th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP 13), the 3rd Meeting of the Parties to the Kyoto Protocol (MOP 3), together with other subsidiary bodies and a meeting of ministers. In light of the fact that the commitment period of the Kyoto Protocol is till 2012, the international community, at this point, started to consider a successor to the Kyoto Protocol. The idea was to work towards adopting ‘concrete steps for the negotiations’ with a view to reaching an agreement by 2009.

COP 13 adopted the Bali Road Map, which included the Bali Action Plan and the setting up of the Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol (AWG-KP). The Bali Road Map marks an important milestone by launching the Bali Action Plan envisioning a comprehensive process to enable the implementation of the Convention through long-term cooperative action, including establishment of an adaptation fund (to meet the costs of adapting to environmental degradation owing to climate change), technology transfer and reduction of emissions through deforestation.

The two-year negotiating process envisioned under the Bali Road Map culminated in the Copenhagen conference, in which, it was hoped that a solution at an international level could be agreed upon by both developed and developing countries regarding the legal framework of burden sharing after the completion of the first commitment period under the Kyoto Protocol, which extends till 2012.

COPENHAGEN

The United Nations Climate Change Conference in Copenhagen constituted the 15th Conference of Parties (COP 15, the annual meeting under the UNFCCC) and the 5th Meeting of Parties (MOP 5, the annual meeting under the Kyoto Protocol), as well as the tenth session of the Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol (AWG-KP 10) and the eighth session of the Ad Hoc Working Group on Long-term Cooperative Action under the UNFCCC (AWG-LCA 8). Ironically, the outcome of the- the Copenhagen conference, better known as the Copenhagen Accord, was more in the nature of a political statement, which was not based on the texts developed by either of the AWGs.

The Copenhagen conference highlighted the nuanced and complicated politics behind the development of the international environmental law in the field of climate change. It must be appreciated that the debate is not a simplistic one in which the lines can be drawn between two negotiating positions of developed and developing countries. Rather, it involves multilateral negotiations of various interest groups and stakeholders. It is not a simplistic framework of developed vs. developing countries. The multiplicity of negotiation positions, and the varying levels of international clout, capacity and commitments is reflected indifference over the very nature and approach towards approaching the problem of climate change, and pose an almost insurmountable hurdle in arriving at a universally acceptable system of rights and obligations.

To make an attempt to sum up the debate, the positions of the negotiation countries could be broadly grouped under the following heads:

The most vulnerable countries (comprising of the African group, the least developed countries and the AOSIS (Association of Small Island States)) are worst affected by the effects of climate change, and require funds for immediate adaptation needs and financing mitigation and capacity building (For example, the African nations face the threat of desertification, droughts, loss of food security. The AOSIS faces the risk of going underwater if the sea level rises. This was brought to the attention of the international community at the Copenhagen conference by the small island nation of Tuvalu) Also, they cannot do anything substantial to mitigate climate change as the existing level of industrialization is also very low. These countries pushed for a legal agreement with binding emission targets and commitment to extend funds for adaptation, mitigation and capacity building and limit temperature increase to below 1.5 degrees above current level.

The Umbrella Group (developed countries, including the USA, Australia) wields enormous economic and political clout, and strongly opposed a legally binding agreement with emission reduction targets, citing the futility of such an agreement in the absence of reciprocal commitments by developing countries as well. However, these countries were willing to participate in climate change negotiations and contribute through extending funds, and facilitating technology transfer, subject to the establishment of an appropriate mechanism for monitoring, reporting and verification (MRV). They agreed to limit the increase in global average temperature to 2 degrees Celsius.

The EU supported the introduction of a legally binding agreement. It also acknowledged the need for funding to support adaptation, mitigation, Reducing Emissions from Deforestation and Forest Degradation in Developing Countries (REDD) and technology and capacity building.

Developing countries with heavy industrialization (including India and China) strongly opposed any binding commitment on non-Annex I countries, emphasizing the need for industrialization, justifying current levels of emission without corresponding obligation, on the rationale that the per capita energy consumption (in technical terms, carbon footprint) is still far lower than developed economies, and the need for alleviating other concerns like poverty and underdevelopment.

What was the best outcome that could have happened, given the positions of the countries at the negotiating table?

An interesting development transpired just 24 hours before the conclusion of the conference. An internal draft document from the United Nations Climate Secretariat’s office was leaked, and according to it, even if the most compromising position the countries were willing to accept were agreed upon, it would have been insufficient by far. Even implementing all of the promises leaders have made thus far to reduce emissions would result in nothing less than an eventual climate disaster. Clearly, the entire conference was merely only talk.

What transpired?

The result of the Copenhagen conference was a hastily drafted last ditch face saving attempt, a ‘political agreement’, the Copenhagen Accord. This was drafted by the BASIC (Brazil, South Africa, India, China) countries and the USA, and noted in the COP decision. Technically, it has no binding requirement at all. The Copenhagen Accord is a sign-on document (i.e., countries who support it will be listed) and not a formal agreement within the UNFCCC framework and thus it is not clear how it will be implemented. The salient features of the Copenhagen Accord can be briefly summed up as follows:
The parties arrive at a consensus that the effort of the international community should be aimed at restricting the increase in temperature to two degrees above the current level.

The Annex 1 countries are willing to mobilise jointly short-term financing of US$30 billion for 2010-2012 and US$100 billion a year by 2020 for developing. A significant proportion of this money would flow through the “Copenhagen Green Climate Fund.”
There is also agreement to establish a Technology Mechanism to facilitate technology transfer. However, there is no detail of how this would work.

Annex 1 parties will commit to quantified economy-wide emissions targets for 2020, which will be submitted to the UN by 31st January.

Non-Annex 1 countries are to report domestic measures taken towards mitigating climate change biannually. Furthermore, they must acquiesce to an accountability mechanism (details not worked out) if they want to avail of the funds extended by the Annex I countries.

There are also provisions on REDD (Reducing Emissions from Deforestation and Forest Degradation in Developing Countries), and adaptation and market mechanisms.

The Copenhagen Accord also envisages a review of the effectiveness of the implementation of the instrument 2015.
The most recent development in this area was on 9th March, 2010, with China and India formally agreeing to be listed as parties, or signatories to the Copenhagen Accord.

The Copenhagen Accord no doubt provides the basis for significant country-by-country carbon cuts, but unfortunately, this may not be sufficient. The shift of emphasis from a global deal to national action, in fact, is the most obvious proof of the failure of the international community to generate consensus upon an equitable and acceptable agreement on burden sharing regarding climate change mitigation action.

And if you’re wondering what lies ahead, there may be reasons to be optimistic, but only modestly so. For one, the domestic targets submitted pursuant to the Copenhagen Accord indicate that for the first time we have all the major economies agreed to action covering over 80% of the world’s emissions. However, in the absence of any commitment under a binding legal agreement, spelling out an acceptable and equitable, but effective path to address climate change, an effective answer to the problem remains elusive. The next Conference of Parties (COP 16) is scheduled to be held in Mexico in 2010, but a binding legal agreement is unlikely to transpire by then. However, one hopes that it does, soon.

The post An Introduction to International Environmental Law: Bali and Copenhagen on the Map appeared first on iPleaders.

In this Blog Post, Sakshi Bhatnagar, a student of National Law University Odisha, Cuttack writes about the controversial Ken Betwa project. The author tries to strike a balance between the benefits and disadvantages surrounding this project. 

About the Ken Betwa Project

Ken Betwa is the name of the first linking area under the major river linking project which is proposed to link 37 Indian rivers with the help of 30 river links. It was introduced by the Former Prime Minister of India, Atal Bihari Vajpayee and has been set into motion by the present Prime Minister, Narendra Modi. It is one of the most contested issues that has been prevalent since the last decade.

This link project diverges the surplus water of Ken basin to the water deficit area of Betwa basin. The aim of this project is to provide irrigation facilities of the drought prone areas of Madhya Pradesh and Uttar Pradesh. To make the project feasible, detailed investigations and surveys are made on the project. The schedule for the construction of the linking project has been estimated for nine years including the pre-constructing year. The annual benefits accrues from the project are estimated to be around ₹10,000 crore.

The Ken-Betwa Link Project envisages a 73.80 m high Vaughan dam across the Ken, about 2.5 km upstream of existing Ganga Weir on the border of Chhattarpur-Panna districts in Madhya Pradesh. Two powerhouses, one at the foot of the dam and other at the end of a 2-km tunnel, are also proposed to generate power.[1]According to the proposal, the Betwa linkage consists of four projects which are Barari, Richman, Kesari and Neemkheda on the upper area of the Betwa basin.

History

Initial Idea

The plan of interlinking rivers was first initiated by Sir Arthur Cotton whose idea was to link Ganga and Cauvery to facilitate navigation. The National Water Development Agency (NWDA) was formed in the year 1982 to carry out water balance and study the feasibility of linking 30 rivers.

Vajpayee Boost

This idea of inter-linkage was steamed during the Atal Bihari Vajpayee reign, where it was planned to connect 14 Himalayan and 16 peninsular rivers by the construction of 30 canals and 3,000 reservoirs for the irrigation of 87 million hectares of land so as to produce 34 gigawatts of hydro-electricity. In this regard, the Supreme Court formed a task force in 2002, which had the job to furnish detailed project reports till 2006.

Rolling of the Plan

A tripartite memorandum of understanding was signed in 2005 between the Union Minister for Water Resources, Chief Minister of Madhya Pradesh and Uttar Pradesh in this regard which was followed by a detailed report on the Ken-Betwa river link project. The project was opposed by the environmentalists, conservationists and the Ministry of Environment.

Supreme Court on the Project

Supreme Court in its final decision on February 27, 2012, given by a three-judge bench decided to favor the project and gave the Centre a thumbs up to begin the project. Further, the court mandated the formation of a committee to take firm steps and set a definite timeline in laying guidelines for the completion of feasibility reports and ensure the completion of projects so that the benefits are accrued within reasonable time and cost.

Modi Campaign

The project got a major push under the governance of Narendra Modi, and the 9,393 crore project was further allocated ₹100 crore in 2014-15 to accelerate the work. But that has too couldn’t bring the project into action as there has been no headway in the absence of green clearances.

Benefits of this Project

This water-linking project would be an exclusive source to transfer water from the flood sustaining zones to the drought-prone zones to balance the availability of water in all parts of the country. This scheme is immensely valuable to the people.

It would help in replenishing ground water as it would provide surface water for irrigation purposes. Also, it would help mitigating drinking water problems in the dry regions. The cited benefits include irrigation facilities in over 6 lakh hectares of cultivating land, water supply for drinking purposes to 13 lakh people in Bundelkhand and would generate 78 MW of power.

Issues With the Project

The major problem with the Ken-Betwa linkage is that it would result in the submergence of 4,600 acres of the Panna National Park which is one of the few tiger reserves that exist in our country. The project requires diversion of 5,258 hectares of forest land which includes 4,141 hectares of Panna Tiger Reserve, which would destroy the habitat of the Tigers and other species of animals residing in the Reserve.

The environment ministry has concluded that the project would lead to a direct loss of 58.03 sq km of Critical Tiger Habitat due to submergence and indirect loss of 105.23 sq km of Critical Tiger Habitat due to fragmentation and loss of connectivity. Thus, ministry of environment, conservationists, and environmentalists.

The project has also been widely criticized as a similar project, the Tagus-Segura scheme from central Spain to the Southeast part which was executed for transferring water failed in its efforts to resolve the water crisis. Thus, conservationists use this as an example to substantiate their disagreement.

Also, it was quoted that the people of the region did not even understand why inter-linking was needed in the first place because Ken does not have excess water.[2]

Controversy

The controversy that circumscribes this river-linking project is the persistent state of debate between the merits and demerits of this linkage. The Modi Government was keen to start with this project, but the environment clearance was not given, and the National Board of Wildlife raised its objections against this project due to which a Standing Committee of the NBWL was created to provide a detailed study of the impact of the Ken-Betwa river project on the Panna Tiger Reserve.[3]

In its report, the standing committee gave clearance to the project after becoming convinced with the government’s action plan to compensate 4,141 hectares of the tiger habitat which would face submergence.The environment impact assessment didn’t give it a clear nod as the endangered Sangai- the brow-antlered deer is found at Ken Basin. But with the government’s plan to relocate the Tigers of the reserve, the experts have accepted the project idea. Recently, a report has also been submitted by the wildlife board highlighting the threat to the tiger habitat. But despite this, the expert report gave clearance to the project. Thus, the project has started with its working but with a slow pace.[4]

Author’s View

The interlinking project has the biggest advantage that it would relocate water from flood-prone to drought affected regions so that it would benefit the farmers for irrigation purposes and would also provide drinking water to the people in the drought-affected regions. But the major concern is that what all can be risked for this benefit? The project requires a heavy investment which is worth a fortune and that investment can be directed towards other fields of development if we disregard the investment to this project. Also, it would cause a great environmental damage to the forest area, tiger reserve, and destroy various human establishments and tiger’s natural habitat.

Another notable argument in disregard of this project is the level of corruption and bureaucratic mismanagement in the Indian government which can be seen by our past experiences of numerous scams. Thus, leaving this large investment in few hands may yield us no returns and might turn into another scam, but there are also few chances that this project might be actual work good in benefitting the drought affecting regions if it is worked on properly and efficiently. This clearly is a question which can only be answered after monitoring the progress of this project in the coming future years, till then, it can only be hoped that this slow pace project turns into a great investment.

Footnotes:

[1]http://www.thehindu.com/news/national/a-project-that-has-run-dry-in-bundelkhand/article2889651.ece

[2]http://www.thehindu.com/news/national/a-project-that-has-run-dry-in-bundelkhand/article2889651.ece

[3]http://timesofindia.indiatimes.com/city/bhopal/Ken-Betwa-project-Panel-gives-nod-to-governments-Plan-II/articleshow/51935510.cms

[4]http://www.bna.com/indias-audacious-riverlinking-n57982072325/

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In this blog post, Pramit Bhattacharya, a student of Damodaram Sanjivayya National Law University, discusses the concept of the doctrine of a clog on redemption. This article analyses the meaning of the doctrine and looks into some conditions where the doctrine may be applied.

When a mortgage takes place, the mortgagor has the right to get back his property when he pays back the mortgage amount. This is known as the right of redemption and arises out of equity. Anything which obstructs the right of the mortgagor to redeem his property is void, and such obstruction constitutes a clog on the right to redemption. This is also known as the doctrine of a clog on redemption.

In the case of a mortgage, two categories of interest are generated. The first interest which is created is the interest of the creditor on the property. This interest is limited and temporary. The second category is the residuary interest which can be determined by deducting the interest of the creditor or the mortgagee, and this interest stays with the mortgagor. This division of the interest gives the right of redemption to the mortgagor when the loan is repaid. This right of the mortgagor is known as the equitable right to redeem. The right of redemption to the mortgagor is provided under Section 60[1] of the Transfer of Property Act, 1882. The contract of mortgage comes to an end when the mortgagor repays the amount of the loan and exercises his right to redeem the property. The right provided under the Act is a statutory right and to enforce it statutory provisions has to be followed.

Doctrine of Clog on Redemption

In the judicial pronouncement of Stanley v Wilde[2] (an English case), it was held by the Court that a mortgage means transferring the interest in an immovable property to a third party as security for the loan that the party has advanced. The security is redeemable by the transferor when he pays back the loan or discharges his obligation. If any act is done, or any provision is there which obstructs the right of redemption on payment of the debt or performance of the obligation, then it acts as a fetter or clog on the equity of redemption and will be held as void. This doctrine also follows the principle of “once a mortgage, always a mortgage.” This means that there cannot be any covenant that modifies the character of the mortgage and would bar the mortgagor to redeem his property on payment of the loan. The doctrine of a clog on redemption is based on the principle of justice, equity, and good conscience. The Court recognizes the fact that the party who forwards the loan is in a dominant position than the person who takes the loan. The law also recognizes the fact that the dominant party may insert a clause in the agreement which can act as a barrier to the right of redemption. Such barrier in exercising the right is struck down by the Courts as invalid so that the mortgagor can exercise his right of redemption. In the case of U. Nilan v. Kannayyan through Lrs,[3] The Court held that hardship of one person should not act as an opportunity for some other person. If a person is taking a loan by giving his property as security, the opposite party cannot exploit him, and the Court seeks to protect the victim.

There are a few situations where it was held by the Court that the condition or covenant acts as a clog on redemption.

Long Term Mortgages

Every long term mortgage agreement cannot be said to be a clog on the right of redemption of the mortgagor. But if a mortgage is for say 100 years, it’ll go beyond the life of the mortgagor and seem like a clog on the right to redemption, at least superficially. The Court also of the same opinion, but has made the stand clear by saying that only by the virtue of a long mortgage period, the mortgage wouldn’t be considered as a clog. There should be a condition which gives an undue advantage to the opposite party for the mortgage to be considered as a clog.[4]

In the judicial pronounce of Vadilal Chhaganlal v. Gokaldas Mansukh,[5] there was a condition in the mortgage deed that the period for the mortgage will be for 99 years, and also the mortgagee will have the authority to construct any structure on the property. A subsequent condition that there would be no limitation on the cost of the construction was imposed. The Court was of the opinion that it would be impossible for the mortgagor to repay the loan amount along with the expenses of the construction, and such a condition amounted to a clog. In the case of RamkhilawanAshwasi v Mullo,[6] There was a condition that the mortgage money will be paid after 80 years and only of Baisakh. The Court opined that such a condition was a clog.

Condition of sale of property

If a condition is stated in the agreement of mortgage that, if the property is not redeemed within a fixed period, it’ll be considered as a sale is a clog. This was held by the Court in the cases of Rocky Flora v. Parvarthy Ammal[7] and Hajee Fatma Bee v. Prohlad Singh.[8] But in the case where there is a separate agreement between the mortgagor and the mortgagee and a sale deed is executed in the favor of the mortgagee independently, then such sale would be valid. In the judicial pronouncement of Meherban Khan v. Mekhna,[9] Property was mortgaged. The conditions of the mortgage were that even on payment of the debt, the mortgagor would be able to redeem the property only till a limited interest. It was further stipulated that in case the mortgagor is unable to pay back the loan, the property will be considered sold to the mortgagee permanently. The Court reached the decision that these conditions acted as a clog. Also, when the amount of the loan has been repaid in full, the mortgagor has the right to get back his property without any impediment. In the judicial pronouncement of Kuddi Lal v. Aisha Begam, the Court allowed the mortgagor to redeem the property by paying through her pocket and not by transferring the property. The Court said that such alienation of the property would act as a clog.

Penalty in case of default

In case the mortgagor has defaulted on any grounds, then the mortgagee can impose a penalty on the mortgagor. But the penalty should be fair and reasonable. In some situations, penalty imposed by the mortgagee can be unreasonable.

1. In the case of default, the mortgagee charges compound interest, instead of charging simple interest even when the original interest rate is extremely high.[10]
2. In case there is any default on the part of the mortgagor, the mortgagee charges the interest by taking in consideration the date when the mortgage agreement was made and not from the date of default. For instance, the mortgage agreement was made on 1^st of the month. The mortgagor defaults of 10^th of the month. The mortgagee, instead of charging interest from the 10^th, charges the interest from the 1^st of the month itself.[11]

Having only a high rate of interest does not mean that the condition will act as a clog. There should be some undue influence of the dominant party over the weaker party to constitute the stipulated condition as a clog on the right to redemption.

Subsequent agreement to postpone redemption

Any subsequent agreement which acts as an obstruction to the mortgagor by creating any personal obligation will be considered as a clog on the right to redemption. This is because, until and unless there is a charge on the transferred property, the mortgagor is not liable for any sum personally except the mortgage amount. In the judicial pronouncement of Sheo Shankar v. Parma,[12] The mortgagor transferred some property to the mortgagee. Subsequently, the mortgagor needed more money. So through a simple mortgage, the mortgagor took another loan from the mortgagee. A condition was inserted in the simple mortgage agreement by the mortgagee that until and unless the amount of simple mortgage was repaid the property cannot be redeemed by the mortgagor. The Court opined that this condition was a clog.

Collateral benefit to the mortgagee

A mortgagee may avail some collateral benefit during the period of the mortgage, in which case it’ll be held valid. The mortgagee can also avail some benefits after the mortgage gets over, but in some cases, it may be considered as void and a clog.

In the case of Noakes & Co. v. Rice there was a condition in the mortgage deed that the mortgagor will sell all the beer brewed on his land to the mortgagee. The Court held that such a condition was valid during the existence of the mortgage, but after the property has been redeemed, such condition would not be valid. The property should be returned to the mortgagor without any tie.

This proposition of the law is also backed by the Indian Courts. In the case of Bhimrao Nagojirao Patankar v. Sakharam Sabajikathak,[13] The Court held that where a condition in the mortgage deed allowed the mortgagee to remain in the possession of the property through permanent tenancy will be considered as a clog. The Court was of the view that the collateral benefit went beyond the period of redemption and hence invalid.

Footnotes:

[1]https://indiankanoon.org/doc/102524/

[2](1899) 2 Ch 474

[3] AIR 1999 SC 3750.

[4]Valdas and Ors. v. BaiJivi and Ors, AIR 1973 Guj 93

[5]AIR 1953 Bom 408.

[6]AIR 1957 MP 200.

[7]AIR 1957 Ker 175

[8]AIR 1985 MP 1.

[9] AIR 1930 PC 142

[10]Rama Krishnayya v. VenkataSomayajulu, AIR 1934 Mad 31.

[11]SundarKoer v. S Krishnen, ILR 34 Cal 150.

[12] ILR 26 All 559.

[13]Bhimrao Nagojirao Patankar v. Sakharam Sabaji Kantak, AIR 1922 Bom 277.

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In this blog post, Pramit Bhattacharya, a student of Damodaramam Sanjivayya National Law University, writes about the concept of fiscal federalism. The post also highlights the Sales Tax Regime in a concise manner and delves into the question of the division of power of taxation among the Union and the States with regard to Central Sales Tax.

India has a Federal form of Government (rather quasi-federal). Therefore, the system of indirect taxation which is followed is also federal in nature. Sales Tax can be considered as one of the most important sources of revenue for the states in India. In India, the Constitution has conferred the states with some power on Sales Tax. Through the Constitutional Amendment in 1956, states were given the authority to impose Sales Tax. The Central Sales Tax Act was enacted in 1956 under the Sixth Constitutional Amendment, which gave the Parliament the power to impose a tax on purchase or sale of goods in the course of inter-state trade and commerce.

The revenue generated from this tax was to go to the States. This was done by amending Article 269 of the Constitution. Therefore, sale within the State is regulated by the state Governments and sale outside the State is governed by the Central Government. Accordingly, the Central Sales Tax is levied on purchase or sale of goods in the course of inter-state trade and commerce. Now the important point, the power to levy this tax is with the State Governments. Also, revenue from this tax is assigned to the States.[1]

Fiscal Federalism in India

Fiscal Federalism refers to the division of responsibilities with regards to public expenditure and taxation between the different levels of the government. Having a Fiscal Federalism mechanism allows the government to optimize their costs on economies of scale, because in this manner, people will get public service which they prefer, and there will be no unnecessary expenditure.[2] From the economic point of view also, having a federalized structure helps as it creates a unified market.

Article 246 of the Constitution lays down the list of subjects on which different levels of government can make laws. There are three lists mentioned under Article 246. The Union can make laws relating to the subject matter given under list I. The Sates has the authority to make laws relating to subjects given under list II, and list III, also known as the Concurrent List, allows both the Union and the States to make laws, relating to subjects provided by the list.

These three lists also include taxation as a subject matter. The Union List (I) includes taxes like Customs and Excise duties, Corporation Tax, taxes on income other that agricultural income, etc. List II includes taxes like taxes on vehicles, taxes on liquors, land revenue, taxes on stamp duties, taxes on entertainment and luxuries, taxes on sale or purchase of goods, etc. (List III, or the Concurrent List does not contain any major tax as such)

The Constitution has provided provisions which enable the Union and the States to work in coordination and to levy and collect these taxes through systematic arrangements, for instance, provisions like-

• Taxes levied and collected by the Centre but assigned to the States.
• Taxes levied by the Centre but collected and kept by the States.
• Sharing of proceeds of income from some taxes.
• Grant-in-aid provided by the Centre to the States.
• Grants provided for any public purpose.

Therefore, by dividing the powers of levying and collecting tax between the Centre and the state, the Constitution has allowed the States to share the resources which are accumulated by the Centre. Any amendment of the list through which the States and the Centre derive their power of regulating the taxation system is governed by Article 368 of the Constitution.[3] These amendments require the consent of at least half of the State Legislatures. But if any provision of Part XII[4] of the Constitution is to be amended it can be done by invoking Article 368 (2) [5] which requires the assent of only 50 % members of each House of the Parliament, and therefore, the share which the States are entitled to can be altered by the Parliament.

When administrative convenience and national policy is looked into, they require that some elastic taxes are assigned to the Central Government, but the nature of these considerations is such that these are regulated by the States.

Sales Taxation in India

Sales Tax is one of the primary sources of revenue for the States in India. Sales Tax can be defined as a tax on sales of goods, and the liability arises when the goods or the commodity is sold for the first time. If a product is sold subsequently, without being subjected to any process, then it is exempted from Sales Tax.

According to the definition given by John Due, Sales Tax is a levy imposed upon sales or element which is incidental to sales, such as any receipts from them.[6] The burden of the tax is shifted upon the shoulders of the consumers, and the seller is considered only as a collecting agent of the tax.

Sales Tax can be categorized into three classes-

1. Single Stage Tax- This tax is applied to the commodity only once in the entire channel of production and distribution.
2. Multiple Stage Tax- This kind of tax apply at all the levels in the production-distribution channel.
3. Value Added Tax (VAT) – VAT possesses the characteristics of both, Single Level Tax and Multiple Level Tax. This is because, VAT involves multiplication of the tax rate, but the overall distribution is same as a Single Stage Tax.

The Central Sales Tax Act, 1966 governs the levy of Sales Tax in India. The Act applies to the whole of India. The main objectives of this Act are-

• Formulation of principle for determining when purchase or sale takes place in the course of inter-state commerce, intra-state commerce, and in cases of export and import of goods.
• Declaration of certain goods as special goods for the purpose of inter-state trade and commerce.
• To provide a procedure for the levy, collection and distribution of tax on the sale of goods.
• Specifying conditions and restrictions on state laws which impose a tax on sale or purchase of special goods.

A sales tax within the range of 4% to 15% is levied on all inter-state sales. Services and exports are exempted from sales tax. Sales tax is levied on the seller, but it is recovered from the customer.

Tax Federalism and Central Sales Tax

The Central Sales Tax Act was introduced in the year 1956, and it authorized the Parliament to levy taxes on sale or purchase of foods (other than newspapers) In the course of inter-state commerce.[7] Thus, the Centre had the power to levy taxes in case of inter-state trade and commerce. However the States were granted the authority to levy the CST, and the amount of revenue procured from the levy of CST was also assigned to the States.

Section 15 of the CST Act puts certain restrictions on the power of the states with regards to the levy of a tax on “special goods” or goods which have been declared having special importance in that particular area.[8] Apart from this, since 1975, the Union Government has also entered into a agreement with a few states to abolish levy of sales tax on goods like sugar, tobacco, and textile.[9]

In furtherance of the agreement, an additional Excise Duty is levied by the Union Government of these three commodities instead of Sales Tax.

Division of Taxing Power

Under Article 246 of our Constitution, it is mentioned in Part XII there are some taxes which are completely under the purview of the Union Government, but can be divided between the Centre and the States under this Article. The various procedures for framing the Rules under CST can be categorized under three heads-

1. Rules framed by the State Governments.
2. Rules framed by the Central Government.
3. Rules which are given under the State Sales Tax Act of each State.

As stated above, it may be noted that, although the Union levies the Sales Tax, it is administered by the States.

• Section 13 (1) of the CST authorizes the Central Government to make certain Rules.
• Section 13 (3) confers the power upon the State Governments to make certain Rules, but these Rules shouldn’t be in contravention to the Rules made by the Central Government, or the CST Act as a whole.
• Section 9 (2) states that if in any State, there are no General Sales Tax law is in force, then the Central Government has the authority to govern the matters relating to sales tax or any other matter provided under the CST Act.

Originally, inter-state trade and commerce were included under Article 269[10] of the Constitution, and the power to administer the taxation and retain the revenue was delegated to the origin States. The original provision was based on “destination” principle, but the Constitutional amendment under the CST Act displaced this rule, making way for exportation.[11]

Sometimes some goods are not subjected to the CST, but some special excise duty may be levied on them by the Union Government. Also, it is very important to determine whether the sale of goods has taken place within or outside the State because CST is applicable only on inter-state trade or commerce. In the case of intra-state trade and commerce, the State Sales Tax Law applies. Section 9 (1) of the CST Act states that the tax will be levied by the Union but collected and retained by the state in which the movement of the goods or the commodities have begun.

Procedure for Imposition of Sales Tax

Under the CST Act, Section 6 is the charging section, i.e. it puts a liability on the seller to pay sales tax on the sale of all goods (other than the sale of electrical energy) in the course of inter-state sales. Goods and Services which fall under the CST Act have been divided into different categories and sales tax is levied according to the category of the good.

The tax is levied on a single point, but in several states assesses have been divided into different categories like the dealer, manufacturer, agent, etc. and the tax is levied on the basic of the category to which the assessee belongs.  A quarter returns of sales or purchases are insisted upon, and the assessee is required to furnish the return in the prescribed form.

Concluding Remarks

For the successful operation of any form of government, it is very necessary that they have the adequate financial resources. Through tax federalism, the State Governments have been provided with enough resources so that they do not over depend on the Union for financial aids and resources. In the interest of national economy, some restrictions have also been placed on the powers of the State, which becomes necessary for a country like India. Therefore, it can be said that a proper balance has been maintained between autonomy and dependence.

Footnotes:

[1]https://indiankanoon.org/doc/1135479/

[2]Ahluwalia, Montek “Economic Performance of States in Post-Reforms Period”, Economic and Political Weekly, May 6, (2001)

[3]Power of Parliament to amend the Constitution and Procedure thereof

[4]http://lawmin.nic.in/olwing/coi/coi-english/Const.Pock%202Pg.Rom8Fsss(17).Pdf, PART XII; FINANCE, PROPERTY, CONTRACTS, AND SUITS.

[5]https://indiankanoon.org/doc/1389240/

[6]Andy and Sundaram, Public Finance and Public Taxation,153,(New Delhi: RatanPrakashan, 2001)

[7]Item 54 of list II – State List – reads: ‘Tax on sale or purchase of goods other than newspapers except the tax on Inter State sale or purchase.’

[8]Vithal, B.P.R., &Sastry, M.L., Fiscal Federalism in India, 115, (New Delhi, Oxford University Press, 2000).

[9]http://www.lawctopus.com/academike/analysis-fiscal-federalism-india-concept-structure-sales-taxation/#_ednref2

[10]https://indiankanoon.org/doc/1135479/

[11]Bagchi, Amresh, “Tax Harmonization in Federalism- A survey of theory and Practice’, NIPFP Working Paper no.1, February. (1995).

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In this blog post, Pramit Bhattacharya, a student of Damodaram Sanjivayya National Law University, writes about the legal framework of inter-country adoption in terms of international law. The post also explores the concept of transnational adoption from the Indian perspective.

Inter-country adoption, also known as transnational adoption is a mode of adoption in which an individual or a couple becomes the legal parent(s) of a child who belongs to a different nation. The couples who are looking to adopt a child belong to some other nation and they have to fulfill the legal conditions of both the countries, i.e. the country in which the potential adopters reside and the country to which the child belongs. Some countries have a proper system in place to go ahead with inter-country adoption while some nations forbid it.

Origin of Transnational/ Inter-Country Adoption

In the judicial pronouncement of Lakshmi Kant Pandey v. UOI,[1] the Apex Court stated that every child has a right to love and be loved. Only if a child is brought up in a family will he grow in an atmosphere of love, and secure moral and material security. But if it is not possible for the biological parents or anyone about look after the child, or if the child is abandoned by his/her family, then adoption of the child will be best for the security of the child.

The practice of inter-country adoption gained momentum around the mid-1940s to protect those children who became orphans in the World War II. It was in response to the plight of these children that the practice started.

At present, the receiving countries are the countries of Western Europe, Canada, and the United States. Factors such as higher rate of infertility and the increasing cost of infertility treatment provide an alternative to couples. The point to be noted here is that usually in the country of origin (or the giving country), an increase in population, extreme poverty, and poor economic system lead to the abandonment of children.[2]

The Legislative Framework – International Aspect

On the international front, the Convention on the Rights of the Child (CRC) deals with the matters of inter-country adoption. It is also regulated by the Hague Convention on the Protection of Children and Cooperation in Respect of Inter-Country Adoption, 1993 (the HC) and it has been ratified by about 90 countries.

Article 21 of the CRC puts an obligation on the adopting parents to ensure that the child who is being adopted enjoys the same level of standards and projection to those who are existence in the case of national adoption.[3] The CRC recognizes the importance of real parents and family in the life of a child and emphasizes on the fact that the State should assist them in safeguarding the rights of the child in case they are having any difficulty. Only when, despite such efforts, the child is suffering, that the concept of alternative care of the child comes into the picture.[4] Also, the way of transnational adoption should be opted only when the State is unable to ensure that the child cannot be cared for in a proper manner in the country of origin.

The Committee on the Rights of the Child, which ensures compliance with CRC has expressed their concern over violation of transnational adoption standards in many countries, and suggest that the Hague Convention should be ratified by these countries.

Hague Convention on the Protection of Children and Cooperation in Respect of Inter-Country Adoption, 1993

The Hague Convention lays down two principles, both towards the protection of the children who are the subject of international adoption- [5]

• Establishing of safeguards to ensure that transnational adoption is in the best interest of the child.
• To establish a system of cooperation between the contacting states to ensure that the safeguards are respected.

According to the Hague Convention, the system of cooperation is to be regulated by the Central Authority, who deals with the matter of adoption and serves as a principal agency for inter-country adoption issues with other countries. The Hague Convention also follows the subsidiary principle which states that transnational adoption can be adopted only when the safety of the child in the State of origin cannot be ensured, but first of all placement of the Child within the country of origin must be given the primary consideration.[6] Other guidelines which the Hague Convention sets out is to look into the fitness of the applicants/ adoptive parents, a restriction on private adoption, prohibition of contact between the adoptive parents and the real parents before the child has been pronounced adoptable by the Central Authority, and ratification of the Hague Convention by all the countries.

The Convention also ask the Central Authority to ensure that the child is mature enough and of proper age to be adopted, the child has been informed about the adoption and consequences of such adoption, the consent of the child has been taken (giving proper weight to the opinion and wishes of the child), and it has not been taken through inducement by compensation or payment of any kind.[7] The information of the child’s origin, his or her medical history, and information about the real parents of the child should be preserved, but access to such data should be restricted.[8] The monitoring of the Hague Convention is the responsibility of the Special Commission, which comprises all the signatories.[9]

Apart from the CRC and the HC, there are several other international instruments which protect the rights of the child in cases of international adoption. Some of these are European Convention on Adoption of Children, 1967, Inter-American Convention on Conflict of Laws Concerning the Adoption of Minors, 1984, and the European Convention on the Exercise of Children’s Rights (ECECR).

Adoption from Non-Hague Convention Countries

Despite the HC being in place, a majority of the countries are not a signatory to it and thus many transnational adoptions take place outside the Convention. The procedure in the countries which are not a party to the conditions is less strict. Considering this fact, the non-signatories attract more people who want to go for inter-country adoption. For instance, ICAs from Ethiopia has grown considerably in the recent times, allowing around 4500 adoptions to the US in 2009-10.[10]

Adoption Laws in India

India is signatory to both, the CRC and the Hague Convention. The primary law which relates to the issue of adoption under the Hindu System is the Hindu Adoption and Maintenance Act, 1956 (HAMA).

The Juvenile Justice (Care and Protection of Children) Act, 2000 and all the Amending Acts (2006, 2010, and the latest being in 2015[11]) guarantee those rights to an adopted child which are recognized under the Hague Convention. The 2000 Act did not, however, define adoption, and the term was added in the 2006 Amendment. This was a major development as up till adoption by a non-Hindu was guided by the Guardians and the Wards Act, 1890.

Concept of Inter-Country Adoption in India

In the case of In Re Rasiklal Chhaganlal Mehta,[12] the issue of transnational adoption was first discussed by the court, which held that adoption under Section 9 (4) of the Hindu Adoption and Maintenance Act, 1956, inter-country adoption is legally valid. In the case of Laxmi Kant Pandey v. Union of India,[13] the Apex Court formed some guidelines which were to govern international adoption. Setting up of a Central Regulatory Body was suggested and in pursuance of the suggestion, Central Adoption Resource Agency (CARA) was set up in 1989. The agency plays a pivotal role in laying down both substantive law and procedural law on intra-country and inter-country adoption.

In the judicial pronouncement of Craig Allen Coates v. State through Indian Council for Child Welfare and Welfare Home for Children,[14] it was stated that if the adoptive parents fail to give proper reasons and motive for adopting the child from another country, then the adoption wouldn’t be allowed.

One of the issues which crop up in transnational adoption is finding suitable potential parents for the child. In the case of Karnataka State Council for Child Welfare v. Society of Sisters of Charity St. Gerosa Convent,[15] the Supreme Court was of the view that finding Indian parents for adoption should be preferred so that the child grows up in an Indian surrounding and retain their heritage and culture.

Central Adoption Resource Authority (CARA)

CARA is an autonomous body which has been set up under the Ministry of Women and Child Development and looks after matters of intra-country and inter-country adoption. CARA Guidelines state that any foreign couple who wants to adopt a child from India must be sponsored by a child welfare agency or a social agency which is recognized by the government of the country in which the foreign couple resides.

CARA Guidelines also states that intra-country adoption is preferred first. As per CARA Guidelines, only three type of children is recognized as adoptable.

• Those children who have been surrendered.
• Those who are abandoned.
• Those who are orphans and are under the care of some specialized adoption agency.

Problems Arising in Case of Inter-Country Adoption

Child Trafficking

In many cases, the child becomes the victim of human trafficking. Children are sold after being taken out of the country by providing false information about the child and forging documents.

Post-Adoption Negligence

In transnational adoption, post-adoption monitoring is extremely tough and hence the child may be prone to negligence by the adoptive parents.

Post-Adoption Identity Problem

In cases of transnational adoption, the adoptive parents have to take the child out of the country as guardians and then complete the adoption procedure of their country too. The situation becomes very bad if the guardian does not turn out to be the adoptive parents of the child.

Concluding Remarks

Transnational adoption is a very good way to start a new life, for both the child and the adoptive parents. But if there is no proper structure to follow up the adoption, the violation of the rights of the child is sure to take place. India also needs better guidelines and laws to deal with intra-country adoption. It is important that the security of the child is not only ensured within the country but also when he goes out of the country after being adopted.

Footnotes:

[1]1984 AIR 469, 1984 SCR (2) 795

[2]D. Howe, P. Sawbridge, and D. Hennings, “Half a Million Women”, New York: Penguin, 1992.

[3]Convention on the Rights of the Child, Article 21(c).

[4]Convention on the Rights of the Child, Article 20.

[5]Hague Convention, Preamble and Article 1.

[6]Hague Convention, Article 4.

[7]Hague Convention, Article 4 (d)

[8]Hague Convention, Article 30

[9]Special Commission on the Practical Operation of the Hague Convention of 29 May 1993.

[10]https://travel.state.gov/content/adoptionsabroad/en/about-us/statistics.html, http://www.lawctopus.com/academike/inter-country-adoption/

[11]http://trackthemissingchild.gov.in/trackchild/readwrite/JJAct_2015.pdf

[12]AIR 1982 Guj. 193

[13] Supra 1

[14]162(2009) DLT 605

[15]ILR 1991 KAR 3543

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In this blog post, Pramit Bhattacharya, a student of Damodaram Sanjivayya National Law University, writes about the impact of e-commerce on SMEs and how the relationship between e-commerce and SMEs has aided in the growth of India’s economy.

With the emergence of a global economy, e-commerce is becoming a strong catalyst to expand business activities and build an active customer base. It is not very surprising to see the revolutionary way in which e-commerce has helped the business industry. The integration of information and communication has totally changed the relationship between the organizations, the consumers and those who act as mediators between the organizations and the consumers. The use of information technology has not only enabled greater consumer participation but has also helped in mass communication along with reduced costs.

But before going into the details of the impact that e-commerce has on SMEs, let us analyze the opportunities, challenges, barriers and drivers of e-business.

Growth of E-Commerce in India

In the year 2014, the number of internet users in India stood at around 280 million and it was speculated that the number would rise to almost around 640 million by the year 2019.[1] An increase of almost 70 million Internet users in a year is a big big thing. The rise of mobile internet users is also expected to touch some astonishing numbers at 457 million by the year 2019.[2] Compare this with the projected growth of e-commerce in India by the year 2020, it is expected to touch USD 80 billion.[3] The analogy seems pretty clear. We are turning into an internet loving nation!

Role of SMEs in growth of Indian Economy

SMEs contribute immensely to the economy of the country. They can be termed as the backbone of the economy. Their contribution to the service sector is also significant. The number of SMEs in India right now comprises of around 6,000 micro-clusters and 1,157 industrial clusters.[4] Their contribution towards the GDP stands at 17 % and their contribution towards Industrial output and Exports stands at 45% and 40% respectively.[5] Considering these stats, the importance of SMEs in the growth of the economy cannot be denied in any manner. There are close to 48 million SMEs in India if the total of two above-mentioned clusters is considered and these SMEs around 40% of the country’s workforce.[6]

This growth can be further stimulated by exploiting the growing internet penetration in India. The SME sector has also started embracing the technology available to them and is now eager to tap into their potential as internet sellers where they can reach more of shoppers and consumers across the country.

The obvious advantage

Information Technology has come out as a game-changer in almost every walk of all. Book your tickets, pay your bills, transfer your money, entertain yourself, it is all there. So, it will not be wrong to say that the use of internet has acted as a game changer even for business activities across the globe. In India, SMEs have been operating in a traditional manner and have been dependent on domestic trading activities for a long time. But with the growing rate of internet penetration, SMEs in India are also gradually modifying their activities to grab opportunities to trade globally through e-commerce. It is very fascinating to note that around 43% SMEs are now involved in online transactions. These SMEs have an enhanced customer base, better employment opportunities and increased profits. And the trend is on a rise, wherein according to survey almost 565 SMEs believe that use of e-commerce will boost their business growth.[7] It was also observed that the SMEs who used the internet extensively had a growth rate of around 19 % as compared to those who did not put the use of Information Technology in an extensive manner. The growth rate of such SMEs was recorded at around 13%.[8] Those SMEs who used the internet extensively for their business purposes also recorded export values which were approximately twice of those SMEs which did not use much of internet for their business activities.[9]

The traditional SMEs have not experimented much and have stuck to their core activities while those who have entered the domain of e-commerce has not only seen a growth in their business but also a growth in their status quo. It has also been ascertained that around 98 % of the SMEs who use Information Technology and e-commerce contribute to the total exports of the country while only 11% of the traditional SMEs are contributing towards the total export values.[10] This gap between the tech using SMEs and traditional SMEs can be explained by the fact that e-commerce goes beyond the geographical boundaries and provides a level playing field. E-commerce increases the trade visibility of the seller among the buyers who are located in far flung geographical regions.

Potential Benefits to SMEs

1. Increase in revenues

One major disadvantage of being offline is that you are cut off geographically, and more often than not, incremental efforts are made to expand the customer base. This takes a long period. On the other hand, e-commerce helps SMEs carry on their business activities transcending geographical barriers, thereby increasing the customer base, sales, and revenue. It has been perceived that due to the increased speed to market and a global customer base, an SME can boost its revenues by 51 %. Another benefit of e-commerce is that there is a prompt feedback channel through which any complaint or mistake can be made good immediately. The referral system on the internet also helps the business to tap into more potential customers.[11]

2. Low Marketing and Distribution Cost

There is a very sharp rise in competition these days. Businesses try to draw in as many customers as possible to beat their rivals. To do this, they spend heavily on traditional and digital media. By adopting e-commerce methods, the SMEs can reduce their marketing costs drastically by cutting down on expenses of trade shows, enormous offline advertisements and call centers, thereby optimizing their spending. These savings can reduce their expenditures up to 60-80 %.[12] Moreover, adoption of e-commerce methods reduces the traditional marketing cost and the cost of opening a store in multiple places also.

3. Increase in Profit Margin

SMEs can take advantage of a third-party trading platform with a very little or no investment by implementing e-commerce methods. They can host and develop their online storefront and also manage logistics, packaging and, warehousing. The reduction in overhead costs of these activities can potentially increase the profits of SMEs by 49%. When costs are reduced, the same resources can be used to develop a better and more competitive pricing strategy which will have a constructive impact on the profit margins. Adoption of e-commerce also cuts out the middle-man between the SMEs and the consumers, thereby cutting down cost further and increasing profits.

4. Better Accessibility and Geographical Reach

The internet is not restricted by any geographical limitations. The seller can connect to several buyers across different geographical areas. In the virtual marketplace, geographical boundaries disappear and business can go on 24×7 without any time zone restrictions.

5. Faster Approach to Market

A key factor in increasing business is to come up with the product in the market before your competitor does. Time is the essence where the window of demand for any specific product is very short. E-commerce provides the ability to SMEs to approach the market faster by avoiding possible chaos in the supply chain. The redundant processes can be eliminated, and the process of communication can be streamlined to reach the customer as quickly as possible.

6. Better Experience for the Customers

In today’s competitive business world, the principle ” the customer is the king”, holds the center stage. E-commerce helps the SMEs to provide a better experience to the customers. Optimized after-sale services, quick responses to the inquiries of the consumer, and an interactive and informative process of transactions creates a strong and loyal customer base which help the SMEs in the long run as these loyal customers themselves act as strong brand advocates.

Why the usefulness and significance of e-commerce shouldn’t be ignored?

1. Not having a virtual presence, or for that matter even having a poorly and haphazardly designed website can hamper the growth of the business. Especially in business sectors that are more customer-centric like export, tourism, and retail, not having an online platform to showcase and exhibit your products can be disadvantageous for the business.
2. When the world is turning more and more towards technology, ignoring it can be harmful. Opting for ways which are not fit according to the ways of the ever changing society can cripple the business and without the competitive edge, survival may become difficult.
3. Presently, many SMEs lack an organized central database to keep track of customers and database. This causes some difficulties in carrying out marketing and communication activities efficiently. E-commerce presents the solution for this problem.

A more opportune moment cannot be imagined for the SME sector. The future is full of exciting prospects for them, and a lot of opportunities are up for grabs by the virtue of an e-commerce boom in India. What remains to be seen is how much SMEs act in a street smart way and use the opportunity that is presented to them in the form of a catalyst to expand their business.

Footnotes:

[1] #shootingforthestars, FCCI-KPMG in India report on Media and Entertainment, 2015

[2] Ibid.

[3] ‘India Internet-Unlocking the potential of billion digital users,’ Goldman Sachs, 04 May 2015

[4] India SMB Market: Monitoring Emerging Markets, Nasscom, Frost, and Sullivan, 2014

[5]http://articles.economictimes.indiatimes.com/2013-06-09/news/39834857_1_smes-workforce-small-and-medium-enterprises

[6] The Indian SME Survey, Firstbiz-Greyhound, 2014-15

[7] The Status of e-commerce Among Indian MSMEs, SMEStreet Survey, 2015

[8] The Internet Economy in G-20, BCG Analysis

[9] The great transformer: The impact of the Internet on economic growth and prosperity, McKinsey Global Institute

[10] The Internet Economy in the G-20: The $4.2 Trillion Growth Opportunity, BCG Analysis

[11]The Status of e-commerce Among Indian MSMEs, SMEStreet Survey, 2015

[12] Industry Discussion conducted by KPMG in India, 2015

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In this Blog post, Abhiraj Thakur, Student NALSAR University of Law tries to answer the question “Are Surrogacy Contracts in consonance with the Indian Contract Act, 1872?” And further examines the different elements of a surrogacy agreement in light of the 1872 Act.

Surrogacy, with advancements in medical technology and increasing need-based demand, has become increasingly popular,[1] Thereby, necessitating the regulation of conduct between parties through the formation of agreements, who by the very nature of it, are likely to grow increasingly attached to the fetus or abdicate responsibility upon birth. Hence, the surrogate and intended parents seek to determine aspects like compulsory prenatal visits, coverage of medical expenses, assured guardianship upon birth,[2] inter alia, through contractual clauses, for both Commercial[3] and[4] Surrogacy.

In the Indian context, owing to lack of legislative clarity on the state’s position on Surrogacy Contracts, it becomes essential to understand the scope of enforceability of both, altruistic and commercial surrogacy contracts concerning the Indian Contract Act, 1872.

Element Of Consent – Section 14

The essentiality of consent[5] being free and unvitiated for any contract as defined and laid down in Sections 13 and 14 of the Indian Contract Act 1872, becomes highly relevant in the Indian context wherein Commercial Surrogacy has not been deemed illegal.

Testing Consent against Section 16(2)

In India, often poor women in vulnerable situations ‘consent’ to such agreements to escape poor economic conditions or are pressurized by their relatives to carry the child of a couple incapable of reproducing.[6]  In the former case, unless a presumption of inequality of bargaining power[7] or other forms of undue influence[8] is raised which goes unrebutted, the consent is held free. Mental distress caused by the need for money is held not to be sufficient to negate consent by the courts.[9]

Whereas in the latter, if the facts indicate that the blood or marital relationship was such that possibility of dominance existed, a presumption of undue influence is raised. This implies that it will be presumed that the ones seeking the contract to be enforced in fact used their position to dominate the surrogates’ will[10] and by Section 19-A, the surrogate will have the right to recede the contract.

Inability to Gauge Consequences- A Voluntary Risk

Further, it is argued that surrogacy, due to its very nature, leads to changes in the will to part with the child. Consent is necessarily predicated upon the ability of a party to comprehend the nature and consequences of the act that they wish to undertake. Consent which is also indicated by intention needs to be present continuously in a long term contract.[11] The implications of giving up a baby are incomprehensible by the surrogate at the time of concluding the contract. In the landmark Re Baby M case[12], the court noted,

“Under the contract, the natural mother is irrevocably committed before she knows the strength of her bond with her child. She never makes a totally voluntary, informed decision, for quite clearly any decision before the baby’s birth is, in the most important sense, uninformed, and any decision after that, compelled by a pre-existing contractual commitment”.[13]

Hence, the surrogate may during the gestation period, develop deep attachment and undergo a ‘change of heart’.[14] This line of argumentation presumes that all surrogates lack the ability to give consent as they are deciding to engage in an activity, the future consequences of which are unassessed, but known.

However, the doctrine of freedom of contract[15]– a touchstone of classical and modern contract law theories and the basis for state enforcement of private contracts necessarily presumes that parties, by deciding the law for themselves, undertake the risk of sticking to it despite a ‘change of the heart.’ To entail oneself personal autonomy, parties face the trade-off of potential regret.[16] This doesn’t create any rational differentiation for surrogacy contracts from other long-term contracts.

Unconscionability Principle- Section 16(3)

The recognition of this freedom principle merely invalidates a change in the decision as an excuse for non-performance; it, however, does not prevent the court from the protection of weaker parties especially in light of unequal bargaining power.

Section 16(3) applies to instances that the courts determine to be ‘unconscionable’ by the facts.[17] In the particular case of surrogacy contracts, this can be adjudged by procedural matters such as inability on the part of the surrogate to read the terms or harsh exemption clauses preventing liability of the fertility clinic, etc. It can also be derived by substantive elements like exceptionally low payment or some explicitly harsh terms. These terms can be indicative of exploitation of the vulnerable, cases that often arise in India being a popular destination especially for foreign parties due to the availability of cheap surrogates, and can be grounds for deeming undue influence being present.[18]

However, it is important to not characterize the very nature of surrogacy as an unconscionable bargain, an argument often advanced by feminist scholars opposing such contracts.[19] Since such an argument stands against the fundamental premise of a contract and disregards truly altruistic forms of surrogacy and cases when women choose to opt into it to experience the joys of childbearing or gratuitously.

Legality of Object – Section 23

The question whether surrogacy contracts are forbidden by any law or opposed to public policy needs to be answered separately.

Commercial Traditional Surrogacy – Forbidden by Law?

The law does not expressly recognize surrogacy, but views traditional surrogacy[20] As the adoption of the surrogate’s child by the intended parents, so, it needs to be examined in light of the Hindu Adoptions and Maintenance Act, 1956. Section 17 of the said Act expressly forbids the payment of any sum or any rewards in consideration for adoption. In Baby Manji Yamada v. The Union of India[21], a landmark Indian surrogacy case, the position taken by the courts was that such an arrangement was viewed as adoption under the law. In Jan Balaz v. Anand Municipality[22] As well, the German couple- intended parents, in this case, were only allowed to take their twins to Germany, who were born out of surrogacy in India, upon completion of adoption formalities. Hence, in commercial traditional surrogacy contracts, the effect is one of committing an act forbidden by law, thereby making the object illegal.

However, courts in decisions above, adopted a pro-contract and pro-commercial approach, indicating that the legislature brings surrogacy contracts in the realm of Indian Contracts Act while issuing further guidelines, so as to not affect their enforceability, but merely regulate them. More recently, in P Geetha Nagar v, Kerala Livestock Development Board[23], the court clarified that surrogacy is not illegal in India and noted India’s significance as a ‘surrogacy destination.’ The courts have recognized the immense economic gain accruing.

Thereby, while a strict reading of the law prohibits such contracts, the precedent has upheld them even in light of Section 23.

Public Policy Considerations

A concern raised by many objectors is that altruistic surrogacy in itself is an immoral bargain as it fails to serve the best interests of the child since the baby is separated from the birth mother, and commercial surrogacy, specifically amounts to ‘baby-selling’ by commodifying and devaluing women and children.[24] The Supreme Court gave these public policy considerations significant weight in the Baby M case[25], and the court felt that there was inherent something harmful about the practice of surrogacy.[26]

Under the Indian Contracts Acts, Section 23 lays down that an agreement is unlawful if it is opposed to public policy. The Supreme Court has interpreted this to apply to agreements injuring public interest or public welfare.[27]

However, there is far less tangible evidence of a material link between permitting surrogacy and public interest, especially considering that the essence of the surrogacy contract lies in a dealing involving two parties affecting their rights on the child. While it is much desired that the courts weigh the best interests of the child, the contract in itself falls short of becoming a public policy concern. Further, it ‘s hard to fit such contracts in any of the recognized ‘pigeon-holes’[28] Of circumstances opposing the public policy.[29]

Indian courts have as well upheld all forms of surrogacy contracts, and in fact recognized reproductive rights as part of the right to privacy.[30] The Universal Declaration of Human Rights in Article 16(1) recognizes the right to marry and found a family. However, in Jan Balaz v. Anand Municipality[31], Justices K.S. Radhakrishnan and A.S. Dave stressed on the necessity of special legislation to govern several issues of public welfare and policy importance that arise in such disputes, like rights of a surrogate mother, guardianship, responsibilities of the fertility clinic, etc. Need for regulation is pressing, but the position of the law is that that, in itself, does not affect the enforceability of surrogacy contracts.

Thus, we see there is a cause for respecting surrogacy contracts as they pass the tests for the existence of essentials of a contract. While ubiquitous claims of disproportionality and inability to gauge consequences exist, these fall short of being specific to surrogacy contracts and fail to create cause for disrupting the system of contractual obligations. These contracts stand to deserve full enforceability since the law needs to respond to new social patterns, rather than abandoning them, and eventually stagnate.

Footnotes

[1] DasGupta, S. (n.d.). Globalization and Transnational Surrogacy in India. Lexington Books 2014, United Kingdom.

[2] Surrogacyindia.com. (2016). Documentations, Contracts at SurrogacyIndia. [online] Available at: http://www.surrogacyindia.com/Contracts.html [Accessed 9 Apr. 2016].

[3] Surrogacy refers to an agreement between the parties wherein the surrogate is given money for merely carrying the baby. See: Fertilityconnections.com.au. (2016). Surrogacy – Fertility Connections. [online] Available at: http://www.fertilityconnections.com.au/surrogacy/ [Accessed 9 Apr. 2016].

[4] Altruistic Surrogacy refers to surrogacy without any financial gain to the surrogate for carrying a child, only ‘out of pocket’ expenses like medical expenses, travel and time out of work are covered. See: Fertilityconnections.com.au. (2016). Surrogacy – Fertility Connections. [online] Available at: http://www.fertilityconnections.com.au/surrogacy/ [Accessed 9 Apr. 2016].

[5] Section 10, Indian Contract Act 1872.

[6] Braho, H. 2015. Motherhood Surrogacy: Progress or Exploitation?. European Journal of Sustainable Development, 4(2).

[7] Lloyds Bank v. Bundy, 1975 1 QB 326.

[8] Section 16, Indian Contract Act 1872

[9] Raghunath Prasad v. Sarju Prasad, AIR 1924 PC 60.

[10] Lancashire Loans Ltd. v. Black, 1934 1 KB 380.

[11] Margalit, Y. Redefining Parenthood – From Genetic Essentialism to Intentional Parenthood. SSRN Electronic Journal.

[12] 537 A.2d 1227, 109 N.J 396.

[13] Id at para 100, p.434.

[14] Margalit, Y. (n.d.). In Defense of Surrogacy Agreements: A Modern Contract Law Perspective. SSRN Electronic Journal.

[15] Pound, R. 1909. Liberty of Contract, 18 YALE L. J. 454.

[16] Schuck, P. 1988. Some Reflections on the Baby M Case, 76 GEO. L.J. p.1793.

[17] Wajid Khan v. Raja Ewaz Ali Khan, 1891 18 IA 144.

[18] A. Schroeder Music Publishing Co. v. Macaulay, 1974 1 WLR 1308.

[19] Andrews, L. 1988. Surrogate Motherhood: The Challenge for Feminists. The Journal of Law, Medicine & Ethics, 16(2), p.72.

[20] Traditional Surrogacy, differing from Gestational Surrogacy, involves the use of the surrogate mother’s egg to procreate.

[21] 2008 13 SCC 518.

[22] Civil Appeal No. 8714 of 2010.

[23] WP(C).No. 20680 of 2014.

[24] Wolf, S. 1992. Surrogate Motherhood: Politics and Privacy. Larry Gostin. Ethics, 102(3), p.671.

[25] Re Baby M, 537 A.2d at 1247.

[26] Id at 1248, 1250.

[27] Ratanchand Hirachand v. Askar Nawaz Jung, 1991 3 SCC 67.

[28] These include contracts of marriage brokerage, the creation of perpetuity, interference with the administration of justice, wagering contracts, against friendly foreign states, trade with the foreign enemy, restraint of trade, price escalation, and interest clauses, among others.

[29] Fender v. John Mildmay, 1938 AC 1.

[30] B. K. Parthasarthi v. Government of Andhra Pradesh, AIR 2000 AP 126.

[31] AIR 2010 Guj 21.

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In this blog post, Abhiraj Thakur, a 1st-year student of NALSAR University of Law, Hyderabad, writes about the scenario of oral healthcare in India concerning dental insurance. This blog post explores the how and why concept of dental insurance that is absent in India and looks at some effective oral healthcare models from which we can learn.

The human body is no doubt one of the finest creations of nature. It being a complex system of elements helps us to perform a broad range of activities and make human beings the most successful species on the planet. This system thus seeks our attention towards its constant maintenance for to function effectively. One of the components of this system is our teeth. There’s no need to highlight the importance of teeth for us. Many of us must have had the experience of that pain due to dental problems; it sends shivers to our spine.

Today the market has filled all sorts of cakes, chocolates, pastries, donuts, shakes and what not and these items feature of the top priority list of children and many times for adults as well. As a result, dental problems have become as common as many other diseases today. Our visits to a dentist have become much more frequent today. Such as we have ‘health insurance plans’ that cover the expenses of our medical treatments after accidents as well as regular health checkups, having a ‘dental insurance’ that covers both seems to be a very good idea.

Benefits of a Dental Insurance

Before coming to context of India, let’s have a cursory look on some of the major advantages of a Dental Insurance Plan:

1. Cost Effective: Data from various resources indicate that dental insurance plans prevalent all over the world today are comparatively cheaper to health insurance schemes, and so a large section of the population can easily afford it. The greatest example is of USA where on an average a health insurance plan costs $90,000 a year whereas a dental insurance plan costs $14,000.
2. Whole scale Coverage: Like a Health insurance plan, a Dental insurance plan covers not only accidental dental treatments but also the expenses of regular dental check-ups and treatments such as root canal, etc. that are performed in the ordinary course of life and not due to damage from accidents. Thus, the benefits arising from a dental insurance can be reaped at the earliest as nowadays dental problems have become frequent among all age groups. In many cases, dental insurance covers as much as up to 75% of the treatment cost which can be helpful in preventing excessive loosening of our pockets.

Dental Insurance in India

The hard truth is that there is no such thing as ‘dental insurance’ in India. Treatment of teeth are covered under ‘health insurance’ by many companies and only the expenses of accidental tooth damage are taken care of. There are no reimburses provided for regular dental checkups or non-accidental treatments. Even these health insurance are provided by a limited number of companies in the country, so about care for teeth, the situation is bleak in India.

Reasons for Not Having ‘Dental Insurance in India.’

There cannot be one single reason for such a failure, but various reasons have operated over a course of time which has led to such a situation:

Policy Problems

Misconception of the concept of ‘Public Health Dentistry.’

In the field of dentistry, Public health dentistry has assumed a greater importance than anything else. Public health dentistry refers to the practice of providing affordable dental health services to the general population. In India also such a scheme was planned to be enacted under the oral health care. The greatest problem in this regard is that while most of the European and North American countries have well-defined oral health care scheme, India lacks it. There was no plan made for public health dentistry under the first oral health policy that was drafted way back in 1985. The provision of organizing ‘dental camps’ throughout the nation was the most remarkable feature of this policy. However, the practice has from the last three decades suffered from gross mishandling and led to a concoction of the term public health dentistry. Even today most of these camps are organized under poor conditions and in most camps adequate treatment is not provided to the patients, in fact, they are subsequently referred to private hospitals where they are asked to pay hefty fees and as a result, most of them prefer not to undergo any treatment.

Implementation Constraints

Internal Corruption happened in dental healthcare industry when government doctors catered with the responsibility of treatment of dental patients in dental camps deliberately do not provide them treatment. They refer them to private hospitals; they do this on charging illicit amount of money. As a result, it has contributed to the failure of the policy.

Structural Problems

Non-effective ‘Dental Plan’: Lack of Uniformity

The countries where the dental insurance is in vogue have effective dental plans for it. The 1985 oral health policy recommended for dental insurance but the same was covered under the ‘health schemes’ and not separately. The policy further was devoid of any guidelines to the private companies for the implementation of dental health schemes. As a result, it became totally discretionary for the companies to implement such a policy. Even today there is no uniformity in providing dental plans among the companies. Nations like UK and USA have dental policies that lay down a reasonable set of common features which the employers need to follow in order while providing dental plans to the employees.

Few of the well-recognized dental plans prevalent in the world are:

• PPO Model: It is referred to as ‘Preferred Provider Organization’ plans. Under this scheme to provide cost-effective dental insurance, the company providing the plan to employee contracts a specific dentist which over a period provides services to the employees at low-cost. These category of dental plans are helpful for regular checkups of gums and tooth and are cost-effective in long run.
• DHMO Model: It is referred as ‘Dental Health Managed Institution’ Models. Under this scheme, the insurance provider contracts with a vast number of dental organizations so as to provide cheap dental treatment. It covers costly dental treatments such as dental surgery etc.
• Indemnity based Dental Insurance: Under this, the person insured is allowed to see any doctor for treatment provided the doctor accepts the terms of the insurance of the company. These are usually employed in cases of preventive measures to prevent tooth decay.

None of these models are currently at work in India, which is the biggest cause of no dental insurance in the country. The lack of importance to the issue of oral health care by the government becomes quite evident from the formulation of healthcare policies for the public. An example is the lack of any policy for standardization of dental procedure in the country. The cost of same dental treatment in India varies significantly in different parts of the country; this also acts as an impediment in formulation dental insurance policies.

Failure of Dental Education on Substantive grounds

Under the current dental education scheme that is regulated by the Dental Council of India. A majority of dental schools in India charge fees which is higher than other MBBS colleges in the country, as a result becoming a dentist for a major chunk of interested individuals becomes a matter of earning and no particular regard is given to dental awareness in the country. Also, the recent measures of introducing private entities in the field of dental education by most of the states have not helped the cause. As a result of the economic burden on an individual dentist, the dental camps are utilized for personal rather than public benefits.

International Scenario: Lessons to be Learned

1. No Dental Camps: In USA, both federal and state governments regularly take various measures such as of price ceiling so as to keep the perks of dental healthcare within the reach of low-income people, that form a significant proportion of a national population. The state-funded dental schools operate at efficient levels providing quality education at a reasonable price. Also, there is no mishandled concept of dental camps in the USA, in fact, the federal government works in collaboration with states to open a large number of dental clinics in rural areas. 
2. Community Dentistry: In UK, community dental services are a vital part of government health schemes, to make the greatest number of people avail the services of dental healthcare. Under the scheme, free of cost dental checkups are provided throughout the country by ‘community dentists’. These dentists voluntarily offer services and are paid under the scheme. The private stake is limited in dental education.
3. Effective Inclusion: In Netherlands, the state has focussed on dental health care in a much more efficient manner than any other country in the world. Each and every Dutch citizen needs to be enrolled under the ‘National Dental Insurance Policy’ by the age of 19 years.

Thus, we see where India still lacks any comprehensive dental insurance policy; many countries of the world have effective dental plans in force. Suffering from both structural and policy problems the scenario of dental healthcare in our country does not look good. When it comes to healthcare of the citizens, it is the state that needs to take the initiative at the earliest.

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In this blog post, Abhiraj Thakur, a 1st-year student of NALSAR University of Law, Hyderabad, writes about the concept of irretrievable breakdown of marriage as a solid ground for divorce. The author uses various case laws to solidify his views. 

When a relationship is not going good and is unnecessarily maintained on papers, where the feelings of trust, love do not exist, and no scope of recovery of relationship is there it is better to end the relationship, incompatibility is often a major reason for unhappiness. When friends can end their relationship, why can’t a couple?”[1] 

Marriages in India have always been considered more than just a union, in fact as defined, marriages in India are considered a sacrament.[2] For the reason that the institution of marriage is considered so sacred, for something like divorce to be accepted and be given legal and social recognition was quite a big step. Divorce Law in India still follows the ideology that only in the cases of extreme problems should marriages be dissolved and that too only after every other means of reconstitution the union is exhausted.

Theories of Divorce

Divorce Law in India is based on two theories:

• The Fault theory: The Fault theory refers to the dissolution of marriage on the grounds of either party to the marriage committing a matrimonial offense, like adultery, desertion, etc., or has been suffering from mental disorder. In toto, there are nine grounds under this theory to get a divorce under the Hindu Marriage Act, 1955.
• Mutual Consent theory: Mutual Consent theory is the concept that if two individuals have the discretion to get married, then they should also be allowed to move out of the union if they wish to do so. It is enumerated under Section 13iA and 13iB of the Hindu Marriage Act, 1955.

What the Indian Law fails to address and cater to is the situations of marriage when all the sanctity and meaning of it has broken down with no fault of either of the parties, yet there is no provision in law to seek a divorce. This is what is called as the No-Fault Theory of Divorce or Irretrievable Breakdown of Marriage.

History of Irretrievable Breakdown as a Ground for Divorce

The concept of irretrievable breakdown of marriage was for the first time introduced in New Zealand where it was recognized that it needn’t be necessary for there to be some fault or other for a spouse to want to opt out of a marriage and hence the law has to recognize and cater to that requirement.

In England, it was the case of Masarati v. Masarati[3] That had opened the gate for the theory and the court of appeal had held that “today we are perhaps faced with a new situation as regards the weight to be attached to one particular factor that is the breakdown of marriage” and the House of Lords 1943 decision in Blunt v. Blunt[4] made it increasingly accepted that no public interest was served by keeping legally in existence a marriage which had in fact broken down.

The Muslim Law too gives both the husband and the wife the right to give Talaq and recognizes the breakdown theory.

In the Mortimer Committee’s report, the breakdown of marriage is defined as: “such failure in the matrimonial relationship or such circumstances adverse to that relation that no reasonable probability remains for the spouses again living together as husband and wife”.[5]

The Law Commission of England in a report had said that there are two objectives to good divorce laws:

• To buttress rather than undermine the stability of marriage
• When regrettably a marriage has broken down, to enable the empty shell to be destroyed with maximum fairness and minimum bitterness, humiliation and distress.[6]

The idea being that though marriage is a union of two individuals and is about companionship and love, the option to opt out of it and dissolve the union should also be available with the same amount of dignity and ease, rather than be put in a situation where a fault has to be brought out to prove to the court as to why the marriage wouldn’t work.

There are two theories that are prevalent in Divorce Law in India, i.e., the Fault Theory and the Mutual Consent Theory. Even though they cater to a large part of the divorce-seeking couples, it is imperative to provide provisions wherein there has been, for example, such emotional damage to marriage, something that a couple might not want to disclose to people outside their marriage, and there’s no hope or chances of reconciliation. They should have the choice and the ability to dissolve the marriage and part ways without having to go through the ordeals of the legal system and having to appeal to higher courts as till now it has only been the higher courts that have shown the authority to be able to dissolve marriages on the grounds of irretrievable breakdown.

Irretrievable Breakdown in India

The concept of irretrievable breakdown of marriage is a lot more problematic in the context of the Indian society because the institution of marriage in India has a lot more sentiment and divinity attached to it. For a society that looks at marriage as a sacrament[7] And has evolved from looking at marriage as eternal love and promise, the idea of divorce wherein partners want a dissolution for no particular reason is quite hard to digest.

Recognition by Supreme Court of India

In the case of Naveen Kohli v. Neelu Kohli[8] The parties had gotten married in 1975, within a few years, the marriage had turned sour, and there were allegations of cruelty, adultery. The husband alleged that he’d found his wife in a comprising position with another man, and the wife had alleged that he had a concubine. The wife initiated several civil and criminal proceedings against husband indicating her resolve to make his life miserable, the husband also initiated some legal proceedings and was living separately from the wife for more than ten years. Thus, it was evident from the facts of the case that the marriage has been wrecked beyond redemption.

The trial court had held that the allegations were of such nature that there was no cordiality left between the parties and thus no possibility to reconnect the chain of marital life between them. Hence, it found that there was no alternative but to dissolve the marriage. Though the High Court took the stand that the trial court had erred in granting a divorce, the Supreme Court upheld the trial court’s decision that the matrimonial bond is beyond repair.[9] “When the marriage becomes a fiction, the legal tie has to be severed.”

Can it be a ground for divorce?

In the case of Vishnu Dutt Sharma v Manju Sharma[10], It was submitted on behalf of the husband that the Supreme Court had, in earlier cases, dissolved a marriage on grounds of irretrievable breakdown. The court observed that the earlier cases had not taken into account the legal position as laid down in Section 13 of the Act.[11] The judgment held that a mere direction of the court in earlier cases, without considering the legal position, was not a precedent to be followed by the courts. The court observed that the granting of the divorce on grounds of irretrievable breakdown would mean adding a clause to Section 13 of the Act through a judicial verdict. 

It held that adding a new clause making irretrievable breakdown of marriage grounds for a divorce could only be done by the legislature, not by the courts. Taking this into consideration, the Supreme Court rejected Sharma’s plea for dissolution of the marriage on grounds of irretrievable breakdown of marriage.[12] The court further said that though the irretrievable breakdown of marriage was recognized in Neelu Kohli’s Case, the divorce was granted on grounds of cruelty.

The legislature does not make laws every day, but the courts hear cases…

The Indian judiciary keeping due regard to the nature of marriage under Indian personal laws and relying on developments of the concept of divorce though has recognized irretrievable breakdown of marriage, but it still can’t be exercised as a ground to get a divorce as it lacks legislative recognition. With the rapid changing social scenario of the country, marked by the spread of Western ideals and adoption of different outlook towards the institution of marriage, irretrievable breakdown of marriage is a progressive change to the field of personal laws. The impact of not having it as a ground for divorce in the country must be a thing to be looked for with concern in our country.

Footnotes

[1] Justice Krishna Iyer, Aboobacker v. Manu, AIR 1971 KLT 663

[2] Paras Diwan, Family Law, 6^th Edition, 2001

[3] [1969] 1 WLR 393, CA; both the parties to the marriage had committed adultery. Thus the court on the wife’s petition observed breakdown of marriage and granted a divorce.

[4] [1943] AC 517, HL

[5] Paras Diwan, Modern Hindu Law, 17^th Edition, 2006, pp. 68-77

Vijender Kumar, Irretrievable Breakdown of Marriage: Right of a Married Couple, Vol.5: No.1, NALSAR Law Review, 15, 2010

[6] Paras Diwan, Family Law, 6^th Edition, 2001, pg. 29

[7] Paras Diwan, Family Law, 6^th Edition, 2001

[8] AIR 2006 SC 1675

[9] Jaya V.S., Irretrievable Breakdown of Marriage as an Additional Ground for Divorce, Vol. 48: 3, Journal of Indian Law Institute,  439, Pg. 440, 2006

[10] Civil Appeal NO. 1330 OF 2009, Supreme Court of India

[11] http://infochangeindia.org/women/judicial-interventions-and-women/sc-flip-flops-on-irretrievable-breakdown-of-marriage.html

[12] Supra Note 10

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In this blog post, Shubham Khunteta, a student of National Law University Odisha, writes about important agreements entered into by businesspeople to prevent their talented human resource from job hopping and to save their business from any unfair competition. It specifically talks about Non-Solicitation and Non-Poaching agreements which are very crucial for any business.

Introduction

Today, we are living in the age of competition where to succeed in the market; people tend to use shortcuts to sustain themselves, get achievements and earn laurels. There is a general tendency of people to prevent others from carrying on their work either necessarily or unnecessarily depending on the loss they might portend to. But, here we are not concerned with each and every tendency of such persons except the tendencies to interfere, damage other persons by certain revelations that might be the core way of the operation of the person, of poaching certain personnel to enrich oneself unjustifiably with the secrets of the person. The core exchange and principle here is “unjustifiable enrichment” at the cost of others.

By persons, I am referring to individuals like professionals or other employees, companies, firms, etc. In this paper, we will be talking about the rights of the persons to prevent something which they consider to be detrimental to their interests.

For example, when individuals are terminated from their employment and subsequent to that these individuals carry out certain activities similar to or related to that of their ex-employment, either directly on their own by starting a similar activity or indirectly by selling or supplying certain trade secrets or confidential information for consideration of job or other benefits from the future employer, which they, during their course of employment gathered and collected. Similarly, employers may, under the garb of prevention of such trade secret or confidential information prevent the employee, for fixed period post-termination, from taking up a job in a similar employment corporation so as to reduce compromise of such sensitive information. This might trigger a violation of the employee’s constitutional rights of life, liberty and his statutory right to employment)[1].

These things are observed in day-to-day commercial activities where one person often tries to protect one’s interest, whether reasonably or unreasonably, as the case may be. In law, disputes often arise on issues which pertain to violations of the nature of constitutional and statutory rights of individuals, statutory rights of companies and firms to protect their interests by preventing and forbidding other persons like employees, partners, et al. from copying or imitating the firm’s unique copyrighted documents or spill the beans of a patented product. Business owners enter into agreements with other companies/firms to forbid poaching of each other’s employees that may come under the grey area of Competition law as concerns regarding concentration of competition mount up.

In the above-introduced section, the significance of the term ““reasonability” in actions and “compliance with directions of law or agreements entered into” erupts. Now, the question that would be dealt with below concerns the validity of above arrangements, principles of law followed by the adjudicating authorities to differentiate between the reasonable and unreasonable restrictions imposed in the contractual arrangements and the impact that befalls on the affected parties.

The two prominent clauses often entered into by the companies and the firms-

1. With their employees (Non-solicitation clause)
2. With the other similar businesses of businesses and firms (Non-poaching clauses)

Non-Solicitation Agreement

This clause is usually entered into as a part of a contract of employment or agreement b/w partners. It is entered into for the purpose of restraining the other party, i.e. an employee/former employee or a partner from solicitation of customers and employees of the company for his benefit and against the interest of the company during and post-employment. The clause is imperative to companies as it is often seen that the employees pursue and persuade the clients and other employees of the company to endanger the employer’s business unjustly and enrich himself at the employer’s expense. Enforceability of such clauses is a question of fact depending and varying on case to case basis.

Now, the question that arises for contemplation is- What constitutes reasonable and legal non-solicitation clauses?

The solution lies in the interpretation of the clause with reference to cases.

Standards to establish non-solicitation

• Merely approaching customers and employees of the previous employer would not be read as solicitation until actions are done or orders are placed under such representation.[2] Such actions and orders would be borne out by records.
• The validity of such clauses can be adjudged from the restrictions imposed as regards distance, time limit, protection and non-usage of trade secrets and goodwill.
• Acts of solicitation committed by alleged persons like former employees take such active shape that it prompts the customers of the former employer to discontinue their contract with the former employer and enter into a contract with the former employee or inhibit other persons from entering into the contracts with the former employer[3].
• The clause would not be reasoned as being in restraint of trade under Sec 27 of the Indian Contract Act liable to be void unless the same is unconscionable or wholly one-sided. The character of such a clause is also reckoned from the form of contract and superiority of persons making it.

It implies that negative covenants like non-solicitation clauses may be acknowledged as void in case of a contract of employment post-termination between the employer and the employee as these contracts are usually standard form contracts where one party is at an inferior bargaining position as they can either take the employment or leave the employment whereas this might not be the case in partnership agreements as each party here negotiates with the strengths of their positions.[4].

• In GEA Energy System India Ltd. v. Germanischer Lloyd Aktiengesellschaf[5], the dispute was related to an agreement b/w two joint partners. The Plaintiff here sought to prevent the defendant, who terminated the JV agreement, from setting up a similar business in India. The Madras High Court considered it to be partial restraint as the JV agreement didn’t absolutely restrain the defendant from carrying on any business. But, the significant point also considered by the court here in addition to partial restraint to strengthen and validate the plaintiff’s submission was that the JV partners had equal bargaining power and the terms weren’t one-sided.
• Sec 27[6] [of the Indian Contract Act] does not restrict reasonable non-solicitation agreements post-termination of employment. These agreements entered into between the employer and the employee should not hamper the growth of employee but should, however, secure the interests of the employer.

Non-Poaching Agreement

This agreement is executed between two employers in which they consent not to solicit or poach each other’s employees. This agreement accentuates the significance of human resource in the constantly evolving society. Human resource is the backbone of any organization which can rally or derail the progress of any business.

Satisfaction of such resource, especially the highly qualified professionals guiding the direction of business, is usually manifested by the business in the form of high remuneration and various incentives which help them in the realization of their goals. If this human resource is not properly acquainted and provided with the proper amenities required by them, then it might lead to them changing their jobs and consequently affecting the interests of the business. The competitors often lure this human resource through various means, which might foil the progress of the company and affect it badly. To prevent it, businesses often enter into such agreements with their competitors to prevent such mishaps and to carry out their business as flexibly as they can without fear of such allurement or voluntary switching of jobs of the employees.

Non-poaching agreement per se does not violate Section 27 of the Contract Act as it does not limit an employee from seeking and/or applying for any job/employment. What this class of agreement does instead is simply command that one competitor should seek the consent of the other before hiring that other competitors’ employee/s.

In a case[7], the Delhi high court opined that the defendant holding confidential information and data of a bank can’t be an excuse and the veil to curb the defendant’s rights to seek and search for better employment. The injunction, as demanded by the plaintiff, will perpetuate forced employment. It would create a situation of ‘once a customer of plaintiff, always a customer of plaintiff.’ Such agreements would constrict the professional and intellectual freedom of the employees.

The doctrine of restraint of trade does not apply during the employment but comes in the picture after the employment contract comes to an end. In a case[8], it was held by the Supreme Court that a man is entitled to exercise any lawful trade or calling as and where he wills, as long as it is not against public policy or interest. But the court added a rider to it as an exception that when an employee might reveal the confidential information of the previous employer, such clause is justified. 

In a case[9], the Delhi high court held that the negative covenants clause like ‘restriction from engaging or undertaking employment for 12 months post-termination’ perpetuates economic terrorism and creates conditions feasible for ‘bonded-labor.’ Such clauses violate Section 27 of the Indian Contract Act and thereby are unenforceable and void. Interchangeability of service is not an accepted norm of service jurisprudence, and an injunction can’t disallow employee’s right to terminate their contracts. Seeking an injunction was only with the extraneous motive to prevent employees from changing employers. Rights of employees to have better conditions and job opportunities elsewhere can’t be curtailed.

Usually, such agreements are also alleged by the parties to be violative of The Competition Act, 2002 especially, Section 3 which prohibits agreements that are anti-competitive in nature and have adverse effects on competition in India. However, non-poaching agreements usually don’t fall under Sec. 3 because it does not ban lateral hiring, but as a substitute, sets guidelines to be followed in case of such hiring[10]

Conclusion

It is understood that both the individuals and businesses grapple in the competitive environment and try to offset and lever the liability to the maximum possible extent through certain agreements. Here, the law only comes with an iron hand when the protection turns into the exploitation of others, unreasonableness trumps reasonability and affects the fundamental and core interests and rights of others which are highly cherished and guarded by law. Absolute restriction in the economic activities would stand the scrutiny of law and is liable to be quashed whereas partial restriction would stand the tests of reasonability and the doctrine of restraint on trade.

So, ultimately, one can protect oneself without infringing on the rights of others. Adjudication authorities often try to strike a balance between the commercial interests of business as well as economic rights of individuals and arrive at a decision by measuring it on the yardstick of reasonableness, equity, and interests of the affected parties.

Footnotes

[1] <http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Employment_Contracts_in_India.pdf>accessed on 13/6/2016

[2] FLSmidth Pvt.ltd. v M/s.Secan Invescast (India) Pvt.ltd (2013) 1 CTC 886

[3] Embee Software Pvt. Ltd. v. Samir Kumar Shaw AIR 2012 Cal 141.

[4] Wipro Ltd. v. Beckman Coulter International SA 2006 (3) ARBLR 118 (Delhi)

[5] (2009) 149 CompCas 689 (Madras)

[6] See, Sec 27 of Indian Contract Act, 1872

[7] American Express Bank Ltd. Vs. Ms. Priya Puri (2006) IIILLJ 540 Del

[8] Gujarat Bottling vs. Coco-cola company AIR 1995 SC 2372

[9] Pepsi Foods Ltd. and others vs. Bharat Coca-Cola Holdings Pvt. Ltd. and Ors. (1999) IILLJ 1140 Del

[10] <http://www.manupatra.co.in/newsline/articles/Upload/091CA8F9-A438-4323-9170-7BC5182387F5.pdf>accesed on 13/6/2016

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In this blog post, Abhiraj Thakur, a 1st-year student of NALSAR University of Law, Hyderabad, writes about the DNA fingerprinting technology which is widely used to secure convictions. This technique being reliable and accurate should be adopted at full scale in India. However, our country still suffers from some issues which thwart the use of DNA fingerprinting in Indian Criminal Law.

What is DNA?

DNA (Deoxyribonucleic Acid) is the primary hereditary material in a human body. The Human DNA has a double helix structure. Most of the DNA is found in Nucleus of the cell called the nuclear DNA, and some are found in mitochondria called the mitochondrial DNA (mtDNA). It complexes with proteins to form chromosomes which contain our genes and all genetic information.[1]

The DNA Fingerprinting technology is one of the foremost and most reliable technologies used in USA and UK in identifying individual culprits through their respective unique DNA patterns. In 1984, Sir Alec Jeffreys, of UK discovered that no two people could have the same DNA sequence.[2] Although more than 99% of the DNA is the same in all humans, there are some particular strands that are unique between two individuals having the same sequence. Sir Jeffreys was the first person to discover this. This led to the birth of DNA Fingerprinting. The potential of DNA Fingerprinting in the investigation of crimes was quickly realized. In 1986, this method to solve the rape and murder mystery of a teenage girl Dawn Ashworth near Leicester. The suspect Richard Buckland was exonerated, and the real criminal Colin Pitchfork was found guilty. It was the first case in which DNA technology was used.[3]

Benefits

Accuracy

In a crime scene, there is always a possibility of finding the DNA of people other than the criminal. In such a scenario the, a majority of investigative agencies today rely on DNA fingerprinting to find out which DNA is that of the criminal. Also in cases where a mixture of a blood sample or other samples is found at the crime scene. DNA technology today has sufficiently evolved so that it can identify each of the blood of each from a mixed sample. This has greatly helped in securing convictions in rape cases. 

For example, if a girl is raped by, let say, six persons, DNA fingerprinting can identify the DNA sequence of every individual and comparing it with the suspects, we can catch the criminals. In such cases, each of the people whose DNA pattern matches with the sample gets convicted and of those whose DNA sample does not match is proved not guilty and acquitted.

Reliability

Today, There is greater acceptance of DNA evidence over Narco Analysis because DNA evidence does not lie. The narcotic analysis is a subjective method. A lot of subjectivity is there in it. It is possible for people to fool it. People can lie but DNA cannot. Earlier there were statistical doubts that two persons may have the same DNA sequence. But as the technology is advanced, it has now been proved that no two persons can have the same DNA sequence. Narco analysis is not always reliable and is not accepted as evidence by the courts.[4]

Apart from crimes, it is also extensively used for on- criminal purposes like paternity tests, seed stock identification, the authenticity of consumer products, and medical diagnosis.

Limitations

Identical or Monozygotic twins have the same DNA sequence. Therefore in such cases, the law enforcement agencies remain skeptical of relying on DNA fingerprinting to deal and identify the real criminal. Also, a question arises in regard to such twins, can they be convicted only by the DNA Evidence? This is the biggest limitation of DNA evidence. Two identical twins do have the same DNA. So in such case where one of them has committed a crime, they cannot be convicted by DNA evidence. But in such cases, the simple fingerprint will help to convict the real criminal. It is because there is a slight difference between the finger prints of the identical twins. But in the courts of law, full fingerprints only are acceptable because clever counsels raise questions on partial fingerprints as they can match with others.

Usage in India

DNA testing as evidence is not covered under Indian Evidence Act 1872 and Criminal Procedure Code 1973. The method of DNA profiling used today in India is based on polymerase chain reaction (PCR) and uses short tandem repeats (STR). These techniques have revolutionized the speed and efficiency of the DNA test. These techniques are very reliable and are in vogue in various countries. Dr. Lalji Singh is considered to be the “Father of DNA fingerprinting” in India, He developed and used the technology in India for the first time in 1988.

Problems with Usage in India

Handling of Samples

The admissibility of DNA evidence depends on upon accurate and proper collection, preservation and documentation which can satisfy the court. As was seen in the infamous OJ Simpson case, improper handling of DNA evidence can lead to the acquittal of the accused. The procedure of collection and preservation is very important. The sterile gloves and forceps must be used. If we use our hand in the collection process, our DNA will get mixed up with it.

Today in India the police constables are untrained in how to collect DNA samples. In foreign countries, when a crime occurs, first the forensic investigators and scientists go to the crime scene to collect forensic data. But here in India, first an untrained constable goes there. Acting on intuition, he washes up the body and removes it. He in this process destroys vital DNA evidence. So they must be trained to handle forensic evidence and to properly collect it and seal it. But even when there is some contamination, it can be found out in the test result; we can see a faint band of DNA of the person whose DNA has been mixed up and a strong band of DNA of the real criminal. But such contaminated evidence is not accepted as evidence in the courts.

Storage of Samples

In UK and US, the samples of DNA are stored in National DNA Database. The police have very limited powers to retain the DNA recovered from crime site; their job is confined to just collection and deposition. Unlike in India where the police have unchecked powers to collect and retain the DNA of suspects even after acquittal. This raises concerns about many over fears that it may lead to misuse of DNA database and may divulge the privacy of the individuals. Of suspects even after acquittal. 

DNA of all convicts should be stored in the database so that the multiple offenders can be apprehended easily. Moreover, in countries like the UK, the government is trying to create a database of all people, not just convicts and acquitted but also of other innocent people. The purpose of such databases is not just for crime investigation rather it will be helpful for research in medicine.

Lack of Test Centers

In foreign countries, there are enough facilities for the DNA testing. People can get DNA fingerprinting done anywhere as there are a lot of institutions. Even for something like $10000-$12000 they can do the full genome sequencing[5]. But in India, there are not many facilities. For doing a DNA, test people have to go all the way to Centre for Cellular and Molecular Biology or CCMB in Hyderabad. This may not be feasible for everyone. With due regard to the efficiency of this technology, there should be sub-branches of this institution in every district of the country. If not possible, it must be made sure that people from all parts of the country can readily have DNA testing.

Violation of Constitutional Rights

There have been quite many ethical concerns regarding DNA tests. Some people allege that it violates the right to privacy, right to life and right against self-incrimination according to Article 20 of Indian Constitution.

The most famous case involving the use of DNA fingerprinting in India is of ND Tiwari. ND Tiwari a famous politician was alleged by Rohit Shekhar to be his biological father. In the subsequent paternity case, many legal issues surrounding the DNA Testing emerged- such as if paternity is conclusively proved (100%) by DNA Testing, whether the persons have the right to keep the result of such tests private etc.

Indian law says that one cannot be forced against his/her will to give DNA evidence. But today in certain cases, courts are forcing suspects to undergo DNA tests. As in the ND Tiwari case, all these arguments were raised. But the court forced ND Tiwari to give his blood sample in the larger interest of the public. Courts can force people to give their blood samples to meet the demands of justice.

These are the few burning issues with the use of DNA printing technology in India. The future of DNA Technology is no doubt very bright. There has been a revolution with regards to the technology. In the time to come, it will prove very helpful in convictions of the offenders. There has already been rigorous research going on in the technology around the world; India shall by no means lack behind in it.

Footnotes

[1] http://www.cdfd.org.in/servicespages/dnafingerprinting.html

[2] Ibid

[3] http://news.bbc.co.uk/2/hi/programmes/newsnight/8245312.stm

[4] Selvi & Ors. Vs. State of Karnataka & Anr. On 5 May 2010

[5] Full genome sequencing is a laboratory process that determines the complete DNA sequence of an organism’s (in this case human’s) genome at a single time.

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In this blog post, Pramit Bhattacharya, a student of Damodaram Sanjivayya National Law University writes about the new Geospatial Information Regulation Bill, 2016 which seeks to regulate and govern all kind of geospatial data. The post highlights the different aspects of the bill and discusses their impact on India’s integrity and sovereignty.

The Geospatial Information Regulation Bill, 2016 has been drafted by the Government of India, which seeks to regulate and control the procurement, distribution, and broadcasting of any kind of geospatial information which can affect the integrity, sovereignty and security of India in any manner. The bill is applicable not only to citizens of the country but also to citizens outside the country, on aircrafts and ships which are registered in India, also persons who are engaged in government service. According to the draft, it will be compulsory to take permission from the government before any geospatial information can be published, broadcast or acquired.

Geospatial Information

The definition and the ambit of “geospatial information” are very wide according to the draft. The definition of geospatial information has been given in such a way that it includes any images or data received through space or any aerial platform. The aerial platforms include satellites, balloons, aircrafts, airships, any unmanned aerial vehicle, etc. The definition also has under its ambit any kind of data which shows any physical feature, boundaries, phenomenon, etc. of the earth. Maps, charts, surveys, terrestrial pictures, etc. also falls under the definition of geospatial information according to the bill. The definition given provided in the bill is so vast that it’ll cover almost everything like GPS enabled devices like cell phones, car navigation systems, drones, balloons, satellite imagery, etc. Not only this, print media like newspapers, magazines and books will also fall under the purview of the definition. Such a wide definition will make the situation very complicated if the bill becomes a law. Almost everyone will have to seek a license from the government to even retain and use the geospatial information. The impact of such a regulation will be widespread. For instance, if a geospatial journal or magazine, say National Geography or Discovery want to publish anything which is even remotely related to some geospatial information, they’ll have to take the prior permission of the government. The editors, publishers and subscribers will also have to take the permission of the government since they will either acquire or broadcast the geospatial information. Any person doing any research related to any geographical issue will also have to take the consent of the government.

Jurisdiction

The jurisdiction which is being given under the bill is also wide. The bill gives an extra-territorial jurisdiction, and if made into a law, it’ll be applicable not only to people residing in India but also to people who are residing abroad. This kind of jurisdiction may not be feasible at all. The main question which arises here is that why would a foreign entity want to submit to a jurisdiction of such an Act which seeks an extensive regulation in distribution and publication of data and information. This may have a negative impact and trade and commerce. This kind of severe regulation will discourage those business houses to set up business in India, which has anything to do with the use of geospatial information (for example foreign cell phone companies whose devices are GPS enabled or car manufacturers who provide a navigation system). The bill talks about licensing all the entities who use any kind of geospatial data. The bill also states that this licensing would be done by a bureaucratic committee, and the data or information would be scrutinized after the data is collected and before it is distributed.

The Authorities

The bill states that an Apex Committee will be set up which will look into the implementation, regulation, and governance of the Bill, which will be in accordance with the policies. A Security Vetting Authority will also be set up and the main aim of this Security Vetting Authority will be to carry out scrutinization and vetting of any kind of geospatial data from the security point of view and provide license and permission to the users to procure, publish, distribute, and broadcast the information, as per the regulations which have been framed. An Enforcement Authority will also be constituted which will look into the enforcement of terms and conditions of the license which has been provided to the user. The Enforcement Authority will have the power to confiscate all the data or resources which have been used for publication or distribution in violation of the Act. The Enforcement Authority will also have the power to impose penalties and revoke or suspend the license of the violators. To hear the appeals against the decisions of the Security Vetting Authority and the Enforcement Authority, an Appellate Authority will be set up, and any person who wishes to appeal against the order or decision of the Appellate Authority can further appeal to the High Court. Thus, to summarize, there will be four authorities to regulate and govern the Act-

• The Apex Committee
• The Security Vetting Authority
• The Enforcement Authority
• The Appellate Authority

The Apex Committee will have the power to delegate its responsibilities but not delegate the regulatory powers. It is the sole authority which can make regulations with regards to the Act. The Apex Committee will comprise of three members. Given the wide ambit of the Act, the authorities may find it very difficult to implement the Act properly. Also having these many authorities for the implementation and monitoring of a single Act can lead to conflict within themselves also.

Licensing

Any person who wants to use geospatial data in any manner, whether to acquire such data, broadcast, publish or distribute such data will have to make an application to the Apex Committee and also to the Security Vetting Authority to obtain the license required to acquire, distribute, publish, or broadcast any geospatial data. A license will also be required if the data is to be used outside India. The license can be suspended or revoked any time by the authorities if the use of any information is in contravention of the Act. The licensee will be supplied with security vetted information, and only that information can be used by the licensee. The licensee shall also display the insignia of clearance by the Authority while using the information. If any loss or damage occurs due to the use of the security vetted information, the licensee will be held liable for such loss. Any person who has acquired any geospatial data before the commencement of the Act will also have to take the permission of the authorities. Such person should make an application to the governing bodies within one year of commencement of the Act for the grant of a license and the permission to retain such data. The governing body has to grant a license or reject the application within three months of receipt of an application.

The issue here is that there are no rules and regulations which state the criteria or requirement for granting or rejecting of license. There is arbitrariness in the granting and revocation of license. There is also no system of check and balance to monitor the activities of the Authorities. This may lead to a lot of arbitrariness on the part of the Authorities. The Bill also states that if the application for the license has been rejected by the Authorities, then the person who applied for a license cannot use or retain any geospatial data with him. This clause also has an ambiguity about it. The Bill does not provide for the way in which such data or information would be disposed of.

Penalties

The draft provides for penalties and fines in case of illegal use of geospatial data. If a person fails to pay the penalty, then such amount would be recovered from the defaulter in the form of land revenues and the defaulter’s license will also be suspended until the penalty is paid. The penalties specified under the draft are exorbitant. The penalties range from Rupees 1 crore to Rupees 100 crore in case of illegal use or distribution or publication of geospatial data. There is also a provision for a penalty which ranges from Rupees 10 lacs to Rupees 100 crore in case India’s map I wrongfully depicted or the license is misused.

It can be said that the proposed bill and the Information Technology Act may be at conflicts because the IT Act deals with any kind of digital data. The IT Act also states that in a case there is a conflict between it and any other Act, the IT Act will prevail. But the bill of the proposed Act also said that in a case of conflict it’ll propose over any other law. This kind of loopholes can be a serious drawback and can make implementation and regulation of the Act very ineffective.

Concluding Remarks

As mentioned earlier, the scope of the bill is very wide. Rather, to wide. Too much law and regulations can also be harmful. The bill needs to be amended to reduce the scope of the definition and make it more streamlined. In order to cover every aspect, it has been given such a broad ambit that instead of regulation it may lead to obstacles and hindrance for the field where geospatial information and data is a necessity. A developing country like ours needs policies to spread information and not laws and policies which are punitive and regressive.

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In this blog post, Pramit Bhattacharya, a student of Damodaram Sanjivayya National Law University, gives a comprehensive analysis of the Goods and Service Tax Bill (GST), 2014  and its impact on the economic system of India.

With the proposal of the Goods and Service Tax (GST) Bill or officially the Constitution (122^nd) Bill, 2014 in the Parliament, the government of India is seeking to remove all indirect service tax which is levied on the consumers by the Centre and the State and implement a national Value-Added Tax through the length and breadth of the country. The Government is looking forward to the GST by the end of 2016. The introduction of the GST will create a comprehensive and all-embracing tax base where, not taking in account some minimum exemption, almost all the goods and services will be taxable.

The introduction of GST will herald a new era in the Indian economic system. The introduction of the GST will give way to a common Indian market. It also seeks to reduce the cascading effect of indirect taxes which is at present prevalent in the current economic structure. In a nutshell, the introduction of GST will completely overhaul the current indirect tax system. Not only will it have a bearing upon the Tax structure, but it’ll also modify the Tax Computation, Compliance, tax incidences, and Reporting. GST will have a pervasive effect on the business operations, impacting almost all aspects including pricing of services and products, accounting and modification of the supply chain.

Understanding GST

GST is a consumption tax which is based on the value added concept. In simple terms, the consumer will have to pay the tax only once, with the price of the goods remaining the same. GST will eliminate the cascading effect of taxation which the consumers face under the current sales tax and service tax. Keeping the federal structure of governance in India, it has been proposed that both the Centre and the State will concurrently levy the GST (CGST and SGST). The basic principles would be the same for the CGST and the SGST and across SGSTs for separate states. It is also proposed that the GST will follow the destination principle, wherein the exports would be zero-rated, but the imports would be subject to tax payment. When the trade and commerce are within India, i.e., interstate, an integrated GST (IGST) will be applied (cumulative of SGST and CGST of the destination)

 It has also been proposed that an additional tax of 1 % will be levied with respect to the supply of goods; in addition to the IGST. The revenue generated from this tax will be assigned to the origin state. This additional tax is proposed for the period of 2 years initially.[1]

Significant Features of the GST

• One of the most important characteristic of the GST is that the authority to make any laws or levy any taxes in the course of “interstate” commerce and trade will be vested only with the Central Government. The State will have authority only over “intra-sate” trade and commerce.
• An IGST will be levied on inter-state trade and commerce. In the case of import of goods, they’ll be subjected to both IGST and customs duty.
• GST will incorporate in itself-

At the Central Level-

1. Central Excise Duty
2. Additional Excise Duty
3. Additional Custom Duty
4. Service Tax
5. Special Additional Duty
6. Central Surcharge and Cess’

At the State Level-

1. VAT
2. Entertainment Tax (Entertainment Tax on Municipality, Panchayat and District level will be continued)
3. Entry Tax
4. Purchase Tax
5. Luxury Tax
6. Octroi

•  Exemption from GST

1. Alcoholic liquor supplied for human consumption
2. Petroleum products like high-speed diesel, crude, aviation fuel, motor spirit, natural gas (Although they shall also be subject to GST if and when the GST Council notifies).

• GST may be levied to advertisements and newspapers.
• Stamp duties, typically imposed on legal agreements by the state, will continue to be levied by the States.
• The GST Council will be responsible for the administration of GST. The Council will act as an apex policy making body for GST, and the council will comprise of State and Central Ministers who hold the portfolios of the finance department.
• It has also been proposed to remove Octroi/Entry tax across India

Advantages of GST

1. GST will provide a wider tax base. GST will also eliminate classification disputes.
2. As mentioned earlier also, one of the major advantages of having GST will be to remove the multiplicity of taxes and the cascading effect.
3. With the introduction of GST, compliance procedures will be simplified, and tax structure will make allowance for better regulations.
4. The duality of administration of Centre and State taxes will be harmonized, and it’ll lead to the reduction of compliance and duplication cost.
5. It is also proposed that the compliance procedure will be automated. This will lead to efficient working and also reduce errors.
6. Exports will become more competitive as exports will be zero rated. More the exports, better the GDP.

Impact of GST

GST if introduced will stand out as one of the most significant fiscal reform in the economic structure of India. GST is expected to harmonize the administration of taxes at the Central and the State level and thus simplifying the structure of consumption taxes. A significant redistribution of tax across goods and services will also take place depending upon the final rate and base of GST. The services which under the current regime falls under both the Central and the State list will see a reduction in taxes levied on them, which in turn will increase demand. The supply chain of operations will also be fundamentally changed with the introduction of GST. Under the current regime, the supply chain is designed in such a way that the burden of Central Sales Tax is minimized. These designs are subprime from the economic and strategic point of view. The elimination of the Central Sales Tax will provide business houses to optimize their supply chain and reduce the costs.

Impact on manufacturing and retail sector

1. Increased flexibility in obtaining credit on goods and services.
2. Reduction in production and procurement cost due to the full credit of taxes on interstate sale.
3. Imports will become cheaper due to credit on import taxes.
4. Elimination of Entry tax along with additional compliances will reduce a huge burden.

Hospitality and Entertainment sector

1. The multiplicity of taxes will be reduced as VAT, Service Tax, Luxury Tax and Entertainment Tax will be eliminated.
2. Simplifies levy and valuation on composite transactions. Thus, will reduce litigation challenges and related costs faced by companies in this sector.

IT and telecom sector

1. Classification disputes on software, SIM Cards, AMCs, and Franchise Fees will cease to exist.
2. Levy and valuation on composition transaction will be made easier.

Service sector

1. Better credits can be availed across various goods and services.
2. No segregation will be done between manufacturing, trading and services for availing credit.

Banking and finance sector

1. Interest on loans will be taxed under the GST.
2. Credit pool will increase due to the availability of GST credits.
3. The rise in tax rate from around 12% will increase to more than 20% which may increase the cost of banking and operations (negative impact).

Infrastructure and real estate

1. Supplies o SEZs to be zero rated and hence SEZs will benefit a lot from GST.
2. Under the GST regime, composite contracts may fall under the head of “services.”
3. Total tax incidences will increase on certain product under the GST such as steel and cement.

GST is not a new tax, but a replacement tax. The major step forward which can be achieved by introduction of GST is the mechanism to mediate inter-state credit. The GST regimes focuses on a central compensation system. The integrated GST will replace the CST, with the originating state charging IGST on sale. Now, this IGST can be taken as a credit at the destination place, and can be used to pay IGST, CGST or SGST (in such order of preference). In simpler words, the loss which is caused to the destination state under the current regime by tax paid in another state which is being adjusted against tax payable to the destination state will be made good by the Centre. This will help in the growth of market across the individual state. The rationale behind such mechanism is to act as a catalyst for increased revenue and production. This system of input tax credit in inter-state sales is a major salutary feature of the proposed GST model.

All said and done; GST has still not seen the light of the day. The idea may seem innovative, but such innovation is not of present times. The idea for GST was conceived in the year 2000 and 16 years have passed, but no implementation of the idea has yet been done. If at all GST is implemented a study done by the National Council of Applied Economic Research (NCAER) also suggests that India will indeed make progress on implementation of GST and could expand India’s growth of gross domestic product by 0.9-1.7 %[2]. The removal of Central and State taxes will help in reducing taxes and will also aid in filing costs and expanding business in a profitable manner. This would attract more investors and as a result, the gross domestic production will increase. Simplification in tax norms through the implementation of GST can also help in improving tax compliance and increasing tax revenues.

Footnotes:

[1]http://www.ey.com/IN/en/Services/Tax/EY-goods-and-services-tax-gst

[2]http://www.referencer.in/GST/Files/GST_NCAER_Report.pdf

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In this blog post, Pramit Bhattacharya, a student of Damodaram Sanjivayya National Law University, writes about the concept of indemnity and agency. The post talks about the essentials of the contract of indemnity, the rights of the indemnity holder, and the indemnifier. The post also discusses the relation between agency and indemnity.

Indemnity can be considered as a sub-species of compensation. And therefore, a contract of indemnity deals with compensation in cases of contracts. The responsibility to indemnify is taken voluntarily by the indemnifier, and even the mere possibility of occurrence of a loss will make him liable. The loss should arise due the conduct of the indemnifier or any third party. A contract of indemnity should also have the essential elements of a contract like free consent, legality, etc. So in the case of indemnity, the promisor is under the obligation to save the promisee from any kind of loss due to the promisor’s own conduct or conduct of any other party.

In the case of an agency, the principle that one person cannot carry out all transactions all alone, so he should have an opportunity to facilitate his business wherein he is represented by another person when dealing with a third person.

Concept of Indemnity

In general, indemnity can be defined as “protection against losses.” Indemnity is a protection or security against a loss. Contract of Indemnity is governed by Section 124 of the Indian Contract Act, 1872,[1] which falls under Chapter VIII of the Act. Under this Section, the definition of a contract of indemnity is given as a contract “by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, is called a “contract of indemnity.”

Essentials

There must be two parties and, there should be an agreement between them wherein the promisor promises to save the promisee from any kind of loss. This is the most vital element in the contract of indemnity. The loss occurring may be due to the conduct of the promisor or any other third party. The provisions of the Act restrict the loss to an extent because it is restricted to a human agency only and an act of God is not covered under the contract of indemnity. Marine Insurance, fire insurance, etc. also fall into the category of the contract of indemnity.[2]

Rights of Indemnity Holder

Section 125 of the Act governs the rights of the indemnity holder.

• The indemnity holder will have the right to recover any amount he was compelled to pay in a matter or a suit to which the promise of the indemnifier applies. For instance, A and B enter into a contract that A will indemnify B if C sues B in a particular matter. Now, C sues B and B had to make some payment. According to the contract, A will have to make good all the payment which B made to C in relation to that matter.
• The indemnity holder is also entitled to recover any cost which he might have to pay to any third party. But the indemnity holder should have acted prudently and under the directions which were given by the indemnifier. In the judicial pronouncement of Adamson v Jarvis,[3] Adamson was an auctioneer and under the instruction from Jarvis he auctioned some cattle. It was later known that Jarvis wasn’t the real owner of the cattle. The real owner of the cattle filed a suit against Adamson. The Court held that Adamson could recover the cost he incurred from Jarvis because he acted as per the instructions given by Jarvis.
• The indemnity holder also has the right to recover nay sum that he may have paid under any suit or compromise provided it was not contrary to the instructions of the indemnifier.

Rights of the Indemnifier

Although the rights of the indemnity-holder have been mentioned under the Act, the rights of the indemnifier haven’t been mentioned expressly under the Act. In the judicial pronouncement of Jaswant Singh v. Section of State,[4] it was opined by the Court that the rights of the indemnifier are similar to the rights of a surety. Rights of a surety have been stated under Section 141 of the Act. The indemnifier, upon indemnification, will be entitled to all the protection which the indemnified person was entitled to. The principle of subrogation comes into play here. The principle of subrogation follows the principle of substitution. Once the promisor pays the amount of compensation, he replaces the indemnified person.

Enforceability of Contract of Indemnity

In India, no provision expressly states that when a contract of indemnity will become enforceable. The judicial decisions are also conflicting with respect to the issue of enforceability. The case of O.J. and Sons Ltd. v. Gopal Purushottam[5] is one of the earliest cases in India where the right to be indemnified before paying was recognized. But the trend and the Courts have changed a bit. In the cases of Gajanand Moreshwar,[6]Shiam Lal v. Abdul Salal,[7] and K. Bhattacharya v. Namo Kumar,[8] the Court was of the opinion that the indemnified party can compel the indemnifier to pay so that he can meet a liability without waiting to actually discharge the liability. The principle followed is that the indemnified party shall never be called to pay. The obligation of the indemnifier starts as soon the loss becomes absolute.

Contract of Agency

In the case of a contract of agency, one person represents some other person when dealing with third prties and transacting with them. The person who authorizes someone else to work on his behalf or represent him is known as the principal. The party who has been authorized is known as the agent. The relationship that subsists between them is known as an agency. In the case of an agency, the principle has to give his express or implied authority to represent him and carry on the activities on his behalf. But an agency can be created through estoppel or ratification also. In a case of an agency by estoppel, the third party may be lead to believe that one person is acting on the behalf of the other, because of the conduct of the parties. In the case of an agency by ratification, one party does not have the authority to represent the other when entering into a contract with a third party or carrying on any activity. But the transaction is adopted by the principal later. This is known as ratification. In the case of an agency, no consideration is needed to be paid. It is not necessary to pay some remuneration or commission, and the principal will be held responsible for the acts of the agent even when no remuneration is paid to the agent. The agent must work according to the instructions of the principal. A fiduciary relationship exists between the agent and the principal, i.e. of trust and confidence. The principal has the duty to reimburse the agent for his expenses, and he must also indemnify the agent against any kind of loss which has been incurred while carrying out the agency business.

Indemnity and Agency

Under Section 222 of the Indian Contracts Act, it is stated that the agent must be indemnified for the activities which have been carried out lawfully on the behalf of the principal. For instance, X, an agent, who is in Spain gets the instruction from Y, the principal, who is in India to enter into a contract with Z and deliver certain goods to Z. Subsequently, Y does not send any goods to X, and the contract is breached because X couldn’t deliver them to Z. Z sues X for the breach. X informs the principal about the suit and the principal authorizes the agent to defend the suit. The agent incurred certain expenses to defend the suit. Y, as the principal will have to indemnify the agent. Another example can be given to define the principle. A, the principal asks B, the agent, to enter into a contract with C and buy 100 sacks of rice. Later A refuses to take the delivery of the sacks. C sues B for the damages and B had to compensate C. A is under an obligation to indemnify B for the damages he suffered.

The case of Adamson v. Jarvis[9] mentioned earlier can also be a classic example of indemnity in case of an agency. The auctioneer sold the cattle under the instruction of Jarvis. But Jarvis was not the true owner of the cattle. Adamson had to pay the damages to the real owner. But as an agent who was working lawfully on the instructions of the principal, he was entitled to be indemnified.

Concluding Remarks

Simply put, in the contract of indemnity one party needs to make good any damage or loss suffered by the other party due to the conduct of the promisor or any third party. Having a simple indemnity clause in a contract would not always answer liability issues because the law does not encourage those who try to shift their own liability onto other or seek to avoid liability. The main reason behind this is that the negligent party shouldn’t be allowed to shift all the liability on another party.

Footnotes:

[1]http://comtax.up.nic.in/Miscellaneous%20Act/the-indian-contract-act-1872.pdf

[2]http://informationbible.com/article-essentials-and-legal-rules-for-a-valid-contract-of-indemnity-181150.html

[3](1827) 4 Bing 66: 5 LJ (os) (CP) 68: 29 RR 503.

[4]14 BOM 299

[5] [1728] ILR 56 CAL 262.

[6]A.I.R. 1942 Bom, 302, at 304.

[7]1931 ALL 754

[8]1899 26 CAL 241.

[9] Supra 3

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In this blog post, Pramit Bhattacharya, a student of Damodaram Sanjivayya National Law University writes about intellectual property rights in the pharmaceutical industry. The post discusses patent law in India and also highlights the concept of product patent. The post also talks further talks about how the Patent Act will affect the pharmaceutical industry.

With the rapid advancement in technology, the pharmaceutical industry has benefited a lot. Every day, new life-saving drugs are being introduced in the market. Intellectual property rights in the pharmaceutical sector is regulated by the law of patents. India has its own patent laws, and it is also a party to GATT. This has helped the law of patents to become more efficient.

With the introduction of the Patents Act in 1970, pharmaceutical companies were allowed to patent their process of manufacturing drugs. The patents were valid for seven years. With the introduction of GATT,[1] due to India becoming a signatory to it in 1994 many changes occurred in the Indian Market. It was now mandatory to comply with GATT as well as the TRIPS[2] Agreement. Not complying with these standards meant that the defaulting party would no longer be a member of the WTO[3] (World Trade Organization). The pharmaceutical industry also had to meet the minimum standards which were provided under TRIPS. Hence, not only process patent, but product patent was also introduced, and the period of patents was increased from 7 years to 20 years. India got some extension to introduce these new measures as it got the benefit of being a developing country.

Patent Law in India

The introduction of product patent has been one of the most significant contributions of the TRIPS Agreement. The Patent Act, 1970 also played a major role in taking India to the global patent arena. As India was a developing country, it took a bit of time to implement the TRIPS Agreement, subject to some conditions mentioned in Article 70 (7)[4] and  70 (8), of the agreement. These two sub-clauses talk about “transitional arrangement.” Sub-clause (8) stated that India has to provide a means to companies to by which the patents could be filed. It also stated that if any member of the WTO has granted a patent right to the product and the product has also obtained marketing rights for it; India also has to provide a patent to that product. Through the first amendment in the Patent Act, 1970, India introduced the system of transitional arrangements.

Some major amendments were also done through the second amendment in the year 2000. Amendments such as an extension of the term of a patent, subject matter of patents, and compulsory licensing system was done.[5] In 2005, a third amendment was also done to the Act. This amendment introduced the product patent regime in some areas including the pharmaceutical industry.[6] The fee structure, penalty provisions, filing procedure, etc. were also changed through this amendment.

Effect of product patent

Earlier, there was the system of “process patent” in the pharmaceutical industry. Process patent means that only the process used to manufacture a particular drug can be patented. The drug cannot be patented under this system. Other manufacturers had to use some other method to manufacture the drug. But with the introduction of the “product patent” regime, even the product (drug) could be patented. Other companies cannot manufacture the same drug once it has been patented. Section 5 (1) was removed from the Indian Patents Act, which spoke about process patent in the pharmaceutical sector.[7]This meant that from January 2005 product patent was also made applicable to the [pharmaceutical industry. It also included those applications which were made during the transitional phase.[8] There was a fear that due to the introduction of product patenting, drugs would become very expensive and would be out of the reach of the common man. Before the third amendment was done, many companies freely used different processes to manufacture the same drugs. But after the third amendment of 2005, these options[9] are being followed by the companies-

For Patent-expired or Non-patented Drugs – continue supplying to the export and domestic market.

For Patented Drugs–

• Manufacture the drugs through compulsory licensing.
• Undertake R&D for creating new drugs.
• Work together with other companies to create new drugs.

But what was feared earlier, that the cost of drugs would go up did not happen. Indian Pharmaceutical sector adapted very fast to the changes which were made in the patent law. Indian Companies started dominating the market even more after the TRIPS Agreements were implemented. Of the twenty largest pharmaceutical companies in the sector, sixteen are controlled by India and only four are MNCs.[10]The market share of the MNCs reduced even after product patent was introduced in 2005.[11] In many cases, foreign companies started opening subsidiaries in India and sold their drugs through them. India is favored because the R&D cost in India is very low when compared to other countries.

What can be patented?

Section 2 (1) (j) of the Patent Act[12] states that invention means a new product which is capable of industrial application. If any party had the knowledge of the invention or is used or sold by any party, within or outside India, then patent for that invention or product will not be granted. If the invention is in the knowledge of some other person, then the invention wouldn’t be considered as exclusive, and the validity of the application for seeking a patent will be void. The application for the patent has to be filed before the invention comes to the public knowledge. The term “new” which is used in respect of a product has worldwide applicability. So if there is any document or record which shows that the invention has already been disclosed, used or patented by some other person, a patent for the product will not be granted in India.[13] Nevertheless, there are certain kinds of innovations which do not fall under the category of inventions. Section 3 states those innovations which do not fall under the category of inventions. Some of them are-[14]

• Any invention which is contrary to the well-established natural law or is frivolous in its claim.
• A method of agriculture of horticulture.
• A process for the medical treatment of human being and animals.
• A presentation of information.
• An invention whose use is against public morality or public order.
• A discovery of a new property or getting to know a new use of a known property.

Ever-Greening Strategies

To protect their financial interest, many companies came up with a strategy known as “ever-greening.” In the case of ever-greening companies make some small change to the existing product, like using the same molecular formulae but using a different structure, adding some new ingredient in the drug without changing the effect of the drug, etc.

Also, many companies either buy out their competitors of file frivolous infringement of patent suits to maintain their position in the market. These kinds of strategies increase the price of the medicines and make the medicines difficult to afford for the middle class and poor patients.[15]

In India also the Supreme Court refused to grant a patent to Novartis, in the case of Novartis AG v. UOI.[16] Novartis is a foreign company and wanted to get one of their drugs. Indian Companies raised an objection stating that a very similar product was already patented, and hence, this particular drug could not be patented. Novartis contended that it was a new invention since there were certain changes made to the drug. The Court stated that the drug did not pass the test laid down by Section 3 (d) of the Patents Act, and hence patent will not be granted. This section states that the mere discovery of a new form of a known substance which does not increase the efficiency of the product will not be considered as an invention. The Apex Court observed that Section 3 (d) was valid and also opined that just making some minor changes in a known product will not increase its efficiency and make it an invention.

Compulsory Licensing

Compulsory Licensing system is one of the most essential featured of the patent law. Section 84 of the Patent Act states that compulsory licensing can be provided only after three years has lapsed from the time when a patent was granted. Compulsory licensing can be granted in the following cases-[17]

1. The invention which has been patented is not available to public at an affordable price.
2. The reasonable requirement of the public with respect to the patented invention has not been satisfied.

The first compulsory license in India was granted in the case of Bayer v Natco[18] in 2012. In the case of compulsory licensing, the company who gets the license can develop the drug and sell it at a lower price.

Effect of the changes in the Patent Act on pharmaceutical industry

After the changes which were brought in the India Patent Act, the need to balance protection of patents and maintaining the competition between the pharmaceutical companies arose. The new product patent regime which has been implemented in India since 2005 may lead to s situation of monopoly. Before the concept of product patenting was introduced, generic companies gave a lot of competition to major companies. The generic companies produced the drugs at low cost which forced the big companies also to sell their product at low cost, if they wanted to survive in the market.[19] But the introduction of the concept of product patenting has changed the scenario. In such a situation, the competition law will also play a major role to avoid a situation of monopoly in the market. The Competition Act of 2002 seeks to prevent monopoly in any field.[20] Three type of competition issues can arise in the pharmaceutical sector. They can be in the form of mergers and acquisition and mergers, collusion, and misuse of a strong market position. These can increase the cost of medicines to a very high level where it will become very difficult for the poor patients to buy medicines. Therefore, for the welfare of the society, it is very crucial that balance is maintained between protection of intellectual property and competition between the companies.

Concluding Remarks

Making a new drug and introducing it in the market is a very expensive job. The company who are making new drugs always look to protect their business and financial interest by patenting the products. For better growth of the industry, it is important that the investors feel secure in investing their money into that sector. The Patent Act provides that security to the pharmaceutical companies. However, it is also necessary to ensure that there are some safeguards also so that a few companies do not take over the market in the name of intellectual property rights. The safeguards are necessary for the welfare of the society as a whole.

Footnotes:

[1]https://www.wto.org/english/docs_e/legal_e/gatt47.pdf

[2]https://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm

[3]https://www.wto.org/

[4]https://www.wto.org/english/tratop_e/trips_e/t_agm8_e.htm

[5]http://wtocentre.iift.ac.in/Papers/3.pdf

[6] Ibid.

[7] Inventions where only methods or processes of manufacture patentable: [Omitted by the Patents (Amendment) Act, 2005], http://ipindia.nic.in/ipr/patent/patent_Act_1970_28012013_book.pdf

[8]Article 70 (8) of TRIPS provided the opportunity to the inventors to get their product patented once the product patent provision is included in the Patent Act, during the transition period.

[9]http://www.undp.org/content/dam/india/docs/five_years_into_the_product_patent_regime_india%E2%80%99s_response.pdf

[10] Ibid.

[11] Ibid.

[12]http://ipindia.nic.in/ipr/patent/patent_Act_1970_28012013_book.pdf

[13]http://www.ipproinc.com/admin/files/upload/09e84b64ad31880686136a2b5bf05dcf.pdf

[14] Ibid.

[15]http://www.plosmedicine.org/article/authors/info%3Adoi%2F10.1371%2Fjournal.pmed.1001460;jsessionid=1F22D17E0D00F1163CD3F42051F437EE

[16]Novartis AG v. Union of India (2007) 4 MLJ 1153

[17]http://www.lawctopus.com/academike/intellectual-property-rights-in-pharmaceuticals/

[18]C.L.A. No 1 of 2011

[19]Abhimanyu Ghosh &Kabir, Balance of Competition and Intellectual Property Laws in the Indian Pharmaceutical Sector, Journal of Intellectual Rights, Vol. 12, May 2007

[20]http://www.cci.gov.in/sites/default/files/cci_pdf/competitionact2012.pdf

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In this blog post, Pramit Bhattacharya, a student of Damodaram Sanjivayya National Law University writes about how a minor can become a part of a partnership. The post also highlights the rights and liabilities of a minor after being admitted into a partnership, and also discusses the position of a minor after he attains majority.

A minor is a person who hasn’t yet attained the age of majority according to the Indian Majority Act of 1875.[1] Section 3[2] of the Indian Majority Act states that a person who is domiciled in India will attain majority at the age of eighteen.

Section 30 of the Indian Partnership Act[3] governs the admittance of a minor into a partnership. This section deals with the rights and liabilities of a minor who is admitted into a partnership and is entitled to the benefits of a partnership. A deeper reading of the provision, specifically sub-section (1)[4] Of the provision makes it very clear that a minor can’t be a full-fledged partner in a partnership. But with the consent of all the partners, a minor can be admitted to the benefits of a partnership.

Minors – Admitted only to benefits

The general principle which has been laid down in Section 11[5] of the Indian Contract Act, 1872, states that a person has to attain the age of majority and should be of sound mind and not disqualified to enter into a contract to be a competent party. The Indian Partnership Act, 1932 was drafted by a Special Committee. Before the enactment of this statute, the provisions relating to partnerships was enshrined in the Indian Contract Act itself. While drafting the Act, the Special Committee felt that no major changes were required in the Partnership Act, and they believed that there was no reason to deviate from the principle of incapability of a minor to enter into a contract as provided by Section 11 of the Contract Act. Following this, the Committee did not allow minors to become a partner in a partnership, although they allowed a minor to be admitted to the benefits of a partnership.[6] In the judicial pronouncement of S.C. Mandal v. Krishnadhan,[7] It was observed that under Section 4 of the Indian Partnership Act, a firm means a group of person who has entered into a contract of partnership among themselves and reading it with Section 11 of the Indian Contract Act, it can be interpreted that a minor cannot be a part of the contract of partnership. A minor can only be admitted to the benefits of a partnership, and that partnership has to exist independently. Also, there cannot be a contract between two minors.  In simple words, there should be a partnership between two major partners before a minor can be admitted to its benefits.

In the case of H.R.G Ram v. Commissioner of Income Tax,[8] It was held by the High Court of Allahabad that any partnership deed which divides the obligations and rights between the major and minor partners equally will be invalid as it will be in contravention of Section 30 of the Partnership Act because in such a case not only the benefits are given to the minor, but liabilities are also being imposed upon the minor. There was some confusion regarding this proposition of law as in some cases, different high Courts of the country opined that even if a minor is made a full-fledged partner in a partnership firm, the partnership deed is to be interpreted in a liberal manner, and the obligations of the minor will be limited to the extent provided in Section 30 of the Partnership Act.

But in the landmark case of Commissioner of Income Tax v. D Khetan and Co.[9]The Apex Court made the legal stand clear on this issue by stating that where a minor is made a full-fledged partner in the firm, the firm could not be registered by the Income Tax Department. In case the Income Tax Department do register such a partnership firm, a new contract is to be made where the minor is admitted only to the benefits of the firm, and the original contract will be rendered invalid by registration of the new contract. Therefore, the proposition of the law is very clear. The partnership deed has to make it specifically clear that the minor is admitted only to the benefits of the firm and is not personally liable for the losses. In the judicial pronounce of Banka Mal Lajja Ram & Co. v. Commissioner of Income Tax, Delhi,[10] It was held by the Court that even if the other partners consent, a minor still can’t become a full-fledged partner in a firm through his or her guardian. In the case of CIT v. Kedarmall v Keshardeo,[11] it was held by the Court that a contract deed is valid when a guardian enters into a partnership on behalf of the minor, provided the minor is not made liable for the losses of the partnership, and the Guardian still had the right of being the guardian of the minor when the contract was entered into. Also, the income of a minor from a partnership will not be considered for the purpose of income tax.

Rights and liabilities of a minor

Sub-section (2)[12] of section 30 of the Partnership Act states that a minor is entitled to share of profits and the property of the firm which may have decided at the time the minor was admitted to the benefits of the partnership.  Under this provision, a minor also has the right to access and inspects the accounts of the firm. But this right is limited to the access and inspection only of the accounts of the firm and not any other document of the firm. Under sub-section (3) of the provision, it is stated that the minor is liable to the extent of his share in the partnership and cannot be made personally liable for the losses of the firm. In the case of S.C Mandal v. Asutosh Ghose,[13] It was held by the Court that the creditors of the firm can only recover the amount from a minor to the extent of his share in the firm, but they can’t sue the minor personally. The full-fledged partners do not enjoy this benefit as they can be made personally liable. In the case of S.R Patil v. C.N. Sedalge,[14] It was opined by the Court that a minor who has been admitted to the benefits of a partnership can’t be declared insolvent even if the other partners are declared as insolvent.

Sub-section (4) of the provision states that the minor can sue other partners to get the benefits of the partnership, but this right to sue is limited by the provision. The minor gets the right to sue other partners to recover the benefits only if the minor sever all ties with partnership firm. This provision further states that in the case the minor sever all ties with the firm, valuation of his share is to be done by section 48[15] of the Act, as far as possible.

Position of minor on attaining majority

Under sub-section (5) of the provision, the minor has two options on attaining majority. Either he can sever the connection with the firm or become a full-fledged member. The minor has to make the decision within six months of attaining majority. If he chooses to become a full-fledged partner of the firm or sever the ties with the firm, he will have to give a public notice specified under section 72[16] of the Act. In the case that no public notice is given by the partner, he will be considered as a member of the partnership. The minor also continues to enjoy the rights which he enjoyed as a minor till he reaches a decision. Sub-section (6) of the provision states that burden of proving that the minor had no knowledge about the fact that he was entitled to enjoy the benefits of the firm lies on the party who alleges such facts. Clause (a) of sub-section (7) states that when a minor becomes a full-fledged partner, such minor will now be held liable not only for the future liabilities of the firm, but will be liable for those obligations also which were incurred by the firm from the date the minor was admitted to the benefits of the partnership. Clause (b) states that the share of the minor after he attains majority will be the same which was given to him when he was a minor. This is because, when the minor chooses to become a full-fledged member of the partnership, there is no break in the partnership and it continues as it is.

Sub-section (8) of the provision states that when the minor decides that he’ll not become a full-fledged member of the partnership, he will be liable for the obligations and liabilities of the firm until the time he gave a public notice stating that he wouldn’t continue as a partner in the partnership. After severing the ties with the firm, the minor may file a suit to recover the benefits he was entitled to. Sub-section (9) of the provision states that nothing is given in sub-section (7) and (8) will affect Section 28 of the Act which states that if a party has misrepresented some fact, he’ll be liable for holding out. Therefore, if a minor even after leaving the partnership represents himself as a partner, he’ll be estopped from denying it later.

Footnotes:

[1]http://admis.hp.nic.in/himpol/Citizen/LawLib/C0141.htm

[2]Age of majority of persons domiciled in India 

[3]https://indiankanoon.org/doc/1921150/

[4] Ibid.

[5]http://comtax.up.nic.in/Miscellaneous%20Act/the-indian-contract-act-1872.pdf

[6]http://www.legalindia.com/minority-and-partnership/

[7](1922) 49 Cal 560,570

[8] [1950] 18 ITR 106 (All)

[9]AIR 1961 SC 680.

[10]AIR 1953 Punj 270 (DB).

[11]AIR 1968 Assam 68

[12]http://www.mca.gov.in/Ministry/actsbills/pdf/Partnership_Act_1932.pdf

[13]AIR 1915 Cal 482.

[14]AIR 1965 SC 212.

[15] MODE OF SETTLEMENT OF ACCOUNTS BETWEEN PARTNERS

[16] MODE OF GIVING PUBLIC NOTICE.

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In this blog post, Abhiraj Thakur, 1st year Student of NALSAR University of Law, Hyderabad, writes about the problems with currently undertaken attempts to have special laws for dealing with khap panchayats.

The social menace of caste councils or Khap Panchayats which interfere and endanger the freedom of life and liberty of couples marrying within similar Gotra and different caste or religion has existed since a long time in our country. ‘Honor Killing’ has been defined as “incidents of violence and harassment caused to young couple intending to marry or married against wishes of community or family members.”[1] The offending acts taken up by these councils imperil the liberty of young couples in the name of honor and tradition. They adopt the means of ‘moral vigilantism’ and enforce their diktats by granting to themselves the role of societal guardians. 

The cause of such crimes lies in the belief that the consenting parties have brought dishonor and disgrace to the communities by breaching their long-standing traditional values. The thinking that the purity of the clan or community needs to be maintained at any cost be it killing of any human being forms the motive for these crimes. As far as India is concerned, incidents of honor killing are reported mostly from the States of Haryana, Uttar Pradesh, Punjab, and Rajasthan. The socio-politico outlook of Khaps is such that they have scant due for individual liberty and consider themselves outside the pale of law.

Inadequacy of Current Laws

The law of the land as it stands today does not directly hit the actions of such Khap panchayats, and the existing penal provisions fail to have a deterrence or sobering influence on their wrath.[2] Any effective attempt to oppose this socio-cultural evil rooted in authoritarianism and superstition necessarily address various dynamics including the nature of the problem, the inadequacy of present law and the wisdom of using penal sanctions for an otherwise lawful group of people aimed at amicably solving concerns for the society.

Many gruesome cases of honor killings in the past have raised the issue of having separate laws for Khaps. One such instance came during the Manoj-Babli case.[3] The trial court punished five people for a death penalty for murdering a couple marrying against the whims of their caste. The Session Judge is taking a strict stance at the menace of Khaps also handed out imprisonment to the Khap leader. The High Court, however, reduced the punishment to imprisonment ruing the lack of direct evidence against the accused. Had honor killing been a specific offense, the High Court would not have been compelled to reduce the sanction.

Problems with Proposed Legislative Reforms and Judicial Pronouncements

It is felt that such honor crimes can be checked by prohibiting such assembly for the purpose of condemning the marriage and taking a course of harassing them. To serve the purpose Government came up with draft legislation named ‘Prohibition of Unlawful Assembly (Interference with Freedom of Matrimonial Alliances) Bill, 2011′.[4] The Prohibition of Unlawful Assembly (Interference with Freedom of Matrimonial Alliances) Bill, 2011 has been the only serious attempt towards a legislative framework to curb the evil of honor crimes. At present, there is no special law and honor killing is treated as murder under Section 300 of the IPC. However, this severely restricts the ring of the crime and many co-accused presents in the unlawful assembly of caste assembly are often let off due to the absence of evidence for direct involvement.  The existing homicide law is insufficient to directly punish a gathering for such purpose. 

The Government of India instead of dealing with the entire issue in a comprehensive manner circulated a bill which seeks to include ‘honor killing’ as a separate category of murder under Section 300 of the IPC.[5] It also perpetrates to make the entire assembly liable for any fatwa issued by the panchayat.[6] The bill also seeks to shift the burden of proof on the side of the defense which is problematic in many ways.

The All India Democratic Women’s Association (AIDWA) had submitted a bill for a standalone legislation to be enacted for crimes in the name of ‘honor’ which also received support from The National Commission for Women. It is also relevant to mention that recently around 15 MPs have argued for a separate law on honor killing in the Rajya Sabha However, contrary views have also been expressed especially by legislators from Khap dominated areas for whom these Khaps stand as formidable vote banks.

The 232^nd report of the Law Commission had suggested for a legislative framework on “Unlawful interference of caste panchayat with marriages in the name of honor” to make members of Khap liable for criminal intimidation by increasing the punishment provided under the IPC but The Law Commission fails to make the family members of the couples liable even if the crimes committed by them are same as that of Khap Panchayats. The suggested legislation only criminalizes offenses against married couples and not if they are merely living together. The suggestions as such seem to be conservative and unwilling to deal with the issue in totality.

Recently, in Arumugam Servai v. State of Tamil Nadu[7] The Supreme Court deprecated the practice of Khaps taking law into their hands and infringing upon the freedom of life and liberty of young couples. In yet another case, the Supreme Court stated- ‘There is nothing honorable in such killings, and in fact, they are nothing but barbaric and shameful acts of murder committed by brutal, feudal minded persons who deserve harsh punishment. Only in this way can we stamp out such acts of barbarism.’[8] However, a recent judgment of the Supreme Court is bound to have far-reaching consequences. It laid down the proposition that honor killing falls within the purview of ‘rarest of the rare cases’ hence deserving death penalties. It was observed that-“All persons who are planning to perpetrate honor killing should know that gallows await them.” Following this judgment, almost all convicted in an honor killing murders have been shown the death knot by the courts in subsequent cases. With utmost respect, the researcher is of the view that this is contrary to the established criminal jurisprudence which has been established by some cases which make death sentences only a last resort only in extreme aggravating and mitigating circumstances.[9] It is submitted that each case must be decided upon facts and merits, and no blanket approach can be imposed towards a consistent death sentence in each case. This rule is bound to create uncertainty in the law of the country.

Possible Solutions

It is thus observed that to check the high-handed and unwarranted interference by caste panchayats with otherwise lawful marriages, the current scheme of legislative and judicial initiatives undertaken are not up to mark. There is a need to punish the congregation of public for an unlawful purpose with a minimum punishment to create deterrence from forming a part of the assembly, However the government has adopted another line of having a separate provision for ‘honor killing’ underSection 300 of the IPC and shifting of burden is unnecessary and will prove futile in the long run.

 The Prohibition of Unlawful Assembly (Interference with Freedom of Matrimonial Alliances) Bill, 2011, needs to shift its focus on prohibiting acts rather than directly punishing them as being proposed. The emphasis of criminalization will make such a piece of social legislation difficult to implement. The social legislations with its emphasis on prohibition rather than criminalization have historically been more effective which can be emulated from colonial Sati and female infanticide laws. It has therefore become necessary to reassert an individual’s right to choose a partner in marriage or a relationship and to punish those who commit acts of violence against individuals exercising this choice through a comprehensive, standalone legislation so as to able citizens to cherish the rights undeterred provided by our Constitution makers.

Footnotes

[1] 242^nd Law Commission of India Report

[2] Dipankar Gupta, Tyranny of Cousins, 37(2) India International Central Quarterly 46, 50 (Autumn 2010).

[3] Murder Reference No. 2 of 2010 Criminal Appeal No.479-DB of 2010 and Criminal Revision No. 2173 of

2010.

[4] Prohibition of Unlawful Assembly (Interference with the Freedom of Matrimonial Alliances) Bill, 2011 (pending).

[5] Preamble, The Prevention of Crimes in the Name of ‘Honor’ & Tradition Bill, 2010.

[6] S 2(1), Prohibition of Unlawful Assembly (Interference with Freedom of Matrimonial Alliances) Bill, 2011.

[7] AIR 2011 SC 1859.

[8] Lata Singh vs. the State of U.P., (2006 5 SCC 475).

[9] Bachan Singh v. State of Punjab AIR 1980 SC 2; Machhi Singh v. the State of Punjab, AIR 1983 SC 957.

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In this blog post, Sakshi Bhatnagar of National Law University Odisha, Cuttack writes about the different agreements that are included in eContracts. 

Introduction

The electronic or e-contracts help in making agreements and transactions electronically in the physical absence of the parties. It aims at making lawfully binding contracts at a much faster rate with the use of latest technology. The electronic transactions today are used for a variety of purposes including recognition of digital signatures and electronic records, filing income-tax returns, fillings forms for admissions, paying bills online and others.

Shrink wrap, clickwrap and browsewrap are common types of contracts used in electronic commerce.

What are Shrink Wrap Contract?

Shrink wrap contracts are boilerplate or license agreements or other terms and conditions which are packaged with the products. The usage of the product deems the acceptance of the contract by the consumer. The term ‘Shrink Wrap’ describes the shrink wrap plastic wrapping which coats software boxes or the terms and conditions which come with products on delivery.

PC programming organizations broadly depend on the utilization of “shrinkwrap” permit assertions in the mass business sector circulation of programming. “Shrinkwrap” assertions are unsigned permit understandings which state that acknowledgment on the client of the terms of the assertion is demonstrated by opening the shrinkwrap bundling or other

Bundling of the product, by utilization of the product, or by some other determined instrument.

PC organizations have for the most part chosen to permit duplicates of PC projects to end clients, instead of to offer those duplicates, for the accompanying central reasons:  To invalidate the “convention of first deal,” which holds that once a duplicate of a copyrighted work has been sold, the copyright holder’s rights in that specific duplicate are depleted, and the duplicate might be uninhibitedly exchanged, rented, loaned or generally arranged of. To put the client on notification of the terms of the guarantee, if any, made by the seller concerning the product, and to repudiate different guarantees as per the procurements of the Uniform Commercial Code (UCC). To force upon the exchange different terms and conditions through the permit assertion, for example, impediments on the allowable utilization of the product, constraints of obligation, the decision of administering the law, and other authoritative procurements.

Since the permit, understanding bears the essential system by which programming merchants constrain the dangers and obligation emerging from the circulation of their items, the enforceability of shrinkwrap assertions is of awesome noteworthiness. The enforceability of these assertions has for some time been the subject of genuine uncertainty. Before 1996, just three cases had touched on the subject of the enforceability of shrinkwrap permit assertions. One of these cases expected without clarification that the shrinkwrap permit at issue, all things considered, was a contract of grip which could be enforceable just if the procurements of a state statute—which expressly made such permit understandings enforceable—were a substantial statute that was not appropriated by government law.

The other two cases concentrated on the guidelines of agreement arrangement under the UCC and their suggestion for choosing whether a shrinkwrap permit understanding oversees an exchange by any stretch of the imagination—very separated from principles concerning contracts of attachment—and, assuming this is the case, which of the terms contained in that are administering. In both cases, the court held that an authoritative relationship was framed between the product merchant and endless supply of requests for the product issued by means of phone, and the shrinkwrap permit assertion which the buyer saw surprisingly after the agreement had been framed was ineffectual under the UCC to change the terms of the beforehand shaped contract.

What are Click Wrap Contracts?

A clickwrap agreement is mostly found as part of the installation process of software packages. It is also called a “click-through” agreement or click-wrap license. It is a take-it-or-leave-it contract which lacks bargaining power. If a customer likes a product and wants to buy it or avail its service he clicks on ‘I accept’ or ‘Ok’ and if he rejects it, then cannot buy that product or avail that service. Click-wrap agreements can be of the following types: 1. Type and Click where the user must type “I accept” or other specified words in an on-screen box and then click a “Submit” or similar button. This displays acceptance of the terms of the contract. A user cannot proceed to download or view the target information without following these steps. 2. Icon Clicking where the user must click on an “OK” or “I agree” button on a dialog box or pop-up window. A user indicates rejection by clicking “Cancel” or closing the window.

The terms of service or license may not always appear on the same webpage or window, but they must always be accessible before acceptance.

A clickwrap assertions is a kind of agreement that is broadly utilized with programming licenses and online exchanges in which a client must consent to terms and conditions before utilizing the item or administration. 

The arrangement and substance of clickwrap understandings fluctuate by the seller. Be that as it may, the vast majority of clickwrap assertions require the assent of end clients by clicking an “Alright,”I Accept” or “I Agree” secure on a pop window or an exchange box. The client may dismiss the understanding by tapping the Cancel catch or shutting the window. Once dismisses, the client us not able to utilize the administration or item.

The odds are that you consent to clickwrap contracts all the time. These assertions commonly show up in an autonomous page when the client experiences an online enrollment procedure, for example, an email account creation, internet saving money login process, online buy, or another system establishment. Now and again these assertions are absurd, showing many pages of content in a small window that for all intents and purposes no client would take an ideal opportunity to peruse.

The term originates from therapist wrap gets that are likewise basic in the product business. The fundamental thought is that the client is given a notification saying something to the impact of “by opening this bundle, you consent to our terms and conditions…”

Clickwrap assertions allow the online organizations to have contracts set up with various clients without arranging with them exclusively. Moreover, clickwraps grant the organizations to spare electronic marks and fuse extra provisions that are not given by the present digital law.

Browse-Wrap Contracts

Browse-wrap agreements cover the access to or use of materials available on a website or downloadable product. Only if the person agrees to the terms and conditions on the web page, then he can access the contents of the web page. 

In most cases, the website or the browsewrap includes a statement that the user’s continued use of the website or the downloaded software manifests assents to those terms.[1] Many times, the terms mentioned in the browsewraps are explicitly displayed on the website but the existence of such browse wrap is hidden or not seen on the page.

Essentials of an Electronic Contract

1. Offer: An offer has to be made to the consumers which are the first and the basic condition for making a contract. Many websites only allow the consumer to browse through its goods and services displayed on its website and allows him to choose from among the available options. This cannot be regarded as an offer as it is merely an invitation to offer to browse through the items and select any of their wishes. Once the person selects and item, then he is the one who is making an offer and according to the availability of the product or convenience, the website either accepts or rejects the offer of selling the particular product or service to the consumer. The consumer’s offer is said to be made when he places the products in the virtual shopping cart or basket of the website.
2. Acceptance of the offer: This is the second stage after an offer has been made by the consumer after actually going through the invitation of the offer, i.e., the display goods and services of the website. There are various procedures of accepting offers namely, e-mail, website forms, or online agreements.
3. Lawful consideration: For the enforceability of a contract there should be a lawful consideration, i.e., something in return for something. Suppose one offers to do something, then the other would accept it in return for something to make it into a lawfully enforceable contract provided that exchange of things is lawful.

Conclusion:

Contracts, as we all know, are governed by the Indian Contract Act, 1872, but the e-contracts are also governed under the Information Technology Act, 2000. Section 4 of the act talks about the legal recognition of the electronic records as Where any law provides that information or any other matter shall be in writing or in the typewritten or printed form, then, notwithstanding anything contained in such law, such requirement shall be deemed to have been satisfied if such information or matter is— (a) rendered or made available in an electronic form; and (b) accessible so as to be usable for a subsequent reference.[2]

It very well lays down that the electronic records are legally recognized by the IT Act 2000. The earlier Indian Contract Act, 1872 is supplemented in this context with the online transaction as an accepted and legally recognized the form of contract.

[1]http://law.stanford.edu/wp-content/uploads/sites/default/files/event/266730/media/slspublic/Kim_clicking_and_cringing.pdf

[2] Information Technology Act, 2000 assessed at http://www.dot.gov.in/sites/default/files/itbill2000_0.pdf

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In this blog post, Sakshi Bhatnagar of National Law University Odisha, Cuttack writes about the duties of bailee in a contract of bailment and the various obligations on bailee in case the goods are not returned.

Introduction

Bailment is a common law term and involves the change of possession, i.e., delivery of goods or personal property by one person to another, but the ownership remains unchanged. Chapter IX of the Indian Contract Act, 1872 deals with the sections regarding the Contract of Bailment.

Section 148 to Section 171 lays down the definitions, nature of the contract of bailment as well as the rights, duties and liabilities of both the bailor and the bailee. Bailment, as per the Indian Contract Act, puts certain legal obligations on bailee at the time of redelivery or disposing of goods as directed by the bailor.

Different sections of this Chapter IX provide for different duties of bailee about the goods bailed to him. Duties of Bailee also depend on upon the very object of the contract of bailment.The obligations of bailee on the goods bailed to him depend on the terms and conditions mentioned in the contract he has entered into. In other words, his duty towards the goods arises at that time when the purpose for which goods are bailed is completed. Such duties, if are not taken care of, may make the bailee liable (according to the contract). Also, there are certain bailment contracts which exempt the bailee from any obligation or liability.

Duties of Bailee

Duty to take reasonable care[1]:

Section 151 of the Contract Act provides that the bailee is under obligation to take care of the goods bailed to him as an ordinarily prudent man in his place would have taken under the similar situation. This means that the duty laid down by this section is general and uniform in nature. This section does not provide for any exceptional situations; rather it covers all the contracts of bailment. In Giblin v. McMullen[2], the court pointed out that “a gratuitous bailee is bound to take the same care of property entrusted to him as a reasonable, prudent and careful man may fairly be expected to take his property of the similar description.”[3] Therefore, the bailee is bound to take reasonable care whether the bailment is gratuitous or non-gratuitous. Additionally, the obligation of a bailee includes not only the duty to take all reasonable precautions to obviate the risks but also the duty of taking all proper measures for the protection of the goods when such risks had already occurred.[4] 

The parties under the contract of bailment may insert any special provision increasing the responsibility of the bailee in respect of care to be taken against the goods bailed, but they cannot decrease the standard of care. Section 152, in this regard clearly states that one has to fulfill the requirement of reasonable care mentioned in Section 151 even if the contract has any special provision. The standard of duty cannot be reduced, as it would be unfair if bailee is not held liable for his negligence of not taking standard care. Even where he has contracted himself out of liability due to his negligence, the bailee has still to show that he took as much care of the pledged goods as an ordinarily prudent man as required by Section 151.[5]

In Sheik Mohamed v. the British Indian Steam Navigation Co. Ltd.[6] The case, it was pointed out that a bailee’s liability cannot be reduced by any provision which is under the limit provided in Section 151; also it was held that any such contract which results in complete exclusion of bailee from liability in case of his negligent act is not valid.

In certain situations the standard of care of care is increased the i.e., special degree of care is required to be fulfilled. In Pitt Son and Badgery Ltd v Proulefco SA[7], a wool broker sold wool but retained it in his store. The store was wooden, old and surrounded by a fence with gaps large enough for a person to enter. The wool was destroyed in the fire caused by an intruder who entered through the gaps, and set light to the store from outside. It was held that the broker, as a bailee, was responsible for the loss; he was in breach of duty because the fence was insufficiently secure to keep out intruders.

Duty not to make any unauthorized use:

In a contract of bailment, the bailor transfers the goods to the bailee for some purpose, and the bailee is responsible for using the goods bailed according to the purpose of bailment. Section 154 of Indian Contract Act imposes liability on bailee if goods are not used authoritatively. Using goods beyond the conditions of a contract would make the bailee liable to bailor if due to such unauthorized act the bailor has suffered any loss or if goods are damaged. This implies that the bailee is not entitled to use the goods for personal benefits (unless the bailment for his use) by doing an unauthorized act. Even if the goods bailed are for his personal use, he is not authorized to let the goods be used by another person. Nevertheless, if the situation requires, the bailee may use these goods for preservation.[8] But in the other circumstances, he is required to have express or implied consent of the bailor to use the goods against the conditions of bailment contract.

Duty not to mix or part with the goods:

The bailee has to take certainly reasonable care while dealing with the goods of the bailor. One such responsibility includes his duty not to mix the bailor’s goods with his own or part of the goods. According to Section 155, if the bailee has mixed the goods with his goods and while doing so he had the prior consent of the bailor, then the bailor will have interest over the goods in proportion to the goods he has bailed. But this section specifically states that the bailee had the consent of bailor.

Section 156 and 157 speaks about the conditions wherein the bailor’s consent was not there while mixing the goods. In those situations wherein the goods are separable, the law imposes liability on the bailee for any loss or damage that the bailor might suffer due to such mixing. But if it is not possible to separate the goods, the bailor is entitled to claim reimbursement for the loss of goods.

Duty to return goods:

One of the essentials of a contract of bailment is that once the purpose for which goods are bailed is accomplished, the bailee has to return the goods back to the bailor or dispose of as per the direction of the bailor. Section 159 states that the bailor may ask for the return of loan at any point of time if the loan is provided gratuitously to him. And the bailee is under obligation to return so. However, he can claim compensation if he has suffered any loss from such act of bailor.

Section 160 provides that if the time of bailment has expired or the purpose is fulfilled, then the bailee is bound to deliver the goods as per the directions of the bailor without demanded by bailor, i.e., he has to be cautious about the delivery of the goods. There is an implied contract in a bailment to return the articles in a reasonable time after the purpose is served even if no time is stipulated for return.[9] The bailee is under a duty to return the goods bailed on the expiration of the period of bailment unless he can show good cause for not returning them.[10] Where an article is hired for use or a purpose but such article is unfit for such use or purpose, this is treated as a breach of warranty, and the bailee is not bound to return it to the bailor because the purpose cannot be accomplished. In such a case, the bailee may give notice to the bailor who is then bound to take it back.[11]

Section 165 says that in the cases involving more than one owner of the goods bailed, the bailee is under obligation to return it to any one of the owner or as per directions were given to him.

Obligations of Bailee if the Goods are not Returned

Section 161 clarifies the responsibility of bailee if he has failed to deliver the goods after the expiry of time or completion of purpose. The bailee is not liable if the delay in delivering the goods or disposal of goods is due to default of others. Unexplained failure to return the thing bailed is presumed to be by the bailee’s default;[12]And it would be presumed as his negligence. A bailee who refuses to give delivery, except upon some unjust or unreasonable condition, is by default.[13] Moreover, if the bailee fails to return or dispose of the good, then the bailee, at his risk, keeps the goods with him and if after that any loss or damage happens, the bailee would be held liable for the same. 

Duty to deliver increase or profit accrued from bailment:

Section 163 of ICA states that “in the absence of any contract to the contrary, the bailee is bound to deliver to the bailor, or according to his directions, any increase or profit which may have accrued from the goods bailed.” This section provides that if there is any gain with regards to the goods bailed, then such gain must be handed over to bailor along with the goods and bailee is not entitled to keep it with him. But the bailor cannot claim profit or increase before the completion of the purpose of bailment or before the expiry of time of bailment contract.

Conclusion

The bailee has to perform according to the obligations laid down in the contract of bailment and as per the law of the land. He is being inconsistent or negligent while performing his obligation or duty would make him liable under various provisions of law. In each contract of law, he has a certain uniform or fixed obligations to comply with, and he cannot part with those basic obligations even if a contract does not provide for any such obligations. These obligations are the essence of bailment contract. The obligations might differ depending on the facts but there are certain duties which are implied, and reasonable care is to be taken by the bailee. The bailee’s responsibility towards the goods bailed can be increased by way of providing provisions in that regard but it cannot be lowered down, i.e., he cannot repudiate his responsibility.

Footnotes:

[1] Section 151, Indian Contract Act 1872.

[2] Giblin v. McMullen, (1703) 2 Ld Raym 909.

[3] Id.

[4]Lakhichand Ramchand v. G.I.P. Rly. Co., (1912) 14 Bom. LR 165.

[5]Central Bank of India v. Grains and Gunny Agencies, AIR 1989 MP 28.

[6]Sheikh Mohamed v. The British Indian Steam Navigation Co. Ltd., (1908) 32 Mad. 95

[7]Indian Airline Corpn. v. Madhuri Chowdhury, AIR 1965 Cal 252.

[8]Fothergill v. Monarch Airlines Ltd [1980] 2 All ER 696, p 702.

[9]Chaturgun v. Shahzady AIR 1930 Oudh 395.

[10]Pollock and Mulla Indian Contract and Specific Relief Acts, Ed. 13^th 2006, Section 160

[11] Isufalli v. Ibrahim, 23 Bom LR 403.

[12]Kush Kanta Barkakati v. Chandra Kanta Kakati AIR 1924 Cal 1056.

[13]GIP Rly v. Firm of Manikchand Premji, AIR 1931 Nag 29.

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In this blog post, Sakshi Bhatnagar of National Law University Odisha, Cuttack writes about what is the dividend, how it is distributed amongst preferential and equity shareholders, the various sources of dividends and what happens when dividends are not distributed.

What is a Dividend?

A dividend is that part of the profits of a company that is legally available for distribution to the shareholders of the company a return on the share capital which has been subscribed by a shareholder and is paid to the shareholders by the company. Dividends are only paid to the registered shareholders of the company and should not be paid in cash

Its articles of association should authorize the payment of dividends, and if it is not authorized, then the articles of association have to be amended accordingly. According to Section 51 of the Companies Act, 2013, the dividends have to be paid in proportion to the amount paid-up on each share.

Dividend Types and Dividend on Different Shares

Final dividend: A final dividend is that dividend which is declared at the annual general meeting of the company. It becomes an obligation upon the company once it has been declared in the meeting. It is declared only on the recommendation of the Board of Directors.

Interim dividend: This dividend is declared between two annual general meetings of the company by the Board of Directors. Section 123(3)[1] Authorizes the board of directors of a company to declare interim dividends during any financial year out of the surplus of the profits of the company.The amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend.[2] The amount of dividend, including the amount of the interim dividend, should be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend where if the articles of the company do not authorize so, it has to be amended accordingly.[3]The dividends are to be given only to the registered shareholders, and no dividend is paid to the shareholders in case there is a failure in repayment of deposits by those shareholders.

Dividend on equity and preferential shares: A company which fails to comply with the provisions of Sections 73 and 74 shall not, so long as such failure continues, declare any dividend on its equity shares.[4] In the case of preferential shares, the dividends can either be in an amount calculated at fixed rate or a fixed amount, which has to be in consonance with the articles of association. The rights of the preferential shareholders in respect to dividends are subjected to three basic conditions- that the preferential dividends can only be paid if the company has sufficient profits, that a dividend becomes payable to the shareholders only when it is declared in the manner laid down in the Act and by the company’s articles, and there should have been a formal declaration.

Preference shareholders are not entitled to treat preference dividend as a debt and sue for its payment in the first instance[5].The preferential shares can be of two types-cumulative or non-cumulative. Since dividends are a subject of availability of distributable profits, cumulative preferential shares are those shares in which the arrears are accumulated for the financial years on which dividends are not given and are these accumulated arrears are given along with the dividends in a financial year where distributable profits are available. No such benefit of accumulated arrears is available to the non-cumulative preferential shareholders.

Preferential shareholders are given priority over the equity shareholders. The part of the distributable profit is given to the equity shareholders as dividends only after all the preferential shareholders are paid the dividends. In case no dividends are left after distribution amongst preferential shareholders, then no dividend is given to the equity shareholders for that financial year.

What Are the Sources of Declaring Dividends?

Section 123 of the Companies Act enables a company to declare its dividend only out of the profits of the company for that year or for any previous financial year after depreciation has been charged and kept undisturbed concerning the provisions of Schedule II of Companies Act, 2013. The dividends can also be declared out of the money provided by the Central Government or a State Government for the payment of the dividend by the company in pursuance of a guarantee given by that Government.[6]

A company shall transfer the appropriate amount of profits for that financial year into its reserves account before declaring any dividend, and a company is bound to declare its dividends only from free reserves.[7]In the case of Inadequacy or absence of profits in any financial year, according to the Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014, a company can declare dividend out of surplus which is subjected to the following conditions:

(1) The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year:

Provided that this sub-rule shall not apply to a company which has not declared any dividend in each of preceding three financial years.

(2) The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.

(3) The amount so drawn shall first be utilized to set off the losses incurred in the financial year in which dividend is declared any dividend in respect of equity shares is declared.

(4) The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid-up share capital as appearing in the latest audited financial statement.

(5) No company shall declare shall declare dividend unless carried over previous losses and depreciation not provided in previous year are set off against profit of the company of the current year the loss or depreciation, whichever is less, in previous years is set off against the profit of the company for the year for which dividend is declared or paid.[8]

Unpaid Dividend Account

In case a dividend is declared by a company and is either not paid or not claimed by the shareholder within 30 days of the declaration, the company would then within seven days after the expiry of these 30 days, transfer the amount to unpaid dividend account. 

Section 124(4) states that any person claiming to be entitled to any money transferred under sub-section (1) to the Unpaid Dividend Account of the company may apply to the company for payment of the money claimed.[9] Such details of the transfer of money to the unpaid dividend account should be placed on the website within a period of ninety days from making a transfer in the account. The statement so published should mention the names, address and should also mention any other website which has been approved by the Central government.

According to the Section 127(6), the shares regarding the unclaimed dividends shall be transferred to the Investor Education and Protection Fund by the company along with a statement which would contain details as prescribed.

Offenses and Penalties

• If a company fails to comply with any of the requirements of Section 124 of Companies Act, 2013 which deals with unpaid dividend account in case of unclaimed dividends, the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.[10]
• If a company after declaring dividends doesn’t give dividends to its shareholders within 30 days of announcement, then it shall be liable under Section 127 of the Companies Act, 2013 and every director if he is a known party to this default, would be punished with imprisonment that might extend to two years and the company would be liable to pay simple interest at the rate of 18% p.a. during the period for which such default continues.[11]

Exception to the Section 127 which talks about punishment for failure to distribute profits, lies in the proviso to the section which states that no offense is committed in the following situations:

• In case the dividend couldn’t be paid because of the reason of operation of law
• In case certain directions for the issue of dividends in a particular manner are given by the shareholder and such directions are not in consonance with the Act, and he has been informed of the same.
• In case there is a dispute in regards to the rights of receiving dividend
• In case such dividend has been adjusted lawfully against any due sum from the shareholder
• In case the failure in paying a dividend or posting the warrant within the period under this section was not due to any default on the part of the company.[12]

Footnotes:

[1] Companies Act 2013.

[2] S 123 (4), Companies Act 2013.

[3] Id

[4] S 123 (6), Companies Act 2013

[5] Evling v Israel & Oppenheimer Ltd (1918) 1 Ch. 101

[6]S 123 (1) (b), Companies Act 2013.

[7] See S 2(43); Companies Act 2013 for the definition of free reserves.

[8] Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014.

[9] S 124(4), Companies Act 2013

[10] S 124(7), Companies Act 2013

[11] S 127, Companies Act 2013

[12] Id

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