indian legal impetus...in quantum meruit and the damages in breach of contract. the question before...

®INDIAN LEGAL IMPETUS

SEPTEMBER 2019. Vol. XII, Issue IX

E-337, East of KailashNew Delhi - 110065, INDIA

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S i n g h a n d A s s o c i a t e s

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Manoj K. Singh Founding Partner

EDITORIAL

Dear Friends,

We are pleased to present the September 2019 edition of our monthly newsletter “Indian Legal Impetus”. In this edition we have covered recent developments, case laws and issues relating to various discipline of laws in India. The first article analyses the doctrine of ‘Quantum Meruit’ and the recent judgment on Quantum Meruit.

Second Article is related to “Loss of Profit in commercial contract” along with landmark judgments and formulae to calculate loss of profit. It is followed by overview of doctrine of commercial impracticability. The Edition also discusses merging of a limited liability partnership with a company and the analysis of the NCLT’s order in M/s Real Image LLP with M/s Qude Cinema Technologies Pvt. Ltd - wherein it was held that an Indian Limited Liability Partnership can amalgamate with an Indian Company.

Next, this Edition presents a brief overview of the clause ‘AS IS WHERE IS BASIS”. Followed by doctrine of legitimate expectation and judicial pronouncement on the same, followed by latest development in Arbitration Act regarding strengthening of the Arbitration Institution. This edition also presents an overview of application of legislative powers of the Supreme Court and its implication on substantive laws.

Lastly, this edition discusses the 2019 Arbitration Amendment and its impact on Arbitration Act, 1996. The said article covers inter alia the modified timeline for completion of proceedings, recognition of arbitral institutions and delegation of crucial functions, appointment of arbitrators, qualifications to be accredited as an Arbitrator, and discusses the relative implication of the changes.

I hope that our esteemed readers find this information useful and it also enables them to understand and interpret complicated legal issues.

I welcome all kinds of suggestions, opinion, queries or comments from all our readers. You can also send us your valuable insights and thoughts at [email protected]

Thank you.

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SINGH & ASSOCIATES ADVOCATES & SOLICITORS

NEW DELHI E-337, East of KailashNew Delhi - 110065 INDIA GURUGRAM7th Floor, ABW Tower, MG Service RoadSector 25, IFFCO Chowk, Gurugram Haryana -122001 INDIAMUMBAI Unit No. 101, 10th Floor Sakhar Bhavan, Plot No. 230Ramnath Goenka MargNariman Point, Mumbai - 400021, INDIABENGALURU Condor Mirage, 101/1, 3rd Floor, Richmond Road, Richmond Town, Bengaluru - 560025, INDIA

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INDIAN LEGAL IMPETUSVolume XII, Issue IX

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Co

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Managing Editor Manoj K. Singh

Published by Singh & Associates

Advocates and Solicitors

EditorAvneet Jha

Anand Pratap Singh

1. QUANTUM MERUIT 042. LOSS OF PROFIT IN COMMERCIAL CONTRACT 073. DOCTRINE OF COMMERCIAL IMPRACTICABILITY 104. MERGING OF A LIMITED LIABILITY PARTNERSHIP WITH A COMPANY 135. 'AS IS WHERE IS' BASIS – STRIKING BALANCE BETWEEN CAVEAT EMPTOR AND SECTION 55 OF TRANSFER OF PROPERTY ACT, 1882 146. DOCTRINE OF LEGITIMATE EXPECTATION 177. STRENGTHENING OF THE ARBITRATION INSTITUTION IN THE POST- AMENDMENT 2019 ERA 208. ARTICLE 142 CONSTITUTION OF INDIA: DECLARATION OF LAW IMPLIED BY THE HIGHEST COURT OF LAND 239. IMPACT OF 2019 AMENDMENT ON THE ARBITRATION ACT, 1996 25

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QUANTUM MERUITPRATIK JAIN

INTRODUCTION Quantum meruit is a legal action based on equitable compensation. It is an alternate remedy to an action on a contract which can be brought for partial performance. A claim in quantum meruit can at best be described as residual equity. Procedurally, quantum meruit is the name of a legal action brought to recover compensation for work done and labour performed “where no price has been agreed.”1 The term literally means “as much as is deserved”2 and often can be seen as the legal form of equitable compensation or restitution.

In a claim of quantum meruit, the plaintiff does not seek a precise sum of money, nor a sum representing the general damages incurred by the plaintiff as a consequence of some unjust act on the part of the defendant, but a sum which will provide the plaintiff, the value of what the plaintiff has done for the defendant, usually calculated in terms of the market price or value of those services.3

THE CONCEPT Quantum meruit claim may be either contractual4 or restitutionary5. Quantum meruit has two distinct connotations and it is necessary to differentiate between them. The difference between contractual and restitutionary quantum meruit can be seen from the below mentioned cases.

1 John H. Munkman, The Law of Quasi-Contracts 87 (1950), cited in Judy B. Sloan, Quantum Meruit: Residual Equity in Law, 42 DePaul L. Rev. 399 (1992), Available at: https://via.library.depaul.edu/law-review/vol42/iss1/31

2 Black’s Law Dictionary 1243 (6th ed. 1990), cited in cited in Judy B. Sloan, Quantum Meruit: Residual Equity in Law, 42 DePaul L. Rev. 399 (1992).

3 J.W. Carter, “Ineffective Transactions,” in P.D. Finn, ed., Essays on Restitution (North Ryde, N.S.W.: Law Books Co., 1990) 206 at 235-40, cited in G.H.L. Fridman, Quantum Meruit, Alberta Law Review Vol. 37(1) 1999, Available at: https://www.albertalawreview.com/index.php/ALR/article/view/1472/1461

4 J & J Penner Construction ltd v. Cringan (1994), 93 Man. R. (2d) 252 (Q.B.)

5 Capital Construction & Foundation ltd. v. Cote (1993), 124 N.B.R. (2d) 204 (T.D.)

In William Lacey (Hounslow) Ltd v. Davis6, the plaintiffs rendered services to the defendant at the latter’s request in anticipation of a building contract that failed to materialize. When the plaintiffs sued for payment for the services, the defendant argued that it was the common expectation of the parties that a contract would be entered into between them and that the plaintiffs’ services would be rewarded by the profits of the contract. The defendant denied that in the circumstances there was any implied promise to pay for the services in issue. The defendant’s argument was that any quantum meruit claim was necessarily contractual, and any such claim was negated by the fact that the parties had an express contract in mind thereby making it impossible to imply any other, contradictory contract. This argument was rejected. Instead the court explained that quantum meruit, though contractual in origin, had given rise to another form of action founded upon what was known, in 1957 when the case was being determined, as quasi-contract. In such quasi-contractual instances of the application of quantum meruit the court looked at the facts and ascertained from them whether or not a promise to pay should be implied, irrespective of the actual views or intentions of the parties at the time when the work was done and the services rendered.7

The case of Burns Fry Ltd. v. Khurana8 involved both contractual and restitutionary claims by the plaintiffs based upon their acts as agents for the defendant in the sale of a business. An agreed fee was payable upon the closing of the transaction. After the plaintiffs had found a purchaser willing to pay approximately the price asked for the business by the defendant, the latter changed his mind and decided not to sell. Krever J. rejected both claims. The defendant had acted in good faith and was not in breach of any implied term of the contract.9 Nor was the alternative of restitution,

6 [1957) I W.L.R. 932.

7 Ibid, p.936.

8 (1985), 20 D.L.R. (4th) 245 (Ont. H.C.J.).

9 Unlike the party which decided not to go through with the contract arranged by the agent in Alpha Trading ltd v. Dunnshaw-Patten ltd., [1981] Q.B. 290, on which see G.H.L. Fridman, The law of Agency, 7th ed. (London: Butterworths, 1996) at 197-98.


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i.e. quasi-contract, applicable. The nature of the contract was such that the plaintiffs had taken the risk of not being paid if there was no sale and no substantial benefit had been acquired by the plaintiff.10

It is evident from the above cases that the basis upon which a quantum meruit claim can be advanced and be successful is different where such a claim is contractual from where it is quasi-contractual or restitutionary.

QUANTUM MERUIT AS DISCUSSED BY INDIAN COURTS The action of Quantum Meruit is allowed in Indian Courts under Section 70 of the Indian Contract Act 1872, which states:

“Obligation of person enjoying benefit of non-gratuitous act—where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered.”

Recently, the Supreme Court of India in the case of Mahanagar Telephone Nigam Limited v. Tata Communications11differentiated between the claims in quantum meruit and the damages in breach of contract. The question before the Hon’ble Court was whether, when parties are governed by contract, a claim in quantum meruit under Section 70 of the Indian Contract Act, 1872, would be permissible. While deciding the aforesaid question, the Hon’ble Court referred to a number of judgments:

First, it referred to the split verdict of two judges in the case of Moselle Solomon v. Martin & Co. 12where Lord William. J held that the remedy provided by Section 70 is not dependent upon the law relating to the liabilities of principal and agent. It is an independent remedy, which is based upon a different cause of action, namely, upon whether a person has lawfully done anything for another or has delivered anything to him not intending

10 As it would have been in Capital Construction & Foundation ltd. v. Cote (1993), 124 N.B.R. (2d) 204 (T.D.) [hereinafter Capital Construction], if the defendant had obtained anything of value from the work done by the plaintiffs, which was not the case.

11 (2019) 5 SCC 341.

12 ( 1935 )ILR 62 Cal 612.

to do so gratuitously, and such other person has enjoyed the benefit thereof. If so, he must either make compensation in respect of, or restore the thing so done or delivered.13On the contrary Jack. J held that where there is an express contract, Section 70 has no application, as shown by the heading of Chapter V of the Act, in which the section finds a place.14

In the case of Alopi Parshad and Sons Ltd. v. Union of India15, Hon’ble Supreme Court dealt with an arbitration award which awarded certain amount on the basis of quantum meruit. However, the same was set aside and it was held that,

“Compensation under quantum meruit is awarded for work done or services rendered, when the price thereof is not fixed by a contract. For work done or services rendered pursuant to the terms of a contract, compensation quantum meruit cannot be awarded where the contract provides for the consideration payable in that behalf. Quantum meruit is but reasonable compensation awarded on implication of a contract to remunerate, and an express stipulation governing the relations between the parties under a contract, cannot be displaced by assuming that the stipulation is not reasonable.”16

In the case of Mulamchand v. State of M.P.17, the court inter-alia held that, if a claim for compensation is made by one person against another under Section 70, it is cannot be on the basis of any subsisting contract between the parties but on a different kind of obligation. This position was followed in the case of Orissa Industrial Infrastructure Development Corporation v. Mesco Kalinga Steel Ltd.18which explained that in estimating the loss or damage arising from a breach of contract, the means which existed for remedying the inconvenience caused by the non-performance of the contract must be taken into account.

In the light of Section 70 of the Indian Contract Act, 1872, and the referred judgments, the Supreme Court held that MTNL could claim only the sum stipulated in

13 Ibid, p.619.

14 Ibid, p.623.

15 AIR 1960 SC 588

16 Ibid, p.809.

17 AIR 1968 SC 1218

18 ( 2017 ) 5 SCC 86

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the contract and anything claimed above this sum should be refunded accordingly.

CONCLUSION The Indian position regarding the evolution of Section 70 has not been at par with the common law. Holding a claim under quantum meruit as only a restitutionary claim and not a contractual one is a deviation from the evolved contractual laws across the globe and the hon’ble Supreme Court here has missed the opportunity to bring the claims in quantum meruit where there is already a stipulation of liquidated damages in a contract.

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LOSS OF PROFIT IN COMMERCIAL CONTRACTANAND PRATAP SINGH

INTRODUCTIONLoss of profit is the loss accruing to the contractor on account of reduction in the profit margin caused by prolongation of the contract or on account of the profit the contractor could not earn during the extended period by being unable to deploy resources and manpower in some other project due to prolongation of the current contract or when Contractor failed to execute the work due to breach of terms and condition of the Contract by the Employer.

Loss of profit was first given as a concept in Robinson v. Harman,1 where it was held that the plaintiff is to be placed at the same position as he would have been, had the contract been performed by the defendant. This basic principle, also known as reinstatement, is generally followed by courts and tribunals while dealing with claims of loss of profit.

One of the landmark judgement in India that deal with loss of profits is the one of Brij Paul & Bros. v. State of Gujarat.2 It was held that in works contract, where the contractor suffers a loss on account of breach by the employer, he is entitled to claim compensation for the expected profit of the balance of work. However, the most important judgement that sets the tone of India’s legal jurisprudence is Bharat Coking Coal Ltd. v. L K Ahuja.3, where it was held by the Supreme Court that in absence of any proof or evidence of loss of profit or possibility of alternate use, compensation for loss of profit cannot be provided. The relevant para of the judgement is mentioned hereunder:

“It is not unusual for the contractors to claim loss of profit arising out of diminution in turn over on account of delay in the matter of completion of the work. What he should establish in such a situation is that had he received the amount due under the contract, he could have utilized the same for some

1 (1848) 1 Ex 850

2 (1984) 4 SCC 59

3 (2004) 5 SCC 109

other business in which he could have earned profit. Unless such a plea is raised and established, claim for loss of profits could not have been granted. In this case, no such material is available on record. In the absence of any evidence, the arbitrator could not have awarded the same.” (Para 24)

Although this case did not provide for compensation of losses, it nonetheless led to an important inference that if such evidence is produced before the court, then compensation for losses may be granted.

In Himachal Joint Venture v. Panilpina World Transport4 it was stated by the arbitrator that the law is well settled that if a breach has been committed by a party then the injured party should be compensated for the deprivation of his profit. The breach in this case was committed by the sespondent by illegally terminating the contract. It was the respondent who did not allow the claimant to perform his part of the contract, while the claimant had been ready and willing to carry out and to execute the contract. Therefore, the claimant was held entitled to expect profit which he would have earned had the respondent allowed the contract to be executed. The percentage allowed for the compensation was 10% and the reasoning was approved and upheld by the Delhi High Court.

In National Highways Authority of India vs. Hindustan Construction Company5 the hon’ble Division Bench of Delhi High Court observed that a claim for loss of earning capacity and profit is entirely different. It means that the manpower, plant and machinery used at the site by the contractor during extended period of contract disabled the contractor to use the same for another contract and it is loss of profit of that other contract which has to be recompensed and an extracted quote from Hudson’s Building and Engineering Contracts is as under:

4 AIR 2009 Delhi 88

5 2016 (2) ARBLR 1 (Delhi)

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“When delay in completion of the whole project results, a contractor will usually suffer – a loss of the profit earning capacity of the particular contract organization affected, due to its being retained longer on the contract in question without any corresponding increase in the monetary benefit earned and without being free to move elsewhere to earn the profit which it otherwise might do.”

FORMULA FOR CALCULATION OF LOSS OF PROFIT AND OVERHEADIt is not disputed that a contractor is entitled for loss of profit if there is any delay attributable to the employer. However, the issue is quantum of loss of profit for which contractor is entitled.

There are three popular formulae which calculate loss of profit along with loss of overhead. They are the Hudson formula, the Emden formula and the Eichleay formula.6

HUDSON FORMULAThe Hudson formula provides for the following method of computation:

EMDEN FORMULAThe Emden formula provides the following method:

EICHLEAY FORMULAThe method provided by Eichleay Formula is:

In M.N. Gangappa v. Atmakur Nagabhushanam Setty & Co,7 it was held that the method used for computation

6 Source McDermott International Ltd v. Burn Standard Co. Ltd. (2006) 11 SCC 181

7 AIR1972SC696

of damages will depend upon the facts and circumstances of each case. The court held so following the landmark English judgement in Lavarack v. Woods of Colchester Ltd.8

In McDermott International Ltd v. Burn Standard Co. Ltd.9 the award for loss of profit was challenged on the basis that instead of using the Hudson formula, the Emden formula was used. In this regard, the hon’ble Supreme Court held:

“...it is an accepted position that different formulas can be applied in different circumstances and the question as to whether damages should be computed by taking recourse to one or the other formula, having regard to the facts and circumstances of a particular case, would eminently fall within the domain of the Arbitrator. If the learned Arbitrator, therefore, applied the Emden Formula in assessing the amount of damages, he cannot be said to have committed an error warranting interference by this Court.” (Para 69)

In McDermott Case10, the hon’ble Supreme Court specifically dealt with the method for computation of damages. The court prefaced its discussion with the remarks, “In the assessment of damages, the Court must consider only strict legal obligations, and not the expectations, however reasonable, of one contractor that the other will do something that he has assumed no legal obligation to do.” The court then explained each of the formulae commonly adopted. The court noted the criticisms of the Hudson’s formula observing that “it adopts the head office overhead percentage from the contract as the factor for calculating the costs and this may bear little or no relation to the actual head office costs of the contractor.” The Emden formula which has received judicial support in a number of cases has the advantage of using the “contractor’s actual head office and profit percentage rather than those contained in the contract.” The Eichleay formula is used “where it is not possible to prove loss of opportunity and the claim is based on actual cost.” The court did not endorse any one particular formula since “it is an accepted position that different formulas can be applied in different

8 (1967) 1 QB 278

9 (2006) 11 SCC 181

10 (2006) 11 SCC 181


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circumstances and the question as to whether damages should be computed by taking recourse to one or the other formula, having regard to the facts and circumstances of a particular case, would eminently fall within the domain of the arbitrator.” What is significant as far as the above discussion is concerned is that it is only concerned with the application of formulae and not whether the formulae would apply notwithstanding there is no proof of the contractor having suffered overhead charges or loss of profit.

It is important to mention here that Central Public Word Department has adopted 7.5% as a contractor’s profit in Analysis of Rate of various items to work out estimated cost and justification of rates. And as per MORT&H Standard Data Book11 the contractor’s profit is 10% of cost of work.

CONCLUSIONIt is not unusual for the contractors to claim loss of profit arising out of diminution in turnover on account of delay in a matter of completion of work. In that event the contractor should establish that had it received the amount in terms of the contract, the contractor could have utilized the same for some other business in which he could have earned profit. Unless such a plea is raised and established, the claims for loss of opportunity/profit could not be granted. A loss of profit earning capacity of the particular contract organization affected, due to its being retained longer on the contract in question without any corresponding increase in the monetary benefit earned and without being free to move elsewhere to earn the profit which it otherwise might do, shall be ground for compensation. Further, the additional costs or compensation as per the Indian Contract Act may include the loss of profit which as per the arbitral tribunal is payable under the laws of India and the said conclusion was derived by applying the principles of Section 73 and 55 of the Contract Act to the additional costs.

Loss of profit is an important concept that lies at the very heart of contracts and transaction between parties, for the reason that a breach of contract can have far reaching consequences. Although the remote and unforeseeable consequences have been carefully disallowed by the court, it has nonetheless been made

11 STANDARD DATA BOOKK FOR ANALYS:S OF RATES (First Revision) Published by Indian Roads Congress On behalf of the Government. Of India, Ministry of Road Transport &Highways

sure that the direct consequences be compensated. The court and arbitral tribunals have through the years, worked on the same principles and have thus made sure that the losses resulting out of breach of contract do not go unaddressed.

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DOCTRINE OF COMMERCIAL IMPRACTICABILITYAKASH SINGH

Where parties carry on various types of commercial transactions, an agreement is sometimes followed by unforeseen events occurring without the fault of either party. The occurrence of such events may interfere in the performance or prevent the performance of the contractual obligations. This brings uncertainty as to the legal effect of such change of circumstances on rights and obligations of the parties and may even result in discharge of the contract in question. In order to identify legal consequences of such extraordinary events, terms of the contract must be analyzed in the first place. The consequences arising out of such extraordinary events/uncertainties can be answered by applying the “Doctrine of Commercial Impracticability”. The concept of impracticability is viewed to have been initiated from the common law prerequisite for excuse where performance of the contract is “vitally different” from the one originally contemplated/envisaged by the parties.

In interpreting the term “impracticability”, courts have paid attention exclusively to a single indication of those changed circumstances where the real cost of performance surpasses the predicted cost of performance. In the view of American law, it is accepted that an issue is impossible when it is not executable. On the other hand, an issue is not executable when it is executable only by means of high and unreasonable cost. In the other words, although performing contract is possible technically but conditions of performing contract are very different from conditions at the time of making of the contract.

Though the Latin dictum Pacta sunt servanda provides that contracts should be performed absolutely and the sanctity of a contract displays party’s absolute liability for obligations assumed; however, under the impracticability doctrine “when an event or a contingency occurs following to the contract formation but preceding to its performance, causing that performance to be impracticability, performance is said to be to be exempted and the contract is discharged”. Indeed impracticability is one of the exceptions of sanctity of contract.

The doctrine of commercial impracticability has its origins in the English common law “doctrine of impossibility”. According to the early version of common law, English courts refused to excuse a party to a contract when an event occurred following the making of the contract that affected one party’s ability to execute. The court demanded the parties to perform absolutely. Paradine v. Jane1 is the case that is often cited for this rule of absolute legal responsibility, assuming that the parties were capable of allocating the risks of any accident by unavoidable requirement. Since this rule caused harsh consequences, the courts began to distinguish particular exceptions to its stringent application. The exception that emerged became the law of impossibility or law of implacability. It was not until 1863 that the conditions implied by the doctrine were first changed to incorporate impossibility as a defense as in the case of Taylor v. Caldwell2. Following this case, there is a famous case of Krell v. Henry3 about this subject. The doctrine of the impossibility in Taylor v. Caldwell maintained that even though the contract did not specify the contingency that took place, its occurrence depicted performance as impossible and validated the court’s imposition of an implied term to the contract.

At the dawn of the twentieth century, the test of impracticability was introduced in the case of Mineral Park Land v. Howard4 as another measure for ascertaining impossibility/impracticability, and therefore excusing performance. The rule as stated in that case was that “a thing is impossible in legal contemplation when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost”. Up until this decision, the court had never excused the obligator’s performance due to only hardship, or due to a contract becoming unprofitable. Nonetheless, for the first time, the court acknowledged that a contract that was not performable except at an excessive cost was not different compared to a contract whose subject matter had been destroyed. Both types of contracts were

1 Paradine v Jane (King’s Bench division 1647).

2 [1863] 3 B & S 826.

3 [1903] 1903 KB2 470.

4 [1916] 172 Cal 289.


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recognized as impossible to perform. In Mineral Park, case5 the obligator had agreed to remove from the land of the oblige, all the earth and gravel needed for the bridge construction. Following the removal of approximately one-half of the necessary materials, the obligator stopped the performance because the rest of the material was below the water level. In reaching the verdict of excusing the obligator’s performance, the court discovered that the parties assumed, as the basis of their agreement, that the land contained the requisite quantity [of earth and gravel] available for use, and that the removal of gravel located below the water level was not within the parties contemplation”.

With heightened globalization recent times have witnessed increasing business relations between the nations, and the development of Contractual Law has also recorded an enormous growth. Hence, the scope of Doctrine of Commercial Impracticability has also increased and a modem statement of this doctrine appears in Translantic Financing Corporation v United States.6 In this case it was held that

“A contractual obligation is impracticable when it can only be done at an excessive and unreasonable cost.”

Another noteworthy case where the American courts have dealt with Commercial Impracticability is Aluminum Co. of America v. Essex Group Inc.7 In this case it was held that “Where, at the time a contract is made, a party’s performance under it is impracticable without his fault because of a fact of which he has no reason to know and the non-existence of which is a basic assumption on which the contract is made, no duty to render that performance arises, unless the language or circumstances indicate the contrary.”

The court, in this case, also dealt with the discharge due to supervening impracticability of contractual obligations between the parties stating that “Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the nonoccurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary”.

5 [1916] 172 Cal 289, p 458.

6 Translantic Fin. Corp. v United States, 363 F. 2d. 312 [D.C. Cir 1966].

7 499 F. Supp.53 (W.D. Pa.1980)

COMMERCIAL IMPRACTICABILITY: INDIAN VIEWImpracticability in Indian law comes under the scope of Section-56 of the Contract Act of India (1872) in which it has been held that “An agreement to do an impossible act is void”. Also, if a contract to do an act which after the formation of the contract, becomes impossible by the reason of some event beyond the control of the promisor, then such a contract becomes void, when the said act becomes impossible or unlawful. In other words, when one person has promised to do something which he knows or, which he with a reasonable diligence might have known and which the promisee did not know to be impossible or unlawful, then, in such a case the promisor must make the compensation to such a promisee for any loss which the promisee sustains because of the non-performance of the promise.

In India the issue of impossibility or impracticability, first cropped up in the landmark case of Satyabrata Ghose v Mugneeram Bangur.8 In this, Justice Mukherjee enunciated the doctrine as contained in section 56 of the Indian Contract Act, 1872:

“The first paragraph of the section lays down the law in the same way as in England. It speaks of something, which is impossible inherently or by its very nature, and no one can obviously be directed to perform such an act. The second paragraph enunciates the law relating to discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done.”

In the Indian legal system, under the scope of Section 56 of the Indian Contract Act, 1872, the court can give relief on the ground of subsequent impracticability when it finds that the whole purpose or the basis of the contract has been frustrated by the intrusion or occurrence or happening of untoward, unexpected or unforeseen event or change in circumstances or there is material alteration in the conditions, which was not contemplated by the parties at the time of formation of the contract.

The concept of changed circumstances or altered conditions has not come into play in the form of an independent rule but is laid down with the Doctrine of

8 Satyabrata Ghose v Mugneeram Bangur & Co. (1954) S.C.R. 319 317-18.

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Commercial Impracticability which has been recognized as a mode of discharge of contract in case, where the performance of the contract becomes impossible or impracticable due to some unforeseen or unexpected event beyond the control of the parties. From the legal point of view, the expression “Commercial Impracticability” exists only in the sense of difficulty of the performance of the contractual obligation of the contract which occurs unexpectedly.

Finally, doctrine of impracticability of contract is an exception to the principle of sanctity of contract. Historically, American law has gradually moved from its origin in the common law to modern law apropos this doctrine. It means that the two concepts of frustration of purpose and impossibility are commonly combined in common law resulting into the single concept of commercial impracticability. It is recommended here that when performance of a contract faces hardship because of the occurrence of an unforeseen event and it must not have been a basic assumption when the contract was made and moreover, performance was rendered impracticable by this incidence, the doctrine of impracticability should apply.

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MERGING OF A LIMITED LIABILITY PARTNERSHIP WITH A COMPANY

JUHI CHANDEL

Can a Limited Liability Partnership be merged with a Company? Under what provision can the merger or amalgamation of a Limited Liability Partnership with a Company be sanctioned?

In the economic world, many companies merge with another company; the concept behind the said merger and amalgamation being to create synergy by establishing such norms which are conducive for development of both the companies.

From a legal viewpoint, a company can only merge with the companies registered under the Companies Act, 2013, or with a foreign entity; there is a similar provision for the Limited Liability Partnership (LLP) under Limited Liability Act, 2008. But both the Acts are silent on the issue whether an LLP can merge with a company and vice versa.

Since there was no resolution to the aforesaid loophole, the National Company Law Tribunal, Chennai, has passed an order sanctioning the Scheme of Amalgamation of an LLP into a Company.

M/s Real Image LLP with M/s Qude Cinema Technologies Pvt. Ltd. (CP/123/CAA/2018)On June 11, 2018, the Chennai Bench passed an astounding order where they sanctioned the Scheme of Amalgamation of an LLP into a Company. The Application for Amalgamation was filed under section 230 to 232 of the Companies Act, 2013. Held:

I. The Bench held that the purpose for enacting both the LLP Act 2008 and the Companies Act 2013 is to facilitate the ease of doing business and create a desirable business atmosphere for the companies and LLPs.

II. That both the Acts provide the provision of amalgamation. The issue involved in the said petition has been categorically dealt with by the Companies Act, 1956, whereas there is no specific provision in the Companies Act, 2013. Therefore, this is the clear case of “casus omissus”.

III. It was further held that if the intention of the parliament is to permit a foreign LLP to merge with an Indian Company, then it would be wrong to presume that the Act prohibits a merger of an Indian LLP with an Indian Company.

IV. Thus, there does not appear any express legal bar to allow/sanction merger of an Indian LLP into an Indian Company.

CONCLUSION In view of the above order, it is clear that now an Indian LLP can amalgamate with an Indian Company without the need for proposal of new amendments in the present Acts as the NCLT has correctly interpreted the gap in the law.

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‘AS IS WHERE IS’ BASIS – STRIKING BALANCE BETWEEN CAVEAT EMPTOR AND SECTION 55 OF TRANSFER OF PROPERTY ACT, 1882

SWATI SEHGAL

I. ‘AS IS WHERE IS’ CLAUSE - INTRODUCTIONThe phrase ‘as is where is’ is a clause in any agreement which implies that the thing so contracted is transferred, by one person to another in its existing condition and the transferee has accepted it with all its faults and defects, whether or not immediately apparent. This clause finds its root in the common law doctrine of ‘Caveat Emptor’. Caveat Emptor means ‘let the buyer beware’. This doctrine puts the duty on the purchaser to carry out all necessary inspection of the property before entering into an agreement1. If the purchaser fails to conduct such an inspection, then later, on identification of defects in the property may not be a ground to revoke or claim damages under the contract. In such cases it is presumed that the purchaser had the notice of defects, if any.

II. STATUTORY INCORPORATION OF ‘AS IS WHERE IS’ CLAUSETransfer of Property Act, 1882 (hereinafter referred as “TPA, 1882”) incorporates this part of English Law as ‘Doctrine of Constructive Notice’ under section 3 of the Act as quoted herein below-

“A person is said to have notice” of a fact when he actually knows that fact, or when, but for willful abstention from an enquiry or search which he ought to have made, or gross negligence, he would have known it.

Explanation II: Any person acquiring any immovable property or any share or interest in any such property shall be deemed to have notice of the title, if any, of any person who is for the time being in actual possession thereof.

1 Mohd. Ma’sum Billah. (1998). Caveat Emptor versus Khiyar al-’Aib: A Dichotomy. Arab Law Quarterly, 13(3), 278-299. Retrieved from http://www.jstor.org/stable/3382012.

Nonetheless the TPA, 1882, also envisages the duty of the seller “to disclose to the buyer any material defect in the property or in the seller’s title thereto of which the seller is, and the buyer is not, aware, and which the buyer could not with ordinary care discover.”2 This is, however, subject to the presence of contract to contrary between the parties.

III. UNDERSTANDING THE DIFFERENCE BETWEEN ‘AS IS WHERE IS’ AND CAVEAT EMPTORThe doctrine of Caveat Emptor finds its origin in a 17th century case of Chandelor v. Lupos,3 where it was held that the defendant being the seller of the store is not liable to the plaintiff for any defect thereon since the plaintiff was at liberty to inspect the same. The doctrine later on developed on the principle that “no man can be cheated except it be with his own consent”4. On the other hand, ‘as is where is’ is a clause incorporated in the agreement generally by the seller in order to sell the property with defects, if any. At times this clause is also misused by the seller to escape their burden to disclose any material defect in the concerned property. In such cases the theory of Caveat Emptor becomes strongest.

It is significant to note that ‘as is where is’ clause adds a new dimension to Caveat Emptor rule and consequently in many cases the presence of this clause in an agreement discharges the seller of his duty as enshrined under section 55(1)(a) of TPA, 1882.

IV. SELLER’S OBLIGATION UNDER SECTION 55(1)(A) OF TPA, 1882Contract for sale of any immovable property is not a contract uberrimae fidei and the seller thereunder is duty bound to disclose only the latent defects of which

2 Section 55(1)(a), Transfer of Property Act 1882.

3 (1603) Cro. Jac. 4, 79, ER 3.

4 P.S. Atiyah, The rise and fall of freedom of contract, Clarendon Press, Oxford, 1979, at 179.


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he is aware.5 Latent defects are such which are unlikely to be discovered by the purchaser during inspection.6 On the other hand, defects that are discoverable if a buyer would have carried inspection with due diligence are termed as patent defects. Even though section 55 of TPA, 1882, is subject to contract to the contrary between the parties, judicial interpretation to it has reflected that the disclosure of the material defects is an obligation on the part of the seller making the provision mandatory in nature and not directory.7

However, in the commercial contract involving the clause of ‘as is where is’ basis, the courts have excused the seller of their statutory duty to disclose material defects and the title deeds. In the matter of V. Sambandan v. The Punjab National Bank8 (V. Sambandan case) where the sale was concluded on ‘as is where is’ basis and the seller citing the same did not provide the original title deed or the copy of any other documents and the purchaser because of which willfully defaulted in making payments and claimed the refund of the amount already paid, the court dismissed the petition relying upon the Supreme Court decision in United Bank of India v. Official Liquidator and Others9 where it was held that the purchaser is deemed to have purchased property subject to all encumbrances, liens and claims where it has been sold on ‘as is where is’ basis.

Also, in the case of Punjab Urban Planning and Development Authority (PUDA) and Ors. v. Raghu Nath Gupta & Ors.,10 commercial plots were allotted on ‘as is where is’ basis and the Hon’ble Supreme Court held inter alia, once the respondent accepted the plots on such condition, they are estopped from contending that PUDA had not provided the basic amenities.

Similarly in Delhi Development Authority v. Kenneth Builders & Developers Ltd.,11 the court opined that where the sale is made on an ‘as is where is basis’, presumption is that the intending purchaser has inspected the site and has familiarized himself with the “prevalent conditions in all respects including status of infrastructure facilities available etc. before giving its bid.”

5 Mulla, The Transfer of Property Act, 12th ed., 2015 at P. 387.

6 Rao Saheb Mohanlal Keshavji Kothari and Ors. v. Rode Theresa Gonslves and Ors., AIR 1965 Bom 139 ¶39.

7 Flight v. Booth, (1834) 1 Bing (NC) 370.

8 W.P. No. 19557 of 2009, dated 28.10.2009.

9 (1994) 1 SCC 575.

10 (2012) 8 SCC 197.

11 (2016) 13 SCC 561.

However, the ‘as is where is’ clause does not entail a rigid interpretation in all cases. There are a number of cases where the court has been proactive in protecting the interest of the purchaser even where the ‘as is where is’ clause is present. In the of Haryana Financial Corporation & Another v. Rajesh Gupta,12 where the purchaser claimed refund of the amount deposited on the ground that the seller did not disclose the material defect and the title deed, the Hon’ble Supreme Court negated the submission that the plots were accepted on ‘as is where is basis’ and therefore, the purchaser cannot wriggle out of a confirmed bid, and dismissed the appeal on the ground that seller failed to perform its obligations in giving a fair description of the property.

Further, in the case of Rekha Sahu v. UCO Bank and Ors. 13 (Rekha Sahu case) court laid down that the immunity claimed by the seller on the pretext ‘as is where is’ and ‘as is what is’ basis is dying a slow death and due diligence must be conducted on their part also before proposing for sale. The court went to the extent to state that if the property is sold ‘as is where is basis’ without the knowledge of the subsequent encumbrances, there is apprehension that the auction proceedings could be stalled by the purchaser through the judicial intervention on the ground of non-furnishing of the material information relating to encumbrance. Failing to supply such information under Section 55(1) of TPA 1882 could be construed that the purchaser was misled.14

V. JUDICIAL VIEW IN CASES INVOLVING COMMERCIAL CONTRACT WITH GOVERNMENTThese days in a commercial contract involving government as a party, the ‘as is where is’ clause is used more often. Under such agreement the property is transferred by the government to the prospective bidder for the construction purpose or for carrying out activity on the land on behalf of the government. The implication of this clause makes it binding for the prospective bidder to conduct due diligence of the property on which the proposed contract is to be executed, before making the bid. Any failure to conduct

12 (2010) 1 SCC 655.

13 (2013) SCC OnLine All 13203.

14 Neelam Dalia and Ors. v. Amrut Industries and Ors., 2017 SCC OnLine Hyd 266.

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such due diligence restricts the bidder to raise claims later, on ground of defects in the contracted property. However, it may be noted that due diligence can only be carried out for identification of patent defects and not latent defects and therefore, in cases of latent defects the clause of ‘as is where is’ does not benefit the authority to evade its liability to disclose any such defects.

In the case of Rajasthan State Industrial Development & Investment Corp. v. Diamond & Gem Development Corp. Ltd.,15 the court reiterated its earlier view in ascertaining the liability of the government who transferred the property to the respondent company on ‘as is where is’ basis on lease for some construction purposes. Court, inter alia, observed that since the allotment was made on ‘as-is-where-is’ basis respondent cannot claim that providing accessibility via road, from the Jaipur Tonk main road was the duty of the government.

Similarly in the case of Ram Kala v. Delhi Development Authority16, the Delhi High Court, adopting a similar approach rejected the petitioner’s claim who was granted the license for collecting parking charges, when he contended that there was flowing water, waste material and garbage in the allotted parking site on the ground that the allotment was made on ‘as is where is’ basis. It must be noted that the defect claimed in both the above-mentioned cases was patent in nature.

However, in cases of latent defect the transferor is duty bound to disclose all such defects known to him even if the transfer is made on ‘as is where is’ basis. In Umrah Developers v. State of Karnataka17 where the land was sold to the petitioner on ‘as is where is’ basis comprising High Tension or High Voltage electricity lines passing through each of the schedule lands and neither the auction notification nor the auction sketch nor the sale certificates nor even the conversion orders referred to such HT Lines and Towers. The court held it is not the petitioner who is entitled to dismantle the HT lines and it is unfair on the part of the State to hold that the petitioner is bound to suffer the HT lines.

15 AIR 2013 SC 1241.

16 2017 SCC OnLine Del 10258

17 Writ Petition Nos. 3603-3607 of 2016, dated 25.02.2016 - KARHC (Unreported).

CONCLUSIONTPA, 1882, as observed by J. Rankin18 is a conglomeration of English Common Law and the principle of Equity which must be kept in mind to develop a balanced construction between Section 3 of TPA, 1882 (which is the reflection of the doctrine of Caveat Emptor) and section 55(1)(a) of TPA, 1882, to prevent one party enjoying any unjust enrichment at the cost of other. Since it cannot be the case, and the legislature also could not have intended that in any circumstances, the onus of being prudent and awareness of all the facts of the concerned property is to be shifted to one person that being the purchaser in the cases where the sale is made on ‘as is where is’ basis. Therefore, such clauses should be adjudicated on the Principle of Equity considering the facts and circumstances of each case individually rather than turning to any rigid Positive Law. It is on this reasoning, the judicial approach to give a progressive interpretation to the concept of ‘as is where is’ is laudable, and that the plea of ‘let the buyer beware’ of any encumbrance on the property sold on the pretext of ‘as is where is’ is no longer an acceptable argument. Moreover, the duty of the purchaser or the transferee under the principle of Caveat Emptor should be restricted only to the extent of patent defects as discernible from the above discussion on the cases involving the commercial contract with the government and the party failing to which, cannot later seek judicial interpretation since it will be presumed that he entered into the contract with open eyes.

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18 Sadasook Ramprotap v. Hoare Miller & Co., AIR 1923 Cal 719.


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DOCTRINE OF LEGITIMATE EXPECTATION NIKITA BATRA

MEANINGLegitimate Expectation means that a person may have a reasonable expectation of being treated in a certain way by administrative authorities owing to some consistent practice in the past or an express promise made by the concerned authority. According to this doctrine, a public authority can be made accountable in lieu of a legitimate expectation. Thus, the doctrine of Legitimate Expectation pertains to the relationship between an individual and a public authority.

“What is legitimate expectation? Obviously, it is not a legal right. It is an expectation of a benefit, relief or remedy that may ordinarily flow from a promise or established practice. The term ‘established practice’ refers to a regular, consistent predictable and certain conduct, process or activity of the decision-making authority. The expectation should be legitimate, that is, reasonable, logical and valid. Any expectation which is based on sporadic or casual or random acts, or which is unreasonable, illogical or invalid cannot be a legitimate expectation. Not being a right, it is not enforceable as such. It is a concept fashioned by courts, for judicial review of administrative action. It is procedural in character based on the requirement of a higher degree of fairness in administrative action, as a consequence of the promise made, or practice established. In short, a person can be said to have a ‘legitimate expectation’ of a particular treatment, if any representation or promise is made by an authority, either expressly or impliedly, or if the regular and consistent past practice of the authority gives room for such expectation in the normal course.”1

Therefore, it can be said that this doctrine is a form of a check on the administrative authority. When a representation has been made, the doctrine of legitimate expectation imposes, in essence, a duty on public authority to act fairly by taking into consideration all relevant factors relating to such legitimate expectation.2 It also adds a duty on the public authority not to act in a way to defeat the legitimate expectation

1 Ram Pravesh Singh and Ors. vs. State of Bihar and Ors, (2006 (8) SCJ 721), Para 14

2 Navjyoti Co-op Group Housing Society vs. UOI 1992(4)SCC494, Para 16

without having some reason of public policy to justify its doing so.3

WHO CAN INVOKE THE PRINCIPLE OF LEGITIMATE EXPECTATION?The doctrine of legitimate expectation, based on established practice, can be invoked only by someone who has dealings or transactions or negotiations with an authority, on which such established practice has a bearing, or by someone who has a recognized legal relationship with the authority.4A total stranger unconnected with the authority or a person who had no previous dealings with the authority and who has not entered into any transaction or negotiations with the authority, cannot invoke the doctrine of legitimate expectation, merely on the ground that the authority has a general obligation to act fairly.5

LEGITIMATE EXPECTATION MAY ARISE:a. if there is an express promise given by a public

authority; or

b. because of the existence of a regular practice which the claimant can reasonably expect to continue;

c. such an expectation must be reasonable.6

Every legitimate expectation is a relevant factor requiring due consideration in a fair decision-making process. Whether the expectation of the claimant is reasonable or legitimate in the context is a question of fact in each case.7 Whenever the question arises, it is to be determined not according to the claimant’s perception but in the larger public interest wherein other more important considerations may outweigh what would otherwise have been the legitimate

3 Ibid, Para 16

4 Supra Note 1, Para 14


6 Madras City Wine Merchants’ Association and Ors. vs. State of T.N. and Ors. (1994) 5 S.C.C. 509, Para 60

7 Food Corporation of India vs. Kamdhenu Cattle Feed Industries (AIR 1993 SC 1601), Para 8

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expectation of the claimant.8 A bona fide decision of the public authority reached in this manner would satisfy the requirement of non-arbitrariness and withstand judicial scrutiny.9

EXPECTATION DOES NOT MEANThe expectation cannot be the same as anticipation. It is different from a wish, a desire or a hope nor does it amount to a claim or demand on the ground of a right. However earnest and sincere a wish, a desire or a hope may be and however confidently one may look to them to be fulfilled, they by themselves cannot amount to an assert-able expectation and a mere disappointment does not attract legal consequences. A pious hope even leading to a moral obligation cannot amount to a legitimate expectation.10

Therefore, legitimacy of an expectation can only be inferred if it is based on the sanction of law or custom or an established procedure followed in regular and natural system.

JUDICIAL PRONOUNCEMENTS This doctrine first found its mention in the case of State of Kerala vs. Madhavan Pillai.11 In this case the government had issued a sanction to the respondents to open a new aided school and to upgrade the existing ones. However, after 15 days, a direction was issued to keep the sanction in abeyance. This action was challenged on the ground that the same violated the principles of natural justice. The Hon’ble Supreme Court held that the sanction order created legitimate expectations in the respondents which was violated by the second order as the same was without following the principles of natural justice which is sufficient to vitiate the administrative order.

This doctrine was applied in another case12 where the government had issued a notification notifying the areas where slum scheme would be introduced. However, the notification was subsequently amended, and some areas earlier included were left out. The court held that when a notification is made rescinding the

8 Ibid

9 Ibid

10 Union of India (UOI) and Ors. vs. Hindustan Development Corpn. and Ors. (MANU/SC/0219/1994), Para 29

11 AIR 1989 SC 49 (Paras 17 to 20)

12 The Scheduled Caste and Weaker Section Welfare Association vs. State of Karnataka (1991)2 SCC 604

earlier notifications without hearing the affected parties, it is clear violation of the principle of natural justice.13The earlier notification had raised legitimate expectation in the people living in an area which has been subsequently left out and hence legitimate expectation cannot be denied without a fair hearing.

In GNCT of Delhi v. Naresh Kumar14, the Delhi High Court summarized the legal position with regard to legitimate expectation as follows:

y Firstly, mere reasonable or legitimate expectation of a citizen may not by itself be a distinct enforceable right, but failure to consider and give due weightage to it may render the decision arbitrary.

y Secondly, legitimate expectation may arise if (a) there is an express promise given by a public authority; or (b) because of acceptance of a regular practice, a claimant can reasonably expect it to continue; and (c) such expectation may be reasonable.

y Thirdly, for a legitimate expectation to arise, the decision of administrative authority must affect the person by depriving him of some benefit or advantage which he had in the past been permitted, by the decision maker, to enjoy and which he can legitimately expect to be permitted to continue, until some rational grounds for withdrawing it have been communicated to him.

y Fourthly, if the authority proposes to defeat a person’s legitimate expectation, it should afford him an opportunity to make a representation in the matter.

y Fifthly, the doctrine of legitimate expectation permits the court to find out if the change in policy which is the cause for defeating the legitimate expectation, is irrational or perverse or one which no reasonable person could have made.

In the case of Navjyoti Coop. Group Housing Society & Ors. v. Union of India & Ors.15, wherein a new criterion of allotment was given by the memorandum impugned

13 Ibid at Para 16

14 175 (2010) DLT 143, Para 21



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therein, prior to which priority in the matter of allotment to Group Housing Societies had all along been made with reference to the date of registration. The court held that since prior to the new guidelines contained in the memorandum of January 20, 1990, the principle of allotment had always been on the basis of date of registration and not the date of approval of the list of members, the Group Housing Societies were entitled to legitimate expectation of following consistent past practice in the matter of allotment, even though they may not have any legal right in private law to receive such treatment.

CONCLUSIONThe necessity for application of the doctrine of Legitimate Expectation arises when an administrative body by reason of a representation or by past practice or conduct stirred an expectation which would be within its powers to accomplish unless some superseding public interest comes in the way. However, a person who centers his claim on the doctrine of legitimate expectation, in the first instance, has to satisfy that he has relied on the said representation and the rejection of that expectation has worked to his detriment. The court would interfere only if the decision taken by the authority was found to be arbitrary, unreasonable or in gross abuse of power or in violation of principles of natural justice and not taken in public interest. But a claim based on mere legitimate expectation without anything more cannot ipso facto give a right to invoke this principle.

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STRENGTHENING OF THE ARBITRATION INSTITUTION IN THE POST-AMENDMENT 2019 ERA

NIYATI KANOJIA

ANAND PRATAP SINGH

The principle behind arbitration proceeding is to provide parties an opportunity to resolve a dispute mutually, especially in commercial sector, without going through arduous judicial proceedings thereby saving time and money, and enhancing efficiency, with minimal interference of courts. In India, where ad hoc arbitration is much more in practice than institutional arbitration, parties, counsels and arbitrators have begun to recognize ad hoc arbitration as a completely scrutiny free procedure causing delay in resolving dispute, ultimately defeating the entire purpose of arbitration. Considering this scenario and worldwide approach towards arbitration proceeding, India legislature has taken measures to develop arbitration institutions by amending the present act.

What is an institutional arbitration? It is a procedure where arbitral proceeding is undertaken according to a set of rules and administered by a particular arbitration institution, whereas, an ad-hoc arbitration proceeding provides liberty to parties to decide the rules to govern their own arbitration proceeding and to appoint arbitrator of their choice. Following are key difference between both the procedures:

I n s t i t u t i o n a l Arbitration

Ad-hoc Arbitration

Procedure to be followed

Pre-specified set of r u l e s / c e r t a i n standards

Discretional choice of rules and procedures, with limited general principles of arbitration and certain mandatory procedural rules

Timelines for a r b i t r a t i o n proceeding

Fixed timelines for the conduct of an arbitration

Timelines are flexible as per requirement of parties and arbitrators

Scrutiny and Accountability

Administration of arbitral proceeding by specialized staff

Absence of scrutiny, only depends upon the arbitrators and parties

Costs Administration fees and arbitrator fees both are mandatory

No administration fee, but fees of arbitrator is required.

Establishment of the Arbitration Council of India by the 2019 Amendment - An attempt to make India a hub of institutional arbitration for both domestic and international arbitration

“There are over 35 arbitral institutions in India. These include, domestic and international arbitral institutions, arbitration facilities provided by various public-sector undertakings, trade and merchant associations, and city-specific chambers of commerce and industry.”1

Despite the existence of various arbitral institutions in India, parties opt for ad hoc arbitration instead of arbitral institution, and parties regularly approach courts to appoint arbitral tribunals under the relevant provisions of the Arbitration Act. The preference for ad hoc arbitrations by Indian parties is not limited to arbitrations where the amounts in dispute are small. For instance, construction and infrastructure, one of the fastest growing sectors in the Indian economy, spends crores of rupees on resolution of disputes. Dispute resolution in this sector also consists mostly of ad hoc arbitration instead of institutional arbitral.

The promotion of institutional arbitration in India by strengthening Indian arbitral institutions has been identified as critical to the process of dispute resolution through arbitration. Though arbitral institutions have been working in India, they have not been preferred by parties, who have leaned in favour of ad hoc arbitration or arbitral institutions located abroad. Therefore, in order to identify the roadblocks to the development of institutional arbitration, examine specific issues affecting the Indian arbitration landscape and also to prepare a road map for making India a robust centre for institutional arbitration, both domestic and international, the Central Government constituted a

1 http://legalaffairs.gov.in


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High Level Committee under the Chairmanship of Justice B. N. Srikrishna, Former Judge of the Supreme Court of India.

The High Level Committee submitted its report on July 30, 2017. With a view to strengthen institutional arbitration in the country, the said Committee, inter alia, points out certain reasons behind parties’ choice of ad hoc arbitration. The Committee recommended for the establishment of an independent body for grading of arbitral institutions and accreditation of arbitrators, etc. The Committee also recommended certain amendments to the Arbitration Act to minimize the need to approach the courts for appointment of arbitrators. After examination of the said recommendations with a view to make India a hub of institutional arbitration for both domestic and international arbitration, it was decided to amend the Arbitration and Conciliation Act, 1996.

REASONS BEHIND PARTIES’ CHOICE FOR AD HOC ARBITRATION

y Lack of credible arbitral institutions;

y Misconceptions relating to institutional arbitration;

y Lack of governmental support for institutional arbitration;

y Lack of legislative support for institutional arbitration; and

y Judicial attitudes towards arbitration in general. These are discussed in detail in the following sub-sections.

The Committee identified six points to improve the performance of Indian arbitral institutions:

(a) Accreditation of arbitral institutions

(b) Accreditation of arbitrators

(c) Creation of a specialist arbitration bar and bench

(d) Amendments suggested to the Arbitration and Conciliation Act and other laws

(e) Role of the government in promoting institu-tional arbitration

(f) Changes in arbitration culture

Accordingly, on the basis of the above recommendations and to become international hub for arbitration, an amendment was made in the Arbitration Act in 2019 which inserted new sections 43A to 43M in the Arbitration and Conciliation Act, 1996, which established Arbitration Council of India (ACI).

The ACI has been created by virtue of Section 43B of the Amendment Act, 2019, where sub-section (1) provides for the establishment of the Arbitration Council of India. Sub-section (2) provides that the Arbitration Council of India shall acquire, hold and dispose-off property, both movable and immovable and sub-section (3) of the said section provides that the head office of the Council shall be at Delhi. Sub-section (4) provides that the Council may, with the prior approval of the Central Government, establish offices at other places in India.

Sub-section (3) of section 43C provides that the salaries, allowances and other terms and conditions of the Chairperson and Members of the Council shall be prescribed by the Central Government and sub-section (4) provides for entitlement of travelling and other allowances of the Part-time Members, to be prescribed by the Central Government.

Sub-section (1) of section 43D provides that it is the duty of the Council to take all measures necessary to promote and encourage arbitration, mediation conciliation or other alternate dispute resolution mechanisms, and for that purpose to frame policy and guidelines for the establishment, operation and maintenance of uniform professional standard in respect of all matters relating to arbitration.

Section 43I provides that the Council shall make grading of arbitral institution on the basis of criteria relating to infrastructure, quality and caliber of arbitrators, performance and compliance of time limit for disposal of domestic and international commercial arbitration.

Section 43J provides that qualification, experience and norms and accreditation of arbitrators shall be governed by the Schedule Eight.

Sub-section (2) of section 43M provides for the qualifications, appointment and other terms and

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conditions of service of the Chief Executive Officer which shall be prescribed by the Central Government. Sub-section (4) of the said section also provides that the Council shall have a Secretariat consisting of such number of officers and employees as may be prescribed by the Central Government. Sub-section (5) of the said section provides that the qualifications, appointment and other terms and conditions of the service of the employees and other officers of the Council shall be prescribed by the Central Government.

Further, sub section 2(ca) provides that arbitral institution means an arbitral institution designated by the Supreme Court or a High Court; sub section (3A) of section 11 provides that the Supreme Court or High Court shall have power to designate, arbitral institution. Sub section (6) of section 11 provides that “the appointment shall be made, on an application of the party, by the arbitral institution designated by Supreme Court, in case of international commercial arbitration, or by the High Court, in case of arbitration other than international commercial arbitration”.

Now the parties in the absence of a procedure to appoint an arbitrator or failure of such procedure under the agreement, can approach arbitral institution designated by the Supreme Court or the High Court for the appointment of Arbitrator.

Further, Section 42A of the Amendment Act, 2019, lays down the conditions of confidentiality to be extended to the arbitrator, the arbitral institution, and the parties to the arbitration agreement in all matters of arbitration proceedings, save for wherever disclosure may be necessary.

The provision of Section 42A of Arbitration Act is a welcome change. Confidentiality of arbitration proceedings is a hallmark of international arbitration tribunals and is enshrined in the rules of almost all such international tribunals, forming one of the fundamental reasons why they remain the preferred destinations of parties and arbitrators alike.

India, with its latest Arbitration and Conciliation (Amendment) Act, 2019, seeks to tackle the problem of a lack of specialized arbitrators, but the problem extends further. In India, it has been noted that arbitration is inextricably tied with court litigation, a relation which might hint at the lack of specialisation and subsequently, a considerably limited number of

arbitrators. Again, the establishment of the ACI as proposed in the Amendment Act, 2019, should prove a handy tool in overcoming this hurdle.

It is evident from 2019 Arbitration Amendment Act that it is the focus of the government of India to make India a hub of institutional arbitration for both domestic and international arbitrations.

However, the amendment lacks any specific procedure or standard that the courts have to meet in order to designate such arbitration institutions, and only provides general conditions for such appointment, and in time, need may arise for further amendments.

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ARTICLE 142 CONSTITUTION OF INDIA: DECLARATION OF LAW IMPLIED BY THE HIGHEST COURT OF LAND

SHELLY TYAGI

Quoting the words of Benjamin Cardozo, “A judge is not a legislator in general but highlights how the judge does legislate new law in close cases to fill gaps between existing rules.” Resting on the same principle Article 142 is defined as the enforcement of decrees and orders of Supreme Court in the exercise of its jurisdiction as is necessary for doing complete justice.

The extra ordinary powers under the article was brought about to bridge the gap created by an insufficient law so as to meet the ends of justice, grant of which is met out by passing an ‘enforceable decree or order’ by the Honorable Supreme Court. The article, for the very first time, came under the light of interpretation in the case of Prem Chand Garg v. Excise Commissioner, U.P.1 which added a rider to the exercise of wide extraordinary powers by laying down that though the powers are wide, the same is an ancillary power and can be used when not expressly in conflict with the substantive provisions of law.

Justice Subha Rao defined the expression ‘declared’ as being wider than the words ‘found or made’. “To declare is to announce opinion. Interpretation, ascertainment and evolution are parts of the process, while that interpreted, ascertained or evolved is declared as law. The law declared by this Court is the law of the land. To deny this power to this Court on the basis of some outmoded theory that the Court only finds law but does not make it, is to make ineffective the powerful instruments of justice placed in the hands of the highest judiciary of this Country.”2

Article 142 of the Constitution of India is supplementary in nature and cannot supplant the substantive provisions, though they are not limited by the substantive provisions in the statute. It is a power that gives preference to equity over law. It is a justice-oriented approach as against the strict rigors of the law.3

1 MANU/SC/0082/1962

2 Golak Nath v. State of Punjab MANU/SC/0029/1967

3 State of Punjab Vs. Rafiq Masih (White Washer), MANU/SC/0621/2014

The article ensures execution of the objective, the statute in question strives to achieve which was correctly explained in the case of The State of Tamilnadu and Ors. vs. K. Balu and Ors.4, where after the legislature prohibited liquor stores only along National Highways; accordingly extending the same to state highways as well, the SC held that, “The prohibition should extend not merely to the national and state highways but must be so appropriately tailored so as to ensure that the policy is not defeated by locating liquor shops in close proximity of the highway. A restriction that the shop should not be accessible or visible from the national or state highways or from a service lane along such highways is necessary to ensure that the policy is not surreptitiously violated.’

It was imperative to keep Article 142 outside the purview of article 141 as its implementation changes based upon the facts of each case. Accordingly, as it does not constitute ratio decidendi and thus, loses its basic premise of making it a binding precedent. The directions issued can widely be interpreted as a relief and the other, as the declaration of law. The article is also different and a step ahead of article 136 which is restricted to the limitations under the specific provisions of the law for appeal while under article 142 any enforceable decree or order can be passed as is necessary for doing ‘complete justice’ in any matter or for meeting myriad situations created by human ingenuity of cause or result of operation of statute law or law declared under Articles 32, 136 and 141 of the Constitution.5

Article 142 read with Article 144 marks a restriction on the legislative power to undo the effect of the decree or order and thus, if a legislative enactment seeks to make unenforceable the decree or order of the Supreme Court in relation to the cause and the parties between whom it was made, uch law would be void for contravening Article 142. 6 In the case of University of

4 MANU/SC/1602/2016

5 Ashok Kumar Gupta vs. State of U.P., MANU/SC/1176/1997

6 Chandra Mohan vs. State of U.P. and Ors. (24.11.1967 - ALLHC) : MANU/UP/0048/1969

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Kerala Vs. Council, Principals’, Colleges, Kerala and Ors.,7 it was held that, “In so far as judicial power is concerned, no such limitation has been imposed under the Constitution. Rather the conferment of judicial power under Articles 141, 142, 32 and 226 has been plenary and very wide and enable the Supreme Court to declare the law which shall be binding on all the courts within the territories of India and Article 142 enables the Supreme Court to pass such order as is required to do complete justice in the case.”

It is well settled that these powers are outside the ambit of the legislative control, but they cease to end where the statutory vacuum ends. The powers being curative in nature cannot be construed as powers which authorise the court to ignore the substantive rights of a litigant and even with the width of its amplitude, cannot be used to build a new edifice where none existed earlier, by ignoring express statutory provisions dealing with a subject and thereby to achieve something indirectly which cannot be achieved directly.8 Relying on the same, the Supreme Court in the case of Union of India (UOI) vs. State of Maharashtra and Ors,9 reiterated that this article cannot be applied to encroach upon the field reserved for the legislature.

Accordingly, this corrective power as provided under the Article should be exercised in such a way, so as to solely thrive on the principles set out by the Constitution. It is the judiciary who “infuses life and blood into the dry skeleton provided by the legislature and creates a living organism appropriate and adequate to meet the needs of the society; thus, by making and moulding the law, he takes part in the work of creation and this is much more true in the case of interpretation of the Constitution.”10

***

7 MANU/SC/1834/2009

8 Supreme Court Bar Association v. Union of India, MANU/SC/0291/1998

9 MANU/SC/1351/2019

10 Chief Justice Bhagwati’s view in ‘Domestic Application of Human Rights Norms’


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IMPACT OF 2019 AMENDMENT ON THE ARBITRATION ACT, 1996

AUROSHREE PANDA

The legislature has over the past years shown its intention to keep pace with the growing popularity of arbitration as the most preferred mode for resolution of commercial matters. Two major amendments [2015 and 2019] to the Principal Act, clearly testify India’s commitment to make the country conducive for both international and domestic arbitrations. This article focuses on the recent Arbitration and Conciliation (Amendment) Act, 2019 (09-08-2019), which introduced noteworthy changes to the Arbitration and Conciliation Act, 1996 (‘Act’), while significantly tweaking some of the formulations introduced by the 2015 Amendment. This article attempts to give an overview of the important changes brought about by the 2019 Amendment, and their practical implications.

A. CHANGE: NO MORE RETROSPECTIVE 1. Insertion of Section 87, provides that 2015 amendments shall not apply on arbitration proceedings that have commenced before 23-10-2015. The retrospective effect of the far-ranging 2015 Amendment inasmuch as related to Court proceedings has been conclusively determined by the Hon’ble Supreme Court in BCCI v. Kochi Cricket (P.) Ltd.1, in the context of Section 36 of the Act, and further in Ssangyong Engineering and Construction Co. Ltd. v. National Highways Authority of India2, in the context of Section 34 of the Act. In the case of Kochi Cricket, the Supreme Court had expressed displeasure with the then pending proposal to render 2015 Amendment prospective. The court had urged a re-think in this regard. However, the Parliament has specifically disregarded the advice of Supreme Court, and through 2019 Amendment expressly made the 2015 Amendment prospective in nature.

1 (2018)6SCC287

2 2019(3)ArbLR152(SC)

A.1. RELATIVE IMPLICATION y The all-encompassing language makes the

applicability of the 2019 Amendment prospective not only to arbitration proceedings themselves but also related court proceedings.

y The immediate fallout of this, inter-alia, would that be a large number of execution petitions filed, inspired by the decision in Kochi Cricket, in relation to awards which arose from arbitrations invoked prior to 23.10.2015 and in which Section 34 award-challenge petitions are pending, would now be, unless the same has already been disposed of, rendered non-maintainable inasmuch as Section 36 of the 1996 Act provides for automatic stay of awards upon the filing of a petition under Section 34.

y However, the 2019 Amendment does not itself contain an express provision about the retrospectivity or otherwise of the changes it introduces to the principal Act.

y Such omission veers to a presumption of prospectivity, which might lead to future litigations, in absence of express provision.

B. CHANGE: MODIFIED TIMELINE FOR COMPLETION OF PROCEEDINGS

y The stringent time-period for completion of arbitration proceedings, for domestic arbitrations (12 months — extendable by 6 months subject to consent of parties, and thereafter of the Court), is now to be reckoned, not from the date of constitution of arbitral tribunal, but from the date of completion of pleading. Pleading shall be completed within 6 months from date the arbitrator receives notice of appointment

y However, international commercial arbitrations have been set free from the mandated pre-determined time-period.

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y Also, the introduction of Section 23 (4), provides that Statement of claim and Statement of defense shall be completed within 6 months from date the arbitrator receives notice of appointment.

y Noticeably, time spent to file a rejoinder [in cases with no counter claims] or a rejoinder to counter claim (for cases with counter claims) will not be considered as time spent in completion of pleadings under Section 23 (4)].

B.1. RELATIVE IMPLICATION y It is, however, unclear as to what are the

consequences of a breach of the six-month period by the parties.

C. CHANGE: MANDATE OF THE ARBITRATOR(S) TO CONTINUE PENDING AN APPLICATION FOR EXTENSION OF TIME

y The new Amendment specifies that after the parties approach the court under Section 29A for extension of time to complete the arbitration proceedings, then the mandate of the arbitrator(s) shall continue till the disposal of the said application.

y This ensures continuation of proceedings for the whole time when the said application is pending before the court.

y Prior to this amendment, such period (when S. 29A application is pending before the Court), could not be put to any beneficial use inasmuch as an arbitrator(s) with a lapsed mandate could revive the proceedings only once application under S. 29A had been allowed.

y The amendment provides that during the period an extension of time application for making an award is pending under Section 29 (5), the arbitrator’s mandate shall continue till disposal of the application. This amendment would help the tribunals to continue proceedings without waiting for court’s decision on extension of time.

y Further, the amendment also provides that, if a court deems fit - a reduction in the fees of

the arbitrator(s) while considering a Section 29A application, it shall be done only after giving the arbitrator(s) concerned an opportunity of being heard.

D. CHANGE: CONFIDENTIALITY OF ARBITRATION PROCEEDINGS

y The Amendment introduces Sections 42A.

y The Amendment explicitly incorporates a requirement for the arbitrator(s), the arbitral institution, and the parties to maintain confidentiality of all proceedings, except where disclosure of award is necessary for implementation and enforcement.

E. CHANGE: MANNER OF DEMONSTRATING CIRCUMSTANCE(S) THAT WOULD JUSTIFY INTERFERENCE WITH AN AWARD IN A PETITION UNDER SECTION 34

y Another interesting modification brought about by the recent Amendment is in relation to the manner of ‘proving’ pre-requisites for interference with an award under Section 34.

y Whereas the provision in the 1996 Act required a party to ‘furnish proof’ of the existence of circumstances that would justify interference with an award, the 2019 Amendment clarifies that the said circumstances have to be established on the basis of the record of arbitral tribunal.

y The amended Section 34 further clarifies that at the stage of challenge to an award, court will not consider any material other than that present in the record of the arbitral tribunal. Now, the Act provides that recording any kind of evidence is not permissible, unless under exceptional circumstances, as discussed in the recent case of Canara Nidhi Limited v. M. Shashikala.3

E.1. RELATIVE IMPLICATION y This not only removes the otherwise

ambiguous phrase ‘furnish proof’, it further

3 MANU/SC/1304/2019.


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expressly clarifies that the demonstration has to be made by the party concerned on basis of record of the tribunal alone, thereby expressly barring reference to material which was not placed before the tribunal.

F. CHANGE: EXCISION OF POWER OF ARBITRATORS TO MAKE ORDERS UNDER SECTION 17 IN THE POST-AWARD STAGE

y The 2015 Amendment had provided for the parties to obtain interim measures from a tribunal under Section 17, during pendency of arbitral proceedings or at any time after making the award, but before enforcement in accordance with Section 36.

y The period for which a tribunal can order interim relief has now been reduced, by the removal of the said power after making of the award, which further means that after the award has been passed, and prior to its enforcement, it is the concerned court only which can be approached for interim measures under Section 9 of the 1996 Act.

As

F.1. RELATIVE IMPLICATION y This ties in with the general prescription that

an arbitral tribunal is by and large functus-officio after the passing of an award except for certain limited functions as mentioned under Section 33 of the Principal Act.

G. CHANGE: PROTECTION FOR ARBITRATORS y New Section 42B puts in place an express

safety-net for the arbitrators, clarifying that no suit or any other legal proceeding shall lie against an arbitrator(s) for doing anything in good faith or intended to be done so in good faith under the 1996 Act.

H. CHANGE: PRIMA FACIE FINDING ENOUGH FOR REFUSAL TO REFER PARTIES TO ARBITRATION UNDER SECTION 45

y The 2019 Amendment has sought to bring about textual equivalence between Section 45 and Section 8 of the 1996 Act in respect to the nature of the determination required to be made by a court.

y Section 45 which required a court to come to a definitive finding that a matter was not capable of settlement through arbitration, which has now been amended to reflect, pari-materia with Section 8(1), that a court may refuse a reference to arbitration under Section 45 upon arriving at a prima-facie finding that the arbitration agreement was null and void, inoperative or incapable of being performed.

I. CHANGE: FORMAL RECOGNITION OF ARBITRAL INSTITUTIONS AND DELEGATION OF CRUCIAL FUNCTIONS

y The 2019 Amendment brings to practical

fruition the push initiated by 2015 Amendment for establishing arbitral institutions in the country.

y The new amendment specifically empowers the Supreme Court and High Courts to designate arbitral institutions for performing crucial functions, including appointment of arbitrators.

I.1. RELATIVE IMPLICATION y This is a significant step inasmuch as

appointment of arbitrators under Section 11 has consistently been regarded as a judicial function in terms of the judgment in SBP & Co. v. Patel Engineering Ltd.4, though there was a dilution of this principle in 2015 Amendment inasmuch as it provided, under Section 11(6)(b), that delegation of powers of appointment of arbitrator by Court to an arbitral institution

4 [(2005) 8 SCC 618]

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shall not amount to a delegation of judicial power.

J. CHANGE: APPOINTMENT OF ARBITRATORS y This function has now been expressly

permitted to be delegated to an institution to be so designated by the courts.

y The applications for appointment which were to be filed before Supreme Court, in case of an international arbitration, and High Court, for a domestic arbitration, are now to be filed before the said institution, if any, designated by Supreme Court and High Court respectively.

y The arbitral institution when approached, is required to dispose-off the application within 30 days from date of service of notice on opposite party [though practicality or mandatory enforceability of this provision is uncertain].

y Yet further, if the High Court concerned is unable to designate an arbitral institution for lack of availability, then the court has to maintain an arbitrator panel to discharge the duties and functions of an arbitral institution and any reference to such arbitrator(s) would be deemed to be made to an arbitral institution.

J.1. RELATIVE IMPLICATION y While this can involve a lot of debate with

regards the efficacy of delegating such a function to an arbitral institution, on an ancillary note, it is definitely another indicator of the rapidly denigrating position of Supreme Court as a Constitutional Court, and its evolution into a predominantly appellate forum.

y The present position is that orders passed by the High Courts in exercise of jurisdiction under Section 11 are, due to the lack of an appellate provision in the Principal Act, directly assailed before Supreme Court in exercise of jurisdiction under Article 136 of Constitution.

y Now, with delegation of the power for appointment under Section 11 being

delegated to arbitral institutions, the Supreme Court will directly hear challenges, under Article 136, against orders passed by designated arbitral institutions.

y This distinction or affliction, depending on the perspective, is seemingly unique to the Indian Supreme Court amongst apex judicial forums in countries across the world.

K. CHANGE: APPLICABILITY OF THE FEE PROVISIONS ENSHRINED IN SCHEDULE IV

y The recent amendment postulates, that in absence of designated arbitral institution, the High Court is required to maintain a panel of arbitrators and if a party were to appoint an arbitrator from such a panel then the fee as stipulated in the Schedule IV shall be applicable to the appointed arbitrator.

y Yet, any reference to an arbitrator from this panel is deemed to be a reference to an arbitral institution.

y Even in case of a designated arbitral institution, unless it’s an international arbitration or where parties have agreed for determination of fees as per rules of an arbitral institution, then the fee as stipulated in Schedule IV shall be applicable to arbitrator so appointed by the arbitral institution concerned.

L. CHANGE: ESTABLISHMENT OF THE ARBITRATION COUNCIL OF INDIA

y The Amendment has introduced a regulatory mechanism for arbitration and has added Part IA (Section 43A to Section 43M) to the Act, which includes the provision for constitution of Arbitration Council of India (“ACI”).

y It has been designed as a premier arbitration regulator and overseer performing multiple functions to reform, promote and advance the practice of arbitration in India.

y In furtherance of making India a global hub for Arbitration, the ACI has been empowered to provide accreditation of arbitrators, grade arbitral institutions, recognize professional


2 9

institutes, maintain a repository of arbitral awards made in India etc.

y The constitution of the ACI, has also been laid down in detail.

L.1. RELATIVE IMPLICATION y For greater clarity on exact scope of powers

and functions of ACI, and its internal constitution, one would have to wait for the introduction of relevant regulations by the Government which has been empowered for the same [to frame and prescribe].

M. CHANGE: EXPRESS QUALIFICATIONS TO BE ACCREDITED AS AN ARBITRATOR

y Schedule VII has been added which provides for qualification of the arbitrators.

M.1. RELATIVE IMPLICATION y However, such qualifications are supposed to

be meant for arbitrators who would be associated with arbitral institutions and not those appointed by the parties directly, without interference of arbitral institutions.

CONCLUSIONThe 2019 Amendment Act clearly shows the government’s aim to strengthen the importance of arbitration in India and to promote the country as a hub of institutional arbitration. Institutional arbitration in our country has been beset by a number of factors hindering its progress, and the causal nexus has time and again resulted in parties favouring international institutional arbitrations for resolving their disputes, an issue that the 2019 Act seeks to remedy, thus, making arbitration the most preferred dispute resolution method in India, and making India the most preferred destination for the same.

The 2019 amendment clearly aims at removing difficulties faced during the arbitration proceedings and the court proceedings arising therefrom.

y With separate time frames for completion of pleadings, arbitral tribunals will now have a

full period of 1 year for conducting trial and passing an award.

y With an increase in the arbitral institutions’ role, institutional arbitration as against ad hoc arbitration is expected to get a boost.

y Clarified applicability of 2015 amendment with prospective effect would go a long way in eliminating any confusion.

y However, legislature needs to consider providing upper age limit for any person to be appointed as arbitrator.

y Even the fee provided in the Schedule IV could be made binding in absence of any agreement to the contrary between parties.

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®INDIAN LEGAL IMPETUS

SEPTEMBER 2019. Vol. XII, Issue IX

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