lab-pgp reading material, oct-dec 2014.pdf

LEGAL ASPECTS OF BUSINESS

PGP-I, Slots 3 & 4

(Sep – Dec 2014)

2014-15

Section B

Prof. Anurag K. Agarwal

Indian Institute of Management

Ahmedabad

September 2014

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Prof. Anurag K. Agarwal, IIM-A LAB-PGP-I, Sep-Dec 2014

COURSE OUTLINE

Course Title: Legal Aspects of Business (PGP)

Credit: 1 (20 sessions)

Area: Business Policy

Term: PGP-I, Slots 3 & 4 (Sep – Dec 2014), 2014 – 2015

Course Objective:

The course shall provide vital legal aspects to management and shall endeavour to make managers aware

about the law vis-à-vis business so that the law may be used as an instrument in bringing positive change.

This change shall reflect in their thought process as it will facilitate in legal thinking and encourage them in

being on the right side of law. The participants shall become informed that knowledge of law can prove to

be a potent tool and sometimes a lethal weapon in the business world.

Pedagogy:

Primarily case discussion. The cases will be mostly court judgments.

Number of sessions:

Total number of sessions is 20

Bibliography:

Course pack comprising court judgments and other legal text.

Legal Aspects of Business, by Akhileshwar Pathak, 6th Edition, McGraw-Hill

Evaluation Criteria:

Class Participation: 20%

Quizzes: 40%

End Term: 40%

SESSION-WISE PLAN

Module – I

Law of Contract

1. Offer and Acceptance

Case: Mac Pherson v. Appanna, Supreme Court of India, 1951

2. Perfomance and Discharge of contract

Case: National Insurance Co. v. Seema Malhotra, Supreme Court of India, 2001

3. Breach of Contract and Remedies

Case: Ghaziabad Development Authority v. Union of India, Supreme Court of India, 2000

4. Damages

Case: Fateh Chand v. Balkishan Dass, Supreme Court of India, 1963

5. Quasi-Contract and Quantum Meruit

Case: Puran Lal Sah v. State of U. P., Supreme Court of India, 1971

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Module – II

Special Forms of Contract

6. Guarantee and Indemnity; Bank Guarantee

Cases: Ansal Engineering v. Tehri Hydro, Supreme Court of India, 1996

State Bank of India v. Mula Sahakari Sakhar, Supreme Court of India, 2006

7. Bailment

Case: Bank of Bihar v. State of Bihar, Supreme Court of India, 1971

8. Pledge

Case: Vimal Chand Grover v. Bank of India, Supreme Court of India, 2000

9. Sale of Goods

Case: Marwar Tent Factory v. Union of India, Supreme Court of India, 1990

10. Nemo Dat Quod Non Habet;; Breach of Contract for sale of goods

Cases: Morvi Mercantile Bank v. Union of India, Supreme Court of India, 1965

Gopalakrishna Pillai v. K.M. Mani, Supreme Court of India, 1984

Module – III

Agency, Partnership and Company

11. Agency and Partnership

Cases: Southern-Roadways v. S. M. Krishnan, Supreme Court of India, 1989

Syndicate Bank v. R.S.R. Engg. Works, Supreme Court of India, 2003

12. Forms of Business Associations, Corporate Veil

Case: Subhra Mukherjee v. Bharat Coking Coal, Supreme Court of India, 2000

13. Contd.

Case: DDA v. Skipper Construction, Supreme Court of India, 1996

14. Administration of a Company: Meetings

Case: Nazir Hoosein v. Darayus Bhathena, Supreme Court of India, 2000

15. Transfer of Shares

Case: Bajaj Auto Ltd. v. Company Law Board, Supreme Court of India, 1998

Module – IV

Law and Trade Practices

16. Consumer Protection and Unfair Trade Practices

Case: Jose Philip Mampillil v. Premier Automobiles, Supreme Court of India, 2004

17. Contd.

Case: Punjab University v Unit Trust of India, Supreme Court of India, 2014

18. Business and Fundamental Rights

Case: Global Energy v. Adani Exports, Supreme Court of India, 2005

19. Competition Law

Case: Shamsher Kataria v Honda Siel Cars India, Competition Commission of India, 2014

20. Intellectual Property Rights

Case: The Pomegranate Story, BP-334

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PREFACE

After several decades of accelerating change, enterprises the world over now conduct

business on a dramatically more international scale. Producers contract with suppliers on

several continents, and those producers, in turn, sell in global markets; service providers do

business through branches and offshoot companies in several parts of the world; firms

increasingly look abroad for merger partners and acquisition targets; distribution, franchise,

and licence networks readily span national borders.

In his book “Make the Rules or Your Rivals Will” Prof. Richard G. Shell of Wharton has

given a new truth about business strategy: He who makes the rules, makes the money. What

kind of rules is he talking about? The rules that executives negotiate into contracts, lobby into

new laws, litigate into court decisions, and persuade bureaucrats to write into regulatory

standards.

Many managers run away from the rules as they are terrified of lawyers. The smartest

executives, on the other hand, know that the law is far too important to leave to the lawyers.

They follow the example set by legally savvy corporate leaders: “Learn the 10 percent of legal

strategy that makes 90 percent of the difference in winning competitive battles.”

As the maxim goes, ignorantia facti excusat, ignorantia juris non-excusat, ignorance of law

is no excuse, however, ignorance of fact may be excused. It is not possible for anyone to know

the complete collection of laws, however, it is important or we can say without exaggerating,

essential for persons involved in business and industry to be well acquainted with the basic

principles of law. It helps them to be on the right side of law, use law as a potent tool or use

law as a lethal weapon.

Learning of law requires an open mind; and law, in fact, can never be contained in books.

The same applies to this reading material. It is a tool to train your mind, however, newer

situations keep occurring in life and they are the best teachers of law. This highlights the

importance of current legal scenario and different problems faced by the humanity in general

and the business world in particular. We must appreciate that when we are dealing with

Business Law, we are dealing with a small segment of the total spectrum of law. There are

bound to be instances of overlapping with other areas of law, which exhibit the role of law in

our lives. Law is ever-changing and therefore, it is best to understand the basic principles and

develop the ability to apply them in real life situations.

In India, Law, and even Business Law, has generally been a study of the statutes. However,

as Anson said, “Law is the last interpretation given by the last judge”, it is the case law which

provides us the real law and it has slowly but surely gained more significance during the latter

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part of the last century. With the Supreme Court of India – arguably the most powerful court

on the earth – taking a lead in providing answers to the socio-economic needs of the masses, it

is but natural to refer to the Supreme Court’s decision. Since its foundation in 1950, the

Supreme Court of India has been using law an instrument for the subservience of the

economic goals of the country with the spirit of social good. Though it is true that the High

Courts in different states have also followed the path shown by the Supreme Court, the

territorial reach of the Supreme Court is tremendous and because of its binding nature on the

entire country, it is utmost essential to be familiar with the law laid down by the apex court.

There has been a shift in focus from the “statutory study” to “case study”. The reading

material which follows has been prepared strictly on the case study method with short notes

and detailed cases. It is the study of cases which is desirable and recommended. A thread bare

analysis – facts, issues, laws, held by the court, importance, etc. – will be much more

beneficial that learning section numbers by rote. Cases have been selected primarily from the

decisions of the Supreme Court of India. Some of the decisions are also from other courts

including the U.S. Supreme Court. This in no way undermines or underestimates the decisions

of the various High Courts and tribunals in India. The only reason being as discussed in the

preceding paragraph.

Throughout the reading material I have used an ellipsis (* * *) to indicate when I have

omitted something from a reproduced case or other material. To enhance readability, however,

I have adopted one exception to this practise: I have frequently omitted citations of authority

and many footnotes in the cases and have not marked these omissions with ellipsis.

Your suggestions are welcome.

September 25, 2014 Anurag K. Agarwal

IIM, Ahmedabad

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INDEX

Course Outline 2

Session-wise Plan 2

Preface 4

Index 6

Note on Case Study 7

~~~

Module I

Law of Contract 16

Mac Pherson v. Appanna, Supreme Court of India, 1951 20

National Insurance Co. v. Seema Malhotra, Supreme Court of India, 2001 25

Ghaziabad Development Authority v. Union of India, Supreme Court of India, 2000 29

Fateh Chand v. Balkishan Dass, Supreme Court of India, 1963 33

Puran Lal Sah v. State of U. P., Supreme Court of India, 1971 40

~~~

Module II

Special Forms of Contract 46

Ansal Engineering v. Tehri Hydro, Supreme Court of India, 1996 46

State Bank of India v. Mula Sahakari Sakhar, Supreme Court of India, 2006 50

Bank of Bihar v. State of Bihar, Supreme Court of India, 1971 53

Vimal Chandra Grover v. Bank of India, Supreme Court of India, 2000 57

Marwar Tent Factory v. Union of India, Supreme Court of India, 1990 66

Morvi Mercantile Bank v. Union of India, Supreme Court of India, 1965 73

Gopalakrishna Pillai v. K.M. Mani, Supreme Court of India, 1984 77

~~~

Module III

Agency, Partnership and Company 81

Southern-Roadways v. S. M. Krishnan, Supreme Court of India, 1989 81

Syndicate Bank v. R.S.R. Engg. Works, Supreme Court of India, 2003 87

Subhra Mukherjee v. Bharat Coking Coal, Supreme Court of India, 2000 92

DDA v. Skipper Construction, Supreme Court of India, 1996 95

Nazir Hoosein v. Darayus Bhathena, Supreme Court of India, 2000 103

Bajaj Auto Ltd. v. Company Law Board, Supreme Court of India, 1998 112

~~~

Module IV

Law and Trade Practices 120

Jose Philip Mampillil v. Premier Automobiles, Supreme Court of India, 2004 121

Punjab University v Unit Trust of India, Supreme Court of India, 2014 123

Global Energy v. Adani Exports, Supreme Court of India, 2005 130

Shamsher Kataria v Honda Siel Cars, Competition Commission of India, 2014 134

The Pomegranate Story, BP-334 147

~~~

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NOTE ON CASE STUDY

Making the Case: Professional education for the world of practice

by

David A. Garvin1

All professional schools face the same difficult challenge: how to prepare students for the world of

practice. Time in the classroom must somehow translate directly into real-world activity: how to

diagnose, decide, and act. A surprisingly wide range of professional schools, including Harvard's law,

business, and medical schools, have concluded that the best way to teach these skills is by the case

method.

The Law School led the way. A newly appointed dean began to teach with cases in 1870, reversing a

long history of lecture and drill. He viewed law as a science and appellate court decisions as the

"specimens" from which general principles should be induced, and he assembled a representative set of

court decisions to create the first legal casebook. To ensure that class time was used productively, he

introduced the question-and-answer format now called the Socratic method.

The Business School followed 50 years later. Founded in 1908, it did not adopt cases until 1920, when

its second dean, a Law School graduate, championed their use. After convincing a marketing professor

to create the first business casebook, he then provided funding for a broader program of casewriting,

built around real business issues and yet-to-be-made decisions. That program produced cases in

multiple fields and their use in virtually all courses by the end of the decade.

The Medical School began using cases only in 1985. All were designed to cement students'

understanding of basic science by linking it immediately to practical problems—typically, the case

histories of individual patients. These cases formed the foundation of the school's revolutionary "New

Pathway" curriculum that shifted students' pre-clinical years away from lectures toward tutorials and

active learning.

In each of these professions, Harvard faculty became evangelists for the case method, spreading this

educational innovation around the world. Now, through close study of case-method teaching in law,

business, and medicine at Harvard, we can see how the technique has been adapted for use in distinct

disciplines—and how it might evolve, and be modified, to better meet the needs of twenty-first-century

students and teachers.

Learning to Think Like a Lawyer

Christopher Columbus Langdell, the pioneer of the case method, attended Harvard Law School from

1851 to 1854—twice the usual term of study. He spent his extra time as a research assistant and

librarian, holed up in the school's library reading legal decisions and developing an encyclopedic

knowledge of court cases. Langdell's career as a trial lawyer was undistinguished; his primary skill was

researching and writing briefs. In 1870, Harvard president Charles William Eliot appointed Langdell,

who had impressed him during a chance meeting when they were both students, as professor and then

dean of the law school. Langdell immediately set about developing the case method.

At the time, law was taught by the Dwight Method, a combination of lecture, recitation, and drill

named after a professor at Columbia. Students prepared for class by reading "treatises," dense

textbooks that interpreted the law and summarized the best thinking in the field. They were then

tested—orally and in front of their peers—on their level of memorization and recall. Much of the real

learning came later, during apprenticeships and on-the-job instruction.

Langdell's approach was completely different. In his course on contracts, he insisted that students read

only original sources—cases—and draw their own conclusions. To assist them, he assembled a set of

cases and published them, with only a brief two-page introduction.

1 David A. Garvin is Christensen professor of business administration at Harvard Business School.

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Langdell's approach was much influenced by the then-prevailing inductive empiricism. He believed

that lawyers, like scientists, worked with a deep understanding of a few core theories or principles; that

understanding, in turn, was best developed via induction from a review of those appellate court

decisions in which the principles first took tangible form. State laws might vary, but as long as lawyers

understood the principles on which they were based, they should be able to practice anywhere. In

Langdell's words: "To have a mastery of these [principles or doctrines] as to be able to apply them with

consistent facility and certainty to the ever-tangled skein of human affairs, is what constitutes a true

lawyer...."

This view of the law shifted the locus of learning from law offices to the library. Craft skills and hands-

on experience were far less important than a mastery of principles—the basis for deep, theoretical

understanding. Of the library, Langdell observed, "It is to us all that the laboratories of the university

are to the chemists and the physicists, the museum of natural history to the zoologists, the botanical

garden to the botanists." And because "what qualifies a person...to teach law is not experience in the

work of a lawyer's office...not experience in the trial or argument of cases...but experience in learning

law," instruction was best left to scholars in law schools.

This view of the law also required a new approach to pedagogy. Inducing general principles from a

small selection of cases was a challenging task, and students were unlikely to succeed without help. To

guide them, Langdell developed through trial and error what is now called the Socratic method: an

interrogatory style in which instructors question students closely about the facts of the case, the points

at issue, judicial reasoning, underlying doctrines and principles, and comparisons with other cases.

Students prepare for class knowing that they will have to do more than simply parrot back material they

have memorized from lectures or textbooks; they will have to present their own interpretations and

analysis, and face detailed follow-up questions from the instructor.

Langdell's innovations initially met with enormous resistance. Many students were outraged. During

the first three years of his administration, as word spread of Harvard's new approach to legal education,

enrollment at the school dropped from 165 to 117 students, leading Boston University to start a law

school of its own. Alumni were in open revolt.

With Eliot's backing, Langdell endured, remaining dean until 1895. By that time, the case method was

firmly established at Harvard and six other law schools. Only in the late 1890s and early 1900s, as

Chicago, Columbia, Yale, and other elite law schools warmed to the case method—and as Louis

Brandeis and other successful Langdell students began to speak glowingly of their law-school

experiences—did it diffuse more widely. By 1920, the case method had become the dominant form of

legal education. It remains so today.

Of course, there are modern-day refinements. Most instructors assign multiple cases for class, typically

selected because they appear to conflict with each other and require subtle, textured interpretation.

Langdell's approach, says professor of law Martha L. Minow, "has been turned on its head." Whereas

Langdell believed that cases not readily conforming to doctrine, or allowing for conflicting

interpretations, were wrongly decided and not deserving of study, law-school faculty today believe that

these are precisely the cases that warrant the most attention—because, Minow says, "We have

conflicting principles and are committed to opposing values. Students have to develop some degree of

comfort with ambiguity."

But preparation is little changed. There are, a second-year student observed, only a few "standard

moves" among instructors. Students prepare—with little or no collaboration—with these moves in

mind. Detailed questions are seldom assigned. Most professors expect students to be able to discuss

each case's facts, issues, arguments, and holdings; they are especially interested in minimal and

maximal interpretations of the associated doctrine and comparisons with holdings in other assigned

cases. This is called "briefing the case"—in many ways the core skill in learning to think like a lawyer.

Professors prepare for class in much the same way. They, too, brief the case; like their students, they

prepare largely without the support of others. But they also come armed with questions. Most pay

special attention to "hypotheticals"—one or more questions that involve made-up situations or that

slightly change the facts or issues in a case and so raise deeper, more fundamental tensions. "Suppose

Mr. Jones's home was located by the ocean, rather than along the highway. Would that change the

applicable zoning laws?" "Suppose Mrs. Smith had no surviving relatives. Would her will still be

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valid?" There is an art to framing thoughtful, stimulating hypotheticals—the late Langdell professor of

law Phillip E. Areeda argued that "the ideal hypothetical is one line long, often focusing on a single,

easily stated fact."

Most classes begin with a "cold call." The professor turns at random to a student and asks her to state

the facts or issues in the case. There is then considerable back and forth, with the opening student and

others, as the professor follows up and guides the discussion by asking a series of narrow, tightly

focused questions. These questions lie at the heart of Socratic teaching. Often, responses require a very

close reading of the case.

This entire process puts the instructor front and center. It is very much hub-and-spoke: the professor

exercises a firm, controlling hand and virtually all dialogue includes her. There are few student-to-

student interchanges. Eventually, the questions cease and the instructor brings class to an end, but

seldom with a conventional summary. There is limited closure and little attempt to tie up loose ends:

most summaries have a strong dose of "on the one hand, on the other hand." Students often leave class

puzzled or irritated, uncertain of exactly what broad lessons they have learned.

And that is precisely the point. Learning to think like a lawyer means understanding and accepting the

importance of small differences. Decisions often turn on matters of seemingly insignificant detail.

Precedents may or may not apply in this particular set of circumstances. Doctrines and rules are seldom

unequivocal or easy to apply.

Legal scholar Edward H. Levi, the late U.S. Attorney General and president of the University of

Chicago, long ago observed that "the basic pattern of legal reasoning is reasoning by example...the

finding of similarity or difference is the key step in the legal process." But because not all examples or

differences are relevant, lawyers must learn to distinguish appropriate from inappropriate analogies.

The hallmark of a good lawyer, says Gottlieb professor of law Elizabeth Warren, is "the ability to make

fine discriminations, to think of two things that are closely interconnected but keep them separate from

one another." And, equally important, to be capable of putting those differences into words: Byrne

professor of administrative law Todd D. Rakoff, dean of the school's J.D. program, says, "We are

trying to teach a public language." The ability to frame an argument or take a position is an essential

legal skill. For litigators, the stakes are especially high, since they must be able to respond on their feet

and under fire when judges ask for further explanation or analysis.

How are these habits of mind best developed? The answer, most law professors agree, is through a

combination of tough, relentless questioning by instructors and the careful study of "boundary

problems...[that] involve a clash of principles in which as much, or nearly as much, may be said on one

side or the other," in the words of Anthony T. Kronman, the dean of Yale Law School. Easy cases

teach students far less than complicated decisions, where distinctions are murky and lines are hard to

draw. Warren says, "You know the difference between daylight and dark? Well, we spend all of our

time at the Law School on dawn and dusk."

Because this approach emphasizes legal process and judicial reasoning, it prepares students to deal with

the unknown, to engage emerging legal questions and apply their skills in changing or unforeseen

circumstances. Still, the Socratic method of teaching is all too easily abused. Typically, students show

their displeasure by rationing their participation or staying silent. (There is little penalty, since grades

depend on anonymous final examinations, not class participation.) In many classes, only a few

"gunners"—those who aggressively seek to ingratiate themselves with faculty and speak on every

possible occasion—are steady, reliable contributors.

A second concern is that the method does not teach the full complement of legal skills. Visiting

professor of law Michael Meltsner, director of the school's First Year Lawyering Program, says that the

case method "does what it does very well. But what it does is narrow." The focus is on preparing

students for litigation. Law is viewed as a public contest with winners and losers, and students are

trained "more for conflict than the gentler arts of reconciliation and accommodation," as former law-

school dean and Harvard president Derek Bok wrote 20 years ago. But most lawyers put a premium on

negotiating, interviewing, and counseling skills. Others require the ability to develop options or

strategies. Even litigators must first engage in fact-finding. Because these skills are not well taught by

the current version of the case method, many schools have developed separate, freestanding

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"lawyering" courses and legal clinics. And that raises perhaps the deepest concern. As a second-year

student put it: "If you can 'think' like a lawyer, does that mean you can 'act' like a lawyer?"

Developing the Courage to Act

After Harvard Business School was founded in 1908, Edwin F. Gay, its first dean, wrote in the

inaugural catalog that professors would employ "an analogous method [to the 'case method' used at the

Law School], emphasizing classroom discussion, supplemented by lectures and frequent reports, which

may be called the problem method." The reality, however, was quite different. In the early years,

courses were general and descriptive ("Economic Resources of the United States," "Railroad

Organization and Finance") and taught primarily through lectures from the economist's point of view.

The situation remained largely unchanged until the appointment in 1919 of a new dean, Wallace P.

Donham, a graduate of Harvard Law School who later practiced law and had taught corporate finance

at the business school. His background led him to see strong parallels between the two professions. In a

1922 article, he observed that the use of cases in law schools was made possible by "the vast number of

published decisions, the thorough classification of the subject [by instructors], published case books,

the elements in the typical law case, and the development of general principles from the discussion of

individual cases. Of these elements, all, with the exception of the reported cases themselves, exist or

may be supplied for teaching business."

Business-school faculty therefore needed to develop cases of their own. But Donham recognized that

these cases would have to be different from legal cases. For businessmen, the primary tasks were

making and implementing decisions, often in the face of considerable uncertainty. In keeping with the

then-prevailing philosophy of pragmatism, cases should describe real problems and students should be

able to practice sizing up situations and deciding on appropriate action. For this reason, he said, a

business case "contains no statement of the decision reached by the businessman...and generally

business cases admit of more than one solution...[they] include both relevant and irrelevant material, in

order that the student may obtain practice in selecting the facts that apply." Much less time and

attention would be devoted to underlying theories or principles, since in business "practices and

precedents have no weight of authority." The particulars of each business situation were paramount;

they had to be understood and analyzed in detail.

With these ideas in mind, Donham moved quickly on several fronts. He persuaded Melvin Copeland, a

noted marketing professor, to change his planned textbook to a collection of business "problems."

Published in September 1920, it became the first business casebook. Donham also orchestrated a series

of informal faculty discussions about the school's methods of instruction. These meetings led to a broad

commitment to case-method teaching and, in 1921, a formal faculty vote that officially changed the

name of the school's approach from the "problem method" to the "case method." Most important,

Donham established and funded the Bureau of Business Research, a dedicated group of scholars under

Copeland's direction that, from 1920 to 1925, developed and wrote cases for multiple courses. (Once a

critical mass of materials was developed, Donham disbanded the bureau and insisted that the faculty as

a whole assume responsibility for developing cases.)

Within the business school, cases had become the dominant mode of instruction by the mid 1930s, and

acceptance was equally swift outside. By 1922 casebooks had been adopted by 85 institutions. Harvard

faculty members helped the dissemination process by publishing books on the case method in 1931,

1953, 1954, 1969, 1981, and 1991, and offering seminars and case-teaching workshops. The most

visible was the Visiting Professors Case Method Program, funded by the Ford Foundation between

1955 and 1965, in which more than 200 faculty members from leading business schools spent entire

summers at Harvard researching, writing, teaching, and improving a case of their own. Today, business

schools around the globe teach by the case method.

Modern cases retain the same basic features described by Donham. Typically, they average 10 to 20

pages of text, with 5 to 10 additional pages of numerical exhibits. The best cases describe real, not

fictitious, organizations and real business issues. "A good case," Donham professor of organizational

behavior emeritus Paul Lawrence noted years ago, is "the vehicle by which a chunk of reality is

brought into the classroom to be worked over by the class and the instructor." Most cases require

students to assume the role of the protagonist and to make one or more critical decisions. The

information is often deliberately incomplete, allowing for many possible options.

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Students are normally assigned one case per class. Preparation is guided by assignment questions,

which have become increasingly detailed over time. Thirty years ago, the focus was on action, and

virtually the only question was, "What should Mr. Smith do?" Today, as management has become more

sophisticated, with a wider array of technical theories and tools, detailed analytical questions are the

norm. Students still come to class with a recommended decision and implementation plan, but also with

extensive supporting analysis. Because of the workload—most cases take at least two hours to read and

prepare, and two to three classes are scheduled per day—students often form their own three- to four-

person study groups to share ideas and divvy up responsibilities.

Instructors prepare much as students do. They too read and analyze the case and prepare answers to

assignment questions. But they attend equally to orchestrating class discussion most effectively. In this,

they have help. All instructors who teach first-year courses, a mix of newcomers and old hands, are

organized into teaching groups—collections of five to nine faculty members, led by an experienced

professor, who teach the same subject and use the same cases. These groups meet regularly to analyze

the cases and discuss classroom management. Detailed teaching notes present both the required

analysis and likely discussion dynamics; most teaching notes even contain "blackboard plans" showing

the best way to organize students' comments on the five blackboards in the typical business-school

classroom.

Classes begin either with a "cold call," as at the law school, or a "warm call," in which a student is

given notice a few minutes before class that he will be asked to speak. The opening question—usually

one from the assignment—typically requires taking a position or making a recommendation. Since as

much as 50 percent of their grade is based on class participation, most students come well prepared.

The opening student normally talks for five to 10 minutes with occasional interruptions by the

instructor. Once he is done, instructors typically throw the same issue or question back to the class for

further discussion.

Throughout the class, a primary goal is to encourage student-to-student dialogue. For this reason,

business-school professors tend to pose broad, open-ended questions far more than their law-school

colleagues do, and to link students' comments by highlighting points of agreement or disagreement.

They also are more likely to seek commentary from experts: students whose backgrounds make them

knowledgeable about a country, a company, or an issue. Instructors are also more likely to provide

closure at the end of a class or unit, with a clear set of "takeaways."

In most classes, debate revolves around a few central questions that prompt conflicting positions,

perspectives, or points of view. "There's got to be a plausible tension in the case," says W. Carl Kester,

chair of the M.B.A. program and Industrial Bank of Japan professor of finance. "It's what allows me to

build a debate and get the students to talk with one another."

The best questions involve issues where much is at stake, and where the class is likely to divide along

well-defined lines. At times, they bring a difficult choice to life: "This new business requires

completely different marketing and manufacturing skills, even though the exact same customers will

purchase the product. Do you want to set up an independent unit, or put the business within an already

established division?" Questions like these force students to take a stand on divisive issues and try to

convince their peers of the merits of their point of view.

That, of course, is how managers spend their time. They regularly size up ambiguous situations—

emerging technologies, nascent markets, complex investments—and make hard choices, often under

pressure, since delay frequently means loss of a competitive edge. They work collaboratively, since

critical decisions usually involve diverse groups and departments. And they discuss their differences in

meetings and other public forums.

Cases and case discussions thus serve three distinct roles. First, they help students develop diagnostic

skills in a world where markets and technologies are constantly changing. "The purpose of business

education," a business-school professor noted more than 70 years ago, "is not to teach truths...but to

teach men [and women] to think in the presence of new situations." This requires a bifocal perspective:

the ability to characterize quickly both the common and the distinctive elements of business problems.

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Second, case discussions help students develop persuasive skills. Management is a social art; it requires

working with and through others. The ability to tell a compelling story, to marshal evidence, and to

craft persuasive arguments is essential to success. It is for this reason that the business school puts such

a heavy premium on class participation. Beyond grading, students also receive regular feedback from

professors about the quantity, quality, and constructiveness of their comments.

Third, and perhaps most important, a steady diet of cases leads to distinctive ways of thinking—and

acting. "The case system, " business school alumnus Powell Niland, now of Washington University,

has observed, "puts the student in the habit of making decisions." Day after day, classes revolve around

protagonists who face critical choices. Delay is seldom an option. Both faculty and students cite the

"bias for action" that results—what Fouraker professor of business administration Thomas Piper calls

"courage to act under uncertainty." That courage is essential for corporate leadership. "The

businessman's stock in trade," wrote two long-time faculty members, the late Walmsley University

Professor C. Roland Christensen and Abraham Zalesnik, now Matsushita professor of leadership

emeritus, "is his willingness to take risks, to decide upon and implement action based on limited

knowledge." Cultivating these attitudes is the raison d'etre of the case method.

But it also raises concerns. At times, courage is difficult to distinguish from foolhardiness. Competitive

information may be unavailable; technologies may be underdeveloped; employees may be untrained or

unprepared. Sometimes the wisest course of action is to wait and see.

The case method does little to cultivate caution. Decisiveness is rewarded, not inaction. Students can

become trigger-happy as a result, committed "to taking action where action may not be justified or to

force a solution where none is feasible." Class discussions can easily polarize. Persuasiveness is

valued—but not publicly changing one's own mind. Few students do so in the course of discussion; if

anything, positions tend to harden as debate continues. Skilled managers, by contrast, try to stay

flexible, altering their positions as new evidence and arguments emerge.

Increasingly, the case method is being used to teach sophisticated techniques like valuation,

forecasting, and competitive analysis. These techniques are essential to modern business literacy and

are required for employment at investment banks, consulting firms, and large corporations. But they

come with a price. "Too many of our cases," says Kester, "are turning into glorified problem sets. They

have a methodological line of attack and a single, preferred, right answer. They are exercises in applied

analysis." Diagnosis, decision-making, and implementation—the action skills the case method was

originally designed for—receive much less time and attention. The challenge is compounded by the

continued influx of Ph.D.s with backgrounds in economics, political science, psychology, and

sociology into business-school teaching. That leaves some professors wondering: how do we continue

to teach the art and craft of management?

Fostering a Spirit of Inquiry

For most of the twentieth century, medical schools followed the model proposed by Abraham Flexner

in a report to the Association of American Medical Colleges in 1910. The first two years of medical

school were devoted to basic-science courses in biochemistry, anatomy, pharmacology, and other core

disciplines. Most teaching was done in large lectures, and students were expected to memorize huge

quantities of information. The following two years were devoted to clinical training—interactions with

live patients in which students learned such skills as taking histories, conducting physical

examinations, and making diagnoses. Most clinical training took place in small groups directly on the

hospital floor. The preclinical and clinical years were largely separate.

For decades, critics complained about this approach, citing the tedium of the first two years, the force-

feeding of material, the lack of connection between science and medical practice, and the weary,

unhappy students who were the result. But despite repeated calls for action, there was little change.

When Daniel Tosteson, an alumnus, became dean of Harvard Medical School in 1977, he drew upon

his prior experience as a professor of cell biology and as dean (at Chicago) and immediately convened

a series of faculty discussions, workshops, and symposiums aimed at reforming medical education. A

1979 workshop examined "What do we want Harvard Medical School graduates to know how to do,

and how does the learning environment foster or hinder the achievement of these goals?" A 1980

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symposium examined the problem of information overload: with more than 600,000 biomedical articles

published each year, how could students, and physicians, keep current?

These discussions resulted in a series of broad design principles and the commissioning of several

planning groups, the first of which involved the Business School's C. Roland Christensen, celebrated

for his mastery of the case method and his case-teaching seminars. Additional case-method experience

came from Gordon Moore, professor of ambulatory care and prevention, another medical-school

graduate and also a recent graduate of the business school's Advanced Management Program, who

oversaw curriculum design and development. After pilot testing, the "New Pathway" was up and

running in 1985. By 1992, it had become the school's sole mode of instruction.

"Medicine," Tosteson argued, was "a kind of problem solving," and each medical encounter was

"unique in a personal, social, and biologic sense.... All these aspects of uniqueness impose on both

physician and patient the need to learn about the always new situation, to find the plan of action that is

most likely to improve the health of that particular patient at that particular time." Students needed to

confront these problems from the start of their education, but without losing rigor. To that end, "the

study of science and clinical medicine should be interwoven throughout the curriculum." Students'

"active participation" was essential, and a "principal objective of medical schools should be to

encourage each student to assume responsibility for his or her own learning." Together, these principles

shifted the center of gravity of medical education from a purely technical orientation toward the

development of essential attitudes and skills. They also led the school to adopt the case method.

In the New Pathway, the entire curriculum is built around multi-week "blocks" of focused, related

material. The first block, on the human body, covers anatomy, histology, and radiology and runs for

eight weeks; the second block, on chemistry and biology of the cell, covers biochemistry and cell

biology and runs for six weeks. During each period, students attend only one lecture per day, with lab

sessions twice per week. A sequence of courses called "Patient-Doctor" spans the first three years; in

them, students learn to interview patients, take a history, and conduct physical examinations.

The core of the program is the tutorial, an ungraded discussion group of six to eight students that meets

three times per week to discuss cases developed especially for the New Pathway. Each case is a

multipart series, keyed to a particular block of the program; their defining feature, says associate

professor of pediatrics Elizabeth Armstrong, is that the story of a real patient is "progressively

disclosed" in five or six short segments so that "students meet the patient much as they would in the

real world." Typically, the first segment describes the patient's background and symptoms, the second

describes the physical examination, and subsequent installments describe lab tests, the doctor's

diagnosis, the treatment, the patient's response, and the long-term progression of the illness.

When a tutorial begins, the instructor hands out the case, and a student volunteers to read the first

segment aloud. The group begins to look up unfamiliar terms, using medical dictionaries and reference

books found in every tutorial room. Once they understand the terminology, the students proceed to

discuss what they know and don't know about the case: what scientific knowledge might be brought to

bear, what mechanisms might produce the patient's condition, and what topics must be probed further.

A patient with a hacking cough complains of chest pains; what does this suggest about possible

connections between heart and lung functioning? Or how might a patient's heavy doses of antibiotics be

linked to her flu-like symptoms?

These discussions—free-form and largely student-directed—seldom generate answers. Instead,

students jointly develop a "learning agenda" that will guide their independent study over the next two

days. Together, they list those things they feel they need to know more about to fully understand the

biological and clinical issues in the case; from this research agenda, they then self-select areas to pursue

through individual reading. How do they choose? According to one first-year student: "I chose the

topics I feel uncomfortable with, the topics that I would not be prepared to discuss intelligently. I study

what I don't understand."

And that, in the end, is the real goal of the New Pathway. The program is designed to "foster a true

spirit of inquiry." Medicine is constantly changing. Doctors must learn how to learn, collaboratively

and individually. According to Gordon Moore, "I want my students to be able to identify a gap in their

knowledge, feel guilty about not filling it, and have the skills to learn what they need." Tosteson adds,

"They discover that choosing what to learn is the hard part; learning it is a lot easier."

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This discovery process lies at the heart of the medical school's case method. The cycle of case

presentation, identification of a learning agenda, and independent study is repeated as additional

segments of a case unfold. Students share the findings from their reading and research, the tutor then

hands out the next part of the story, and the process begins anew.

What role do tutors play in the process? Outside of class, they provide detailed feedback and

evaluations to students about their contributions and participation. During tutorials, they speak

infrequently—perhaps 5 to 10 percent of the time—and almost always ask short, focused questions.

Unlike their counterparts at the law and business schools, they do not orchestrate or steer discussions.

Most do little or nothing to kick-off class. Instead, faculty and students say, the best tutors subtly

"nudge students in the right direction" by "massaging rather than managing the process." Skilled tutors

set the tone of discussion by asking reflective questions: "Are there any terms you don't understand?"

"Why do you think this might be happening?" They impose rigor by asking testing questions: "Are you

sure about that?" "Is that something that might be worth checking?" Finally, they provide guidance and

help by asking narrow, substantive questions: "You've talked about over-stimulation of the bone

marrow. Do you have any idea how different the blood picture might be if the patient had an infection

instead of leukemia?"

The latter role is by far the most difficult. Tutorials are designed to prompt self-directed student

learning. Too much faculty guidance and students become passive; too little and they become confused.

A first-year student says, "Sometimes, I have the feeling that we are wandering around in a dark tunnel.

We're trying door after door with no luck. The best tutors shine a little light from under one door and

show us the way."

This entire process goes by the name of "problem-based learning." It was first developed by a small

number of pioneering medical schools, notably McMaster University in Canada, in the 1960s and

1970s. Cases are springboards for self-study, not documents prepared in advance of discussion.

Because the problem is presented before students have learned all of the associated scientific or clinical

concepts, cases serve as catalysts for learning, not as the primary content.

The goal is still to ensure that students master the underlying science, but do so in ways that lead to

deeper understanding and improved retention. The method draws heavily on the findings of modern

cognitive science: learning and retention improve markedly when students are motivated, when prior

knowledge is activated by specific cues, and when new knowledge is linked to a specific context.

Vivid, evocative cases featuring patients and their illnesses serve these purposes admirably.

They also lead to a more cooperative spirit, which is essential to modern team-based medicine.

Students in tutorials are forced to listen carefully and work together closely because their independent

reading leads them in different directions. As one student put it, "In a traditional curriculum, you hope

your classmates don't study, so you can appear brilliant; in the New Pathway, you hope your classmates

do study, because we learn from each other." Only by pooling their findings can the students fully

explain the phenomenon being studied.

But the method has its detractors. The biggest problems are accountability and rigor. When students are

unmotivated or tutors are unskilled, participation can quickly evaporate. Faltering discussions lead

nowhere and are difficult to redirect. Because tutorials are ungraded and tutors are discouraged from

taking students through the preferred reasoning process, there is little they can do to command

involvement or attention, or to ensure disciplined, efficient analysis.

Still, many medical schools are moving rapidly in Harvard's direction, even if few have made the same

curriculum-wide commitment to cases. (In part, the reason is cost. Because discussion groups are so

small, staffing is an issue. Harvard, with 165 students per class, requires 300 tutors to lead the tutorials

in the first two years of its program.)

Moreover, the superiority of this approach is not yet fully documented. Careful studies comparing the

performance of the pilot group of New Pathway students—who were randomly selected and could thus

be compared scientifically with their traditionally taught peers—found comparable scores on board

certification tests. There were no significant differences in biomedical knowledge, and New Pathway

graduates reported being more committed to careers in primary care and psychiatry, more comfortable

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interpersonally, more competent dealing with psychosocial issues, and more likely to display

humanistic attitudes. But studies of problem-based learning at other medical schools have shown some

fall-off in performance on basic science examinations, despite high levels of student and faculty

satisfaction and equal or better performance on clinical examinations.

Broadening the Portfolio

The case method is now firmly established at Harvard's law, business, and medical schools. Each

school has tailored the method to its own ends, focusing on distinctive aptitudes and skills. Each has

selected a different center of gravity—diagnosis or decision making, competition or collaboration,

analytical precision or courageous action. Each has also recognized the limitations of its chosen

approach and begun to explore alternatives.

At the law school, a dozen junior and senior faculty members have been meeting for nearly a year in a

teaching workshop, formed originally to deal with issues of diversity and race. The group soon

broadened its agenda to include other pedagogical issues: how faculty members approach their

teaching, how their approach compares with those at the business and medical schools, how they could

better engage and stimulate students. A few participants videotaped their classes and then presented

them for collective discussion. Teaching practice became a topic of shared intellectual interest—routine

for business and medical school faculty members, but a rarity for law professors. According to a

participant, "We learned that teaching is a collaborative enterprise, and that a culture of talking about

teaching is incredibly invigorating. We all became more experimental and made major changes in our

teaching." The group is now sharing its observations with faculty colleagues and the new dean (who is

interested in curricular reform; see page 74) in the hope of stimulating further change.

At the business school, a faculty committee recently explored the possibility of adding small-group

discussions to the core curriculum. Those groups would still be rather large—the cutoff was set at 25

students—but the goal is to foster new behaviors, encouraging students to work together more closely

than in their typical 80- to-100-person classes. The M.B.A. program's Carl Kester notes the obvious

parallels to the New Pathway: "I'm particularly interested in the medical-school model and how it

might be adopted here in a small-group setting. I'd like to see our students working together more

collaboratively, focusing on diagnosis, data collection, and problem identification by asking, 'What

information do we need, and how should we go about getting it?'" In Kester's view, "Students need

something more open-ended at the beginning. They need to learn how to tackle a problem strategically

and technically" before they encounter detailed, structured, analytical assignments.

The medical school has been moving on two fronts: adding more structure to tutorials, and reexamining

the process of clinical education (the latter initiative prompted by the changing economics of healthcare

and the difficulty of finding hospital-based instructors for clinical rotations, not by concerns about

pedagogy). Faculty members have long known that tutorials lose steam in their second year as the

process becomes repetitive, students master the mechanics, and become bored. Changes "that add

complexity and are developmentally appropriate," as professor of medicine and of biological chemistry

and molecular pharmacology David Golan puts it, are underway, at least experimentally. In one,

students are assigned multiple cases simultaneously; they share responsibilities much as a ward team

would. In another, students are assigned different medical roles for each case and then respond

according to their specialties; they trade roles as the tutorial progresses. In a third, based on discussions

with business-school faculty, cases take on a decision-making focus, requiring students to move beyond

diagnosis to debates about difficult medical choices.

With these innovations, the boundaries among the three case methods have started to fall. Each school

is beginning to broaden its pedagogical portfolio, learning from, and borrowing from, the others. Much

as the College is overhauling the undergraduate curriculum, the law, business, and medical schools are

moving in their own ways to better prepare their students for the demands of twenty-first-century

professional practice.

Abridged, September-October 2003: Volume 106, Number 1, Page 56

Copyright ©1996-2004 Harvard Magazine, Inc.

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MODULE – I

LAW OF CONTRACT

Essentials Of A Valid Contract

Introduction: Every contract is an agreement, however, every agreement is not a contract. The

essential idea in an agreement is the legal relationship must be established between the parties. This can

happen only when the parties communicate with each other and with a view to create a right in one

party and a corresponding duty on the other party. This is generally done by one party making an offer

or proposal to the other party. If this offer is accepted, it gives rise to a promise.

An agreement consists of the following four elements:

1. There must be at least two parties

2. There must be an identity of mind

3. There must be mutual communication

4. There must be an intention to create a legal relationship

For an agreement to be a contract, it is essential that the agreement is enforceable by law. An

agreement must satisfy the following conditions to be called a contract:

1. It must have been made by free consent of the parties

2. Consideration and object of agreement must be lawful

3. The parties must be competent to contract

4. The agreement must not be such as is expressly declared to be void

5. If specifically required, the agreement must be in writing, otherwise, oral agreement is as good as a

written agreement

The law restricts the use of the word contract only to those agreements which the law will recognise

and if necessary enforce by compelling a party to it to discharge his or her obligation.

Law in India: Let us examine the law of contract in India. It is contained in the Indian Contract Act,

1872, which lays down the general principles relating to formation, performance and enforceability of

contracts and the rules relating to certain special types of contracts such as indemnity, guarantee,

bailment, pledge and agency. Some special contracts such as partnership, sale of goods, negotiable

instruments, insurance, etc. are dealt with by separate legislation. However, the general principles of

contract law are the basis for such special contracts too.

Some of the important definitions to be kept in mind are as follows:

Proposal, Sec 2 (a): When one person signifies to another his willingness to do or to abstain from doing

anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a

proposal.

Promise, Sec 2 (b): When the person to whom the proposal is made signifies his assent thereto, the

proposal is said to be accepted. A proposal, when accepted, becomes a promise.

Promisor and Promisee, Sec 2 (c): The person making the proposal is called the ‘promisor’, and the

person accepting the proposal is called the ‘promisee’.

Consideration, Sec 2 (d): When at the desire of the promisor, the promisee or any other person has done

or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing

something, such act or abstinence or promise is called a consideration for the promise.

Agreement, Sec 2 (e): Every promise and every set of promises, forming the consideration for each

other, is an agreement.

Reciprocal Promises, Sec 2 (f): Promises which form the consideration or part of the consideration for

each other, are called reciprocal promises.

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Void ab initio, Sec 2 (g): An agreement not enforceable by law is said to be void. (ab initio means from

the very beginning)

Contract, Sec 2 (h): An agreement enforceable by law is a contract.

Voidable Contract, Sec 2 (i): An agreement which is enforceable by law at the option of one or more of

the parties thereto, but not at the option of the other or others, is a voidable contract.

Void Contract, Sec 2 (j): A contract which ceases to be enforceable by law becomes void when it

ceases to be enforceable.

Valid, Void, Voidable and Illegal Contract: Any contract may fall in either of these categories. If it is

not void, voidable or illegal, it is a valid contract. Let us see what these different types of contracts are.

A contract may be void from the very beginning, i.e., void ab initio – in such a case, it is not even a

contract, it is simply an agreement and is void from the very beginning. However, in certain cases, the

contract may be a valid contract at the beginning, but with the passage of time becomes void. For

instance, A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the

bargain, though neither party was aware of the fact. The contract though valid initially becomes void

when the fact is known to both the parties.

A contract becomes voidable in the following circumstances:

(a) If the consent has been obtained by coercion, undue influence, fraud or misrepresentation, i.e., one

of the parties did not give free consent.

(b) If a party to an executory contract prevents the other party from performing his part of the contract,

the contract becomes voidable at the option of the party so prevented.

(c) If a party to a contract, in which time is essential fails to perform his part of the contract at a fixed

time, the agreement becomes voidable at the option of the promisee.

Illegal contracts or rather agreements are those whose objects or considerations are illegal. This refers

to Sec 232 which declares that the consideration or object of an agreement is illegal if:

(a) it is forbidden by law, or

(b) is of such a nature that, if permitted, it would defeat the provisions of any law, or

(c) is fraudulent, or

(d) involves or implies, injury to the person or property of another, or

(e) the Court regards it as immoral, or

(f) opposed to the public policy.

In each of the above mentioned cases, the consideration or object of an agreement is said to be unlawful

or illegal. Every agreement of which the object or consideration is unlawful is void.

It is important to understand the distinction between a void and a voidable contract:

1. A voidable contract is an agreement which is enforceable by law at the option of one or more of

the parties thereto, but not at the option of the other or others, whereas a void agreement is, not at

all, enforceable at law.

2. A voidable contract is a perfectly valid one unless it is repudiated by the party to do so and when

such a party exercises his option to repudiate it, it becomes void. As against this, a void contract is

completely void ab initio. It cannot be enforced at all.

3. A void contract does not create any right or obligation between the parties to the contract, whereas

a voidable contract creates rights and obligations between the parties.

4. The various factors which render a contract voidable are: coercion, fraud, undue influence and

misrepresentation, whereas, the Act declares numerous agreements to be void on the grounds of

morality, social consideration, impracticability or public policy.

2 23. What consideration and objects are lawful, and what not The consideration or object of an agreement is lawful, unless -It is forbidden by law; oris of such nature that, if permitted it would defeat the provisions of any law or is fraudulent; ofinvolves or implies, injury to the person or property of another; orthe Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.

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Sec 10 provides that all agreements are contracts, if they are made by free consent of parties, competent

to contract, for a lawful consideration, and with a lawful object, and are not expressly declared by law

to be void.

Consent and Free Consent: For a valid contract, consent should be free. Consent is said to be

free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake. The

relevant sections define each term.3 Coercion is related to acts forbidden by Indian Penal Code (acts of

3 13. "Consent" defined Two or more person are said to consent when they agree upon the same thing in the same sense. 14. "Free consent" defined Consent is said to be free when it is not caused by - (1) coercion, as defined in section 15, or (2) undue influence, as defined in section 16, or (3) fraud, as defined in section 17, or (4) misrepresentation, as defined in section 18, or (5) mistake, subject to the provisions of section 20,21, and 22. Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation, or mistake. 15. "Coercion" defined "Coercion" is the committing, or threating to commit, any act forbidden by the Indian Penal Code (45 of 1860) or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. 16. "Undue influence" defined (1) A contract is said to be induced by "under influence" where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. (2) In particular and without prejudice to the generally of the foregoing principle, a person is deemed to be in a position to dominate the will of another - (a) where he hold a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or (b) where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress. (3) Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall be upon the person in a position to dominate the will of the other. Nothing in the sub-section shall affect the provisions of section 111 of the Indian Evidence Act, 1872 (1 of 1872) 17. "fraud defined "Fraud" means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto his agent, or to induce him to enter into the contract; (1) the suggestion as a fact, of that which is not true, by one who does not believe it to be true; (2) the active concealment of a fact by one having knowledge or belief of the fact; (3) a promise made without any intention of performing it; (4) any other act fitted to deceive; (5) any such act or omission as the law specially declares to be fraudulent. 18. "Misrepresentation" defined "Misrepresentation" means and includes - (1) the positive assertion, in a manner not warranted by the information of the person making it, of that whichis not true, though he believes it to be true; (2) any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or anyone claiming under him; by misleading another to his prejudice, or to the prejudice of any one claiming under him; (3) causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is subject of the agreement. 19. Voidability of agreements without free consent When consent to an agreement is caused by coercion, [***] fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. A party to contract, whose consent was caused by fraud or mispresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put on the position in which he would have been if the representations made had been true. Exception : If such consent was caused by misrepreentation or by silence, fraudulent within the meaning of section 17, the contract, neverthless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence. Explanation : A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practised, or to whom such misrepresentation was made, does not render a contract voidable. 20. Agreement void where both parties are under mistake as to matter of fact Explanation : An erroneous opinion as to the value of the things which forms the subject-matter of the agreement,is

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criminal nature) and detaining of goods, etc. with a view to force any person to enter into a contract;

undue influence signifies the relations between parties where one party is in a position to dominate;

fraud as we understand in common parlance but defined legally in section 17; misrepresentation is also

positive statement of untrue facts – fraud and misrepresentation differ from each other in the sense that

in the case of former the person making the statement knows that he is making an untrue statement,

whereas in the latter case, the person making a statement does not know that he is making a statement

which is untrue – and misleads the other party; and mistake means to understand wrongly.

Free consent is an essential condition for a valid contract. The presence of coercion, undue influence,

fraud, misrepresentation or mistake in the formation of contract does not negative consent, there is

consent, but it is not given freely. The result is that the contract becomes voidable at the option of the

other party.

There must be a contract between two or more parties. No one can enter into a contract with himself. At

the time of contracting, the parties must be thinking of the same thing and in the same sense, i.e., there

must be consensus ad idem (agreement as to the same thing). There must be an intention on the part of

the parties to create a legal relationship. The law presumes that an agreement of a purely social or

domestic nature is not a contract. In commercial agreements, the law presumes that the parties intended

those agreements to have legal consequences. However, both the presumptions are rebuttable to the

contrary. Consent must be free (no fraud, coercion, etc.) and parties must be competent to contract

(major and of sound mind). Contract must be supported by consideration on both sides. Each party

must give or promise something, and receive something or a promise in return. In case, there is no

consideration, the promise will be nudum pactum (a nude contract) and would not be enforceable by

law. However, there are certain exceptions as mentioned in Sec 254 – love and affection, time barred

not be deemed a mistake as to a matter of fact. 21. Effect of mistake as to law A contract is not voidable because it was caused by a mistake as to any law in force in India; but mistake as to a law not in force in India has the same effect as a mistake of fact. 22. Contract caused by mistake of one party as to matter of fact A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact. 4 25. Agreement without consideration, void, unless it is in writing and registered or is a promise to compensate for something done or is a promise to pay a debt barred by limitation law An agreement made without consideration is void, unless - (1) it is expressed in writing and registered under the law for the time being in force for the registration of documents, and is made on account of natural love and affection between parties standing in a near relation to each other; or unless (2) it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do; or unless (3) it is a promise, made in writing and signed by the person to be charged therewith or by his agent generally or specially authorised in that behalf, to pay wholly or in part debt of which the creditor might have enforced payment but for the law for the limitation of suits. In any of these cases, such an agreement is a contract. Explanation 1 : Nothing in this section shall affect the validity, as between the donor and donee, of any gift actually made. Explanation 2 : An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given. 26. Agreement in restraint of marriage, void Every agreement in restraint of the marriage of any person, other than a minor, is void. 27. Agreement in restraint of trade, void Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. Exception 1 : Saving of agreement not to carry on business of which good will is sold - One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the court reasonable, regard being had to the nature of the business.[***] 28. Agreements in restrain of legal proceedings, void Every agreement, by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights, is void to the extent. Exception 1 : Saving of contract to refer to arbitration dispute that may arise.This section shall not render illegal contract, by which two or more persons agree that any dispute which may arise between them in respect of any

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debt, etc. Adequacy of consideration is no criterion, however, it will be taken into account to determine

the free consent. This gives rise to the ‘peppercorn theory’ – even a nominal consideration is fine.

A stranger to a contract cannot maintain a suit for remedy. The law entitles only those who are parties

to the contract to enforce his rights as against the other party. This is known as ‘privity of contract’.

Thus, law of contract creates jus in personam (a right against a specific person) as distinguished from

jus in rem (a right against the world at large).

Offer and Acceptance:

The word offer has not been used in the Indian Contract Act, instead, the word proposal has been used.

Both are synonymous and are used interchangeably. There are three essential requirements that an offer

must fulfil. These are:

1. There must be a contractual intention behind an offer.

2. The offer must be definite and not vague or ambiguous.

3. The offer must be communicated to the offeree.

The moment an offer is accepted, it gives rise to an agreement, and if enforceable by law to a contract.

What acceptance is to offer, a lighted match is to gun powder. The acceptance produces something

which cannot be undone. However, an offer should not be confused with an invitation to offer. The first

statement made by a person is not always an offer. An advertisement for tenders is not a proposal

which binds a party to sell to the person who makes the highest bid, but is a mere attempt to ascertain

whether an offer can be obtained within such a margin as the sellers are willing to adopt. Thus, such an

advertisement is an invitation for proposal and does not amount to a proposal. Similarly, a catalogue of

goods for sale is not a series of offers, but only an invitation for offers. A display of goods with a price

tag on them in a shop window is construed an invitation to offer and not an offer to sell.

An excellent case bringing out the difference between an offer and an invitation to receive an offer was

decided by the Hon’ble Supreme Court in 1951, just a year after its formation. It is as follows:

~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~

AIR 1951 SC 184

COL. D.I. MAC PHERSON . . Appellant;

Versus

M.N. APPANNA AND ANOTHER . . Respondents.

Appeal from a Judgment and Decree of the Judicial Commissioner of Coorg, dated 1st April,

1946, in Original Suit No. 1 of 1945 decided on 9th day of February, 1951.

Present:

THE HON’BLE JUSTICE SAIYID FAZL ALI

THE HON’BLE JUSTICE MUKHERJEA

THE HON’BLE JUSTICE CHANDRASEKHARA AIYAR

FAZL ALI, J.— This is an appeal from a judgment of the Judicial Commissioner of Coorg in a suit

filed by the first respondent (hereinafter referred to as “the plaintiff”) against the appellant (hereinafter

referred to as “the first defendant”) and the second respondent (hereinafter referred to as “the second

defendant”), for the specific performance of a contract. The first defendant owned a bungalow in

Mercara known as “Morvern Lodge”. The suit which has given rise to this appeal was instituted by the

plaintiff for the specific performance of an alleged contract of sale in respect of this bungalow.

2. It appears that the first defendant owned certain estates in Mercara, and one Mr White was an

alternative Director in one of the estates, and Youngman was the manager of another estate also

belonging to the first defendant and was looking after “Morvern Lodge” during his absence. It seems

that about the middle of 1944, the plaintiff asked White if he would cable to the first defendant his offer

subject or class of subject shall be referred to arbitration, and that only and amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.[***] Exception 2: Saving of contract to refer question that have already arisen - Nor shall this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to reference to arbitration.

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of Rs 4000 for the bungalow, and, on 1st June, 1944, White sent a cable to the first defendant to the

following effect:

“Have enquiries Mercara bungalow if for sale, wire lowest figure.”

3. On 24th July, 1944, the plaintiff wrote to the first defendant that he was prepared to purchase the

bungalow for Rs 5000 and if the offer was acceptable to him, he (the first defendant) should inform the

plaintiff to which bank he should issue a cheque in payment of the price. This letter was followed up by

a cable from Youngman to the first defendant to the following effect:

“Have had offer Morvern Lodge rupees six thousand for immediate possession.”

4. On 8th August, 1944, Youngman received a cable from the first defendant saying: “Won’t accept

less than rupees ten thousand”. On 7th August, 1944, the plaintiff wrote to Youngman asking him

whether his offer had been accepted, and saying that he was prepared to accept any higher price if

found reasonable. Meanwhile, on the 8th August, the first defendant sent an airgraph to Youngman,

which states inter alia:

“I got a cable from you a few days ago saying you had an offer of Rs 6000 for Morvern

Lodge. At the same time I got one from White saying value of Bungalow was Rs 10,000. So wired

you — ‘Won’t accept less than Rs 10,000’.” On 9th August, 1944, Youngman, wrote to the

plaintiff as follows:

“In reply to your letter, dated 7th August, I received yesterday a cable from Col. MacPherson

regarding your offer of Rs 6000, which reads as follows:

‘Won’t accept less than rupees ten thousand’ MacPherson.’ ”

5. The plaintiff has stated in his plaint that this letter of Youngman was received by him on 14th

August, 1944, and he immediately accepted the “counter-offer made by the first defendant”, and

confirmed it in writing in a letter addressed to Youngman. In his evidence, however, the plaintiff has

stated that he met Youngman on 11th August after receiving his letter and told him personally that he

would pay Rs 10,000 for the bungalow and will require immediate delivery. There was also some talk

about the conveyance charges, and ultimately the plaintiff agreed to bear those charges. Afterwards, he

wrote to Youngman a letter on 14th August in which after referring to the conversation he had with the

latter he stated as follows:

“I hereby confirm my oral offer of ten thousand for the bungalow. I shall be grateful if you

will kindly hurry up with consultation with your lawyers at Madras and make arrangements to

receive the money and hand over the bungalow as early as practicable.”

6. It appears that three days later i.e. on 17th August, one Subbayya wrote to Youngman stating that

“he confirmed his offer of Rs 10,500 made to him (Youngman) the previous day for the purchase of the

bungalow”, and he expected that the latter had cabled to the first defendant communicating the offer as

promised. It seems that Youngman did not communicate Subbayya’s offer to the first defendant, but

sent a cable to him on the 26th August to the following effect:

“Offered ten thousand Morvern Lodge immediate possession. May I sell.” On the same day,

White cabled to the first defendant in the following terms:

“Hold offer for Morvern Bungalow rupees eleven thousand cash subject immediately

acceptance and occupation. Strongly recommended acceptance.”

7. On the 29th August, Youngman sent an airgraph to the first defendant in which he wrote as follows:

“Thank you for your airgraph letter of 8th August which reached me on 24th instant. I cabled

you on Saturday an offer of Rs 10,000 for Morvern Lodge from the would-be purchaser who

previously had offered Rs 6000, but I had a call from White a day or two ago and he tells me that

he cabled an offer on the same day of Rs 11,000. I expect you will have answered these and will

have accepted White’s offer. If you have decided will you please arrange for a power of attorney to

be prepared as soon as possible.”

8. In the meantime, the first defendant sent a cable to White to the following effect:

“Accept rupees eleven thousand Morvern Lodge occupation permitted when full amount

deposited my account Mercantile Bank Madras inform Youngman.”

9. Thereafter, the second defendant paid the amount of Rs 11,000 and occupied the bungalow.

10. The question to be decided in this case is whether in view of the correspondence which has been

reproduced, it could be held that there was a concluded contract for the sale of “Morvern Lodge” in

favour of the plaintiff on 14th August, as stated by him in the plaint. The Judicial Commissioner of

Coorg who tried the suit held that there was a concluded contract, but, instead of giving to the plaintiff

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a decree for specific performance, awarded a sum of Rs 3000 as compensation to him. Against this

decree, the first defendant alone has appealed, after obtaining a certificate under Section 109(c) of the

Civil Procedure Code from the Judicial Commissioner. The plaintiff has not preferred any appeal.

11. The plaintiff’s case is that the cable sent by the first defendant on the 5th August, and received by

Youngman on the 8th, to the effect that he would not accept less than Rs 10,000, was a counter-offer

made by him through Youngman to the plaintiff, and the contract was complete as soon as he accepted

it. We however find it difficult to hold on the entire facts of the case that there was any concluded

contract on 14th August, 1944, and we are supported in this view by the well-known case of Harvey v.

Facey 1 in which the facts were somewhat similar to those of the present case. In that case, the

appellants had telegraphed to the respondents “Will you sell us B.H.P.? Telegraph lowest cash price”

and the respondents had telegraphed in reply, “Lowest price for B.H.P. £ 900,” and then the appellants

telegraphed, “We agree to buy B.H.P. for £ 900 asked by you. Please send us your title-deed in order

that we may get early possession,” but received no reply. On these facts, the Privy Council held that

there was no contract, and Lord Norris, who delivered the judgment of the Board, observed as follows:

“The third telegram from the appellants treats the answer of L.M. Facey stating his lowest

price as an unconditional offer to sell to them at the price named. Their Lordships cannot treat the

telegram from L.M. Facey as binding him in any respect, except to the extent it does by its terms

viz. the lowest price. Everything else is left open, and the reply telegram from the appellants

cannot be treated as an acceptance of an offer to sell them; it is an offer that required to be

accepted by L.M. Facey. The contract could only be completed if L.M. Facey had accepted the

appellant’s last telegram. It has been contended for the appellants that L.M. Facey’s telegram

should be read as saying ‘yes’ to the first question put in the appellant’s telegram, but there is

nothing to support that contention. L.M. Facey’s telegram gives a precise answer to a precise

question viz. the price. The contract must appear by the telegrams, whereas the appellants are

obliged to contend that an acceptance of the first question is to be implied. Their Lordships are of

opinion that the mere statement of the lowest price at which the vendor would sell contains no

implied contract to sell at that price to the persons making the inquiry.”

12. The conclusion at which we have arrived is strengthened by certain facts which emerge from the

correspondence between the parties. The real question is whether the first defendant had made a

counter-offer in his cable of the 5th August or he was merely inviting offers. The plaintiff in his letter

of the 14th August addressed to Youngman, stated that he confirmed his oral offer of ten thousand for

the bungalow, and he did not say in so many words that he accepted the ‘counter-offer’ of the first

defendant. Similarly, in the cable which Youngman sent to the first defendant on the 28th August, he

did not state that the latter’s offer had been accepted, but stated that he had been offered Rs 10,000 for

the bungalow and concluded with the words “May I sell?” Neither party thus treated the first

defendant’s cable as containing a counter-offer. On the other hand, they proceeded on the footing that

the plaintiff had made an offer of Rs 10,000 which was subject to acceptance by the first defendant.

Apparently, the first defendant was in communication not only with Youngman but also White, and

both of them rightly thought that no transaction could be concluded without obtaining the first

defendant’s express assent to it.

13. Mr Jindra Lal, counsel for the plaintiff, who pressed his points with force and ability, contended

that by 26th August, 1944, Youngman had come under the influence of the rival bidder or at least that

of White who was supporting him, and the cable to the first defendant was deliberately framed by

Youngman in such a way as to prejudice the plaintiff. There is however nothing in the evidence to

support such an extreme conclusion. On the other hand, Youngman has frankly stated in his evidence

that he felt it improper to entertain Subbayya’s higher offer and did not communicate it to the first

defendant. This statement is supported by the cable of the 26th August and, if Youngman can be said to

have had any leaning at all, it was certainly in favour of the plaintiff. In these circumstances, it would

be difficult to hold that Youngman had deliberately misdescribed the plaintiff’s acceptance of the

counter-offer as his offer in the cable which he sent on the 26th August to the first defendant.

14. It seems to us that the view taken by the Judicial Commissioner is not correct, and, as there was no

concluded contract, the decree passed by him awarding compensation to the plaintiff for breach of

contract cannot be sustained. We therefore allow the appeal, set aside the judgment and decree of the

Judicial Commissioner and dismiss the plaintiff’s suit. Having regard to the circumstances of the case,

we make no order as to costs.

~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~

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Acceptance

It is not always necessary that an offer may be made to a specific person or body of persons. An offer

may be of a general nature and to unascertained persons. For instance, in the case of a reward offered

by an advertisement for doing a certain thing – finding a dog – performance is indicated as a mode of

acceptance. Notification of acceptance need not precede performance, but performance itself will bind

the promisor. This rule is based on the practical view that actual performance is more valuable than the

mere promise to perform.

Acceptance must be absolute and unqualified. An acceptance with a variation is not an acceptance in

the eyes of law. Such an acceptance will be deemed to be a counter proposal. If the stage of negotiation

continues, no legal obligation comes into being. In order to constitute a valid acceptance, it is necessary

that the words of acceptance must correspond to the proposal actually made. An offer once refused

cannot be accepted unless renewed. If a person makes a mere enquiry in reply to a proposal, it will,

however, not amount to a counter-proposal or rejection of the proposal. There are instances, when an

offeree, while making a positive acceptance, also makes a request or suggestion to the effect that some

addition or modification may be made in the offer. In such cases, a contract is formed so long as it is

evident that the offeree means to positively and unequivocally accept the offer whether such request is

granted or not. But if the acceptance made is dependent upon the granting of the request, no contract is

made.

Besides being absolute and unqualified, the acceptance must be expressed in some usual and reasonable

manner, unless some special mode is prescribed for its acceptance.

If some negotiations are taking place face-to-face, there is no time gap in communication. The same is

also true for the telephone, however, it does not apply to letters (hard copies) sent by post. The letter –

whether of offer or acceptance - takes sometime in reaching its destination. During this time, the

offeror or offeree may change his mind and would like to revoke the offer or acceptance. This can be

done by a faster means of communication, for instance, telephone, fax or email.

The law provides for when the communication is deemed to be complete. Section 45 deals with it:

The communication of a proposal is complete when it comes to the knowledge of the person to whom it

is made. The communication of an acceptance is complete – (a) as against the proposer, when it is put

in a course of transmission to him so as to be out of the power of the acceptor, and (b) as against the

acceptor, when it comes to the knowledge of the proposer.

5 3. Communication, acceptance and revocation of proposals The communication of proposals, the acceptance of proposals, and the revocation of proposals and acceptance, respectively, are deemed to be made by any act or omission of the party proposing, accepting or revoking, by which he intends to communicated such proposal, acceptance or revocation, or which has the effect of communicating it. 4. Communication when complete The communication of a proposal is complete when it becomes to the knowledge of the person to whom it is made. The communication of an acceptance is complete -as against the proposer, when it is put in a course of transmission to him so at to be out of the power of the acceptor; as against the acceptor, when it comes to the knowledge of the proposer. The communication of a revocation is complete -as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it; as against the person to whom it is made, when it comes to his knowledge. 5. Revocation of Proposals and acceptance A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but no afterwards. 6. Revocation how made A proposal is revoked - (1) by the communication of notice of revocation by the proposer to the other party; (2) by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, by the lapse of a reasonable time, without communication of the acceptance; (3) by the failure of the acceptor to fulfil a condition precedent to acceptance; or (4) by the death or insanity of the proposer, if the fact of the death or insanity comes to the knowledge of theacceptor before acceptance.

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The communication of a revocation is complete – (a) as against the person who makes it, when it is put

into a course of transmission to the person to whom it is made, so as to be out of the power of the

person who makes it, and (b) as against the person to whom it is made, when it comes to his

knowledge.

A proposal may be revoked at any time before the communication of its acceptance is complete as

against the proposer, but not afterwards. An acceptance may be revoked at any time before the

communication of the acceptance is complete as against the acceptor, but not afterwards.

Performance of contract:

The parties to contract must either perform or offer to perform their respective promises unless such

performance is dispensed with or excused under the provisions of law. If the promisor offers

performance of his obligation at the proper time and place, but the promisee refuses to accept the

performance, the promisor shall neither be responsible for non-performance nor lose his rights under

the contract. There are certain circumstances when the contract need not be performed – both the

parties mutually agree or the promisee changes the conditions of the contract with the agreement of the

promisor (generally not to the detriment of the promisor) or if it is a voidable contract at the option of

one party and that party chooses to exercise its right or promisee does not provide necessary facilities

for the promisor to perform the contract. (Sec 62, etc.)6

Discharge of contract:

Performance of contract is the most obvious method of discharge of contract. The tender or offer of

performance has the same effect as performance. If a promisor tenders performance of his promise but

the other party refuses to accept, the promisor stands discharged of his obligations. If the parties agree

to substitute a new contract for the existing contract, the original contract is discharged. A contract may

be discharged because of impossibility of performance. “Impossibility” means legal impossibility and

not commercial impossibility. Such cases of commercial impossibility must necessarily be incorporated

in the contract. A contract may also be discharged by operation of law – death of a party, insolvency of

a party, merger of the contract into a superior contract and by unauthorised alteration of terms of a

written document. A contract may also be discharged by breach, which is really one of the most

important gray areas of commercial contracts.

6 62. Effect of novation, rescission, and alteration of contract If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed. 63. Promise may dispense with or remit performance of promise Every promise may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit. 64. Consequence of rescission of voidable contract When a person at whose option a contract is voidable rescinds it, the other party thereto need to perform any promise therein contained in which he is the promisor. The party rescinding a voidable contract shall, if he have received any benefit thereunder from another party to such contract restore such benefit, so far as may be, to the person from whom it was received. 65. Obligation of person who has received advantage under void agreement, or contract that becomes void When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore, it, or to make compensation for it, to the person from whom he received it. 66. Mode of communicating or revoking rescission of voidable contract The rescission of a voidable contract may be communicated or revoked in the same manner, and subject to some rules, as apply to the communication or revocation of the proposal. 67. Effect of neglect or promise to afford promisor reasonable facilities for performance If any promisee neglects or refuses to afford the promisee reasonable facilities for the performance of his promise, the promisor is excused by such neglect or refusal as to non-performance caused thereby.

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(2001) 3 SCC 151

(BEFORE K.T. THOMAS AND R.P. SETHI, JJ.)

NATIONAL INSURANCE CO. LTD. . . Appellant;

Versus

SEEMA MALHOTRA AND OTHERS . . Respondents.

Civil Appeal No. 1350 of 2001†, decided on February 20, 2001

The Judgment of the Court was delivered by

THOMAS, J.— Leave granted.

2. Under a contract of insurance the insured gave a cheque to the insurer towards the first premium

amount, but the cheque was dishonoured by the drawee bank due to insufficiency of funds in the

account of the drawer. Is the insurer liable in such a situation to honour the contract of insurance?

There is no dispute that the insurer is liable as against third parties because it is covered by the statutory

provisions contained in Chapter XI of the Motor Vehicles Act, 1988. But the insurer vehemently

disputed the liability when the claim is made by the insured himself or his legal heirs, without any third

party being involved. To avoid confusion we may point out that the Insurance Company has no dispute

that the claims, if any, made by the kith and kin of the insured for the injuries sustained by them in the

accident including the claims made by the legal representatives of the deceased in such accident would

also be treated as third-party claims.

3. A Division Bench of the High Court of Jammu and Kashmir held, on the facts of the case, that

the Insurance Company is still liable because it chose to cancel the policy with effect from the date of

bouncing of the cheque, whereas the liability was incurred prior to it.

4. The question can be dealt with after summarising the facts in this case which led to the

impugned judgment of the High Court. The insured was one Yash Paul Malhotra. He and the appellant

Insurance Company entered into an insurance contract on 21-12-1993, by insuring a Maruti car for a

sum of Rupees one lakh and fifty thousand. On the same day, the insured gave a cheque for Rs

4492 towards the first instalment of the premium and the Insurance Company issued a cover

note as contemplated in Section 149 of the Motor Vehicles Act. But unfortunately, the last day in the

year 1993 became the last day of the insured as well as his Maruti Car because the insured died and the

car was completely damaged in an accident which occurred on 31-12-1993.

5. On 10-1-1994 the bank on which the cheque was drawn by the insured sent an intimation to the

Insurance Company that the cheque was dishonoured as there were no funds in the account of the

insured. On 20-1-1994 the Insurance Company informed the business concern of the insured as under:

“Notwithstanding anything contained to the contrary, it is hereby agreed and declared that

your cheque has been dishonoured by the bank. So we are cancelling the abovesaid policy with

immediate effect. The Company is not at risk.”

6. The respondents who are the widow and children of the insured, who died in the accident, filed a

claim for the loss of the vehicle. When the claim was repudiated, the respondents moved the State

Consumer Protection Commission. As per the judgment pronounced by the Commission the said claim

was rejected. The Judicial Member of the State Commission, who delivered the judgment, has stated

thus:

“Insofar as the facts of the present case are concerned, it is a settled law that the insurer even if

it had issued a cover note, is entitled to cancel the policy if it fails to cash the cheque for premium.

The concept of contract in essence envisages a proposal, acceptance and passing of consideration.

In the absence of any consideration there can be no contract and that is all what is recognised by

Section 64-VB of the Insurance Act. The insurer was justified in repudiating the contract and it has

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done it in time and soon after the cheque bounced. In this view of the matter there is no need for us

to go to any other point that may arise in this case.”

7. When the respondents (legal heirs of the insured) moved the High Court of Jammu and Kashmir,

the Division Bench which heard the matter reversed the order passed by the State Consumer

Commission and held the Insurance Company liable to honour the claim. The Division Bench directed

the State Commission to assess the compensation in accordance with law and pay the same after

deducting the amount of premium (as the cheque was dishonoured). The following reasoning was

mainly adopted by the learned Judge of the Division Bench for holding that the Insurance Company is

liable on the fact situation:

“While ordering the cancellation of policy in question, the respondent Insurance Company

instead of cancelling the same due to dishonour of cheque of the premium from the date it was

issued i.e. 21-12-1993, chose to cancel it ‘with immediate effect’. This clearly indicates that till the

issuance of this communication the respondent Insurance Company itself treated the policy

subsisting. Besides this, it had not chosen to treat the same cancelled from the date of issue. In the

face of this position, this case need not detain us any further and for this reason the argument

addressed on behalf of the Insurance Company based on Section 64-VB of the Insurance Act also

does not hold good. There was nothing which prevented the Insurance Company to have informed

the appellants that the policy stood cancelled from the date of its issuance, and as such it is not

liable for the payment of any compensation.”

8. The direction that the Insurance Company can now deduct the premium amount from the

compensation to be fixed is no solace to the insurer. The essence of the insurance business is the

coverage of the risk by undertaking to indemnify the insured against loss or damage. They agree to pay

the damages arising out of any accident by taking a chance that no accident might happen. Motivation

of the insurance business is that the premium would turn to be the profit of the business in case no

damage occurs. Such business of the insurance company can be carried on only with the premium paid

by the insured persons on the insurance policy. The only profit, if at all the insurance company makes,

of the insurance business is the premium paid when no accident or damage occurs. But to ask the

insurance company to bear the entire loss or damages of somebody else without the company receiving

a pie towards premium is contrary to the principles of equity, though the insurance companies are made

liable to third parties on account of statutory compulsions due to the initial agreement, entered between

the insured and the company concerned.

9. A three-Judge Bench in Oriental Insurance Co. Ltd. v. Inderjit Kaur1 left this point

unconsidered. In that case also the premium was paid by cheque which was later dishonoured and the

insured was intimated about it by the Insurance Company two months after the vehicle got involved in

the accident. When a claim was made by the legal heirs of the driver who died in the accident the

Insurance Company resisted the claim on the strength of Section 64-VB of the Insurance Act of 1938.

Repelling the contention of the Insurance Company, the three-Judge Bench held thus: (SCC p. 375,

para 9)

“9. We have, therefore, this position. Despite the bar created by Section 64-VB of the

Insurance Act, the appellant, an authorised insurer, issued a policy of insurance to cover the bus

without receiving the premium therefor. By reason of the provisions of Sections 147(5) and 149(1)

of the Motor Vehicles Act, the appellant became liable to indemnify third parties in respect of the

liability which that policy covered and to satisfy awards of compensation in respect thereof

notwithstanding its entitlement (upon which we do not express any opinion) to avoid or cancel the

policy for the reason that the cheque issued in payment of the premium thereon had not been

honoured.”

10. Thus, the three-Judge Bench refrained from expressing any opinion on the question of insurer’s

entitlement to avoid or cancel the policy as against the insured when the cheque issued for payment of

the premium was dishonoured.

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11. Subsequently the same question was mooted before a two-Judge Bench of this Court in New

India Assurance Co. Ltd. v. Rula2 but the question of insurer’s right to repudiate the claim as against

the insurer in a similar situation did not arise therein and hence the Bench parried the question.

12. Thus the question has now to be considered as the same is the crux of the issue involved in this

case. As pointed out earlier the insurance is a contract whereby one undertakes to indemnify another

against loss, damage or liability arising from an unknown or contingent event and is applicable only to

some contingency or act to occur in future. We have to consider how far the legislature has controlled

the insurance business. Section 2(9) of the Insurance Act defines “insurer”, inter alia, as

“any body corporate ... carrying on the business of insurance, which is a body corporate

incorporated under any law for the time being in force in India”.

Section 2-D of the Act says that:

“2-D. Every insurer shall be subject to all the provisions of this Act in relation to any class of

insurance business so long as his liabilities in India in respect of business of that class remain

unsatisfied or not otherwise provided for.”

13. It is in the aforesaid context that we have to consider the impact of Section 64-VB of the

Insurance Act. As sub-sections (1) and (2) of the said section alone are material for the purpose we

extract them herein:

“64-VB. (1) No insurer shall assume any risk in India in respect of any insurance business on

which premium is not ordinarily payable outside India unless and until the premium payable is

received by him or is guaranteed to be paid by such person in such manner and within such time as

may be prescribed or unless and until deposit of such amount as may be prescribed, is made in

advance in the prescribed manner.

(2) For the purposes of this section, in the case of risks for which premium can be ascertained

in advance, the risk may be assumed not earlier than the date on which the premium has been paid

in cash or by cheque to the insurer.”

14. Sub-section (1) is not applicable to cases in which premium is ordinarily payable outside India.

In other words, the insurer has no liability to the insured unless and until the premium payable is

received by the insurer. As the premium can be paid in cash or by cheque, what is the position when the

cheque issued to the insurer is dishonoured by the drawee bank?

15. Sections 51, 52 and 54 of the Indian Contract Act can profitably be referred to for the purpose

of deciding the point. They are subsumed under the sub-title “Performance of reciprocal promises” in

the said Act. Section 51 deals with a contract concerning reciprocal promises to be simultaneously

performed and in such a contract the promisee is absolved from performing his promise unless the

promisor is ready or willing to perform his part of the promise. Section 52 says that where the order in

which reciprocal promises are to be performed has not been expressly provided in the contract such

promise shall be performed in that order which the nature of the transaction warrants it. Illustration (b)

given to Section 52 highlights the utility of the provision. That illustration is as follows: A and B

contract that A shall make over his stock-in-trade to B at a fixed price, and B promises to give security

for the payment of the money. A’s promise need not be performed until the security is given, for the

nature of transaction requires that A should have security before he delivers his stock.

16. Section 54 of the Contract Act is to be read in that background. It is extracted below:

“54. When a contract consists of reciprocal promises, such that one of them cannot be

performed or that its performance cannot be claimed till the other has been performed, and the

promisor of the promise last mentioned fails to perform it, such promisor cannot claim the

performance of the reciprocal promise, and must make compensation to the other party to the

contract for any loss which such other party may sustain by the non-performance of the contract.”

- 28 -


17. In a contract of insurance when the insured gives a cheque towards payment of premium or

part of the premium, such a contract consists of reciprocal promise. The drawer of the cheque promises

the insurer that the cheque, on presentation, would yield the amount in cash. It cannot be forgotten that

a cheque is a bill of exchange drawn on a specified banker. A bill of exchange is an instrument in

writing containing an unconditional order directing a certain person to pay a certain sum of money to a

certain person. It involves a promise that such money would be paid.

18. Thus, when the insured fails to pay the premium promised, or when the cheque issued by him

towards the premium is returned dishonoured by the bank concerned the insurer need not perform his

part of the promise. The corollary is that the insured cannot claim performance from the insurer in such

a situation.

19. Under Section 25 of the Contract Act an agreement made without consideration is void.

Section 65 of the Contract Act says that when a contract becomes void any person who has received

any advantage under such contract is bound to restore it to the person from whom he received it. So,

even if the insurer has disbursed the amount covered by the policy to the insured before the cheque was

returned dishonoured, the insurer is entitled to get the money back.

20. However, if the insured makes up the premium even after the cheque was dishonoured but

before the date of accident it would be a different case as payment of consideration can be treated as

paid in the order in which the nature of transaction required it. As such an event did not happen in this

case, the Insurance Company is legally justified in refusing to pay the amount claimed by the

respondents.

21. In the light of the above legal position we uphold the contention of the appellant Insurance

Company. We, therefore, allow this appeal and set aside the impugned judgment of the Division Bench

of the High Court. The order passed by the State Consumer Commission will stand restored.

———

† From the Judgment and Order dated 27-9-1999 of the Jammu and Kashmir High Court in

CIMA No. 46 of 1999

1 (1998) 1 SCC 371 : 1999 SCC (Cri) 148

2 (2000) 3 SCC 195 : 2000 SCC (Cri) 601

~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~

- 29 -


Breach of contract and Remedies:

If one party has not performed its promise in accordance with the terms of the contract, this amounts to

breach of contract. A contract discharges by breach. The remedies available to the affected party are

basically two – suit for specific performance and damages. If the affected party wants the other party to

do exactly what has been mentioned in the contract, it can move the court for specific performance.

However, in most of the cases, the affected party is awarded damages i.e., compensation for the loss

suffered – the basic principle being that the affected party is to be compensated for the loss and should

not enrich itself. The damages may be liquidated or unliquidated – the former are fixed beforehand but

the latter are determined later keeping in mind a number of factors eg., the loss suffered, efforts done to

mitigate the loss, the effect of non-performance, whether the promisee fulfilled its promise or not, etc.

~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~

Supreme Court of India

(2000) 6 SCC 113

Ghaziabad Development Authority v. Union of India

(BEFORE S. RAJENDRA BABU AND R.C. LAHOTI, JJ.)

GHAZIABAD DEVELOPMENT AUTHORITY . . Appellant;

Versus

UNION OF INDIA AND ANOTHER . . Respondents.

Decided on May 12, 2000

R.C. LAHOTI, J.— Leave granted in SLP (C) No. 18897 of 1999.

2. In this batch of appeals, Ghaziabad Development Authority constituted under Section 4 of the

Uttar Pradesh Urban Planning and Development Act, 1973 is the appellant. The Authority has from

time to time promoted and advertised several schemes for allotment of developed plots for construction

of apartments and/or flats for occupation by the allottees. Several persons who had subscribed to the

schemes approached different forums complaining of failure or unreasonable delay in accomplishing

the schemes. Some have filed complaint before the Monopolies and Restrictive Trade Practices

Commission and some have raised disputes before the Consumer Disputes Redressal Forum. In two

cases civil writ petitions under Article 226 of the Constitution were filed before the High Court seeking

refund of the amount paid or deposited by the petitioners with the Authority. In all the cases under

appeal the Court or Commission or Forum concerned has found the appellant Authority guilty of

having unreasonably delayed the accomplishment of the announced scheme or guilty of failure to

perform the promise held out to the claimants and therefore directed the amount paid or deposited by

the respective claimants to be returned along with interest. In the cases filed before the High Court of

Allahabad there was a term in the brochure issued by the Authority that in the event of the applicant

withdrawing its offer or surrendering the same no interest whatsoever would be payable to the

claimants. The High Court has held such term of the brochure to be unconscionable and arbitrary and

hence violative of Article 14 of the Constitution. The High Court has directed the amount due and

payable to be refunded with interest calculated at the rate of 12 per cent per annum from the date of

deposit to the date of refund. In all the other appeals before us the impugned order passed by the

Commission or the Forum directs payment of the amount due and payable to the respective claimants

with interest at the rate of 18 per cent per annum. In G.D.A. v. Brijesh Mehta1 the MRTP Commission

has held the claimants entitled to an amount of Rs 50,000 payable as compensation for “mental

agony” suffered by the claimants for failure of the Authority to make available the plot as promised by

it.

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3. As all these appeals raise the following common questions of law, they have been heard together

and are being disposed of by this common judgment. The questions arising for decision are:

(i) Whether compensation can be awarded for “mental agony” suffered by the claimants?

(ii) Whether in the absence of any contract or promise held out by Ghaziabad Development

Authority any amount by way of interest can be directed to be paid on the amount found due and

payable by the Authority to the claimants?

(iii) If so, the rate at which the interest can be ordered to be paid?

4. In CA No. 8316 of 1995, Ghaziabad Development Authority had announced a scheme for

allotment of developed plots which was known as “Indirapuram Scheme”. The Authority informed the

claimants that a plot of 35 sq metres was reserved for them, the estimated cost of which plot was Rs

4,20,000 payable in specified instalments. An allotment of plot was also informed. Then at

one point of time the claimants were informed that due to some unavoidable reasons and the

development work not having been completed there has been delay in handing over possession. Having

waited for an unreasonable length of time the claimants approached the MRTP Commission.

5. When a Development Authority announces a scheme for allotment of plots, the brochure issued

by it for public information is an invitation to offer. Several members of the public may make

applications for availing benefit of the scheme. Such applications are offers. Some of the offers having

been accepted subject to rules of priority or preference laid down by the Authority result in a contract

between the applicant and the Authority. The legal relationship governing the performance and

consequences flowing from breach would be worked out under the provisions of the Contract Act and

the Specific Relief Act except to the extent governed by the law applicable to the Authority floating the

scheme. In case of breach of contract damages may be claimed by one party from the other who has

broken its contractual obligation in some way or the other. The damages may be liquidated or

unliquidated. Liquidated damages are such damages as have been agreed upon and fixed by the parties

in anticipation of the breach. Unliquidated damages are such damages as are required to be assessed.

Broadly the principle underlying assessment of damages is to put the aggrieved party monetarily in the

same position as far as possible in which it would have been if the contract would have been

performed. Here the rule as to remoteness of damages comes into play. Such loss may be compensated

as the parties could have contemplated at the time of entering into the contract. The party held liable to

compensation shall be obliged to compensate for such losses as directly flow from its breach. Chitty on

Contracts (27th Edn., Vol. 1, para 26.041) states—

“Normally, no damages in contract will be awarded for injury to the plaintiff’s feelings, or for

his mental distress, anguish, annoyance, loss of reputation or social discredit caused by the breach

of contract; … The exception is limited to contracts whose purpose is ‘to provide peace of mind or

freedom from distress,’…. Damages may also be awarded for nervous shock or an anxiety state (an

actual breakdown in health) suffered by the plaintiff, if that was, at the time the contract was made,

within the contemplation of the parties as a not unlikely consequence of the breach of contract.

Despite these developments, however, the court of appeal has refused to award damages for

injured feelings to a wrongfully dismissed employee, and confirmed that damages for anguish and

vexation caused by breach of contract cannot be awarded in an ordinary commercial contract.”

6. The ordinary heads of damages allowable in contracts for sale of land are settled. A vendor who

breaks the contract by failing to convey the land to the purchaser is liable to pay damages for the

purchaser’s loss of bargain by paying the market value of the property at the fixed time for completion

less the contract price. The purchaser may claim the loss of profit he intended to make from a particular

use of the land if the vendor had actual or imputed knowledge thereof. For delay in performance the

normal nature of damages is the value of the use of the land for the period of delay, viz. usually its

rental value (see Chitty on Contracts, ibid, para 26.045).

- 31 -


7. In our opinion, compensation for mental agony could not have been awarded as has been done

by the MRTP Commission.

8. However, the learned counsel for the respondents has invited our attention to Lucknow

Development Authority v. M.K. Gupta2 wherein this Court has upheld the award by the Commission of

a compensation of Rs 10,000 for mental harassment. The basis for such award is to be found in

paras 10 and 11 wherein this Court has stated inter alia—

“[W]here it is found that exercise of discretion was mala fide and the complainant is entitled

to compensation for mental and physical harassment then the officer can no more claim to be under

protective cover. When a citizen seeks to recover compensation from a public authority in respect

of injuries suffered by him for capricious exercise of power and the National Commission finds it

duly proved then it has a statutory obligation to award the same.” (SCC p. 264, para 11)

The Court has further directed the responsibility for the wrong done to the citizens to be fixed on the

officers who were responsible for causing harassment and agony to the claimants and then recover the

amount of compensation from the salary of officers found responsible. The judgment clearly shows the

liability having been fixed not within the realm of the law of contracts but under the principles of

administrative law. We do not find any such case having been pleaded much less made out before the

Commission. Indeed, no such finding has been arrived at by the Commission as was reached by this

Court in the case of Lucknow Development Authority2. The award of compensation of Rs

50,000 for mental agony suffered by the claimants is held liable to be set aside.

9. The next question is the award of interest and the rate thereof. It is true that the terms of the

brochure issued by the Authority relevant to any of the cases under appeal and the correspondence

between the parties do not make out an express or implied contract for payment of interest by the

Authority to the claimants. Any provision contained in the Consumer Protection Act, 1986, the

Monopolies and Restrictive Trade Practices Act, 1969 and the U.P. Urban Planning and Development

Act, 1973 enabling the award of such interest has not been brought to our notice. The learned counsel

for the claimants have placed reliance on a recent decision of this Court in Sovintorg (India) Ltd. v.

State Bank of India3 wherein in similar circumstances the National Consumer Disputes Redressal

Commission directed the amount deposited by the claimants to be returned with interest at the rate of

12 per cent per annum. This Court enhanced the rate of interest to 15 per cent per annum. To sustain

the direction for payment of interest reliance was placed on behalf of the claimants on Section 34 CPC

and payment of interest at the rate at which moneys are lent or advanced by national banks in relation

to commercial transactions was demanded. This Court did not agree. However, it was observed: (SCC

p. 409, para 6)

“There was no contract between the parties regarding payment of interest on delayed deposit

or on account of delay on the part of the opposite party to render the services. Interest cannot be

claimed under Section 34 of the Civil Procedure Code as its provisions have not been specifically

made applicable to the proceedings under the Act. We, however, find that the general provision of

Section 34 being based upon justice, equity and good conscience would authorise the Redressal

Forums and Commissions to also grant interest appropriately under the circumstances of each case.

Interest may also be awarded in lieu of compensation or damages in appropriate cases. The interest

can also be awarded on equitable grounds....

* * *

The State Commission as well as the National Commission were, therefore, justified in

awarding the interest to the appellant but in the circumstances of the case we feel that grant of

interest at the rate of 12% was inadequate as admittedly the appellant was deprived of the user of a

sum of Rs one lakh for over a period of seven yeas. During the aforesaid period, the appellant

had to suffer the winding-up proceedings under the Companies Act, allegedly on the ground of

- 32 -


financial crunch. We are of the opinion that awarding interest at the rate of 15 per cent per annum

would have served the ends of justice.”

10. We are therefore of the opinion that interest on equitable grounds can be awarded in

appropriate cases. In Sovintorg (India) Ltd. case3 the rate of 15 per cent per annum was considered

adequate to serve the ends of justice. The Court was apparently influenced by the fact that the claimant

had to suffer winding-up proceedings under the Companies Act and the defendant must be made to

share part of the blame. However, in the cases before us, the parties have not tendered any evidence

enabling formation of opinion on the rate of interest which can be considered ideal to be adopted. The

rate of interest awarded in equity should neither be too high nor too low. In our opinion awarding

interest at the rate of 12 per cent per annum would be just and proper and meet the ends of justice in the

cases under consideration. The provision contained in the brochure issued by the Development

Authority that it shall not be liable to pay any interest in the event of an occasion arising for return of

the amount should be held to be applicable only to such cases in which the claimant is itself responsible

for creating circumstances providing occasion for the refund. In the cases under appeal the fault has

been found with the Authority. The Authority does not therefore have any justification for resisting

refund of the claimants’ amount with interest.

11. For the foregoing reasons, the direction made by the MRTP Commission for payment of

Rs 50,000 as compensation for mental agony suffered by the respondent claimants in Civil Appeal No.

8316 of 1995 is set aside. In all the other cases the direction for payment of interest at the rate of 18 per

cent shall stand modified to pay interest at the rate of 12 per cent per annum.

Civil Appeal No. 8482 of 1997

12. This case relates to allotment of a flat. The MRTP Commission has held the claimant entitled

to allotment of a flat. An option has been given to the claimant. If the claimant refuses to take the flat in

terms of the direction made by the Commission he will be entitled to the refund of the amounts

deposited by him with interest at the rate of 18 per cent per annum from the date of deposit of the

various amounts by the claimant. During the course of hearing before this Court the possibility of the

claim being satisfied by allotment of an alternative flat was explored but that could not materialise as

the claimant was not agreeable to accept the flat offered by the Authority submitting that it was located

in a deserted area and was heavily priced. That being the position the direction of the Commission for

refund of the amount shall stand though the rate of interest shall be 12 per cent and not 18 per cent.

13. All the appeals and contempt petitions stand disposed of accordingly. No order as to costs.

~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~

- 33 -


1963 Indlaw SC 418: AIR 1963 SC 1405

[SUPREME COURT OF INDIA]

Fateh Chand

v

Balkishan Dass

15/01/1963

BENCH

HON'BLE JUSTICE B. P. SINHA (CJI), HON'BLE JUSTICE P. B. GAJENDRAGADKAR,

HON'BLE JUSTICE K. N. WANCHOO, HON'BLE JUSTICE K. C. DAS GUPTA AND HON'BLE

JUSTICE J. C. SHAH

SHAH, J. : By a registered deed of lease dated May 19, 1927 which was renewed on January 30 1947

the Delhi Improvement Trust granted leasehold rights for 90 years to one Dr. M. M. Joshi in respect of

a plot of land No. 3, 'E Block, Qarol Bagh, Delhi, admeasuring 2433 sq. yards. Dr. Joshi constructed a

building on the land demised to him. Chandrawati, widow of Dr. Joshi as guardian of her minor son

Murli Manohar by sale-deed dated April 21, 1947 sold the leasehold rights in the land together with the

building to Lala Balkrishan Das who will hereinafter be referred to as 'Plaintiff' for Rs.63, 000/-. By an

agreement dated March 21, 1949 the Plaintiff contracted to sell his rights in the land, and the building

to Seth Fateh Chand-hereinafter called 'the defendant'. It was recited in the agreement that the plaintiff

agreed to sell the building together with 'pattadari

"rights appertaining to the land admeasuring 2433 sq. yards for Rs.1, 12, 500/- and that Rs.1, 000/-

were paid to him as earnest money at the time of the execution of the agreement. The conditions of the

agreement were :"

(1) I, the executant shall deliver the actual possession, i.e. complete vacant possession of Kothi

(bungalow) to the vendee on the 30th March? 1949, and the vendee shall have to give another cheque

for Rs. 24, 000/- to me : out of the sale price.

(2) Then the vendee shall have to get the sale (deed) registered by the 1st of June, 1949. If, on account

of any reason, the vendee fails to get the said sale-deed registered by the 1st June, 1949, then this sum

of Rs. 25, 000/- (twenty five thousand) mentioned above shall be deemed to be forfeited and the

agreement cancelled. Moreover, the vendee shall have to deliver back the complete vacant possession

of the kothi (Bungalow) to me, the executant. If due to certain reason, any delay takes place on my part

in the registration of the sale-deed, by the 1st June, 1949, then I, the executant, shall be liable to pay a

further sum of Rs. 25, 000/- as damages, apart from the aforesaid sum of Rs. 25, 000/- to the vendee,

and the bargain shall be deemed to be cancelled."The southern boundary of the land was described in

the agreement as" Bungalow of Murli Manohar Joshi".

2. On March 25, 1949 the plaintiff received Rs.24, 000/- and delivered possession of the building and

the land in his occupation to the defendant, but the sale of the property was not completed before the

expiry of the period stipulated in the agreement. Each party blamed the other for failing to complete the

sale according to the terms of the agreement. Alleging that the agreement was rescinded be cause the

defendant had committed default in performing the agreement and the sum of Rs.25, 000/- paid by the

defendant stood forfeited, the plaintiff in an action filed in the Court of the Subordinate Judge, Delhi,

claimed a decree for possession of the land and building described in the plaint, and a decree for Rs.6,

500/- as compensation for use and occupation of the building from March 25, 1949 to January 24, 1950

and for an order directing enquiry as to compensation for use and occupation of the land and building

from the date of the institution of the suit until delivery of possession to the plaintiff. The defendant

resisted the claim contending inter alia that the plaintiff having committed breach of the contract could

not forfeit the amount of Rs. 25, 000/- received by him nor claim any compensation. The trial Judge

held that the plaintiff had failed to put the defendant in possession of the land agreed to be sold and

could not therefore retain Rs. 25, 000/- received by him under the contract. He accordingly directed that

on the plaintiff depositing Rs. 25, 000/- less Rs. 1, 400/- (being the amount of mesne profits prior to the

date of the suit) the defendant do put the plaintiff in possession of the land and the building, and

awarded to the plaintiff future mesne profits at the rate of Rs. 140/- per mensem from the date of the

suit until delivery of possession or until expiration of three years from the date of the decree whichever

event first occurred. In appeal the High Court of Punjab modified the decree passed by the trial Court

and declared" that the plaintiff was entitled to retain out of Rs. 25, 000/paid by the defendant under the

- 34 -


sale agreement, a sum of Rs. 11, 250/ "being compensation for loss suffered by him and directed that

the plaintiff to get from the defendant compensation for use and occupation at the rate of Rs. 265/- per

mensem. The defendant has appealed to this Court with certificate under Art. 133 (1) (a) of the

Constitution.

3. The first question which falls to be determined in this appeal is as to who committed breach of the

contract. The plaintiffs case as disclosed in his pleading and evidence was that he had agreed to sell to

the defendant the leasehold rights in the land and building thereon purchased by him from Murli

Manohar Joshi by sale-deed dated April 21, 1947, that at the time of execution of the agreement the

defendant had inspected the sale deed and the lease executed by the Improvement Trust dated January

30, 1947 and the "sketch plan" annexed to the lease, that the plaintiff had handed over to the defendant

a copy of that plan and had put the defendant in possession of the property agreed to be sold, but the

defendant despite repeated requests failed and neglected to pay the balance remaining due by him and

to obtain the sale deed in his favour. The defendant's case on the other hand was that the plaintiff had

agreed to sell the area according to the measurement and boundaries in the plan annexed to the lease

granted by the Improvement Trust and had promised to have the boundary wall built, that at the time of

the execution of the agreement of sale the plaintiff did not show him the sale deed by which he had

purchased the property, nor the lease obtained from the Improvement Trust in favour of Dr. Joshi nor

even the "sketch plan", that the plaintiff had given him a copy of the "sketch plan" not at the time of the

execution of the agreement, but three or four days after he was put in possession of the premises and

that on measuring the site in the light of the plan he discovered that there was a "shortage on the

southern side opposite to Rohtak Road", that thereupon he approached the plaintiff and repeatedly

called upon him to put him in possession of the land as shown in the plan and to get the boundary wall

built in his presence but the plaintiff neglected to do so. We have been taken through the relevant

evidence by counsel and we agree with the conclusion of the High Court that the defendant and not the

plaintiff committed breach of the contract.

4. The defendant's case is founded primarily on two pleas :

(i) that the plaintiff offered to sell land not according to the description in the written agreement but

according to the plan appended to the Improvement Trust lease, and that he- the defendant-accepted

that offer, and

(ii) the plaintiff had undertaken to have the southern boundary demarcated and a boundary wall built

thereon.

If the case of the defendant be true, it is a singular circumstance that those covenants are not found

incorporated in the written agreement nor are they referred to in any document prior to the date fixed

for completion of the sale. The defendant was put in possession on March, 25, 1949 and he paid Rs. 24,

000/- as agreed. If the plaintiff did not put the defendant in possession of the entire area which the latter

had agreed to buy, it is difficult to believe that the defendant would part with a large sum of money

which admittedly was to be paid by him at the time of obtaining possession of the premises, and in any

event he would have immediately raised a protest in writing that the plaintiff had not put him in

possession of the area agreed to be delivered. It is implicit in the plea of the defendant that he knew that

the southern boundary was irregular and that the plaintiff was not in possession of the area agreed to be

sold under the agreement. Why then did the defendant not insist that the terms pleaded by him be

incorporated in the agreement? We find no. rational answer to that question : and none has been

furnished. The story of the defendant that he agreed to purchase the land according to the measurement

and boundaries' in the Improvement Trust Plan without even seeing that plan, is impossible of

acceptance.

5. It is common ground that according to this plan the land demised was rectangular in shape

admeasuring 140' x 160' though the conveyance was in respect of 2433 sq. yards only. Manifestly if the

land conveyed to the predecessor-in-interest of the plaintiff was a perfect rectangle the length of the

boundaries must be inaccurate, for the area of a rectangular plot of land 140' x 160' would he 2488 sq.

yards and 8 sq. feet and not 2433 sq. yards. The plaintiff had purchased from his predecessor-in-interest

land admeasuring 2433 sq. yards and by the express recital in the agreement the plaintiff agreed to sell

that area to the defendant. At the request of the plaintiff the trial court appointed a Commissioner for

measuring the land of which possession was delivered to the defendant, and according to the

Commissioner the land" admeasured 141/142 feet by 157/158 feet. The Commissioner found that two

- 35 -


constructions-a latrine and a garage - on the adjacent property belonging to Murli Manohar Joshi

"broke the regular line of the southern boundary". The fact that the southern boundary was irregular

must have been noticed by the defendant at the time of the agreement of sale, and in any event soon

after he obtained possession the defendant did not raise any objections in that behalf. His story that he

had orally called upon the plaintiff repeatedly to put him in possession of the land as shown in the

Improvement Trust plan cannot be believed. The defendant's case that a part of the land agreed to be

conveyed was in the possession of Murli Manohar Joshi was set up for the first time by the defendant

in his letter dated June 17, 1949. On June 1, 1949 the defendant informed the plaintiff by a telegram

that the latter was responsible for damages as he had failed to complete the contract. The plaintiff by a

telegram replied that he was ready and willing to perform his part of the contract and called upon the

defendant to obtain a sale deed. The defendant then addressed a letter on June 9, 1949 to the plaintiff

informing him that the latter had to get the document executed and registered after giving clear title by

June 1, 1949. To that letter the plaintiff replied that the defendant had inspected the title-deeds before

he agreed to purchase the property and had satisfied himself regarding the plaintiff's title thereto and

that the defendant had never raised any complaint about any defect in the lisle of the plaintiff. The

defendant's Advocate replied by letter dated June 17, 1949 "This is true that my client paid Rs.25, 000/

and got possession of the kothi on the clear understanding that your client has clear title of the entire

area mentioned in the agreement of sale and sketch map attached to it. Long before 1st June, my client

noticed that a certain area of the Kothi under sale is under the possession of the Shri Murli Manohar

Joshi on which his garage stands. Again on the same side Shri Murli Manohar Joshi has got latrines and

there is clear encroachment on the land included in the sale. It was clearly understood at the time of

bargain that vacant possession of the entire area under sale will be given by your client. My client was

anxious to put a wall on the side of Shri Murli Manohar Joshi and when he was actually starting the

work this difficulty of garage and latrine came in. Your client was approached XX"

One thing is noticeable in this letter according to the defendant, there was a "sketchplan" attached to

the agreement of sale, and that it was known to the parties at the time of the agreement that a part of the

land agreed to be sold had been encroached upon, before the agreement by Murli Manohar Joshi. If

there had been an "understanding" as suggested by the defendant and if the plaintiff had, in spite of

demands made in that behalf by the defendant, failed to carry out the agreement or understanding, we

would have expected this version to be set up in the earliest communication and not reserved to be set

up as a reply to the Plaintiff's assertion that the defendant had never complained about any defect in the

title of the plaintiff. According to the written agreement the area to be conveyed was 2433 sq. yards and

the land was on the south bounded by the Bungalow of Murli Manohar Joshi. It is common ground that

the defendant was put in possession of an area exceeding 2433 sq. yards, and the land is within the four

boundaries set out in the agreement. But the defendant sought to make out the case at the trial that he

had agreed to purchase land according to the Improvement Trust Plan - a fact which is not incorporated

in the agreement, and which had not been mentioned even in the letter dated June 17, 1949. The

assertions made by the defendant in his testimony before the Court show that not much reliance can be

placed upon his word. He stated that the terms of the contract relating to forfeiture of Rs. 25, 000/- paid

by him in the event of failure to carry out the terms of the contract were never intended to be acted

upon and were incorporated in the agreement at the instance of the writer who wrote the deed. This plea

was never raised in the written statement and the writer of the deed was not questioned about it. The

defendant is manifestly seeking to add oral terms to the written agreement which have not been referred

to in the correspondence at the earliest opportunity. We therefore agree with the High Court that the

plaintiff carried out his part of the contract to put the defendant in possession of the land agreed to be

sold, and was willing to execute the sale-deed, but the defendant failed to pay the balance of the price,

and otherwise to show his willingness to obtain a conveyance.

6. The claim made by the plaintiff to forfeit the sum of Rs. 25, 000/- received by him from the

defendant must next be considered. This sum of Rs.25, 000/- consists of two items of Rs.1,

000/received on March 21, 1949 and referred to in the agreement as earnest money and Rs. 24,

000/agreed to be paid by the defendant to plaintiff as "out of the sale price" against delivery of

possession and paid by the defendant to the plaintiff on March 25, 1949 when possession of the land

and building was delivered to the defendant. The plaintiff submitted that the entire amount of Rs.25,

000/-was to be regarded as earnest money, and he claimed to forfeit it on the defendant's failure to

carry out his part of the contract. This part of the case of the plaintiff was denied by the defendant.

7. The Attorney-General appearing on behalf of the defendant has not challenged the plaintiff's right to

forfeit Rs. 1, 000/- which were expressly named and paid as earnest money. He has, however,

- 36 -


contended that the covenant which gave to the plaintiff the right to forfeit Rs.24, 000/out of the amount

paid by the defendant was a stipulation in the nature of penalty, and the plaintiff can retain that amount

or part thereof only if he establishes that in consequence of the breach by the defendant, he suffered

loss, and in the view of the Court the amount or part thereof is reasonable compensation for that loss.

We agree with the Attorney-General that the amount of Rs.24, 000/- was not of the nature of earnest

money. The agreement expressly provided for payment of Rs.1, 000/- as earnest money, and that

amount was paid by the defendant. The amount of Rs.24, 000/- was to be paid when vacant possession

of the land and building was delivered, and it was expressly referred to as "out of the sale price". If this

amount was also to be regarded as earnest money, there was no. reason why the parties would not have

so named it in the agreement of sale. We are unable to agree with the High Court that this amount was

paid as security for due performance of the contract. No. such case appears to have been made out in

the plaint and the finding of the High Court on that point is based on no. evidence. It cannot be

assumed that because there is a stipulation for forfeiture the amount paid must bear the character of a

deposit for due performance of the contract.

8. The claim made by the plaintiff to forfeit the amount of Rs.24, 000/- may be adjudged in the light of

S. 74 of the Indian Contract Act, which in its material part provides :

"When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of

such breach, or if the contract contains any other stipulation by way of penalty, the party complaining

of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to

receive from the party who has broken the contract reasonable compensation not exceeding the amount

so named or as the case may be, the penalty stipulated for".

The section is clearly an attempt to eliminate the somewhat elaborate refinements made under the

English common law in distinguishing between stipulations providing for payment of liquidated

damages and stipulations in the nature of penalty. Under the common law a genuine pre-estimate of

damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding

between the parties, a stipulation in a contract in terrorem is a penalty and the Court refuses to enforce

it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to

cut across the web of rules and presumptions under the English common law, by enacting a uniform

principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by

way of penalty.

9. The second clause of the contract provides that if for any reason the vendee fails to get the sale-deed

registered by the date stipulated, the amount of Rs.25, 000/- (Rs. 1, 000 paid as earnest money and Rs.

24, 000/- paid out of the price on delivery of possession) shall stand forfeited and the agreement shall

be deemed cancelled. The covenant for forfeiture of Rs. 24, 000/- is manifestly a stipulation by way of

penalty.

10. Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i)

where the contract names a sum to be paid in case of breach and (ii) where the contract contains any

other stipulation by way of penalty. We are in the present case not concerned to decide whether a

contract containing a covenant of forfeiture of deposit for due performance of a contract falls within the

first class. The measure of damages in the case of breach of a stipulation by way of penalty is by S. 74

reasonable compensation not exceeding the penalty stipulated for. In assessing damages the Court has,

subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems

reasonable having regard to all the circumstances of the case. Jurisdiction of the Court to award

compensation in case of breach of contract is unqualified except as to the maximum stipulated, but

compensation has to be reasonable, and that imposes upon the Court duty to award compensation

according to settled principles. The section undoubtedly says that the aggrieved party is entitled to

receive compensation from the party who has broken the contract whether or not actual damage or loss

is proved to have been caused by the breach. Thereby it merely dispenses with proof of "actual loss or

damage"; it does not justify the award of compensation when in consequence of the breach no. legal

injury at all has resulted because compensation for breach of contract can be awarded to make good

loss or damage which naturally arose in the usual course of things, or which the parties knew when they

made the contract, to be likely to result from the breach.

11. Before turning to the question about the compensation which may be awarded to the plaintiff, it is

necessary to consider whether S. 74 applies to the stipulations for forfeiture of amounts deposited or

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paid under the contract. It was urged that the section deals in terms with the right to received from the

party who has broken the contract reasonable compensation and not the right to forfeit what has already

been received by the party aggrieved. There is however no. warrant for the assumption made by some

of the High Courts in India, that S. 74 applies only to cases where the aggrieved party is seeking to

receive some amount on breach of contract and not to cases where upon breach of contract an amount

received under the contract is sought to be forfeited. In our judgment the expression "the contract

contains any other stipulation by of penalty" comprehensively applies to every covenant involving a

penalty whether it is for payment on breach of contract of money or delivery of property in future, or

for forfeiture of right to money or other property already delivered. Duty not to enforce the penalty

clause but only to award reasonable compensation is statutorily imposed upon Courts by S. 74. In all

cases, therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount

deposited pursuant to the terms of contract which expressly provides for forfeiture, the Court has

jurisdiction to award such sum only as it considers reasonable, but not exceeding the amount specified

in the contact as liable to forfeiture. We may briefly refer to certain illustrative cases decided by the

High Courts in India which have expressed a different view.

12. In Abdul Gani and Co. v. Trustees of the Port of Bombay, 1952 ILR(Bom) 747 : 1952 AIR(Bom)

310), the Bombay High Court observed as follows :

"It will be noticed that the sum which is named in the contract either as Penalty or as liquidated

damages is a sum which has not already been paid but is to be paid in case of a breach of the contract.

With regard to the stipulation by way of penalty, the Legislature has chosen to qualify 'stipulation' as

'any other stipulation', indicating that the stipulation must be of the nature of an amount to be paid and

not an amount already paid prior to the entering into of the contract. The section further provides that a

party complaining of a breach is entitled to received from the party aggrieved has to receive from the

party who has broken the contract reasonable compensation not exceeding the amount so named or the

penalty stipulated for. Therefore, the section clearly contemplates that the party in default some amount

or something in the nature of penalty : it clearly rules out the possibility of the amount which has

already been received or the penalty which has already been provided for".

13. In Natesa Aiy v. Appavu Padayachi, ILR 38 Mad 178 : 1915 AIR(Mad) 896) (FB), the Madras

High Court seems to have held that S. 74 applies where a sum is named as penalty to be paid in future

in case of breach, and not to cases where a sum is already paid and by a covenant in the contract it is

liable to forfeiture.

14. In these cases the High Courts appear to have concentrated upon the words "to be paid in case of

such breach" in the first condition in S. 74 and did not consider the import of the expression "the

contract contains any other stipulation by way of penalty", which is the second condition mentioned in

the section. The words "to be paid" which appear in the first condition do not qualify the second

condition relating to stipulation by way of penalty. The expression "if the contract contains any other

stipulation by way of penalty" widens the operation of the section so as to make it applicable to all

stipulations by way of penalty, whether the stipulation is to pay an amount of money, or is of another

character, as, for example, providing for forfeiture of money already paid. There is nothing in the

expression which implies that the stipulation must be one for rendering something after the contract is

broken. There is no. ground for holding that the expression "contract contains any other stipulation by

way of penalty" is limited to cases of stipulation in the nature of an agreement to pay money or deliver

property on breach and does not comprehend covenants under which amounts paid or property

delivered under the contract, which by the terms of the contract expressly or by clear implication are

liable to be forfeited.

15. Section 74 declares the law as to liability upon breach of contract where compensation is by

agreement of the parties predetermined, or where there is a stipulation by way of penalty. But the

application of enactment is not restricted to cases where the aggrieved party claims relief as a plaintiff.

The section does not confer a special benefit upon any party, it merely declares the law that

notwithstanding any term in the contract predetermining damages or providing for forfeiture of any

property by way of penalty, the Court will award to the party aggrieved only reasonable compensation

not exceeding the amount named or penalty stipulated. The jurisdiction of the Court is not determined

by the accidental circumstance of the party in default being a plaintiff or a defendant in a suit. Use of

the expression "to receive from the party who has broken the contract" does not predicate that the

jurisdiction of the Court to adjust amounts which have been paid by the party in default cannot be

exercised in dealing with the claim of the party complaining of breach of contract. The Court has to

- 38 -


adjudge in every case reasonable compensation to which the plaintiff is entitled from the defendant on

breach of the contract. Such compensation has to be ascertained having regard to the conditions

existing on the date of the breach.

16. There is no. evidence that any loss was suffered by the plaintiff in consequence of the default by the

defendant, save as to the loss suffered by him by being kept out of possession of the property. There is

no. evidence that the property had depreciated in value since the date of the contract provided; nor was

there evidence that any other special damage had resulted. The contract provided for forfeiture of

Rs.25, 000/consisting of Rs.1, 000/- paid as earnest money and Rs.24, 000/- paid as part of the

purchase price. The defendant has conceded that the plaintiff was entitled to forfeit the amount of Rs.1,

000/- which was paid as earnest money. We cannot however agree with the High Court 13 per cent of

the price may be regarded as that reasonable compensation in relation to the value of the contract as a

whole, as that in our opinion is assessed on an arbitrary assumption. The plaintiff failed to prove the

loss suffered by him in consequence of the breach of the contract committed by the defendant and we

are unable to find any principle on which compensation equal to ten percent of the agreed price could

be awarded to the plaintiff. The plaintiff has been allowed Rs.1, 000/- which was the earnest money as

part of the damages. Besides he had use of the remaining sum of Rs.24, 000/- and we can rightly

presume that he must have been deriving advantage from that amount throughout this period. In the

absence therefore of any proof of damage arising from the breach of the contract, we are of opinion that

the amount of Rs.1, 000/- (earnest money) which has been forfeited, and the advantage that the plaintiff

must have derived from the possession of the remaining sum of Rs. 24, 000/- during all this period

would be sufficient compensation to him. It may be added that the Plaintiff has separately claimed

mesne profits for being kept out of possession for which he has got a decree and therefore the fact that

the plaintiff was out of possession cannot be taken into account in determining damages for this

purpose. The decree passed by the High Court awarding Rs. 11, 250/- as damages to the plaintiff must

therefore be set aside.

17. The other question which remains to be determined relates to the amount of mesne profits which

the plaintiff is entitled to receive from the defendant who kept the plaintiff out of the property after the

bargain had fallen through. It is common ground that the defendant is liable for retaining possession to

pay compensation from June 1, 1949 till the date of the suit and thereafter under O. 20 R. 12(c) C.P.

Code till the date on which possession was delivered. The trial Court assessed compensation at the rate

of Rs.140/- per mensem. The High Court awarded compensation at the rate of Rs. 265/- per mensem. In

arriving at this rate the High Court adopted a highly artificial method. The High Court observed' that

even though the agreement for sale of the property was for a consideration of Rs. 1, 12, 500/- the

plaintiff had purchased the property in 1947 for Rs.63, 000/- and that at the date of the suit that amount

could be regarded as "the value for which the property could be sold at any time". The High Court then

thought that the proper rate of compensation for use and occupation of the house by the defendant when

he refused to give up possession after failing to complete the contract should have some relation to the

value of the property and not to the price agreed as sale price between the parties, and computing

damages at the rate of five per cent on the value of the property they held that Rs.3, 150/was the annual

loss suffered by the plaintiff by being kept out of possession, and on that footing awarded mesne profits

at the rate of Rs.265/- per mensem prior to the date of the suit and thereafter. The plaintiff is

undoubtedly entitled to mesne profits from the defendant, and 'mesne profits' as defined in S. 2(12) of

the Code of Civil Procedure are profits which the person in wrongful possession of property actually

received or might with ordinary diligence have received therefrom, together with interest on such

profits, but do not include profits due to improvements made by the person in wrongful possession. The

normal measure of mesne profits is therefore the value of the user of land to the person in wrongful

possession. The assessment made by the High Court of compensation at the rate of five per cent of

what they regarded as the fair value of the property is based not on the value of the user, but on an

estimated return on the value of the property cannot be sustained. The Attorney-General contended that

the premises were governed by the Delhi and Ajmer-Merwara Rent Control Act XIX of 1941 and

nothing more than the standard' rent of the property assessed under that Act could be awarded to the

plaintiff as damages. Normally a person in wrongful possession of immovable property has to pay

compensation computed on thee basis of profits he actually received or with ordinary diligence might

have' received. It is not necessary to consider in the present case whether mesne profits at a rate

exceeding the rate of standard rent of the house may be awarded, for there is no. evidence as to what

the 'standard rent' of the house was. From the evidence on the record it appears that a tenant was in

occupation for a long time before 1947 of the house in dispute in this appeal and another house for an

aggregate rent of Rs.180/- per mensem, and that after the house in dispute was sold, the plaintiff

- 39 -


received rent from that tenant at the rate of Rs.80/- per mensem, and the vendor of the plaintiff at the

rate of Rs.106/- per mensem. But this is not evidence of standard rent within the meaning of Delhi and

Ajmer-Merwara Rent control Act, XIX of 1947.

18. The Subordinate Judge awarded mesne profits at the rate of Rs. 140/- per mensem and unless it is

shown by the defendant that that was excessive we would not be justified in interfering with the amount

awarded by the Subordinate Judge. A slight modification, however, needs to be made. The plaintiff is

not only entitled to mesne profits at the monthly rate fixed by the Trial Court, but is also entitled to

interest on such profits : vide S. 2 (12) of the Code of Civil Procedure. We, therefore, direct that the

mesne profits be computed at the rate of Rs. 140/- per mensem from June 1, 1949 till the date on which

possession was delivered to the plaintiff (such period not exceeding three years from the date of decree)

together with interest at the rate of six per cent on the amount accruing due month after month.

19. The decree passed by the High Court will therefore be modified. It is ordered that the plaintiff is

entitled to retain out of R.. 25, 000/- only Rs. 1, 000/- received by him as earnest money, and that he is

entitled to compensation at the rate of Rs. 140/- per mensem and interest on that sum at the rate of six

per cent as it accrues due month after month from June 1, 1949 till the date of delivery of possession,

subject to the restriction prescribed by O. 20, R. 12 (1) (c) of the Code of Civil Procedure. Subject to

these modifications, this appeal will be dismissed. In view of the divided success, we direct that the

parties will bear their own costs in this Court.

~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~

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Quasi-Contract:

It is a situation in which no contract, express or implied, has been entered into. It is a situation in which

law imposes upon one person an obligation similar to that which arises from a contract. The underlying

principle is that no one shall be allowed to enrich himself at the expense of another. The claim based on

a quasi-contract is generally for money. These are discussed from sec 68 to 72 in the Act.7

Quantum Meruit:

The general rule is that unless one party has performed his obligation in full, he cannot claim

performance from the other. However, in certain cases, when one party has done some work under the

contract and the contract gets discharged due to some reason (not because of the fault of the party

which has done some work), he is entitled to be paid for the work he has done. This is the principle of

quantum meruit which means ‘as much as merited or earned’.

~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~


(1971) 1 SCC 424

(BEFORE P. JAGANMOHAN REDDY AND I.D. DUA, JJ.)

PURAN LAL SAH . . Appellant;

Versus

STATE OF U.P.† . . Respondent.

Civil Appeal No. 1687 of 1968, decided on January 21, 1971


REDDY, J.— This appeal is by a Certificate under Article 133(1)(a) of the Constitution against

the Judgment and decree of the Allahabad High Court, dated 8th March, 1965, setting aside the decree

of the trial court and dismissing the suit of the plaintiff-appellant.

2. The appellant had submitted a Tender to Construct Mile 3 of Nainital-Bhowali Road at 13 per

cent below the rates given in Schedule B to the Notice issued by the Government of the United

Provinces on 30th September, 1946. This tender was accepted and a contract was signed on 20th

November, 1946. It is alleged by the appellant that the rates given in Schedule B were based on the

calculation that stone required for the Road construction work would be available at a distance of 26

7 68. Claim for necessaries supplied to person incapable of contracting, or on his account If a person, incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person. 69. Reimbursement of person paying money due by another, in payment of which he is interested A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other. 70. 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 another person enjoys the benefit thereof, the letter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered. 71. Responsibility of finder of goods A person who finds goods belonging to another, and takes them into his custody, is subject to the same responsibility as a bailee. 72. Liability of person to whom money is paid, or thing delivered, by mistake or under coercion A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it.

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Chains while as a matter of fact no stone was available within that distance. The appellant had in fact to

get stone from Gadhera and Bhumedar from a distance of 79 and 110 Chains respectively. It is his

contention that by reason of the nonavailability of the stone and the definite understanding and

assurance given by the local authorities of the PWD that higher rates would be given for the extra work

done over and above the work provided in the contract he carried on the work. It was also alleged that

during the construction work on the road very hard shale rock came in the way not originally provided

for in the contract as such he was entitled to get the costs for the works done at the current rates from

the PWD which was not paid to him. In respect of these items of work done as also due to him having

done the work by bringing stone from a longer distance than was given in the estimates the appellant

claimed Rs 48,840-0-0 due as balance together with interest by way of damages at 12 per cent

amounting to Rs 17,582-0-0, making a total of Rs 66,422-0-0. When this claim was rejected the

appellant gave notice under Section 80 of the CPC and thereafter filed a suit for the above amount.

3. The defendant-respondent resisted the suit and pleaded that no assurance was given to the

appellant by officers of the PWD as alleged, that the quantity of very hard shale shown in the plaint

was incorrect and at any rate the contractor, under para 5 of the special instructions must be prepared to

execute the work at the original tender rate in excess of the given quantities of work up to 30 per cent

and if an increase in excess of 30 per cent is ordered over the work the contractor must intimate to the

Engineer-in-charge in writing his willingness or refusal to do extra work at the original tendered rates.

If he refuses to carry on at the original rates he is required to settle fresh rate for increased work over 30

per cent before doing the work.

4. On these averments the trial court held Issues 1, 2, 6 and 7 in favour of the appellant while

Issues 3, 4 and 5 were decided against him. In the result a decree for a sum of Rs 20,495 for extra lead

plus Rs 1653-14-0 for extra work done under the item very hard shale and Rs 4155 interest by way of

damages on Rs 22,158-14-0 making a total of Rs 26,313-14-0 was passed with interest at 3 per cent per

annum. In appeal the High Court reversed the decree holding that: “(1) the employment of the figure 26

Chains in the estimate was for no other purpose than that of calculation .... and if knowing that the same

was available within 26 Chains it (PWD) worked out its estimates on that basis, it could not be held to

have extended any assurance much less guarantee to the contractors that they would get stone within

that distance”; (2) the plaintiff-appellant performed the work required of him without exercising his

right under para 5 of the special instructions which gives the option to do the extra work in excess of 30

per cent but if he refuses to do the extra work at the originally tendered rates he should settle fresh rates

for increased work over 30 per cent before doing the work which he failed to do. In view of these

findings against the appellant the appeal of the respondent was allowed and the suit dismissed but in the

special circumstances of the case left the parties to bear their respective costs in both the Courts.

5. The two main questions in this appeal are: (1) whether the estimate of the PWD formed part of

the contract so as to be binding on both parties and whether any assurances were given to the appellant

that he would be given higher rates for bringing the stone from places situated at 79 Chains and 110

Chains respectively; (2) whether clause 5 of the special conditions of the contract was applicable to the

extra item of work contained in Ext. B-3 and whether he was entitled on the assurances given by the

local officers to higher rate for the extra work done. Shri Bindra, learned Advocate for the appellant has

referred us to clauses 8, 11 and 14 of the notice calling for the tender as also to certain letters and

passages in the evidence to substantiate his contention that the estimates of the PWD were part of the

contract and that in any case assurances were given to the appellant that when he could not get stone

from distance of 26 Chains, to bring from Chains 79 and 110 for which higher rates would he paid. It

may be stated that the PWD of the United Provinces, as it then was, had issued a tender notice

consisting of 16 paras and the appellant was required to sign this tender notice in token of his having

received it because ultimately under clause 34 of the conditions of the contract all papers signed by the

parties to the contract and bond will be deemed to be part of the contract bond and have to be read as

conditions to the contract. Clauses 8, 11 and 14 of the notice to which reference was made are as

follows:

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”8. All tenders should be on percentage rates above or below the rates given in the Schedule

‘B’.

11. Items not provided in the Schedule ‘B’ will be paid at current schedule of rate plus or

minus the percentage above or below as tendered by the contractor whose tender is accepted for

this work.

14. Contractors was advised to see the estimate, plans, specifications, special condition

prescribed and site of work before tendering.”

6. It is obvious from these clauses that the rates are given in Schedule ‘B’ on the basis of certain

plans and specifications. The person intending to tender for the work was required to examine this

material and also inspect the site before tendering. These interactions were designed to make all those

who were desirous of obtaining the contract responsible for their acts so that it cannot be said that any

misrepresentation was made or they were misguided in any way. The contention of the learned

Advocate for the appellant is that it was definitely stated in the estimates that stone was available at 26

Chains which representation was binding on the respondents and if no stone was available within that

distance he was entitled to claim higher rates if he had to get stone from places farther away. In fact the

appellant alleges that the engineers assured him that he would he paid higher rates.

7. We may here observe that in none of the clauses of the notice or conditions of contract or in any

other document is there any specific mention that stone will be available at 26 Chains nor is there any

assurance that if stone was not available within that distance the contractor will be paid higher rates.

The mere fact that the estimates were prepared by the PWD on the basis of the stone being available at

26 Chains which respondents admitted as stated in the judgment of Civil Judge, Nainital, does not

mean that there was any assurance or undertaking given that stone would be available at that place. In

fact it is not denied that stone was available within the distance of 26 Chains but it was in the area

belonging to the Cantonment, for the removal of which permission of the Cantonment authorities had

to be taken. Evidently the contractor was not able to obtain that permission. In our view it was up to the

contractor to have satisfied himself before entering into the contract that the Cantonment authorities

would permit him to take stone from its jurisdiction just in the same way as permission will have to be

taken from any private individual in whose land stone required for road building is found. If the

contractor has failed successfully to negotiate with the owners of land from which he could bring stone

it cannot be said that the estimate prepared by the PWD on the basis that the stone was available at 26

Chains was a statement which amounted to an assurance or constituted a condition of the contract.

8. The appellant as PW 1 stated in his evidence: “Before giving offer I saw the estimates and plan.

In the estimate it was written that the stone would be found within 26 Chains. On this basis estimate

was prepared through the PWD I enquired this from the Assistant Engineer also. He too informed that

stone would be available within 26 Chains. On this basis I prepared the estimate .... In the beginning of

the year 1947 I started work. I attempted to take out stones from within 26 Chains. The moment I

started to take out stones, the Cantonment authorities checked me. For this act I challaned, but I was

acquitted. The entire area within 26 Chains was of the Cantonment”. Further on he says “I have seen

the tender notice and I had gone through it; after that I signed it. Schedule ‘B’ was attached to the

notice. I signed it after going through it. I submitted tender 13 per cent less than the scheduled rate ...

before giving the tender I went to that place and found that the stones were available within 26 Chains,

when I wanted to take them out I learnt that this was within the Cantonment boundary. I sought

permission to take out stones from the Cantonment authorities, but it was disallowed”.

9. It is clear from this evidence that the appellant before giving the tender inspected the site, went

to the place where stone was said to be available and after satisfying himself that the stone was

available he gave the tender. A perusal of the documentary evidence would also show that he actually

commenced work after his request to allow him higher rate was rejected which was long after the time

when under the contract he was required to start the work. In fact just before the date fixed for the

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completion of the work, he had under Ext. B-4, dated the 12th June, 1947, made the following

representation.

10. “That as agreed upon the contract deed of my contract Nainital-Bhowali Motor Road Mile 3

the lead of stones for masonary work is given only about half a mile. On inspecting the place I find it

very difficult to get a quarry there as there is no stone at all. I am getting the stones from near the K.K.

Sanitorium which falls at a distance of two and a half miles from my place, as has already been brought

to your and the CE’s kind notice. Therefore, you are requested kindly to allow me a lead of two and a

half miles distance”. On this the concerned authorities seem to have made the endorsement: “As lead

and royalty is provided in the Schedule ‘B’ of the tender, the request cannot be acceded to. Draft reply

is put up”. Accordingly by letter, dated the 21st June, 1947, he was informed as follows:

“Reference your application, dated 12th June, 1947. Please refer to Items 6, 7, 8 and 9 of

Schedule B attached with your tender and on which basis you tendered your rate in this

connection. As the rates noted therein provide all lead and royalty and there is no mention there

that the rate contains a lead for half a mile, your request cannot be acceded to.”

11. This correspondence shows that the appellant’s claim to have extra lead was definitely rejected

as untenable even before he started the work under the contract, as is apparent from Ext. B-2, dated the

19th July, 1947. In that letter the appellant was being informed as follows:

“Please note that since you have signed the contract for the above work, the work must be

started now in consultation with the Overseer-in charge, Nainital section. The date of start and

completion will be as follows:

Date of start — November 20, 1946

Date of completion — July 19, 1947.”

12. It cannot therefore be said that the appellant was in any way induced by any assurances given

by the PWD authorities that they would give a higher rate for the extra lead before he commenced

work. The case of the appellant in these letters was that no stone was available within half a mile while

in his deposition he gave a contrary version altogether. Subsequently he seems to have become hopeful

because in the letter of the Assistant Engineer, dated 28th December, 1948, it is stated:

“In the estimate lead for 26 Chains was provided on the assumption that stone will be

available within the distance from the quarries in Cantonment areas. Later on when the work was

in progress the Cantonment authorities objected to quarrying stones from Cantonment land....”

Not doubt the Executive Engineer in his letter, dated 15th June, 1950, Ext. 22 has recommended the

case of the appellant for a higher rate as he says “When the stones were not available from the

Cantonment area it seems that the contractor naturally was forced to bring them from quarries situated

outside the Cantonment area” and he further says “If these quarries are the- places from where stones

were actually obtained then naturally the contractor is entitled to get the lead for the full quantity of

stones brought by him to complete different items requiring the use of stones”.

13. The letter seems to be a recommendatory letter by a subordinate to the higher officer but it

does not in any way establish the right of the appellant to obtain a higher rate, nor does the evidence

justify this conclusion. In our view neither the terms and conditions of the contract nor the oral or

documentary evidence justify the conclusion that the appellant was entitled to any extra lead.

14. Another argument was but forward by the learned Advocate for the appellant which is also

based on the same assumption that the availability of stone at 26 Chains was a condition of the contract

namely that once stone was not available at 26 Chains the contract was at an end and that because the

appellant had done the work he should be paid on the basis of quantum meruit. This in our view is a far

fetched argument and has no relation to the facts and circumstances of the case. Even assuming that the

stand taken by the appellant that the availability of stone at 26 Chains was a condition of the contract

- 44 -


was justified, he had notwithstanding the rejection of his claim even before he started the work,

acquiesced in the stand taken by the respondents that he is not entitled to any higher rates, carried on

and completed the contract as if there was no such condition. We therefore cannot understand the

contention of the appellant’s Advocate as to how the contract came to an end and who put an end to it.

Even if at that stage the contract had been but an end to by the respondent which is no one case, as the

appellant had not started the work no question of quantum meruit would arise. The principle of

quantum meruit is rooted in English law under which there were certain procedural advantages in

framing an action for compensation for work done. In order to avail of the remedy under quantum

meruit, the original contract must have been discharged by the defendant in such a way as to entitle the

plaintiff to regard himself as discharged from any further performance and he must have elected to do

so. The remedy it may be noticed is, however, not available to the party who breaks the contract even

though he may have partially performed part of his obligation. This remedy by way of quantum meruit

is restitutory that is it is a recompense for the value of the work done by the plaintiff in order to restore

him to the position which he would have been in if the contract had never been entered into. In this

regard it is different to a claim for damages which is a compensatory remedy aimed at placing the

injured party, as near as may be in the position which he would have been in, had the other party

performed the contract. This Court had in Alopi Parshad and Sons Ltd. v. Union of India1 observed at

p. 809:

“Compensation 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 persuant to the terms of a

contract compensation quantum meruit cannot be awarded where the contract provides for

consideration payable in that behalf.”

Though in that case the basis of the principle was not explained, it nonetheless, lays down that where

work is done under a contract persuant to the terms thereof no amount can be claimed by way of

quantum meruit. In the view we have taken on the facts of the case we do not propose to examine the

decisions cited at the Bar in this behalf. The claim of the appellant for higher rates which in fact was by

way damages has been rightly disallowed by the High Court.

15. On the second question also the appellant cannot succeed because under clause 12 of the

contract Ext. B-1, the plaintiff was bound to perform additional work which was required of him on the

same terms and conditions on which he undertook to do the work for which he tendered. It appears that

by a subsidiary contract entered into between the appellant and the PWD., Ext. B-3, on the 12th April,

1946, the appellant undertook to execute some additional work for the Department. The quantity of

work which appellant actually performed was far in excess of what was mentioned in Ext. B-3. The

Appellant therefore claimed payment for the work done by him in excess of the quantity mentioned in

the contract plus 30 per cent at the current rate as against the stipulated rates. It was submitted on

behalf of the State of U.P. before the High Court that under clause 12 of the contract Ext. B-1 and para

5 of the special instructions the plaintiff was not entitled to any amount in excess of what he had

already been paid. This contention was accepted because under the aforesaid clause 12 the contractor

was bound to perform all additional work which was required of him on the same terms and conditions

in which he undertook to do the main work. Para 5 of the special instructions further provides as

follows:

“Contractors must be prepared to do at their original tender rate work in excess of the given

quantities of work up to 30 per cent if an increase in excess of 30 per cent is ordered over the work

the contractor must intimate to the Engineer Incharge in writing his willingness or refusal to do

extra work at the originally tendered rates. In the latter case he should settle fresh rate for increased

work over 30 per cent before doing the work.”

These instructions being part and parcel of the original contract Ext. B-1 would govern the parties. As

such the appellant unless he gave notice under that para that he is not prepared to do the extra work

- 45 -


over the 30 per cent at normal rates, he cannot claim anything other than at the rates mentioned in the

contract, unless he had settled fresh rates for that extra work. There is no evidence nor is it claimed by

the appellant that he had given any notice as required under para 5 of the special instructions and since

he did the work without fulfilling these requirements he is not entitled to claim any amounts at a higher

rate for the extra work done. As neither of the contentions have force the appeal is dismissed but in the

circumstances without costs.

———

† Appeal from the Judgment and Decree, dated 8-3-1965 of the Allahabad High Court in First

Appeal No. 84 of 1954

1 AIR 1960 SC 588 : 1960 (2) SCR 793 : 1960 SCJ 763 (1960) 2 SCA 45

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MODULE II

SPECIAL FORMS OF CONTRACT

Guarantee and Indemnity:

When a person promises to save the other from loss caused to him by the conduct of the promisor

himself or of any third person, it is called a contract of indemnity. The person giving the indemnity is

called the ‘indemnifier’ and the person protected is called the ‘indemnified’. However, if a person

promises to discharge the liability of a third person in case of his default, it is called a contract of

guarantee. It involves three persons – person who gives the guarantee (surety or guarantor), person in

respect of whose default the guarantee is given (principal debtor) and the person to whom the guarantee

is given (creditor). [Sec 124 and 126]8

It is important to understand the differences between guarantee and indemnity (it is infact contract of

guarantee and contract of indemnity, however in short, we are using guarantee and indemnity). These

are as follows:

- In guarantee, there are three parties – principal debtor, creditor and the surety, but in indemnity,

there are only two parties – indemnifier and indemnified.

- Guarantee presupposes a principal debtor, while indemnity is an original and direct engagement

and may be made independently of the existence of a third party.

- Guarantee exists for security of the creditor but indemnity is brought about for reimbursement of

loss.

- In guarantee, where a surety discharges a debt payable by the principal debtor to the creditor, he

becomes entitled to recover it from the debtor. But in indemnity, the indemnifier cannot sue third

party in his own name. He has to bring the suit in the name of the indemnified.

- The indemnifier is primarily liable and no one is secondary liable. In guarantee, the principal

debtor is primarily liable and the guarantor has a sort of secondary liability.

- The indemnifier has some interest in the transaction, however, the guarantor is totally unconnected

with the transaction.

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(1996) 5 SCC 450

(BEFORE K. RAMASWAMY, S. SAGHIR AHMAD AND G.B. PATTANAIK, JJ.)

ANSAL ENGINEERING PROJECTS LTD. . . Petitioner;

Versus

TEHRI HYDRO DEVELOPMENT CORPORATION LTD. AND ANOTHER

. . Respondents.

SLP (C) No. 15878 of 1996† (CC No. 3415 of 1996), decided on July 31, 1996

1. This special leave petition arises from the order of the learned Single Judge of the Delhi High

Court dated 17-1-1996 made in Suit No. 990 of 1995. The petitioner had sought for injunction under

Section 41 read with Schedule II of the Arbitration Act, 1940 (for short, ‘the Act’) to restrain the

respondent from invoking the bank guarantee No. 33 of 1991 dated 13-2-1991 to encash Rs

8 124. "Contract of indemnity" defined 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". 126. "Contract of guarantee", "surety", "principal debtor" and "creditor" A "contract of guarantee" is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the "surety", the person in respect of whose default the guarantee is given is called the "principal debtor", and the person to whom the guarantee is given is called the "creditor". A guarantee may be either oral or written.

- 47 -


57,57,970 pursuant to the letter of invocation dated 5-4-1995. The facts mentioned therein are

that the petitioner had entered into contract on 30-3-1991 pursuant to a tender submitted by him to

construct 108 residential quarters at Katharia, Bhagirath Puram, Tehri. The construction was to be

completed within the stipulated period but was not completed. In terms of the contract, the first

respondent had terminated it. The petitioner availed of the remedy under Section 20 of the Act for

appointment of an arbitrator for reference of the dispute in terms of the contract. Pending consideration

thereof, he filed an application to restrain the respondent from encashing the bank guarantee. The

respondent after termination of the contract had issued a letter of invocation dated 5-4-1995 calling

upon the UCO Bank to pay the aforesaid amount in terms of the bank guarantee. It was contended in

the High Court that the amount due and payable by the petitioner should be determined in the suit. The

bank guarantee could not be invoked till then and the payment thereof could not be made. The

respondent had played fraud on the petitioner in entering into the contract and seeking extension of the

time. There are exceptional circumstances which necessitated the petitioner to seek relief of injunction

pending determination of the amount due and payable by the petitioner. The High Court rejected the

contentions and dismissed the petition. Thus, this special leave petition.

2. Admittedly, the bank guarantee given by the UCO Bank on behalf of the petitioner reads as

under:

“On production of a bank guarantee for the above principal amount and interest due thereon,

we, UCO Bank, 5, Parliament Street, New Delhi, (hereinafter referred to as ‘the Bank’) at the

request of Ansal Engineering Projects Limited Contractor(s) do hereby undertake to pay to the

Corporation an amount not exceeding Rs 57,57,970 plus interest as aforesaid against any

loss or damage caused to be suffered or would be caused to or suffered by the Corporation by

reason of any breach by the said Contractor(s) of any of the terms or conditions contained in the

said agreement.

We, UCO Bank, 5, Parliament Street, New Delhi do hereby undertake to pay the amount due

and payable under this guarantee without any demur, merely on a demand from the Corporation

stating that the amount claimed is due by way of loss or damage caused to or would be caused to or

suffered by the Corporation by reason of breach by the said Contractor(s) of any of the terms or

conditions contained in the said agreement or by reason of the Contractor(s) failure to perform the

said agreement. Any such demand made on the bank shall be conclusive as regards the amount due

and payable by the bank under this guarantee. However, our liability under this guarantee shall be

restricted to an amount not exceeding Rs 57,57,970 plus interest due on the outstanding

balance of mobilisation advance @ 18% p.a.

We undertake to pay to the Corporation money so demanded notwithstanding any dispute or

disputes raised by the Contractor(s)/Supplier(s) in any suit or proceeding pending before any court

or tribunal relating thereto. Our liability under this present being absolute and unequivocal.”

3. The letter of invocation of the respondent is thus:

“We hereby invoke subject bank guarantee and demand the amount detailed hereinafter as the

amount claimed is due by way of loss and damage caused to or would be caused to or suffered by

THDC/ourselves by reason of breach by your customer of the terms and conditions contained in

the said agreement and also by reason of your customer’s failure to perform the said agreement.

THDC/We are limiting our claim against you to the extent of the principal amount of

mobilisation advance lying outstanding against your customer plus interest due on the outstanding

balance of mobilisation advance @ 18% per annum. You are as such, requested to pay the

following amount:

(a) Outstanding amount of mobilisation advance due and payable by M/s Ansal

Engineering Project Limited, in terms of the bank guarantee in question, Rs 51,02,658.

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(b) Balance interest @ 18% per annum calculated on the outstanding mobilisation

advance up to 30-10-1994, Rs 13,89,625.

(c) Interest @ 18% per annum on the outstanding mobilisation advance of Rs

51,02,658 w.e.f. 31-10-1994 till the date of payment by you.

This notice of demand may be treated as a fresh demand to pay the abovenoted amounts in

terms of order dated 1-9-1994 passed by the Hon’ble High Court of Delhi at New Delhi in OMP

No. 39 of 1994 titled as M/s Ansal Engineering Projects Ltd. versus Tehri Hydro Development

Corporation Ltd. and yourself. Photocopy of the said order is enclosed herewith for ready

reference.”

4. It is settled law that bank guarantee is an independent and distinct contract between the bank and

the beneficiary and is not qualified by the underlying transaction and the validity of the primary

contract between the person at whose instance the bank guarantee was given and the beneficiary.

Unless fraud or special equity exists, is pleaded and prima facie established by strong evidence as a

triable issue, the beneficiary cannot be restrained from encashing the bank guarantee even if dispute

between the beneficiary and the person at whose instance the bank guarantee was given by the bank,

had arisen in performance of the contract or execution of the works undertaken in furtherance thereof.

The bank unconditionally and irrevocably promised to pay, on demand, the amount of liability

undertaken in the guarantee without any demur or dispute in terms of the bank guarantee. The object

behind is to inculcate respect for free flow of commerce and trade and faith in the commercial banking

transactions unhedged by pending disputes between the beneficiary and the contractor.

5. It is equally settled law that in terms of the bank guarantee the beneficiary is entitled to invoke the

bank guarantee and seek encashment of the amount specified in the bank guarantee. It does not depend

upon the result of the decision in the dispute between the parties, in case of the breach. The underlying

object is that an irrevocable commitment either in the form of bank guarantee or letters of credit

solemnly given by the bank must be honoured. The court exercising its power cannot interfere with

enforcement of bank guarantee/letters of credit except only in cases where fraud or special equity is

prima facie made out in the case as triable issue by strong evidence so as to prevent irretrievable

injustice to the parties. The trading operation would not be jettisoned and faith of the people in the

efficacy of banking transactions would not be eroded or brought to disbelief. The question, therefore, is

whether the petitioner had made out any case of irreparable injury by proof of special equity or fraud so

as to invoke the jurisdiction of the Court by way of injunction to restrain the first respondent from

encashing the bank guarantee. The High Court held that the petitioner has not made out either. We have

carefully scanned the reasons given by the High Court as well as the contentions raised by the parties.

On the facts, we do not find that any case of fraud has been made out. The contention is that after

promise to extend time for constructing the buildings and allotment of extra houses and the term of

bank guarantees was extended, the contract was terminated. It is not a case of fraud but one of acting in

terms of contract. It is next contended by Shri G. Nageshwara Rao, the learned counsel for the

petitioner, that unless the amount due and payable is determined by a competent court or tribunal by

mere invocation of bank guarantee or letter of credit pleading that the amount is due and payable by

the petitioner, which was disputed, cannot be held to be due and payable in a case. The Court has yet

to go into the question and until a finding after trial, or decision is given by a court or tribunal that

amount is due and payable by the petitioner, it cannot be held to be due and payable. Therefore, the

High Court committed manifest error of law in refusing to grant injunction as the petitioner has made

out a prima facie strong case. We find no force in the contention. All the clauses of the contract of the

bank guarantee are to be read together. Bank guarantee/letters of credit is an independent contract

between the bank and the beneficiary. It does not depend on the result of the dispute between the

person on whose behalf the bank guarantee was given by the bank and the beneficiary. Though the

question was not elaborately discussed, it was in sum answered by this Court in Hindustan Steel

Workers Construction Ltd. v. G.S. Atwal & Co. (Engineers) (P) Ltd.1 (SCC at p. 79). This Court had

held in para 6 that the entire dispute was pending before the arbitrator. Whether, and if so, what is the

amount due to the appellant was to be adjudicated in the arbitration proceedings. The order of the

learned Single Judge proceeds on the basis that the amounts claimed were not and cannot be said to be

due and the bank has violated the understanding between the respondent and the bank in giving

unconditional guarantee to the appellant. The learned Judge held that the bank had issued a guarantee in

a standard form, covering a wider spectrum than agreed to between the respondent and the bank and it

cannot be a reason to hold that the appellant is in any way fettered in invoking the conditional bank

- 49 -


guarantee. Similarly, the reasoning of the learned Single Judge that before invoking the performance

guarantee the appellant should assess the quantum of loss and damages and mention the ascertained

figure, cannot be put forward to restrain the appellant from invoking the unconditional guarantee. This

reasoning would clearly indicate that the final adjudication is not a precondition to invoke the bank

guarantee and that is not a ground to issue injunction restraining the beneficiary to enforce the bank

guarantee. In Hindustan Steelworks Construction Ltd. v. Tarapore & Co.2, it was contended that a

contractor had a counter-claim against the appellant; that disputes had been referred to the arbitrator

and no amount was said to be due and payable by the contractor to the appellant till the arbitrator

declared the award. It was contended therein that those were exceptional circumstances justifying

interference by restraining the appellant from enforcing the bank guarantee. The High Court had issued

interim injunction from enforcing the bank guarantee. Interfering with and reversing the order of the

High Court, this Court has held in para 23 that a bank must honour its commitment free from

interference by the courts. The special circumstances or special equity pleaded in the case that there

was a serious dispute on the question as to who has committed the breach of the contract and that

whether the amount is due and payable by the contractor to the appellant till the arbitrator declares the

award, was not sufficient to make the case an exceptional one justifying interference by restraining the

appellant from enforcing the bank guarantee. The order of injunction, therefore, was reserved with

certain directions with which we are not concerned in this case.

6. A conjoint reading of the bank guarantee and the letter of invocation demanding payment of

amount due and payable by the petitioner would show that the first respondent had specified and

quantified in terms of the bank guarantee a total sum with interest due thereon in a sum of Rs

57,57,970 as on 5-4-1995. A demand in terms of clause (i) of the bank guarantee was made.

The bank had irrevocably promised and undertaken to pay to the Corporation without any demur or

damage an amount not exceeding Rs 57,57,970 plus interest as per terms and conditions contained in

the bank guarantee untrammelled by the bilateral agreement between the petitioner and the first

respondent-Corporation stating the amount claimed was due and payable on account of loss or damage

caused to or likely to be caused to or by the Corporation by reason of any breach by the said contract or

any of the terms and conditions contained in the said agreement notwithstanding any dispute or

disputes raised under the contract in any suit or proceedings pending before any court or tribunal

relating thereto. The liability of the bank is absolute and unequivocal; it would thereby be clear that the

bank is not concerned with the ultimate decision of a court and a tribunal in its finding after

adjudication as to the amount due and payable by the petitioner to the first respondent. What would be

material is the quantification of the liability in the letter of revocation. The bank should verify whether

the amount claimed is within the terms of the bank guarantee or letter of credit. It is axiomatic that any

payment by the bank, obviously be subject to the final decision of the court or the tribunal. At the stage

of invocation of bank guarantee, the need for final adjudication and decision on the amount due and

payable by the petitioner, would run contrary to the terms of the special contract in which the bank had

undertaken to pay the amount due and payable by the contractor. Thus we hold that there is no question

of making out any prima facie case much less strong evidence or special equity or exceptional

circumstances for interference by way of injunction.

7. The special leave petition is accordingly dismissed.

———

† From the Judgment and Order dated 17-1-1996 of the Delhi High Court in Suit No. 990 of

1995

1 (1995) 6 SCC 76

2 (1996) 5 SCC 34 : JT (1996) 6 SC 295

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- 50 -


State Bank of India v. Mula Sahakari Sakhar Karkhana Limited

(Supreme Court of India, 2006)

2006 (6) SCC 293 = AIR 2007 SC 2361

Bench: S. B. Sinha, P. K. Balasubramanyan, JJ.

6 July 2006

The Judgment was delivered by Sinha, J.

Facts

The Respondent is a cooperative society. It has a sugar factory. It entered into a contract for installation

of a paper plant at village Sonai on turnkey basis so as to enable it to utilize the left over material called

"bagasse" of the sugarcane with M/s. Pentagon Engineering Pvt. Ltd.. The total value of the contract

was Rs.3.40 Crores. Pentagon furnished a performance guarantee in regard to the machinery supplied

by it. The said contract contained a clause for retention of 10% of the contract price by the cooperative

society …

Pentagon…suggested for a modification as regards the said payment clause regulating the cooperative

society to waive its rights to retain the said 10% of the contract price, and in its turn proposed to have a

letter of credit so that they can furnish appropriate bank guarantee; to which the cooperative society

accepted…

Pentagon in response…agreed…

The Bank Guarantee/Indemnity was thereafter furnished by the Appellant …

The Dispute

Disputes and differences arose by and between the cooperative society and Pentagon. The contract of

Pentagon was terminated by the cooperative society by a notice dated 17th July, 1987. A claim of

Rs.3,23,28,209.10 was also raised. Pentagon not only denied and disputed its liability to pay the said

sum but also, on the other hand, asserted that an amount of Rs.4,66,73,300 was due and owing to it by a

letter dated 18th July, 1987.

The Bank Guarantee was thereafter invoked by the cooperative society. The demand of the cooperative

society invoking the said Bank Guarantee met resistance from the Appellant stating that it had executed

an agreement of indemnity pursuant whereto or in terms whereof only losses, claims, damages, actions

and costs which might have been suffered by it, were covered and the transaction in question does not

constitute Bank Guarantee. It was, therefore, contended that unless the cooperative society proved any

loss or damage for design, performance, workmanship or supply of any defective material through a

competent court or authority, the Appellants were not liable to pay the said amount.

Trial Court

Cooperative society thereafter filed a suit in the Court of Civil Judge, Senior Division, Ahmednagar …

for a direction upon the Appellant to deposit the amount of Rs.34 lakhs…The suit was dismissed.

High Court

An appeal was preferred … by the cooperative society…The High Court construing the said agreement

dated 25.9.1983 to be a Bank Guarantee decreed the suit directing Appellant to pay the said sum of

Rs.34 lakhs with interest @ 14% per annum.

The Appellant is, thus, before us.

- 51 -


Case Discussion in the Supreme Court

* * *

The Operative portion of the Bank Guarantee dated 7th September, 1985 reads, thus:

Now therefore this bank guarantee is made in favour of Mula Sahakari Sakhar Karkhana Ltd.

by State Bank of India (Dombivli Industrial Estate Branch) agreed security the State Bank of

India (Dombivli Industrial Estate Branch) hereby agrees and undertake subject to the terms

and conditions set forth in this agreement to indemnify and keep indemnified Mula Sakhari

Sakhar Karkhana Ltd. against all losses, claims, damages actions and cost in respect of such

sums which the supplier shall become liable to pay as the terms of the said order.

In addition to the aforementioned, the Appellant agreed to the other terms and conditions referred to

therein, stating:

Notwithstanding anything hereinbefore contained, our maximum liability under this guarantee

is restricted to Rs. 34 lakhs. This guarantee shall remain in force upto 3rd September 1987

unless a suit or action to enforce claim under this guarantee is filed against us on or before the

3rd September, 1987 all right under this guarantee shall be forfeited and we shall be relieved

and discharged from all liabilities hereunder.

* * *

A document, as is well known, must primarily be construed on the basis of the terms and conditions

contained therein. It is also trite that while construing a document the court shall not supply any words

which the author thereof did not use.

The document in question is a commercial document. It does not on its face contain any ambiguity. …

Surrounding circumstances are relevant for construction of a document only if any ambiguity exists

therein and not otherwise.

The said document, in our opinion, constitutes a document of indemnity and not a document of

guarantee as is clear from the fact that by reason thereof the Appellant was to indemnify the

cooperative society against all losses, claims, damages, actions and costs which may be suffered by it.

The document does not contain the usual words found in a bank guarantee furnished by a Bank as, for

example, "unequivocal condition", "the cooperative society would be entitled to claim the damages

without any delay or demur" or the guarantee was "unconditional and absolute" as was held by the

High Court.

The High Court, thus, misread and misinterpreted the document as on scrutiny thereof, it had opined

that it was a contract of guarantee and not a contract of indemnity.

The document was executed by the Bank in favour of the cooperative society. The said document

indisputably was executed at the instance of Pentagon.

* * *

We are, however, unable to accept the submissions of the learned Senior Counsel that the bank

guarantee must be construed in the light of other purported contemporaneous documents. A contract

indisputably may be contained in more than one document. Such a document, however, must be a

subject matter of contract by and between the parties. The correspondences referred to hereinbefore

were between the cooperative society and Pentagon. The said correspondences were not exchanged

between the parties hereto as a part of the same transaction. The Appellant understood that it would

stand as a surety and not as a guarantor.

* * *

It is one thing to say that the nature of a transaction would be judged by the terms and conditions

together with the surrounding and/or attending circumstances in a case where the document suffers

- 52 -


from some ambiguities but it is another thing to say that the court will take recourse to such a course,

although no such ambiguity exists.…It is beyond any cavil that a bank guarantee must be construed on

its own terms. It is considered to be a separate transaction.

* * *

…The bank guarantee constitutes a separate, distinct and independent contract between the bank and

the defendants. In this case, the document in question does not specifically refer to any particular clause

of the contract. In fact the contract does not contain any clause requiring Pentagon to furnish any Bank

Guarantee.

Daewoo Motors Decision

We may now consider the decision in Daewoo Motors India Ltd. v. Union of India and Others [(2003)

4 SCC 690]. The bank guarantee involved therein inter alia read as under:

We, Times Bank Ltd., PTI Building, Parliament Street, New Delhi, 110 001 further agree that

the demand made by the President of India any money so demanded notwithstanding any

dispute raised by M/s Daewoo Motors India Ltd. in any proceeding before any court or

tribunal; We, Times Bank Ltd., PTI Building, Parliament Street, New Delhi 110 001 further

agree that the demand made by the President of India shall be conclusive as regards the

amount due and payable by us under these presents as out of liability under these presents are

absolute and unequivocal…

Construing the terms thereof, this Court held:

From a perusal of the above clauses, it is abundantly clear that the bank guarantee furnished

by the Bank is an unconditional and absolute bank guarantee. The Bank has rendered itself

liable to pay the cash on demand by the President of India "notwithstanding any dispute raised

by M/s Daewoo Motors India Limited in any proceeding before any court or tribunal". It is

worth noticing that the clause in the bank guarantee specifically provides that the demand

made by the President of India shall be conclusive as regards the amount due and payable by

the Bank under this guarantee and the liability under the guarantee is absolute and

unequivocal. In the face of the clear averments, it is trite to contend that the bank guarantee is

a conditional bank guarantee. Therefore, the Bank has no case to resist the encashment of the

bank guarantee.

The said decision, in the facts and circumstances of the case, cannot be said to have any application

here.

We are not oblivious of the decisions of this Court where, save and except the cases of fraud or

irretrievable evil, the Bank has been held liable to pay the guaranteed amount without any demur

whatsoever…

However, in this case, we have no doubt in our mind that the document in question constitutes a

contract of indemnity and not an absolute or unconditional bank guarantee. The High Court, therefore,

erred in construing the same to be an unconditional and absolute bank guarantee.

…

For the reasons aforementioned, the impugned judgment cannot be sustained which is set aside

accordingly. The decree of the trial court is restored. The appeal is allowed with costs. Counsel's fee

assessed at Rs.5000.

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- 53 -


Bailment:

Bailment is the delivery of goods by one to another person for some purpose, upon a contract that they

shall, when the purpose is accomplished, be returned. The person delivering the goods is called the

‘bailor’ and the person to whom the goods are delivered is called the ‘bailee’. (Sec 148) The bailee has

to return the goods as soon as the purpose is accomplished.9

The bailee has certain other duties besides the primary duty of returning the goods – take proper care of

the goods, use the goods bailed to him for the purpose for which it is meant and not to mix the bailor’s

goods with his own goods.

Pledge or Pawn:

Pledge is a transfer of possession of the chattel as security for the payment of a debt or performance of

an obligation. On default being made, the chattel may be sold. The borrower, who deposits the chattel

is called the ‘pledgor’ or ‘pawnor’ and the lender to whom the chattel is deposited is called the

‘pledgee’ or ‘pawnee’. Pledge is also a form of bailment, however, in pledge there is delivery of goods

by way of security for debt or promise. The bailee may use the bailed goods for certain purposes as

agreed, but the pledgee is not supposed to use the pledged article. In case the pledgor fails to pay the

debt, the pledgee may sell the goods after giving due notice to the pledgor. (Sec 172)10

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(1972) 3 SCC 196

[BEFORE K.S. HEGDE AND A.N. GROVER, JJ.]

BANK OF BIHAR . . Appellant;

Versus

STATE OF BIHAR AND OTHERS . . Respondents.

Civil Appeal No. 1942 of 1966, decided on April 1, 1971.

GROVER, J.— This is an appeal by certificate from a decree of the Patna High Court in a suit

instituted by the appellant against the State of Bihar which was impleaded as Defendant 1, the other

defendants being the Jagdishpur Zamindari Co. Ltd. (Defendant 2) and some of its directors Defendants

3 to 5.

2. According to the allegations in the plaint one of the methods of making advances followed by

the plaintiff Bank was that the constituents pledged their merchandise on a cash credit system with the

Bank and took advances on the pledged goods. The Bank held the goods as security for the advances

made and the constituents either provided the Bank with godown or the Bank kept the pledged goods in

godowns of its own and charged rents from the constituents. Defendant 2 entered into a cash credit

system agreement with the plaintiff’s Arrah Branch, the arrangement being that the sugar would be

9 148. "Bailment", "bailor" and "bailee" defined A "bailment" is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the direction of the person delivering them. The person delivering the goods is called the "bailor". The person to whom they are delivered is called the "bailee".Explanation: If a person already in possession of the goods of other contracts hold them as a bailee, he thereby becomes the bailee, and the owner becomes the bailor of such goods, although they may not have been delivered by way of bailment. 10 172. "Pledge", "Pawnor", and "Pawnee" defined The bailment of goods as security for payment of a debt or performance of a promise is called "pledge". The bailor is in this case called "pawnor". The bailee is called "pawnee".

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pledged under the cash credit system. On December 16, 1946, the advance made to Defendant 2 stood

at Rs 3,20,486-2-0 and the Bank held 6239 bags of different varieties of sugar as security. These bags

were kept in godowns provided by Defendant 2. The key of the lock of each godown was in the

custody of the Bank. It was alleged that in December 1949, under cover of an illegal seizure order

issued by Defendant 1 the Rationing Officer and the District Magistrate, Patna, got the locks of the

godown broken open and forcibly and illegally removed 1818 bags of 27D quality of sugar. The total

quantity removed weighed about 5000 maunds. No payment was made to the plaintiff Bank which held

the bags of sugar as pledge under the cash credit agreement. It is unnecessary to refer to the other facts

stated in the plaint except to mention that according to the plaintiff it was entitled to recover the sugar

which had been seized illegally or to recover the price of that sugar as per Schedule 2 of the plaint

which the plaintiff would have got if the quantity of sugar which had been seized had been sold in the

market on the material day. The plaintiff prayed for a decree for the return of 1818 bags of 27D quality

sugar and, alternatively, for recovery of Rs 1,81,700-9-3 with interest by way of damages for illegal

removal and detention of sugar or price thereof. Alternatively a decree for Rs 93,910-10-9 was claimed

against Defendant 2 and the other defendants.

3. The suit was resisted by Defendant 1 on the ground that the seizure had been effected pursuant

to lawful orders which had been made and that the sale proceeds of about 5000 mds. of sugar were

included in the sum of Rs 1,50,039-10-9 which was deposited in the treasury but which was later on

attached under the orders of Certificate Officer, Patna, under the Public Demands Recovery Act on

account of arrears of sugar cess amounting to Rs 2,00,000 due from the Bhita Sugar Factory with which

Defendant 2 had entered into an arrangement pursuant to which the entire quantity of sugar including

5000 mds. which had been seized had come into possession of Defendant 2. The other defendant also

resisted the suit on various grounds. A number of issues were framed on the pleadings of the parties.

We may only mention Issue 6(a) which will be material for determination of the points which we have

been called upon to decide:

“Was the sugar seized by the Government in possession of the Bank as a pledgee at the time

of the seizure and have the rights of the Bank as such pledgee been determined by the seizure in

question?”

The trial court held that the order of seizure in respect of the stock of sugar was valid. It was further

held that the plaintiff’s right as a pledgee could not be extinguished by seizure of the sugar in its

possession and though the attachment order of the Certificate Officer was legal and binding on

Defendant 2 it was not binding on the Bank (plaintiff) and it could be effective only in respect of that

portion of the price which was not necessary for the liquidation of the dues of the plaintiff from

Defendant 2. A decree was passed in favour of the plaintiff against Defendant 1 only for Rs 93,910-10-

9 with interest at 6% per annum from the date of the suit till realisation. Defendant 1 (State of Bihar)

filed an appeal to the High Court. The High Court was of the view that in the presence of the finding

that the plaintiff had not been wrongfully deprived of the sugar on account of the lawful seizure or its

price owing to the certificate proceedings started by the Cane Commissioner the plaintiff was not

entitled to any decree against the State. But it was entitled to a decree against Defendant 2 and the other

defendants. Consequently a decree against Defendant 1 was set aside and instead a decree was granted

against the other defendants.

4. Now it is common ground that the plaintiff (which is the appellant before us) held the sugar

which was seized from its custody as security for payment of the debts or advances made to Defendant

2 in its cash credit account. There were arrears of certain cess due from Defendant 2. As stated before,

the Cane Commissioner took proceedings under the Public Demands Recovery Act and attached the

price of the sugar which had been deposited by the appropriate authorities in the Government Treasury

instead of being paid to the plaintiff. The Cane Commissioner indisputably did not have any right of

priority over the other creditors of Defendant 2 and, in particular, the secured creditors. Section 172 of

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the Contract Act defines a pledge to mean the bailment of goods as security for payment of debt or

performance of a promise. The bailor is called the “pawnor” and the bailee is called the “pawnee”.

Section 173 of that Act provides that the pawnee may retain the goods pledged not only for the

payment of the debt or performance of the promise but also for the interest of the debt, etc. Section 176

is in the following terms:

“If the pawnor makes default in payment of the debt, or performance, at the stipulated time of

the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the

pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may

sell the thing pledged, on giving the pawnor reasonable notice of the sale.

If the proceeds of such sale are less than the amount due in respect of the debt or promise, the

pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so

due, the pawnee shall pay over the surplus to the pawnor.”

Section 180 is to the effect that if a third person wrongfully deprives the bailee of the use of the

possession of the goods bailed or does him any injury the bailee is entitled to use such remedies as the

owner might have used in the like case if no bailment had been made and either the bailor or the bailee

may bring a suit against a third person for such deprivation or injury. According to Section 181

whatever is obtained by way of relief or compensation in any such suit shall, as between the bailor and

bailee, be dealt with according to their respective interests. Relying on the above two sections the High

Court came to the conclusion that a pawnee has merely the possession of the goods coupled with a

power to sell them on default by the pawnor but the latter retains the ownership subject to a lien to the

extent of the debt enforceable by exercise of the power of sale. In the present case the sugar had been

seized and then sold. The sale proceeds would have been available to Defendants 2 to 5 subject to the

claim of the plaintiff against them but it ceased to have any lien on the pledged property or the sale

proceeds against any third party including the State as soon as it was legally deprived of the possession

of the pledged goods.

5. According to the Statement in Halsbury’s Laws of England “pawn” has been described as a

security where by contract a deposit of goods is made a security for a debt and the right to the property

vests in the pledgee so far as is necessary to secure the debt; in this sense it is intermediate between a

simple lien and a mortgage which wholly passed the property in the thing conveyed.1 “The pawnee has

a special property or special interest in the thing pledged, while the general property therein continues

in the owner. That special property or interest exists so that the pawnee can compel payment of the debt

or can sell the goods when the right to do so arises. This special property or interest is to be

distinguished from the mere right of detention which the holder of a lien possesses, in that it is

transferable in the sense that a pawnee may assign or pledge his special property or interest in the

goods”.2 “Where judgment has been obtained against the pawnor of goods and execution has issued

thereon, the sheriff cannot seize the goods pawned unless be satisfied the claim of the pawnee” (based

mainly on Rogers v. Kennay.3) “On the bankruptcy of the pawnor the pawnee is a secured creditor in

the bankruptcy with respect to things pledged before the date of the receiving order and without notice

of a prior available act of bankruptcy”.4 It has not been shown how the law in India is in any way

different from the English law relating to the rights of the pawnee vis-a-vis other unsecured creditors of

the pawnor.

6. In our judgment the High Court is in error in considering that the rights of the pawnee who had

parted with money in favour of the pawnor on the security of the goods can be defeated by the goods

being lawfully seized by the Government and the money being made available to other creditor of the

pawnor without the claim of the pawnee being fully satisfied. The pawnee has special property and a

lien which is not of ordinary nature on the goods and so long as his claim is not satisfied no other

creditor of the pawnor has any right to take away the goods or its price. After the goods had been seized

by the Government it was bound to pay the amount due to the plaintiff and the balance could have been

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made available to satisfy the claim of other creditors of the pawnor. But by a mere act of lawful seizure

the Government could not deprive the plaintiff of the amount which was secured by the pledge of the

goods to it. As the act of the Government resulted in deprivation of the amount to which the plaintiff

was entitled it was bound to reimburse the plaintiff for such amount which the plaintiff in ordinary

course would have realized by sale of the goods pledged with it on the pawnor making a default in

payment of debt.

7. The approach of the trial court was unexceptionable. The plaintiff’s right as a pawnee could not

be extinguished by the seizure of the goods in its possession inasmuch as the pledge of the goods was

not meant to replace the liability under the cash credit agreement. It was intended to give the plaintiff a

primary right to sell the goods in satisfaction of the liability of the pawnor. The Cane Commissioner

who was an unsecured creditor could not have any higher rights than the pawnor and was entitled only

to the surplus money after satisfaction of the plaintiff’s dues.

8. Defendants 3 to 5 did not file any appeal against the judgment of the High Court. The decree

passed by the High Court against them would, therefore, stand. In the view that we have taken the

appeal is allowed, the judgment and decree of the High Court dismissing the suit against the State of

Bihar is hereby set aside and a decree is granted against the State of Bihar in the same terms as was

granted by the trial court. The appellant will be entitled to costs throughout.

1 Halsbury’s Laws of England, 3rd Edn., Vol. 29 p. 211

2 Halsbury’s Laws of England, 3rd Edn., Vol. 29 pp. 218-219

3 (1846) 9 QB 592

4 Halsbury’s Laws of England, 3rd Edn., Vol. p. 222

~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~

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2000 Indlaw SC 2577 : AIR 2000 SC 2181


Vimal Chandra Grover

v

Bank of India

26/04/2000

HON'BLE JUSTICE D. P. WADHWA AND HON'BLE JUSTICE S. SAGHIR AHMED

The Judgment was delivered by WADHWA, J.:

1. This appeal is directed against the order dated 21st June, 1996 of the National Consumer Disputes

Redressal Commission (National Commission) holding that there was no negligence on the part of the

respondent-bank in dealing with its security of pledged shares of the appellant or its release in part to

him and that the bank could also not be faulted on its practice not to dispose of shares through brokers

not on the approved list of the bank and lastly that it could not be said that there was any deficiency in

service by the bank as defined in section 2(1)(g) of the Consumer Protection Act, 1986 ('Act' for short).

Leave was granted limited to the claim of the appellant to his shares of Castrol Ltd. pledged with the

bank.

2. On the request of the appellant, bank sanctioned to him on 20th September, 1990 an overdraft limit

of Rs. 5, 00, 000 against pledge of shares of various companies, value of all the shares being Rs. 10, 60,

900 at the relevant time. Out of these number of shares of the Castrol Ltd. were 1, 400 @ Rs. 200 per

share of the total value of Rs. 2, 80, 000. It is not disputed that as per the guidelines issued by the

Reserve Bank of India, banks are allowed to make advance against pledge of shares retaining 50 per

cent margin. As per the terms of sanction of the overdraft limit shares were got transferred in the name

of the bank. In due course of time, bank received bonus shares numbering 2, 224 of Castrol ltd. It is

stated that value of shares also increased manifold. Appellant also paid an instalment of Rs. 1, 45, 600

to the bank against the overdraft limit. Overdraft amount was to be adjusted in three equal instalments.

In order to clear the overdraft account the appellant, apart from shares of other companies, requested

the bank to arrange sale of 500 shares of Castrol Ltd. This he did by letter dated 23rd April, 1992.

3. After 12 days of the receipt of this letter the bank at Nagpur, where the overdraft account of the

appellant was maintained sent a letter dated 5th May, 1992 to its head office at Bombay (copy of this

letter was endorsed to the appellant) agreeing to the terms of the appellant set out in his letter dated

23rd April, 1992. Nagpur Branch received a letter of 19th June, 1992 from its head office stating that it

did not receive the letter dated 23rd April, 1992 of the appellant and further that the shares were not in

the head office. By letter dated 29th July, 1992, Nagpur Branch of the bank informed the appellant that

head office was not holding the shares. It was, however, found that the shares were lying with the

Nagpur Branch itself. By this time it appeared that the price of the share fell and the shares could not be

sold at the price indicated by the appellant. He, therefore, filed a claim with the National Commission

for Rs. 5, 09, 037.53 in respect of shares of Castrol Ltd. as under:

"Less on account of non-sale of 500 shares of Castrol Ltd.

Rs. (a) Estimated sale price of 500 shares @ Rs. 2, 400 per share 12, 00, 000.00

Deduct price prevailing on 23rd July, 1992 @ 700 per share 3, 50, 000.00 8, 50, 000.00 --------------

Deduct amount of effective debit balance in O/D on 3, 40, 962.53

30th June, 1992 -------------- 5, 09, 037.53" *

He also filed other claims against the bank with which we are not concerned in this appeal.

4. There cannot be any doubt if action had been taken by the bank promptly or within a reasonable time

appellant would have been able to clear his overdraft account. About the prevalent price of the share as

claimed by the appellant there cannot be any dispute.

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5. Bank has submitted before us that relationship between the parties is governed by sections 172 to

177 of the Contract Act, 1972 and bank was within its right to choose the time and place as to when it

would like to dispose of the pledged goods and that the only requirement is that before that notice is to

be given to pawnor, appellant in the present case. In support of its submissions reference was made to a

Division Bench decision of the Punjab High Court in Bharat Bank v. Bodhraj 1956 AIR(Punj) 155. We

were also referred to "Chitty on Contracts", 27th edn., and other decisions to which we will presently

refer.

6. Prima facie it does appear to us that bank has failed to honour its commitment resulting in loss to the

appellant. The question still, however, arises if the alleged default on the part of the bank could be

termed as deficiency in service. 'Service' has been defined in clause (o) of sub-section (1) of section 2

of the Act and 'deficiency' in clause (g) thereof. These are as under :

'(g) "deficiency" means any fault, imperfection, shortcoming or inadequacy in the quality, nature and

manner of performance which is required to be maintained by or under any law for the time being in

force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in

relation to any service; '

'(o) "service" means service of any description which is made available to potential users and includes

the provision of facilities in connection with banking, financing, insurance, transport, processing,

supply of electrical or other energy, board or lodging or both, housing construction, entertainment,

amusement or the purveying of news or other information, but does not include the rendering of any

service free of charge or under a contract of personal service.'

7. In the arguments it was submitted that the appellant is not a consumer within the meaning of sub-

clause (ii) of clause (d) of section 2 of the Act. This sub-clause is as under :

'(d) "consumer" means any person who -

(i) * * *

(ii) hires or avails of any service for a consideration which has been paid or promised or partly paid and

partly promised, or under any system of deferred payment and includes any beneficiary of such

services other than the person who hires or avails of the services for consideration paid or promised, or

partly paid and partly promised, or under any system of deferred payment, when such services are

availed of with the approval of the first mentioned person; '

8. We think that the argument that the appellant is not a consumer or that the bank is not rendering

service is an argument in desperation. No such plea was raised before the National Commission.

Overdraft limit prescribed by the bank was not without consideration. Bank is rendering service by

providing overdraft facilities to a customer which is not without consideration. Bank is charging

interest and other charges as well in providing the service. Provision for overdraft facility is certainly a

part of the banking and its service within the meaning of clause (o) of section 2 of the Act. In ordinary

parlance 'banking' is a business transactions of a bank (The Concise Oxford Dictionary). 'Banking' is

defined in the Black's Law Dictionary. It is as under:

"The business of banking, as defined by law and custom, consists in the issue of notes payable on

demand intended to circulate as money when the banks are banks of issue, in receiving deposits

payable on demand; in discounting commercial paper; making loans of money on collateral security;

buying and selling bills of exchange; negotiating loans, and dealing in negotiable securities issued by

the government, state and national and municipal and other corporations. Mercantile Bank v. New York

121 US 138, 156; 7 S Ct. 826; 30 L.Ed. 895; Prudence Co., In re. DCNY, 10F. Supp. 33, 36."

9. The Reserve Bank of India under the Reserve Bank of India Act, 1934 controls various activities of

the banks in India. Under section 22 of that Act, Reserve Bank of India has the sole right to issue bank

notes in India. Bank in the present case is governed by the Banking Regulation Act, 1949

10. Request for sale of part of the pledged shares for getting overdraft facilities and which is agreed to

by the bank is certainly part of the service connected with the grant of overdraft facilities. Appellant as

a consumer was hiring service of the bank for consideration by way of payment of interest for the

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overdraft facilities received by him by pledging the shares of different companies. We reject the

argument that the appellant is not a consumer or that the bank is not providing any service to the

appellant. The only question that requires consideration is if there was any deficiency in service in the

present case.

11. Bank has denied that there was any deficiency in service on its part and the conduct of the bank in

dealing with the alleged securities was not negligent. It was stated that facts on record clearly

established that it was the appellant who was solely responsible for causing the confusion and

misguiding the bank to locate the shares with Bombay office. It was, thus, contended that the alleged

delay which was caused could not be attributed to the negligence of the bank as it was the appellant

himself who mislead the bank. It was rather explained that it was the assertion of the appellant which

led to the time consuming process of checking and again rechecking whether the said shares were

indeed in the Bombay office. It was, thus, denied that

"there was any negligence or deficiency in service on the part of the respondent-bank who carried out

its duty with due diligence and care and was hampered by the misleading information given by the

appellant himself".

It was then contended that the bank had lien over certain shares which the appellant had pledged as

security for the overdraft facility of Rs. 5, 00, 000 provided by the bank. It was stated that the bank, in

fact, acceded to the request of the appellant and sanctioned the overdraft facility after imposing certain

terms and conditions. It was also submitted that prior to the agreement for grant of overdraft facility of

Rs. 5, 00, 000 appellant had executed a letter of lien and set off dated 9th August, 1989 which entitled

the bank to retain all the shares, which were in its possession or which may come into the possession of

the bank at any future date, as collateral security for all the outstanding dues of the appellant apart from

any specific facility provided to him. Then the bank said that it was well-settled principle of law that

the banker's lien extended to all securities deposited in its character as a banker. It was, therefore,

contended that it was undisputed that the bank had every right to exercise lien over the pledged shares.

Then it was submitted that though the appellant had requested the bank to sell the shares through his

broker who was not on the approved list of the bank and that it was the standard practice followed by

the banks that they dealt with the pledged shares only through brokers whose names featured in the

approved list of bank. According to the bank appellant should have discharged his contractual

obligations by settling the overdraft account in three equal instalments as agreed and secured the

release of the pledged shares but instead he sought release of some of the pledged shares. Bank, in

pursuance to the request and directions given by the appellant, carried out a thorough search in the

Bombay office but the Castrol shares were not traceable there. It was then denied by the bank that the

appellant suffered any monetary loss. This is how the bank advanced its plea:

"It is submitted that the appellant received some bonus shares of Castrol India Ltd., which were allotted

in the ratio of 3 : 5 on 23rd June, 1992. Subsequently the appellant obtained some more bonus shares

whose total market value inclusive of the original No. of shares pledged with the answering respondent,

at a time when market price of the said shares allegedly dipped was higher that the alleged previous

value of the Castrol shares pledged by the appellant with the answering respondent. Hence the

averments made by the appellant about the loss suffered by him is wholly sustainable and illogical."

12. It was then submitted by the bank that the appellant was a regular defaulter and time and again had,

failed to liquidate his dues and discharge his obligations. The bank was under no obligation whatsoever

to release the shares which were in its possession and could not be compelled in law to sell any of the

pledged shares. Then the bank said that delay was caused to process the request of the appellant to sell

the shares held by the bank as security as his request needed to be carefully examined especially in

view of the fact that he had several irregular accounts and was a habitual defaulter. The bank which is a

custodian of public funds could hardly be rushed into making its commercial/business decisions, so the

bank lamented. Lastly, it was submitted by the bank that it could not be blamed for any fluctuations of

the market price of the shares and by merely fluctuating the market price of the shares on the days

when the value of the shares are particularly high, one cannot calculate the gain or loss suffered and

that in any case fluctuations in the value of the shares could also be worked out other way, i.e., to the

prejudice of the bank. That is all to the case set up by the bank.

13. We have been referred to various decisions by Mr. Krishna Venugopal, who appeared for the bank.

He submitted that he could certainly raise issues such as the law of pledge or the jurisdiction of the

National Commission in this appeal for sustaining the decision of the National Commission. In support

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of his submission, he referred to a decision of this court in Management of Northern Railway Co-

operative Society Ltd. v. Industrial Tribunal 1967 Indlaw SC 16. But as held by this court in Chinta

Lingam v. Government of India 1970 Indlaw SC 298 when there is no foundation laid in the pleadings

before the National Commission argument of such pleading could not be allowed to be raised in this

court. However, if it is a pure question of law going to the root of the case, this plea may be allowed to

be raised with the permission of the court. We may in this connection refer to order 41, rule 22, of the

Code of Civil Procedure, 1908 which provides that though the respondent may not have appealed from

any part of the decree, he may not only support the decree but may also state that finding against him in

the court below in respect of any issue ought to have been in his favour. For this, however, there has to

be pleadings and evidence on that. In Warehousing & Forwarding Co. of East Africa Ltd. v. Jafferali &

Sons Ltd. 1963 Indlaw PC 10on the question when a new point is raised in appeal, which was not

raised in the court below, whether that new point should have been allowed to be taken the Privy

Council observed :

"The question of ratification never having been investigated and the outcome of such an investigation

not being clear, it was not possible to hold that the result would have been the same whatever such

investigation would have revealed; in such circumstances the respondents ought not to have been

allowed to argue the new point before the Court of Appeal."

14. Mr. Krishna Venugopal, it appears, made this point in answer to objection by the appellant that the

bank did not raise any issue regarding law of pledge or the jurisdiction of the National Commission

before the National Commission. We heard Mr. Venugopal on the applicability of the law of pledge as

contained in sections 172 to 177 of the Contract Act on a plea that there was no deficiency in service

because the bank was not under a legal obligation to follow a customer's instructions to sell the pledged

shares. He said the statute not only imposes no obligation on the pledgee to sell pledged shares on the

request of the pledgor it grants a positive option to the pledgee to either retain or sell the pledged shares

which would be nullified by creating an obligation on his part to sell on the request of the pledgor. We

may refer to some of the decisions cited by Mr. Venugopal at the bar on this aspect.

15. In Hallday v. Holgate 1868 LR Exchequer 299 the facts (as appeared from the head note) a holder

of scrip certificates for shares borrowed of the defendant a sum of money on his own promissory note,

payable on demand, and on the security of the shares, and deposited with the defendant the scrip

certificates. He afterwards became bankrupt, and the defendant, without demand and without notice,

sold ten of the fifteen shares to repay himself his debt. The creditors' assignee, without making any

tender of the amount of the debt, brought an action of trover against the defendant to recover the value

of the shares. It was held that even assuming the sale to be wrongful, the immediate right to the

possession of the shares was not by the sale revested in the plaintiff, and that he could not, therefore,

maintain trover, either for the whole value of the shares or for nominal damages.

16. In S. L. Ramaswamy Chetty v. MSAPL Palanlappe Chettiar 1930 AIR(Mad) 364 (DB) the court

said :

"The respondent (pledgor) could not compel the appellants to exercise the power of sale as a means of

discharging or satisfying the decree. His only rights were : (1) in case the appellants (a pawnee)

exercised the power, to insist that it should be honestly and properly done and the sale proceeds applied

to the debt, (2) in case the appellants did not exercise the power, to redeem the pledges on payment of

the debt or so much of it as remained otherwise unpaid and (3) in case the sale was improperly

exercised, to get damages caused thereby." *

17. A Single Judge of the Delhi High Court in Bank of Maharashtra v. Racmann Auto (P.) Ltd. 1991

Indlaw DEL 134 on examining the provisions of sections 176-177 said :

"In view of the provisions of section 176 of the Contract Act, there remains no doubt about the legal

proposition that it is in the discretion of the plaintiff bank to have filed the suit for recovery of the debt

and retain the pledged goods as collateral security or in the alternative could resort to selling the

pledged goods after giving reasonable notice of sale to the defendant. Plaintiff bank had in its wisdom

exercised the first option of filing the suit and retained the pledged goods as collateral security. So,

even if the value of the goods had deteriorated due to passage of time, no relief can be obtained by the

defendant against the plaintiff as the defendant was legally bound to clear the debt and obtain the

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possession of the pledged goods from the plaintiff bank before the pledged goods were sold during the

pendency of the suit. That is clearly provided in section 177 of the Contract Act." *

18. In China & South Sea Bank Ltd. v. Tan 1989 Indlaw PC 2, the Privy Council laid the following

principle:

"The creditor is not obliged to do anything .... No creditor could carry on the business of lending if he

could become liable to a mortgagee [sic : mortgagor] and to a surety or to either of them for a decline in

value of mortgaged property, unless the creditor was personally responsible for the decline." *

19. In Bharat Bank Ltd. v. Bodhraj AIR 196 Punj, . 1 (DB) the appellant gave notice to the respondent.

The appellant was defendant in a suit filed by the respondent-plaintiff. The plaintiff had cash credit

account with the Bharat Bank Ltd. at Rawalpindi (now in Pakistan) prior to the year 1947. He had

pledged as security 988 shares of a company. The defendant gave notice to the plaintiff demanding

payment of the debt due from the plaintiff by 18th August, 1947 and if the amount was not paid the

shares would be sold without reference to the debtor and at his risk rind responsibility. The plaintiff did

not send any reply to this letter of demand by the defendant. On 28th August, 1948 the shares were sold

at Rs. 10 per share. Plaintiff on 31st January, 1949 gave a notice to the defendant claiming Rs. 9, 000

on account of surplus which would have accrued had the shares been sold by the middle of September

1947 when the price was Rs. 19/12 per share. The defendant replied on 8th February, 1949 saying that

it was not bound to sell the shares in September 1947 and could sell them at any time after the

expiration of the period of notice sent by it in August 1947. The material plea of the defendant was that

the bank could not function after August 1947 due to disturbances that the bank could not bring the

records to India due to restrictions imposed by the Pakistan' Government and that before the shares

could be sold the bank had to get the sanction of the Custodian of Evacuee Property. Suit of the

plaintiff was decreed on appeal by the defendant to the High Court. Reference was made to section 176

of the Contract Act which requires a reasonable notice of the sale. It was submitted by the defendant

that the sale should take place within a reasonable time of the notice but the High Court negatived this

plea. High Court referred to an earlier decision in Surajmal v. Fulchand 1951 AIR(Nag) 264 where it

was held that a pawnee who has given a reasonable notice of sale under section 176, Contract Act can

sell at any time and is not bound to sell within a reasonable time after the expiry of the period

mentioned in the notice. Section 176 of the Contract Act talks of reasonable notice of sale. The pawnor

is warned by notice that if he does not discharge the debt within a reasonable time the pledged goods

would be put to sale. This will mean that if there is default by the pawnor the goods would be put to

sale after expiry of a reasonable period from the date of the notice. However, it does not mean that after

reasonable period has expired from the date of notice, the pawnor is debarred from all time to redeem

his pledged goods. Any time before the pledged goods are put to sale, he can redeem after discharging

the debt.

20. In Agencia Commercial International Ltd. v. Custodian of the Branches of Banco Nacional

Ultramarino 1982 Indlaw SC 132, this court held that branch of the bank in which account is

maintained by the customer is a separate and distinct entity from the head office. This is how this court

said :

'14. Now it is indisputed as a general proposition that a body corporate and its branches are not distinct

and separate entities from each other, that the branches constitute mere components through which the

corporate entity expresses itself and that all transactions entered into ostensibly with the branches are in

legal reality transactions with the corporate body and it is with the corporate body that a person must

deal directly. But it is also now generally agreed that in the case of a bank which operates through its

branches, the branches are regarded for many purposes as separate and distinct entities from the head

office and from each other. This court observed in Delhi Cloth & General Mills Co. Ltd. v. Harnam

Singh 1995 (2) SCR 402

"In banking transactions the following rules are now settled : (1) the obligation of a bank to pay the

cheques of a customer rests primarily on the branch at which he keeps his account and the bank can

rightly refuse to cash a cheque at any other branch : Rex v. Lovitt 1912 AC 212, State Aided Bank of

Travancore v. Dhrit Ram 1941 Indlaw PC 9 and New York Life Insurance Co. v. Public Trustee 1924

(2) Ch 101; (2) a customer must make a demand for payment at the branch where his current account is

kept before he has a cause of action against the bank : Joachimson v. Swiss Bank Corporation 1921 (3)

KB 110 quoted with approval by Lord Reid in Arab Bank Ltd. v. Barciays Bank 1954 Indlaw HL 18.

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The rule is the same whether the account is a current account or whether it is a case of deposit. The last

two cases refer to a current account, the Privy Council case was a case of deposit. Either way, there

must be a demand by the customer at the branch where the current account is kept, or where the deposit

is made and kept, before the bank need pay, and for these reasons the English courts hold that the situs

of the debts is at the place where the current account is kept and where the demand must be made.It

was explained further that if the bank wrongly refused to pay when a demand was made at the proper

place and time, then it could be sued at its head office as well as at its branch office, but the reason was

that "the action is then, not on the debt, but on the breach of the contract to pay at the place specified in

the agreement", and reference was made to Warrington, LJ at page 116 and Atkin, LJ at page 121 of

New York Life Insurance Co. v. Public Trustee. That is the position in regard to banking law and

practice, and it is apparently in that light that the Regulation has been framed."

21. Chitty on Contract, 27th edn. dealt with unlawful dealing by the pledgee. It said:

'If the pledgee deals with the thing pledged in an unlawful manner, such as by sale before the time fixed

for repayment of the debt, or by wrongfully claiming to be absolute owner of the thing, the contract of

pledge is not determined and the pledgor cannot, without payment or tender of the debt, sue the pledgee

for conversion. But if the pledgee "deals with it in a manner other than is allowed by law for the

payment of his debt, then, insofar as by disposing of the reversionary interest of the pledgor he causes

to the pledgor any difficulty in obtaining possession of the pledge on payment of the sum due, and

thereby does him any real damage, he commits a legal wrong against the pledgor".' [paras 32-100]

22. It is difficult to accept the contention of the bank that the correspondence that was exchanged

between the appellant, the Nagpur Branch of the bank and its head office did not constitute an

agreement between the parties under which the bank is agreed to sell the 500 shares of Castrol Ltd.

pledged with it by the appellant. This agreement can be clearly spelt out from the correspondence

exchanged between the parties, Mr. Venugopal sought reference to the provisions of Securities

Contracts (Regulation) Act, 1956 under which stock exchange in the country function. We cannot

permit him to raise such a plea which has no foundation either in the pleading or in the evidence before

the National Commission.23. We do not think it is necessary for us to go into all these legal niceties in

view of the clear provisions of law and in this mass of judicial pronouncements referred to above we

should not forget the teal issue. We have held that the appellant is a consumer and bank is provider of

the service. Appellant's case is simple. He did not want his shares back. He only wanted part of the

shares to be sold and for, the bank to keep the money to liquidate part of his overdraft account. Bank

agreed. Each branch of the bank is independent. The bank has taken two principal pleas : (1) it was not

obliged to sell the shares as under law bank is not bound to follow the instructions in view of the

provisions regarding pledges as contained in sections 172 to 177 of the Contract Act; and (2) it was the

appellant who misled the bank by saying that the shares were lying in the head office of the bank at

Bombay. That the bank has a right under the law to retain the pledged goods is not in dispute. But once

the bank having agreed to sell part of the pledged goods, it could not fall back on those very provisions

to raise a plea of its right under the law to retain the pledged goods. Bank says it was misled by the

appellant that the shares were lying in Bombay when in fact these were lying in the Nagpur branch

itself where the appellant had the overdraft account. Could not the bank verify as to where the pledged

shares were kept when on the basis of those very shares as security overdraft facility was granted ? We

think that the bank is just firing shot from the shoulders of the appellant to hide its own defaults, ney

negligence. As far as the appellant is concerned, he has clearly stated, which has not been denied, that

the pledged shares were to be transferred in the name of the bank and sufficient number of blank

transfer forms duly signed by him were submitted to the bank and further that the share department of

the Bombay head office of the bank was centralised for handling all matters concerning shares and that

bonus shares in this very case were received by the Bombay head office of the bank. Bank also

advanced a plea that the appellant was guilty of contributory negligence by which the bank tacitly

admitted its own negligence on its part as well. That the appellant suffered loss because of the delay in

not disposing of his shares as agreed to by the bank cannot be disputed. In these days of revolution in

information technology bank is merrily going on corresponding with its customer, the appellant, and

also its own head office. It was not difficult for the bank to find out on receipt of the letter dated 23rd

April, 1992 of the appellant where the pledged shares were lying. It took 12 days to transmit the request

of the appellant to its head office. When the Nagpur branch received letter dated 19th June, 1992 from

the head office that the shares were not lying there, it took another 40 days to inform the appellant of

this fact by its letter of 29th July, 1992. Then the Nagpur branch finds that the shares are lying with it

and then it is too late. It is true that the bank is not expected to process the request of its customer at

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once but within reasonable time and certainly promptness and diligence is required which we find

lacking in the present case. Whatever may be the fault of the appellant being not regular in his account

with the bank, all these pleas raised by the bank are merely afterthoughts in order to hide its own

default and inefficiency. Once the bank agreed to sell the part of the shares on request by the appellant

and without any preconditions, it cannot fall back on other alleged defaults of the appellant in his

dealing with the bank. The plea of the bank that it could dispose of the shares only through its own

broker is without substance as it never apprised the appellant this fact. We, therefore, find ourselves

unable to agree with the view of the National Commission that there was no negligence on the part of

the bank or that the bank was not bound to dispose of the shares.24. The appellant made a claim of Rs.

29, 56, 264.76 before the National Commission. He further claimed interest at the rate of 21 per cent

per annum till the final decision of the National Commission and realisation of the decreed amount. We

think the claim made is highly inflated and there does not appear to be any basis for the same. The

indicative price at which the appellant requested the bank to sell the shares of Castrol Ltd. was Rs. 2,

400 to Rs. 2, 500 per share. As to what is the price of share on any day is known to the bank and for

that matter to any person interested in knowing value of the shares. On 29th July, 1992 the price of the

share of Castrol Ltd. had fallen to Rs. 700 per share though it was more than the value of the share at

the time these shares were pledged with the bank. The appellant has arrived at the figure of Rs. 8, 50,

000 as the loss occasioned to him. On 30th June, 1992 his overdraft account showed debit balance of

Rs. 3, 40, 962.53 with the bank. The appellant, therefore, said that he suffered a loss of Rs. 5, 09,

037.45 after deducting the debit balance, which he, thus, claimed with interest and other charges like

damage for loss of long standing business due to non-renewal of letter of credit; for non-releasing of

securities; undue and unjust harassment, thus, making a total of Rs. 29, 56, 264.76. On the face of it

apart from the claim of damages for loss in selling the shares other claims are too much overblown to

be considered at all. The appellant would, thus, be entitled to the award of Rs. 5, 09, 037.47 with

interest at the rate of 11 per cent per annum from 1st August, 1992. The bank is granted four weeks

time to make the payment. In case of default, the appellant shall be entitled to further interest at the rate

of 18 per cent per annum on the amount of Rs. 5, 09, 037.47 from the date of the award till payment.

We are not concerned in this appeal with the working of the overdraft account, which the appellant had

with the bank in respect of which shares of Castrol India Ltd. were pledged. If any amount is due to the

bank in any of the accounts of the appellant or of any of his firms where he is a partner or otherwise,

the bank shall be entitled to adjust the amount awarded by this judgment. Bank shall, however, not

claim any interest or other charges on amount of Rs. 3, 40, 962.53 in the relevant overdraft account of

the appellant from the date of filing of complaint before the National Commission.25. The appeal is

therefore, allowed. Impugned judgment of the National Commission is set aside and the complaint of

the appellant is allowed. There shall be award of Rs. 5, 09, 037.47 with interest at the rate of 11 per

cent from 1st August, 1992 in favour of the appellant and against the respondent Bank of India. Bank is

granted four weeks time to make the payment of the amount so awarded. In case of default the

appellant shall be entitled to further interest at the rate of 18 per cent on Rs. 5, 09, 037.47 from the date

of this judgment till payment. Bank shall be entitled to adjust the amount of award against any sum due

to it from the appellant in any of his accounts with the bank or any other account in which he has

interest as a partner or otherwise. Parties shall bear their own costs.

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SALE OF GOODS ACT

The contracts for sale of immovable property are governed by the Transfer of Property Act, 1882 and

the contracts for sale of movable property are governed by the Sale of Goods Act, 1930.

Meaning of Goods

Goods means every kind of movable property other than actionable claims and money and includes

stocks and shares.

Things like goodwill, copyright, trademark, patents, water, gas, electricity and ships are all goods and

may be the subject of a contract of sale. Things attached to or forming part of land may be sold as

goods provided they are agreed to be severed under the contract. Thus standing trees may be sold as

goods if they are to be removed within a reasonable time. A decree can also be sold as goods. “Goods”

also include shares and stock. In this respect our definition is wider than the one in the English Sale of

Goods Act, 1893, which does not expressly include shares and stock.

Money and actionable claims are excluded from the definition of “goods”. Money, which is a legal

tender, is an essential aspect of every sale because the price of goods has to be expressed in terms of

money and, therefore, “money” itself cannot be the subject of a sale. However, any coins or notes

which have ceased to be legal tender and have become objects of curiosity, they may be sold as goods

and if the sale is by a thief the buyer will not get a good title. Foreign money can also be bought and

sold.

Contract of Sale and Agreement to Sell:

A contract of sale (sale) has to be distinguished from an agreement to sell. A sale has the immediate

effect of transferring property, whereas in an agreement to sell the property is to pass at some future

time or subject to some condition. Following are the points of distinction between the two:

1. A sale makes the buyer the owner of the goods. He acquires a jus in rem, that is , a right

against the goods. On the other hand, an agreement to sell is a contract pure and simple. It is

not a conveyance. The buyer’s rights are only personal against the seller, that is, a jus in

personam.

2. In a sale, the risk of loss, if any, of the goods is on the buyer. But in an agreement to sell, the

seller remains the owner of the goods and, therefore, he runs all the risks.

3. In a sale, if the buyer commits default, the seller may sue him for the price, that is, for specific

enforcement of the contract. In an agreement to sell, the seller’s only remedy is to sue for

damages for breach.

Agreement to Sell and Hire Purchase:

Ana agreement to sell and a sale have to be distinguished from a contract of hire purchase. It is the

presence of the option on the part of the hirer to buy or to terminate the hiring that marks the

distinction. Where the hirer does not have the option to return, it will be an agreement to buy and not a

hire purchase, even if the price is payable in instalments and the seller has the power to seize the goods

on default. Other differences are:

1. A hire purchase agreement entitles the hirer only to possession of the goods. He cannot pass a

good title to any buyer from him. But a person who receives possession under an agreement

to buy is able to pass a good title to a bona fide purchaser from him.

2. A hirer cannot claim the benefit of implied conditions and warranties created by the Sale of

Goods Act unless it becomes a sale.

3. The Hire Purchase Act is applicable only to hire purchase contracts.

4. Sales tax is not leviable on a hire purchase until it becomes a sale.

The essence of a contract of a sale is the transfer of general property in the goods. A mortgage is a

transfer of interest in the goods from a mortgagor to a mortgagee to secure a debt and that too for

immovable property. A pledge is a bailment of goods by one person to another to secure payment of a

debt. A hypothecation is an equitable charge on goods without possession, but not amounting to a

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mortgage. All the three are different from sale, since the ownership in the goods is not transferred

which is an essential condition of sale.

Condition and Warranties:

Every contract of sale is likely to contain a number of terms and stipulations about the nature and

quality of the goods and their fitness for the buyer’s purpose. Every such term is not likely to be of

equal importance. Some of them constitute the hard core of the contract and their non-fulfilment may

seem to upset the very basis of the contract. They may be so vital to the contract that their breach may

seem to be a breach of the contract as a whole. Such terms are known as conditions of the contract and

their breach entitles the innocent party to repudiate the contract. A term which is not of such vital

importance is known as a warranty. Its breach does not lead to repudiation, but only to damages for

breach.

Stipulations in a contract of sale with reference to goods may be conditions or warranties. Whether a

stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of

the contract. A stipulation may be a condition though called a warranty in the contract.

Implied Conditions and Warranties:

It is open to the parties to include in their contract any number of express conditions and warranties.

But in addition to what the contract may provide, the law implies into every sale of goods a number of

conditions and warranties. They are read into every contract of sale unless they are excluded and are

known as implied conditions and warranties. These are:

1. Condition as to title: The essence of sale being the transfer of ownership, it is one of the duties

of the seller to ensure that he has the right to sell what he purports to sell. If the seller’s title

turns out to be defective the buyer may reject the goods.

2. Sale by description: Where there is a contract of sale of goods by description, there is an

implied condition that the goods shall correspond with the description. If they do not do so the

buyer may reject them and it will be no defence to say that they will serve the buyer’s purpose.

Thus the requirement of “correspondence with description” is a strict one. Correspondence

with the description means that the buyer must get the article that was described in the

contract, for “if you contract to sell peas you cannot oblige a party to take beans”.

3. Sale by description as well as by Sample: The goods should not merely agree with the sample,

but must also correspond with the description.

4. Exceptions to the principle of Caveat Emptor: The principle to caveat emptor does not apply.

It means that the seller is not bound to supply goods which should be fit for any particular

purpose or which should possess any particular quality. It is the buyer’s duty to select goods of

his requirement.

Passing of Property in Goods:

Property can broadly be classified in two: material and non-material. The former has physical existence

and can be perceived by our sense organs, whereas the latter do not have physical existence and cannot

be perceived by the sense organs. Copyright, patent right are non-material property. It is the material

property that is known as goods. Material property has two elements: corpus and animus. The physical

entity of the property is called the corpus and the property in the goods (mental or the intention) is

called the animus. These two relate to possession and ownership respectively.

The passing of property in goods is the most important incident of a contract for the sale of goods. If

the goods are destroyed or if one of the parties becomes insolvent, it is important to know who had the

ownership of the property. Hence, when it is said that the property has passed we simply mean that the

goods have ceased to be the property of the seller and becomes buyer’s property. The essence of sale is

the transfer of the property in goods from the seller to the buyer for a price. Transfer of property is

quite different from the transfer of possession (delivery). Property may pass without delivery and

conversely property may not pass even thought delivery is made.

As a general rule, the risk, prima facie, passes with the property, however, parties are free to provide

otherwise. Thus, it will be seen that risk and property go hand in hand. However, in certain cases, risk

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and property are separable: by custom in practice in particular trade, by mutual agreement between the

buyer and the seller. (Sec 26)

Res Perit Domino - The thing is lost to the owner. This phrase is used to express that when a thing is

lost or destroyed, it is lost to the person who was the owner of it at the time. For example, an article is

sold; if the seller have perfected the title of the buyer so that it is his, and it be destroyed, it is the

buyer's loss; but if, on the contrary, something remains to be done before the title becomes vested in the

buyer, then the loss falls on the seller. (Sec. 18-25)

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(1990) 1 SCC 71

Marwar Tent Factory v. Union of India

(BEFORE SABYASACHI MUKHARJI AND B.C. RAY, JJ.)

M/S MARWAR TENT FACTORY . . Appellant;

Versus

UNION OF INDIA AND OTHERS . . Respondents.

Civil Appeal No. 4586 of 1989†, decided on November 9, 1989

RAY, J.— Special leave granted. Arguments heard.

2. This is an appeal against the judgment and order passed in R.F.A. (OS) No. 3 of 1983 on March

14, 1983 by the High Court of Delhi dismissing the civil writ petition in limine against the judgment

and decree rendered by Chawla, J. in Suit No. 50 of 1972 on February 12, 1982.

3. The matrix of this case is stated hereunder :

The appellant M/s Marwar Tent Factory is a firm having its registered office at Jodhpur

(Rajasthan) and dealing in the manufacture and sale of tents and tarpaulins. The firm is a regular

supplier of these goods to the defence services of India.

4. On March 13, 1986 tenders were invited for the supply of tents by the Directorate General of

Supplies and Disposals, respondent 2. Accordingly, the appellant submitted a tender which was

accepted by the officer of the Directorate General of Supplies and Disposals on behalf of the President

of India. The said contract was of two kinds of tents ‘Flies Inner’ and ‘Flies Outer’. The agreed rate for

the ‘Flies Outer’ was Rs 225 per tent and the quantity was 19,100. In accordance with the said terms of

the contract the goods were to be inspected at the premises of the firm at Jodhpur and after the same

being passed by the Inspector, the goods had to be despatched to the Commandant, COD, Kanpur. It

was further agreed between the parties that 95 per cent of the price was payable on proof of despatch

and production of the inspection note. The balance 5 per cent was to be paid after receipt of the goods

in good condition by the COD, Kanpur.

5. On October 14, 1968, one consignment of 1500 tents was despatched to the COD, Kanpur by

the appellant under railway receipt No. 502671 dated October 14, 1968 and 95 per cent of the price was

paid by demand drafts dated October 17, 1968 and May 19, 1969. The Commandant, COD, Kanpur

reported that 224 tents out of a sale consignment had not been received at Kanpur and consequently a

sum of Rs 51,912 (being the full price of those 224 tents inclusive of sales tax) was deducted from the

amounts due to the appellant under another contract.

6. The appellant made repeated requests and sent repeated reminders for payment of the said sum

of Rs 51,912 from the respondent but without any effect. As such, the appellant filed a suit being Suit

No. 50 of 1972 in the High Court at Delhi for recovery of the said principal sum as well as interest on

the principal. The appellant further claimed interest on two other consignments as the price of the said

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consignments was paid after a great delay. The two consignments were of 700 and 1400 tents

despatched on August 10, 1968 and August 27, 1968 respectively. Though 95 per cent of the price was

paid, the balance 5 per cent amounting to Rs 24,357 was not paid till December 1, 1971 despite

repeated requests and reminders. The said payment of Rs 24,357 was wrongfully delayed by about

three years and a sum of Rs 8525 was, therefore, claimed as interest @ 12 per cent per annum from

January 1, 1969 to December 1, 1971 on the said amount. The total claim of the appellant was of Rs

74,792 i.e. Rs 51,912 principal sum and Rs 14,535 as interest on this and Rs 8525 as interest on the

sum of Rs 24,357 wrongfully withheld for three years.

7. A joint statement was filed by respondents 1, 2 and 5 as their interests were identical. The

defence was that 224 tents were received short under railway receipt No. 502671 and the sum of Rs

51,912 was rightly deducted from the payment due to the appellant under other contracts.

8. Respondents 3 and 4 also filed a joint written statement stating inter alia that only 11 tents were

delivered short under railway receipt No. 502671 for which the admitted liability was to the tune of Rs

2475. This sum had been paid to the COD, Kanpur by debit adjustment.

9. T.P.S. Chawla, J. by his judgment and order dated February 12, 1982 though dismissed the

claim of the appellant substantially but insofar as the amount of Rs 2475 regarding the shortage of 11

tents admitted by respondents 3 and 4 was concerned, decreed the said sum in favour of the appellant

with interest @ 12 per cent per annum from April 1, 1972 till the date of judgment and further interest

@ 6 per cent from the date of judgment till the realisation of the amount. Against the said judgment and

decree the appellant preferred an appeal being R.F.A. (OS) No. 3 of 1983 before the Division Bench of

the said High Court. The said appeal was, however, dismissed by the High Court of Delhi by order

dated March 14, 1983. The instant appeal on special leave has been preferred by the appellant against

the aforesaid judgment and decree.

10. The crucial question that requires consideration in this appeal is whether 1500 tents which were

loaded in the railway wagons on October 14, 1968 at Jodhpur for delivery to respondent 5, the

Commandant, COD, Kanpur under railway receipt No. 502671 were actually delivered to respondent 5.

It has been held by the trial court i.e. learned Single Judge, High Court, Delhi that the tents were carried

in three wagons up to Agra. The railway line from Jodhpur to Agra was a meter gauge. Thereafter,

from Agra to Kanpur which is a broad gauge line the tents were put into four broad gauge wagons at

Agra for onward transmission to Kanpur, as evident from the transmission register. It has been found

that the railways could not establish the delivery of 224 tents under railway receipt No. 502671 to the

Commandant, COD, Kanpur from the unloading register. The shortage certificate issued by the

railways corroborates the entries in the unloading register. The particulars of the consignment are set

out in the heading of this document. The railway receipt is No. 502671 and the names of the sender and

consignee are also mentioned. The Traffic Officer, Commandant, COD, Kanpur filed a claim with the

railways on February 10, 1969 for 224 packages received short and this claim was made under railway

receipt No. 502671. The plea of the railways was that the shortage was of 11 tents and not of 224 tents.

It has been found by the trial court that this plea is falsified by the unloading register, the shortage

certificate and the reconciliation statement as also the report made by their Traffic Inspector on

December 9, 1970. Accordingly, it was held that under railway receipt No. 502671 the appellant

delivered the full quantity of 1500 tents to the railways but the latter failed to deliver 224 tents out of

this consignment to the Commandant, COD, Kanpur and as such the railways are estopped from

contending that it was under some other railway receipt. The trial court, however, held that no decree

could be passed against the railways because the plaint did not contain any claim for loss or non-

delivery against the railways. Secondly, the suit against the railways was barred by time and thirdly

since no notice under Section 78-B of the Indian Railways Act was served on the railways by or on

behalf of the appellant. The appellant, however, submitted that the title of the goods passed on to

respondent 5, Commandant, COD, Kanpur, the moment the tents were lodged on rail head, Jodhpur as

the term of delivery under the contract was FOR, Jodhpur. For any short delivery of the goods made by

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the railways at Kanpur, the appellant was not responsible and respondent 5, under the terms of the

contract is not entitled to deduct the price of the short delivery of tents i.e. 224 tents. It was for the

Commandant, COD, Kanpur to claim damages from the railways and the Commandant had actually

made a claim as stated hereinbefore to the railways in respect of the short delivery. The learned Single

Judge, however, found that the abbreviation FOR meant Free on Rail meaning simply that the cost of

the carriage of the goods up to the railway wagon is included in the price and must be borne by the

seller and the cost of carriage thereafter is to be borne by the buyer. It has also been held that the risk in

the goods would not pass at Jodhpur as expressly stipulated in the general conditions of contract

contained in Form DGS & D-68. These were made applicable by clause 7 in the schedule of acceptance

of tender. Special emphasis was laid to condition No. 4 entitled “responsibility of contractor for

executing the contract”. The learned Judge has with reference to sub-clause (10) of this condition held

that the goods shall remain in every respect at the risk of the contractor until their actual delivery to the

consignee at the stipulated place and as such the risk of the appellant remains until the goods were

actually delivered to the Commandant, COD, Kanpur. The argument as regards condition No. 14 of the

general conditions of contract as well as its sub-clause (2) entitled “passing of property” was negatived

on the ground that the risk was governed by condition 4(1) of the general conditions of contract. The

claim before the railways being time barred and also no notice under Section 78-B of the Indian

Railways Act having been served on the railways within the stipulated period, the appellant could not

claim for damages for breach of contract and for the price of the tents not delivered. However, in

respect of the price of 11 tents the shortage of which was admitted by the railways and for which a sum

of Rs 2475 was paid to respondent 5 by the appellant, it was decreed with interest @ 12 per cent per

annum from April 1, 1972 till the date of passing of the decree and also further allowed interest on the

said sum @ 6 per cent per annum thereafter till the date of payment. The respondents, however, did not

question the finding of the trial court regarding the short delivery of 224 tents at the railway station at

Kanpur. Admittedly, there has been a short delivery of 224 tents out of the consignment of 1500 tents

loaded at Jodhpur railway station in the railway wagon under the said receipt No. 502671.

11. In order to decide and fix the responsibility for passing of the decree in respect of the sum of

Rs 51,912 being the full price of 224 tents inclusive of sales tax deducted from the amount due to the

appellant under another contract by respondent 5, it is pertinent to consider the question when the

property in goods passed from the seller to the buyer at Jodhpur when the goods were loaded in railway

wagons for delivery to the consignee at Kanpur. The learned counsel for the appellant drew our

attention to condition No. 11 of the schedule of acceptance of tender dated February 29, 1968. It has

been mentioned therein that the terms of delivery was FOR, Jodhpur i.e. free on rail at Jodhpur railway

station. It has also been mentioned that before the goods are loaded on railway wagons for delivery to

respondent 5 at Kanpur, the Inspector, I.G.S. North India will inspect the same at firm’s premises at

Jodhpur and after approval the said goods will be despatched to its destination by placing them in the

railway wagons at Jodhpur railway station and the railway receipt has to be sent to the consignee under

registered cover immediately after despatch of the stores with full details. It is also stipulated that 95

per cent of the price of the goods will be paid by respondent 5 on receipt of the railway receipt and the

inspection note and the balance 5 per cent will be paid after the same reached at the destination in good

condition. Referring to this term for delivery under clause 11 of the schedule of acceptance of tender, it

has been urged by the learned counsel for the appellant that the delivery was complete at Jodhpur when

the goods were loaded in the goods train for delivery to respondent 5 at Kanpur and property in the

goods passed to the buyer as soon as the goods were despatched by railway at Jodhpur. Thereafter, the

risk in respect of the goods despatched remained with the consignee. The appellant, the consignor is

entitled to get the entire price of the 224 tents which were short delivered by respondents 3 and 4 to

respondent 5 at Kanpur in view of the clear finding by the trial court that though the entire consignment

of 1500 tents was actually loaded in the railway wagons for despatch to the consignee, respondent 5.

Respondent 5 duly filed a claim to the railways, respondents 3 and 4 for the short delivery to the tune of

224 tents immediately after taking delivery of the goods. In order to decide the question as to whether

the rights in the goods passed from the seller to the buyer i.e. from the appellant to respondent 5 as

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soon as the goods were loaded in railway wagons at Jodhpur and the railway receipt was sent to the

consignee, it is pertinent to refer to the meaning of the words, f.o.r. Jodhpur. In Halsbury’s Laws of

England, 4th Edition (Volume 41) at page 800, para 940 it has been mentioned that:

“Under a free on rail contract (f.o.r.) the seller undertakes to deliver the goods into railway

wagons or at the station (depending on the practice of the railway) at his own expense, and

(commonly) to make such contract with the railway on behalf of the buyer as is reasonable in the

circumstances. Prima facie the time of delivery f.o.r. fixes the point at which property and risk pass

to the buyer and the price becomes payable.”

12. In Benjamin’s Sale of Goods (2nd edn.), at para 1799 it is stated as under:

“Stipulations as to time of “delivery”. Provisions as to the time of delivery in an f.o.b. contract

are taken to refer to the time of shipment and not to the time of arrival of the goods; and this may

be so even though the provision in question contemplates the arrival of the goods by a certain time.

Thus in Frebold and Sturznickel (Trading as Panda O.H.D.) v. Circle Products Ltd.1 German

sellers sold toys to English buyers f.o.b. Continental port on the terms that the goods were to be

delivered in time to catch the Christmas trade. The goods were shipped from Rotterdam and

reached London on November 13; but because of an oversight for which the sellers were not

responsible the buyers were not notified of the arrival of the goods until the following January 17.

It was held that the sellers were not in breach as they had delivered the goods in accordance with

the requirements of the contract by shipping them in such a way as would normally have resulted

in their arrival in time for the Christmas trade.”

13. The question as to the meaning of f.o.r. contract fell for consideration in the case of Girija

Proshad Pal v. National Coal Co. Ltd.2 P.B. Mukharji, J. as His Lordship then was observed in para 11

as follows :

“The words f.o.r. are well known words in commercial contracts. In my judgment they mean

when used to qualify the place of delivery, that the seller’s liability is to place the goods free on the

rail as the place of delivery. Once that is done the risk belongs to the buyer.”

14. Reference may also be made in this connection to the decision of this Court rendered in CST v.

Husenali Adamji & Co.3 In that case under the terms of the contract the respondent company whose

place of business was situate in Chanda in the erstwhile Central Provinces had to load diverse

quantities of ‘sawar’ logs on railway wagons and to despatch the same from Chanda and other railway

stations in the Central Provinces to Ambernath, a town in the erstwhile Province of Bombay. Clause 2

of the contract reserved the right of the consignee to examine the goods on arrival at Ambernath and to

reject the same if they were found, in the opinion of the factory manager, not to conform with the

specifications. Clause 6 also provided that the goods shall be measured under the supervision of the

factory’s representative, the decision of the factory manager at Ambernath would be binding on the

contractor and by clause 7 the prices of the goods shall be ‘FOR Ambernath’. The question arose was

as to when and where the property in the logs passed from the respondent to the consignee and whether

the respondent was liable to pay sales tax under the provisions of the Central Provinces and Berar Sales

Tax Act, 1947. The sales tax department levied the tax on the respondent on the ground inter alia that

the property in the logs passed from the respondent to the factory consignee under Section 23 of the

Indian Sale of Goods Act, 1930 when the logs were loaded in the wagons at railway stations within the

Central Provinces and the railway receipts taken in the name of the factory were forwarded to the latter.

It was held: (SCR headnote, p. 703)

“[T]hat on a proper construction of the contract as a whole the intention of the parties was that

the respondent would send the logs by rail from the different stations in the Central Provinces to

Ambernath where the factory manager would inspect, measure and accept the same if in his

opinion they were of the description and quality agreed upon. Consequently, as the respondent sent

the logs and left it to the factory to appropriate to the contract such of them as they accepted as of

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contract quality and description, the property in the logs did not pass to the buyer by the mere

delivery to the railway for carriage but passed only at Ambernath when the logs were appropriated

by the factory with the assent of the seller within the meaning of Section 23 of the Indian Sale of

Goods Act, 1930.”

15. It is also convenient to refer to the provision of Section 23(2) of the Indian Sale of Goods Act,

1930. This sub-section provides that:

“(2) Where, in pursuance of the contract, the seller delivers the goods to the buyer or to a

carrier or other bailee (whether named by the buyer or not) for the purpose of transmission to the

buyer, and does not reserve the right of disposal, he is deemed to have unconditionally

appropriated the goods to the contract.”

16. In the instant case, in view of the terms and conditions of the contract embodied in clause 11 of the

schedule of acceptance of tender regarding the place of delivery ‘f.o.r. Jodhpur’, the property in the

goods passed immediately on from the seller after delivering the goods and loading the same in the

railway wagons at Jodhpur for transmission to the buyer, the consignee, without reserving any right of

disposal. The seller is deemed to have unconditionally appropriated the goods to the contract only

under Section 26 of the said Act, the goods remained at seller’s risk until the property therein is

transferred to the buyer. As stated earlier that the property in goods has been transferred to the buyer by

the seller by delivery of the goods and loading the same at Jodhpur in railway wagons. In this

connection reference may be made to Section 39(1) of the said Act. Considering the aforesaid

provisions of the Sale of Goods Act, 1930 as well as the terms and conditions of delivery i.e. ‘f.o.r.

Jodhpur’ the irresistible conclusion that follows is that the property in the goods together with the risk

passed from the seller to the buyer i.e. from consignor to the consignee as soon as the goods were

loaded in the railway wagons at Jodhpur as per the terms of delivery i.e. f.o.r. Jodhpur. Therefore, the

finding of the trial court that the risk throughout remained with the appellant until the goods were

actually delivered to the Commandant, COD, Kanpur is wholly wrong and illegal. The further finding

of the trial court that the risk was governed with the condition No. 4(1) of the schedule of acceptance of

tender and the property in the goods i.e. the tents did not pass until the same were actually delivered to

the Commandant, COD, Kanpur and the Commandant, COD, Kanpur was not liable for loss of the

tents during the period of transit by the railways is also illegal and bad. As stated hereinbefore on

consideration of the place of delivery as well as the terms of delivery embodied in clause 11 of the

schedule of acceptance of tender, the property in the goods along with the risk in the goods passed from

the appellant to respondent 5 when the goods were delivered and despatched by railway wagons at

Jodhpur i.e. FOR, Jodhpur. The consignee, Commandant, COD, Kanpur is therefore, liable for the price

of 224 tents which was deducted by him from the other bills of the appellant. The findings of the trial

court which were confirmed by the Division Bench of the High Court are, therefore, liable to be set

aside and the claim of the plaintiff-appellant should be decreed.

17. As regards the claim of interest on the unpaid price of 224 tents amounting to Rs 51,912 for the

period from January 1, 1969 to December 1, 1972 @ 12 per cent per annum, the courts below

disallowed the claim on the findings that no claim for the price of the goods had been made against the

railways, nor any notice under Section 78-B of the Indian Railways Act had been served on

respondents 3 and 4, and the suit was barred by limitation against the railways. We have already held

hereinbefore that the appellant is entitled to get not only the price of the goods but also the interest

thereon for not making the payment of the price of the goods within a reasonable time. The interest @

12 per cent per annum was claimed by the plaintiff-appellant on Rs 51,912 being the price of 224 tents

for the period from January 1, 1969 to December 1, 1971. It is appropriate to refer in this connection to

the relevant provisions of Section 61(2) of the Sale of Goods Act, 1930 (Act 3 of 1930) which reads as

follows:

“61(2) In the absence of a contract to the contrary, the court may award interest at such rate as

it thinks fit on the amount of the price)

(a) to the seller in a suit by him for the amount of the price) from the date of the tender

of the goods or from the date on which the price was payable,

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(b) to the buyer in a suit by him for the refund of the price in a case of a breach of the

contract on the part of the seller) from the date on which the payment was made.”

18. In the instant case, undoubtedly, it has been found by the courts below that the short delivery of

224 tents occurred during the transmit of the said goods by the railways. It is also an admitted fact that

respondent 5, the Commandant, COD, Kanpur deducted the price of the said 224 tents from the other

bills of the contractor i.e. the appellant and did not pay the same. The appellant has claimed interest in

respect of the price of the said goods being not paid to the appellant within a reasonable time from the

date of delivery of the goods i.e. for the period from January 1, 1969 to December 1, 1971. Respondent

5 did not dispute the claim of the appellant in this regard. His only plea was that in the notices under

Section 80 of the Code of Civil Procedure served on the respondents the claim of interest was not made

and as such the claim of interest could not be allowed. In the case of B.B. Bose v. National Coal

Trading Company4 the plaintiff filed a suit for recovery of price of goods sold to the defendant. Before

filing the suit the plaintiff served a demand notice on the defendant. In the demand notice Ex. 2, no

claim for interest was put by the plaintiff. It was urged on behalf of the defendant that there was no

stipulation for payment of interest in case the price remained unpaid in the contract and as such the

plaintiff could not claim any interest on the unpaid amount. This was negatived by the High Court,

Patna and it was held : (AIR p. 351)

“That is, no doubt, true, but the demand clearly was for the outstanding balance price of coal

which the plaintiff had supplied to the defendant. The supplies had been effected up to June 26,

1954, and in the normal course, the price ought to have been paid by the defendant within a

reasonable time of the deliveries, but the payment had been delayed for nearly three years and

plaintiff was obliged to institute the present suit for recovery of the price. In such circumstances, it

was within the discretion of the court to award interest to the plaintiff at a reasonable rate on the

amount of the price under Section 61(2) of the Sale of Goods Act. The price was undoubtedly

payable when the notice of demand (Ex. 2) was served by the plaintiff upon the defendant, and

there can be no doubt that the rate of 6 per cent per annum which the court awarded was a

reasonable rate.”

19. Similar question cropped up for decision in the case of M.K.M. Moosa Bhai Amin, Kota v.

Rajasthan Textile Mills, Bhawanimandi5. In this case the plaintiff filed the suit for price of the goods

delivered as well as for interest on the unpaid price. The claim regarding interest was disallowed by the

District Judge on the ground that there was no stipulation for payment of interest in case the price of the

goods supplied remained unpaid. It was contended on behalf of the plaintiff that even in the absence of

the contract, the plaintiff was entitled to reasonable interest under Section 61(2) of the Sale of Goods

Act, 1930. The supply had been effected up to September 18, 1962 and in normal case the price of the

goods ought to have been paid by the defendant within a reasonable time of the deliveries but the

payment had been delayed for nearly a year which compelled the plaintiff to bring the suit for recovery

of the price. It has been held that in such circumstances, the lower courts should have exercised

discretion in favour of the plaintiff and awarded interest on the amount of the price of the goods under

Section 61(2) of the Sale of Goods Act. The High Court of Rajasthan allowed interest @ 6 per cent per

annum which was considered to be a reasonable rate of interest.

20. On a conspectus of all the decisions referred to before as well as the provisions of Section

61(2) of the Sale of Goods Act, we are constrained to hold that the plaintiff is entitled to get a decree of

interest on the unpaid price from January 1, 1969 to December 1, 1971 @ 6 per cent per annum which

is considered to be a reasonable rate of interest, as claimed by the plaintiff-appellant.

21. In the premises aforesaid the appeal is allowed and the judgments and the decree of the courts

below insofar as they rejected the claims regarding the price of 224 tents and interest thereon are set

aside. The plaintiff-appellant’s claim for the price of the said goods as well as interest thereon @ 6 per

cent per annum for the period from January 1, 1969 to December 1, 1971 is hereby decreed. The appeal

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is thus allowed with costs quantified at Rs 4000. The claim for interest @ 6 per cent per annum for the

period from January 1, 1972 till date of payment of amount unpaid is allowed.

———

† From the Judgment and Order dated March 14, 1983 of the Delhi High Court in R.F.A. (O.S.)

No. 3 of 1983

1 (1970) 1 Lloyd's Rep 499

2 AIR 1949 Cal 472

3 1959 Supp 2 SCR 702: AIR 1959 SC 887

4 AIR 1966 Pat 346

5 AIR 1974 Raj 194

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Doctrine of Caveat Emptor – ‘Let the buyer beware’. It is not the seller’s duty to point out defects of

his own goods. The buyer must inspect goods to find out if they will suit his purpose. In olden days,

goods were bought and sold in the open market. There were very few transactions of sale by

description or by sample. The buyer was at liberty to inspect the whole lot of goods he intended to

purchase, and if by chance he failed to notice any patent or latent defect in the goods, he was himself to

suffer for his negligence. The seller was not made responsible for not disclosing the defects of his

goods.

However, there are certain exceptions to this general rule – seller makes false representation, consent of

buyer is obtained by fraud, buyer makes known to the seller the purpose for which he is buying the

goods, sale by description and usage in any trade may establish an implied condition as to the quality of

goods supplied.

Transfer of Title by Non-Owners:

It is a normal and general principle that a person can transfer only that title which he owns. In other

words, no person can transfer a better title than he himself possesses. This principle is based on the

Latin maxim “nemo dat quod non habet”.

Nemo Dat Quod Non Habet – No one gives who possesses not. No one can convey a better title than

what he had.

However, there are certain exceptions to this general rule – estoppel, sale by mercantile agent, sale by

joint owners, sale by person in possession under voidable contract, seller in possession after sale and

buyer in possession. (Sec. 27-30)

Delivery of goods:

The term delivery means voluntary transfer of possession from one person to another. There are two

modes of delivery: symbolic and constructive.

A delivery where there is no actual transfer of goods sold means symbolic delivery. In such cases, the

seller does something which gives the buyer the power to take possession of the goods, for instance

handing over the keys of a car. However, it is essential that the buyer has full access and control over

the goods intended to be transferred.

Delivery is said to be constructive when there is no actual and physical delivery of goods sold. In such

cases possession over goods is transferred by some person to another by attornment of a third person.

Attornment means a formal acknowledgement by the person who holds the goods in his possession and

control that he recognises the authority of the buyer.

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Unpaid Seller’s Rights:

A seller of goods has a right to receive payment for his goods. If his goods are not paid for, he retains

right over his goods. Law protects the interest of an unpaid seller by giving him following rights

against the goods notwithstanding the facts that the property in goods has passed on to the buyer:

- while the seller is in possession of goods, a lien on the goods (lien is the right to hold the goods)

- where the buyer has become insolvent, the seller has a right of stopping the goods in transit

- a limited right of re-sale

These rights of the unpaid seller do not result from any agreement, express or implied, between the

buyer and the seller. They arise by the very implication of law of contract of sale of goods.

Remedies for breach of a contract for sale of goods:

Where there is a breach of contract for sale, the following remedies are available to the buyer:

a) recovery of damages for failure on the part of the seller to supply the goods

b) specific performance of the contract

c) remedy for breach of warranty – the buyer is not by reason only of such a breach of warranty

entitled to reject the goods, but he may sue for damages

~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~

Morvi Mercantile Bank v. Union of India

(Supreme Court of India 1965)

AIR 1965 SC 1954

Bench: K. Subba Rao, Raghubar Dayal, J. R. Mudholkar, R. S. Bachawat, V. Ramaswami, JJ.

3 March 1965

Majority Judgment (Per Rao, Dayal and Bachawat, JJ.)

The judgment was delivered by Subba Rao, J.

Brief Facts

On October 4, 1949, M/s Harshadrai Mohanlal & Co., a firm doing business at Thana, Bombay,

hereinafter called the firm, entrusted 4 boxes alleged to have contained menthol crystals to the then

G.I.P. Railway for carriage from Thana to Okhla near Delhi under a railway receipt bearing No.

233/27. On October 11, 1949, the firm consigned 2 more such boxes to Okhla from Thana under 2

railway receipts bearing Nos. 233/35 and 233/36. All the said 6 boxes were marked with the name of

the said firm and were consigned to “self”. The said firm endorsed the relevant railway receipts in

favour of Morvi Mercantile Bank Ltd., hereinafter called the Bank, against an advance of Rs 20,000

made by the Bank to the firm.

The said consignments did not reach Okhla. The railway company offered to deliver certain parcels to

the Bank, but the Bank refused to take delivery of the same on the ground that they were not the goods

consigned by the firm. As the railway failed to deliver the boxes, the Bank, as the endorsee of the said

railway receipts for valuable consideration, filed Civil Suit…in the Court of the Civil Judge, Senior

Division, Thana, against the Union of India through the General Manager, Central Railway, Bombay,

for the recovery of Rs 35,500, being the value of the goods contained in the said consignments as

damages.

The defendant in the written-statement averred that on February 1, 1950, the railway company offered

to deliver all the consignments to the Bank, but the latter wrongfully refused to take delivery of the

same on the ground that the consignments were not identical to the ones consigned from Thana; it put

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the plaintiff to strict proof of the allegation that the consignments contained menthol crystals as alleged

or that the aggregate value of the said consignments was Rs 35,500, or that the railway receipts were

endorsed in favour of the plaintiff for valuable consideration.

Found by the Civil Judge

The learned Civil Judge found as follows:

(1) The boxes consigned by the firm contained menthol crystals and by the wrongful conduct of the

employees of the railway administration the contents of the boxes were lost;

(2) the said consignments were not offered for delivery to the Bank, but what was offered were

different consignments containing caustic soda;

(3) the relevant railway receipts were endorsed by the firm in favour of the Bank for valuable

consideration; and

(4) the Bank, as endorsee of the railway receipts, was not entitled to sue the railway company on the

railway receipts for loss of the consignments.

On those findings the suit filed by the Bank was dismissed with costs.

Appeal in the High Court

The Bank preferred an appeal to the High Court against the decision of the learned Civil Judge…

The appeal was heard by a Division Bench of the Bombay High Court…agreed with the learned Civil

Judge on the first 3 findings; but on the 4th finding they took a different view. They held that the Bank,

as endorsee of the said railway receipts, was entitled to sue for compensation for the loss suffered by it

by reason of the loss of the consignments, but, as pledgee of the goods, it suffered the loss only to the

extent of the loss of its security. On that view, the learned Judges gave a decree to the Bank for a sum

of Rs 20,000 advanced by it with interest and proportionate costs in both the Courts.

Cross Appeals in the Supreme Court

The plaintiff as well as the defendant preferred, by certificate, cross appeals to this Court.

Discussion in the Supreme Court

Issues to be decided

Learned Additional Solicitor-General raised before us the following points:

(1) In law the endorsement of a railway receipt does not constitute a pledge;

(2) an endorsement of a railway receipt for consideration constitutes at the most a pledge of the railway

receipt and not the goods covered by it, and, therefore, in the present case the Bank acquired only a

right to receive the goods covered by the relevant receipts from the railway; and

(3) if the endorsement of the railway receipts does not constitute in law a pledge of the goods, the Bank

has no right to sue for compensation, as, though the proprietary right in the goods was transferred to it,

the right to sue under the contracts did not pass to it.

I. The First Issue

The decision on the first point depends upon the scope of the legal requirements to constitute a pledge

under the Indian law. That calls for a careful scrutiny of all the relevant provisions of the Indian

Contract Act, the Indian Sale of Goods Act and the Transfer of Property Act, for their combined

consideration yields the answer to the problem raised.

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The Contract Act

Under the Contract Act, delivery of goods by one person to another under a contract as security for

payment of a debt is a pledge. Ordinarily delivery of tangible property is essential to a true pledge; but

where the law recognizes that delivery of tangible symbol involves a transfer of possession of the

property symbolized, such a symbolic possession takes the place of physical delivery.

The short but difficult question, therefore, is whether the Indian law equates the railway receipts with

the goods covered by them for the purpose of constituting delivery of goods within the meaning of the

Contract Act.

…

The law on the subject, as we conceive it, may be stated thus: An owner of goods can make a valid

pledge of them by transferring the railway receipt representing the said goods. The general rule is

expressed by the maxim nemo dat quod non habet i.e. no one can convey a better title than what he

had. To this maxim, to facilitate mercantile transactions, the Indian law has grafted some exceptions, in

favour of bona fide pledges by transfer of documents of title from persons, whether owners of goods or

their mercantile agents who do not possess the full bundle of rights of ownership at the time the pledges

are made. To confer a right to effect a valid pledge by transfer of documents of title relating to goods

on owners of the goods with defects in title and mercantile agents and to deny it to the full owners

thereof is to introduce an incongruity into the Act by construction. On the other hand, the real intention

of the legislature will be carried out if the said right is conceded to the full owner of goods and

extended by construction to owners with defects in title or their mercantile agents.

We are glad that, on a reasonable construction of the material provisions of the relevant Acts, we have

been able to reach this conclusion. To accept the contentions of the respondents to the contrary would

be a retrograde step and would paralyse the entire mechanism of finance of our internal trade. In this

vast country where goods are carried by railway over long distances and remain in transit for long

periods of time, the railway receipt is regarded as a symbol of the goods for all purposes for which a

bill of lading is so regarded in England.

II. The Second Issue

The next question is whether the plaintiff would be entitled to recover the full value of the

consignments amounting to Rs 35,500 or, as the High Court held, only the amount of Rs 20,000 with

interest i.e. the amount secured under the pledges. The answer to this question depends upon the

construction of Section 180 of the Contract Act. It reads:

If a third person wrongfully deprives the bailee of the use or possession of the goods bailed, or

does them any injury, the bailee is entitled to use such remedies as the owner might have used in

the like case if no bailment had been made; and either the bailor or the bailee may bring a suit

against a third person for such deprivation or injury.

Under this section, a pledge being a bailment of goods as security for payment of a debt, the pledge will

have the same remedies as the owner of the goods would have against a third person for deprivation of

the said goods or injury to them. If so, it follows that the Bank, being the pledge, can maintain the

present suit for the recovery of the full value of the consignments amounting to Rs 35,500.

III. The Third Issue

The last question is whether the Bank was the pledgee of the goods or was only the pledgee of the

documents of title whereunder they could only keep the documents against payment by the consignee

as contended on behalf of the Railway. The firm borrowed a sum of Rs 20,000 from the Bank and

executed a promissory note…dated October 6, 1949, in its favour. It also endorsed the railway

receipts…in favour of the Bank. The Accountant of the Bank deposed that the railway receipts were

endorsed in favour of the Bank, which had advanced the said amount to the firm on the security of the

said railway receipts. The evidence of this witness was not challenged in the High Court. The Bank

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advanced a large amount of money to the firm. The three transactions, namely, the advancing of loan,

the execution of the promissory note and the endorsement of the railway receipts, together form one

transaction. Their combined effect is that the Bank would, be in control of the goods till the debt was

discharged. This is a well known practice followed by Banks.

…We, therefore, hold on the facts of this case that the firm by endorsing the railway receipts in favour

of the Bank for consideration pledged the goods covered by the said receipts to the Bank.

…Civil Appeal…filed by the Bank is allowed; and Civil Appeal…filed by the Railway is dismissed.

The plaintiff’s suit is decreed with costs throughout.

Minority Judgment (Per Mudholkar and Ramaswami JJ.)

The judgment was delivered by Ramaswami, J.

We regret we are unable to agree with the judgment pronounced by our learned Brother Subba Rao, J.

…

Counsel for appellant has referred to the practice of merchants in treating a railway receipt as a symbol

of goods and in making pledge of goods by pledge of railway receipts, but no such practice or custom

has been alleged or proved on behalf of the plaintiff in the present case. In the absence of such

allegation or proof it is not open to the Court to take any judicial notice of any such practice. …

…if any hardship and inconvenience is felt it is for Parliament to take appropriate steps to amend the

law and not for the courts to legislate under the guise of interpretation. For the reasons expressed, we

hold that Civil Appeal…brought by the plaintiff-bank should be dismissed and Civil Appeal…brought

by the Union of India through the General Manager, Central Railway should be allowed with costs and

the suit of the plaintiff-bank should be dismissed with costs throughout.

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Gopalakrishna Pillai v. K.M. Mani

(Supreme Court of India, 1983)

(1984) 2 SCC 83

Bench: A.P. Sen and D.P. Madon, JJ.

21 November 1983

The judgment was delivered by Madon J.

Question for determination

The question which falls for determination in this appeal by special leave from the judgment and order

of the Kerala High Court is whether the amount claimed by the appellant in a suit filed by him against

the respondent was a “debt” within the meaning of that expression as defined in clause (3) of Section 2

of the Kerala Debt Relief Act, 1977, (hereinafter referred to as “the said Act”) and was, therefore,

deemed to be discharged.

Brief Facts

The appellant’s case as founded in the plaint was that the respondent sold a cow and a calf to him for a

sum of Rs 1600 and that the cow did not yield the quantity of milk which the respondent had stated it

would yield and was suffering from an incurable disease which was concealed from the appellant by

the respondent. For this reason, the appellant asked the respondent to buy back the said cow and the

calf for the same price which had been paid by the appellant to the respondent and thereupon the

respondent agreed to buy back the said cow and calf for a sum of Rs 1600. In pursuance of this

agreement, the said cow and calf were returned by the appellant to the respondent.

By his letter dated October 27, 1976, the respondent acknowledged that he had received back the said

cow and calf and assured the appellant that he would pay the price as early as possible. In spite of

repeated demands made by the appellant, including by his advocate’s letter dated September 17, 1977,

the respondent failed and neglected to pay to the appellant the said sum of Rs 1600 or any part thereof

though he went on promising to do so by his letters dated November 25, 1976, December, 30, 1976,

and May 19, 1977.

Suit in the Court of the Munsif

The appellant thereupon filed the suit out of which the present appeal arises…in the Court of the

Munsiff, Taliparamba. In the plaint it was stated that though there was no agreement to pay any

interest, the appellant was entitled to interest by way of damages, and interest at the rate of 6 per cent

per annum was claimed on the said sum of Rs 1600 from October 27, 1976. The appellant expressly

averred in the plaint that the amount claimed by him was excluded from the definition of “debt” in the

said Act.

By his written statement the respondent contended that he had only sold a pregnant cow to the appellant

for a sum of Rs 1500 and not Rs 1600 and that the cow did not suffer from any disease but by reason of

the negligent manner in which the appellant handled the cow, it gave premature birth to a calf and that

the appellant brought back the cow and the calf and left them in front of his house. The respondent

further denied his liability to pay any amount to the appellant and alleged that he had “agreed to pay Rs

1500 to the plaintiff (appellant) by his letters for nothing”. He further alleged that he had paid a sum of

Rs 750 to the appellant. He also contended that he was a “debtor” and the amount claimed from him in

the said suit was a “debt” within the meaning of those expressions in the said Act and that he was

entitled to the benefit of the said Act and the suit was, therefore, not maintainable.

The Relevant Law

In order to understand the controversy between the parties it will be convenient to refer now to the

relevant statutory provisions. The Kerala Debtors Temporary (Relief) Act, 1975, provided for a

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moratorium on the recovery of debts due from certain categories of persons, such as, indigent

agriculturists, landless labourers, artisans…Clause (3) of Section 2 of the said Act defines the

expression “debt”:

Debt means any liability in cash or kind, whether secured or unsecured, due from or incurred by a

debtor on or before the date of commencement of this Act, whether payable under a contract, or

under a decree or order of any court, or otherwise, and subsisting on that date, but does not

include…any debt which represents the price of goods purchased…

Clause (4) of the said Act defines the expression “debtor” as meaning “any person whose annual

income does not exceed three thousand rupees from whom any debt is due”. There are two exceptions

to this definition. We are concerned only with the first of these exceptions. Under it any person from

whom debt or debts exceeding three thousand rupees (excluding interest) is or are due is excluded from

the definition of the expression “debtor”. …

Thus, if the respondent’s annual income as also his total debts, excluding interest, did not exceed Rs

3000, he would be a debtor for the purposes of the said Act. In such eventuality, the amount due by him

to the appellant together with interest, if any, thereon would be deemed to be wholly discharged…and

the Court would have no jurisdiction to entertain the appellant’s suit…unless the claim made in the suit

was a debt which represented the price of goods purchased by the respondent.

The Legal Journey

Bearing the above position in mind, we now turn to the findings given at different stages of this

litigation in order to examine which court took the correct view.

The Trial Court

At the trial of the suit, the respondent gave up all the contentions raised by him except two, namely,

that he was a debtor entitled to the benefit of the said Act and that he had made a part payment of Rs

750. The appellant in his turn restricted his claim to Rs 1500. Accordingly the trial court framed only

two issues, namely, with respect to the applicability of the said Act and the part payment pleaded by the

respondent. The respondent’s case of part payment was disbelieved by the trial court. The trial court

found that the respondent’s annual income did not exceed Rs 3000 and that he was a debtor within the

meaning of clause (4) of Section 2 of the said Act.

It was argued on behalf of the respondent that the subject-matter of sale were a cow and a calf and they

could not be said to be “goods” for the purposes of the Sale of Goods Act, 1930. This contention was

rejected by the trial court and it held that the amount claimed by the appellant in the suit was a debt

which represented the price of goods purchased by the respondent and, therefore, fall within exception

(f) to clause (3) of Section 2 of the said Act.

The trial court accordingly passed a decree in favour of the appellant for a sum of Rs 1500 with interest

thereon at the rate of six per cent per annum from October 27, 1976, and ordered the respondent to pay

the costs of the suit.

Appeal in the District Court

The respondent filed an appeal in the District Court, Tellicherry…was dismissed and the parties were

ordered to bear and pay their own costs of the appeal. Though in the memorandum of appeal it had

been contended that there was no transaction of sale of goods between the parties as the sale of

livestock was not a sale of goods this contention was given up at the hearing of the said appeal.

Revision in the High Court

The respondent then took the matter by way of revision to the Kerala High Court…was allowed…The

High Court held that the amount claimed by the appellant did not fall within Exception (f) to clause (3)

of Section 2 of the said Act and that the appellant’s claim, therefore, stood discharged. The High Court

made no order as to costs throughout. The reasons which induced the High Court to arrive at this

decision may be reproduced in its own words:

Irrespective of whether the defendant is bound to take back the cow or not the defendant may

agree to take it back. If he takes back the cow and agrees to pay the amount he has received,

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the amount payable by him is not a debt which represents the price of goods purchased. It is

equivalent to the price of goods purchased, but it does not represent the price of goods

purchased. Therefore, it is not excluded from the purview of goods as envisaged in Section

2(3) of the Kerala Debt Relief Act 17 of 1977.

It is against this judgment and order of the High Court that the present appeal is directed.

Discussion in the Supreme Court

We find ourselves unable to agree with the conclusion reached by the High Court or the reasoning upon

which it is based. In our opinion, the High Court has not appreciated the true nature of the transaction

between the parties. It has overlooked the pleadings of the parties, what transpired at the hearing of the

suit, and the issues on which the parties went to trial.

Claim

The claim made by the appellant in his plaint was for the price of goods sold and delivered by him to

the respondent. It was not a claim for refund of price. Whether the amount due by way of refund of

price would be a debt representing the price of goods sold is not a question with which we are

concerned for the appellant had expressly pleaded in his plaint that the respondent had agreed to buy

back the said cow and calf and had agreed to pay to him a sum of Rs 1600 as price and that he had

failed to pay the said amount or any part thereof.

Denial of contract

The respondent in his written statement had denied this contract of sale. As set out earlier, at the trial of

the suit the respondent abandoned this defence and the appellant restricted his claim to Rs 1500.

An Agreement Existed

As a result of this, the agreed and undisputed position was that there was an agreement between the

appellant and the respondent under which the appellant had agreed to sell to the respondent the said

cow and calf purchased by him from the respondent for a sum of Rs 1500 and had delivered the said

cow and calf to the respondent in performance of his part of the contract.

As per Sale of Goods Act

…It is also pertinent to note that it was not the case of the appellant that it was a condition of the

contract that the cow would yield a particular quantity of milk and that such condition not having been

fulfilled, he was entitled to reject the goods, namely, the cow and the calf, and get a refund of the price.

Even if such a statement on the part of the respondent were to be treated as a warranty, a breach of

warranty does not entitle a buyer to reject the goods and his only remedies would be those provided in

Section 59 of the Sale of Goods Act, 1930, namely, to set up against the seller the breach of warranty in

diminution or extinction of the price or to sue the seller for damages for breach of warranty.

Resale

The case of the appellant was also not founded upon any breach of warranty. His case as expressly

pleaded in the plaint was that he took back the cow and the calf to the respondent and that the

respondent agreed to buy them back for the same price. This was, therefore, a case of a resale by the

buyer to the seller, the sale price being the very same amount which the buyer had paid to the seller.

Clause (10) of Section 2 of the Sale of Goods Act defines “price” as meaning “the money consideration

for a sale of goods”. A resale of goods is also a sale of goods and the money consideration for such

resale is the price payable in respect of such resale. When a person purchases goods, he may sell them

in his turn. Such second sale is generally referred to as a resale. A resale may be to a third person or to

the original seller. In either case, the money consideration for such second sale would be the price of

goods resold.

The High Court Erred

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It is, therefore, difficult to understand how the High Court could have come to the conclusion that such

money consideration would be equivalent to the price of goods purchased but would not represent the

price of goods purchased. The High Court was clearly wrong in the view which it took. The amount

due from the respondent to the appellant was a debt which represented the price of goods purchased by

the respondent from the appellant and was by reason of exception (f) to clause (3) of the said Section 2

of the said Act clearly excluded from the definition of “debt”.

Payment of Interest

It was also submitted before us on behalf of the respondent that there being admittedly no agreement as

to any payment of interest, the trial court was not justified in awarding interest to the appellant. The

amount of interest claimed by the appellant in his plaint was not based on an agreement but was

claimed by way of damages.

Section 61 of the Sale of Goods Act provides for interest by way of damages and special damages. The

relevant provisions of sub-section (2) of that section are as follows:

In the absence of a contract to the contrary, the court may award interest at such rate as it

thinks fit on the amount of the price…(a) to the seller in a suit by him for the amount of the

price…from the date of the tender of goods or from the date on which the price was payable

According to the averments in the plaint it was by his letter dated October 26, 1976, that the respondent

had agreed to pay the amount of the price. The appellant had accordingly made a claim for interest

from the said date. Under the provisions of Section 61(2) of the Sale of Goods Act, the appellant was

clearly entitled to such interest by way of damages.

In the result, this appeal must succeed and is allowed …The respondent will pay to the appellant the

costs of this court.

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MODULE III

AGENCY, PARTNERSHIP AND COMPANY

Agency:

(Sec 182 – 238 Indian Contract Act)

Agency is a relationship based on an express or implied agreement whereby one person the ‘agent’ is

authorised to act for another ‘the principal’.11 The act of the agent is considered the act of the principal

and the agency is a device of connecting the principal with the third party through the medium of agent.

The act of the agent binds the principal to the third person. No consideration is necessary for agency. It

is based on consent and for that reason, it is called a consensual relation. If there is consideration, the

relationship is also contractual.

In order that the act of the agent may be binding on the principal, it is necessary that the act should be

within the terms of the agency. The use of the word agent in itself really means very little. The facts

must speak for themselves and if those facts show a state of things different to a simple arrangement

between principal and agent then the effect of these facts will not be altered simply because the

language of agency has been used in a loose manner.

When a person has by his conduct induced others to believe that a certain person is his agent, he is

estopped from subsequently denying it. This is called agency by estoppel. (Sec 237)12

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Supreme Court of India, 1989

(1989) 4 SCC 603

(BEFORE K. JAGANNATHA SHETTY AND A.M. AHMADI, JJ.)

SOUTHERN-ROADWAYS LTD., MADURAI, REPRESENTED BY ITS

SECRETARY . . Appellant;

Versus

S.M. KRISHNAN . . Respondent.

Decided on October 5, 1989

JAGANNATHA SHETTY, J.— Special Leave granted.

2. The question raised in this appeal is whether the agent after revocation of his authority is entitled

to remain in possession of the premises of the principal and interfere with the business thereof. The

11 182. "Agent" and "principal" defined An "agent" is a person employed to do any act for another, or to represent another in dealing with third persons. The person for whom such act is done, or who is so represented, is called the "principal". 12 237. Liability of principal inducing belief that agent's unauthorised acts were authorised When an agent has, without authority, done acts or incurred obligations to third person on behalf of his principal, the principal is bound by such acts or obligations, if he has by his word or conduct induced such third person to believe that such acts and obligations were within the scope of the agent's authority. Illustrations (a) A consigns goods to B for sale, and gives him instructions not to sell under a fixed price. C, being ignorant of B's instruction, enters into a contract with B to buy the goods at a price lower than the reserved price. A is bound by the contract (b) A entrusts B with negotiable instruments endorsed in blank. B sells them to C in violation of private order from A. The sale is good.

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learned Single Judge of the Madras High Court in Original Suit CS No. 1317 of 1988 has granted

temporary injunction restraining the respondent from interfering with the appellant’s transport business.

But the Division Bench by judgment delivered on 28-3-1989, vacated that temporary injunction. The

present appeal is directed against the judgment of the Division Bench.

3. The facts are substantially undisputed. The appellant-company under the name as Southern

Roadways Ltd. is engaged in the business of transport of goods and parcels to different places in

Southern India. It has appointed commission agents at various stations for the purpose of carrying on

its business. S.M. Krishnan-respondent was one such agent appointed at Madras city. Clause III of the

agreement by which he was appointed provides that the respondent should arrange a suitable godown

and engage employees. Clause XI provides for his removal from service at any time without notice. It

also provides that upon removal of the agent the company could occupy the godown. The company

could also utilise the services of employees engaged by the respondent. As per the agreement perhaps

at the suggestion of the respondent, the company took on lease a godown at No. 10, Srinivasan Road,

T. Nagar, Madras. The godown was put in possession of the respondent for the purpose of carrying on

his agency business of the company.

4. In the course of the company’s audit, it was discovered that the respondent had mismanaged the

business and misappropriated the income of the company. By letter dated 13-10-1988, the company

terminated his agency with effect from 14-10-1988. He was informed that the company would be

taking possession of the godown and carrying on the business on its own. By subsequent letter, he was

also intimated that the company has taken possession of the godown on 15-10-1988 and another agent

called R. Sundarajan was appointed in his place. The respondent however, prevented R. Sundarajan and

also the company from carrying on business at the godown premises. The company, therefore, had to

institute a suit for declaration of its right to carry on business in the said premises. Permanent

injunction restraining the respondent from interfering was also sought for. The suit was based on two

separate grounds. The first related to legal right of the company to carry on its business after

termination of agency of the respondent; the second concerned the factum of taking actual possession

of the premises on 15-10-1988.

5. Pending suit, the company moved the High Court for temporary injunction. The temporary

injunction was for restraining the respondent from interfering with the possession of the premises and

the business thereof. The learned Single Judge (M. Srinivasan, J.) acceded to that request. The Judge

said:

“As pointed out already, in this case, there is no denial of the lease arrangement between the

owner of the premises and the plaintiff. The defendant does not claim to be the owner of the

premises nor does he put forward any rival title as against the plaintiff. The only claim of the

defendant is that he is in possession and that he has been paying the rent to the owner. He does not

claim that he took possession as a lessee from the owner. Though there is a specific averment in

the plaint and the affidavit of the plaintiff that there is a lease arrangement between the plaintiff

and the owner, there is no denial of the same by the defendant. In these circumstances, the

defendant cannot claim that he is in possession pursuant to any right enured in him.”

6. As to the possession of the premises, he said:

“The claim made by the plaintiff that it took possession on 15-1-1988 is acceptable in view of

the fact that the defendant was never the lessee under the owner of the premises. The defendant

was only looking after the business as an agent of the plaintiff and as such he was permitted to

enter the premises and he cannot claim independent possession.”

7. Finally, he concluded:

“In the circumstances of the case, there can be no doubt that the plaintiff has been in legal and

actual possession of the premises on the date of suit. The fact that the business has been

temporarily shifted to another place in view of the threat meted out to the plaintiff’s agent will not

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disentitle the plaintiff to get injunction. The plaintiff is certainly entitled to carry on its business at

No. 10, Srinivasan Road, T. Nagar, Madras-600 017, having taken the premises on lease. It is not

open to the defendant to prevent the plaintiff from carrying on such business.”

8. The respondent was thus restrained by means of temporary injunction from interfering with the

company’s transport business in goods and parcels at the suit premises.

9. The respondent took up the matter in appeal before the Division Bench of the High Court. The

Division Bench consisting of Sathidev and Padmini Jesudurai, JJ., accepted the appeal and vacated the

temporary injunction. The conclusion of learned Judges is largely based on the actual possession of the

premises claimed by the company. They found it hard to accept that claim and observed:

“The plaintiff will not be entitled to the relief sought for unless it establishes that its claim that

possession of the property was handed over to it on 15-10-1984 is true. The defendant has

consistently been contending that possession was not handed over to the plaintiff on 15-10-1984

and that he continues to be in actual and physical possession of the property even now. No material

has been placed before the court to substantiate the claim of the plaintiff that possession was taken

over on 15-10-1984.”

10. They continued:

“In the face of these documents and in the absence of any material to show that possession of

the suit property was taken by the plaintiff on 15-10-1988, it would be impossible for this. Court to

grant the plaintiff, the relief of injunction.”

As to the company’s right to treat the respondent as trespasser, the Division Bench observed:

“Before the defendant could be characterised as a trespasser, the validity of the termination of

the agency and the rights of the parties, following that, have also to be determined and this could

be done only during trial.”

11. At the outset, we may state that we are not so much concerned with the rival claims relating to

actual possession of the suit premises. Indeed, that is quite irrelevant for the purpose of determining the

rights of the company to carry on its business. Mr Venugopal, learned counsel for the appellant also

discreetly did not advert to that controversy. He, however, rested his case on certain facts which are

proved or agreed. They may be stated as follows:

“The company was and is the tenant of the suit premises and has been paying rent to the

owner. The lease in respect of the premises has been renewed up to 22-11-1993. It was the

company which has executed the lease and not the respondent. The respondent as agent was

allowed to remain in possession of the premises. It was only for the purpose of carrying on

company’s business. His agency has been terminated and his authority to act for the company has

been put an end to. These facts are indeed not disputed. On these facts the contention of counsel is

that when the agency has been terminated, the respondent has no legal right to remain in the

premises or to interfere with the business activities of the company.”

12. The force of this argument cannot be gainsaid. Counsel, in our opinion, appears to be on terra

firma. The principal has right to carry on business as usual after the removal of his agent. The courts

are rarely willing to imply a term fettering such freedom of the principal unless there is some

agreement to the contrary. The agreement between the parties in this case does not confer right on the

respondent to continue in possession of the suit premises even after termination of agency. Nor does it

preserve right for him to interfere with the company’s business. On the contrary, it provides that the

respondent could be removed at any time without notice and after removal the company could carry on

its business as usual. The company under the terms of the agreement is, therefore, entitled to assert and

exercise its right which cannot be disputed or denied by the respondent.

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13. Even otherwise, under law revocation of agency by the principal immediately terminates the

agent’s actual authority to act for the principal unless the agent’s authority is coupled with an interest as

envisaged under Section 202 of the Indian Contract Act. When agency is revoked, the agent could

claim compensation if his case falls under Section 205 or could exercise a lien on the principal’s

property under Section 221. The agent’s lien on principal’s property recognised under Section 221

could be exercised only when there is no agreement inconsistent with the lien. In the present case the

terms of the agreement by which the respondent was appointed as agent, expressly authorises the

company to occupy the godown upon revocation of agency. Secondly, the lien in any event, in our

opinion, cannot be utilised or taken advantage of to interfere with principal’s business activities.

14. There is yet another significant factor to be borne in mind when we deal with the rights of an

agent. An agent who receives property or money from or for his principal obtains no interest for

himself in the property. When he receives any such property he is bound to keep it separate from his

own and that of others. Long ago, Lord Cottenham, L.C. in Foley v. Hill1 said:

“... So it is with regard to an agent dealing with property; he obtains no interest himself in the

subject matter beyond his remuneration; he is dealing throughout for another, and though he is not

a trustee according to the strict technical meaning of the word, he is quasi a trustee for that

particular transaction for which he is engaged.”

15. Out of this practice there has emerged a rule, which is a normal incident of agency, that an

agent cannot deny principal’s title to property nor he can convert it into any other kind or use.

Fridman’s Law of Agency (5th edn., page 150) also supports this view:

“Respect of principal’s title: The agent cannot deny the title of the principal to goods, money,

or land possessed by the agent on behalf of the principal. The possession of the agent is the

possession of the principal for all purposes, including the acquisition of title under statutes of

limitation, even where in fact the agent, though in ignorance of his claim, is entitled to the land,

unless the agent possesses not as agent but on his own behalf, in which event his possession will be

personal and not for his principal.”

16. As to the nature of agent’s possession in respect of principal’s property, this Court in a recent

judgment rendered in Smt Chandrakantaben v. Vadilal Bapalal Modi2 said : (SCC pp. 643-44, para 19)

“It is well settled that the possession of the agent is the possession of the principal and in view

of the fiduciary relationship Defendant 1 cannot be permitted to claim his own possession. This

aspect was well emphasised in David Lyell v. John Lawson Kennedy3 where the agent who was

collecting the rent from the tenants on behalf of the owner and depositing it in a separate

earmarked account continued to do so even after the death of the owner. After more than 12 years

of the owner’s death his heir’s assignee brought the action against the agent for possession and the

agent defendant pleaded adverse possession and limitation. The plaintiff succeeded in the first

court. But the action was dismissed by the Court of Appeal. The House of Lords reversed the

decision of the Court of Appeal and remarked: “For whom, and on whose behalf, were those rents

received after Ann Duncan’s death? Not by the respondent for himself, or on his own behalf, any

more than during her lifetime.” Emphasising the fiduciary character of the agent his possession

was likened to that of trustee, a solicitor or an agent receiving the rent under a power of attorney.

Another English case of Williams v. Pott4 arising out of the circumstances similar to the present

case was more interesting. The agent in that case was the real owner of the estate but he collected

the rents for a considerably long period as the agent of his principal who was his mother. After the

agent’s death his heir claimed the estate. The mother (the principal) had also by then died after

purporting by her will to devise the disputed lands to the defendants upon certain trusts. The claim

of the plaintiff was dismissed on the plea of adverse possession. Lord Romilly, M.R., in his

judgment observed that since the possession of the agent was the possession of the principal, the

agent could not have made an entry as long as he was in the position of the agent for his mother,

and that he could not get into possession without first resigning his position as her agent which he

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could have done by saying: “The property is mine; I claim the rents, and I shall apply the rents for

my own purposes.” The agent had thus lost his title by reason of his own possession as agent of the

principal.”

17. We wish to add that it is not every agent who is in a fiduciary position vis-a-vis his principal.

For example if A appoints B to be his agent merely to sign a memorandum and places no particular trust

in B, the doctrine of fiduciary relations would not apply. Likewise, where the principal authorises an

agent to do particular or specified acts, the doctrine of fiduciary relation may not arise. What we want

to emphasise is, in all cases of general agency, the relation may be generally fiduciary, but in other

kinds of agencies, the relation may vary with the confidence which the principal chooses to repose in

the agent. It may also depend upon the power which the agent exercises over the subject matter under

the terms of the contract of agency or by virtue of the incident of law and usage of the business which

the relationship implies. Thus the fiduciary element in agency, though the key to much of the law

governing this relation, is not the essential element in the relation.5

18. The crux of the matter is that an agent holds the principal’s property only on behalf of the

principal. He acquires no interest for himself in such property. He cannot deny principal’s title to

property. Nor he can convert it into any other kind or use. His possession is the possession of the

principal for all purposes. As the Kerala High Court in Narayani Amma v. Bhaskaran Pillai6 observed:

(AIR p. 217, para 6)

“The agent has no possession of his own. What is called a caretaker’s possession is the

possession of the principal.”

19. So much is, we think, established law as regards agent’s right to property belonging to the

principal. Dr Chitale, learned Counsel for the respondent, however, cited in this context, two decisions:

(i) Abdul Nabi Sahib v. Bajan Sahib7 and (ii) Jemma v. Raghu8. In the former case of the Madras High

Court, the suit was for a permanent injunction restraining the defendant from interfering with the

plaintiff’s peaceful possession and enjoyment of the suit properties and performance of the religious

services. The defendant admitted that he was agent of the plaintiff but set up title to the property in

himself as donee. He has also set up title by adverse possession. On these claims, Kunhi Raman, J.,

observed:

“Since the plaintiff had not got possession of the property, it would not be sufficient to show

that he was in constructive possession and the theory of constructive possession as between the

principal and agent, cannot be relied upon by the principal for the purpose of meeting the

contention of the description raised on behalf of the defendant, who is the agent.”

20. If the defendant in the above case, has admitted that he was the agent of the plaintiff and yet set

up title to the property of his principal, the above observation may not be consistent with the settled

principle of law. We have already stated that the agent acquires no interest in the property of the

principal and he cannot, therefore, non-suit the principal on the possessory title as agent.

21. The second case in Jemma v. Raghu8 referred to us is the decision of the Orissa High Court.

That case dealt with the general principle that the plaintiff who is not in possession of the suit premises

is not entitled to relief of injunction. The plaintiff must ask for recovery of possession. But this

principle has no application with regard to dispute between the principal and agent in respect of

principal’s property.

22. In this case, the respondent’s possession of the suit premises was on behalf of the company and

not on his own right. It is, therefore, unnecessary for the company to file a suit for recovery of

possession. The respondent has no right to remain in possession of the suit premises after termination

of his agency. He has also no right to interfere with the company’s business. The case, therefore,

deserves the grant of temporary injunction. The learned Single Judge of the High Court in our

judgment, was justified in issuing the injunction. The Division Bench of the High Court was clearly in

error in vacating it.

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23. In the result, we allow the appeal with costs. In reversal of the order of the Division Bench, we

restore the temporary injunction granted by learned Single Judge of the High Court.

———

† From the Judgment and Order dated 28-3-1989 of the Madras High Court in O.S.A. No. 48 of

1989

1 2 HLC 28 : 1843-60 All ER (Rep) 16,19

2 (1989) 2 SCC 630

3 (1889) 14HL(E) 437

4 LR 12 Eq Cas 149

5 See 17 Modern Law Review 31-32

6 AIR 1969 Ker 214 : 1968 Ker LJ 738

7 AIR 1944 Mad 221 : (1944) 1 MLJ 87

8 AIR 1977 Ori 12 : 42 Cut LT 940

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PARTNERSHIP

A partnership is a contract of a special kind. The law is contained in the Indian Partnership Act, 1932.

Since a partnership is a contract, it should be borne in mind that where the Partnership Act is silent on

any point, the general principles of law of contract apply.

According to the Act (Partnership Act), partnership is a relation between persons who have agreed to

share the profits of a business carried on by all or any of them acting for all. Thus, there are five

essentials:

- There must be an alliance of business between two or more persons – the maximum number of

partners in a partnership firm can be 10 in case of banking business and 20 in case of any other

business (sec 11 Companies Act)

- There must be an agreement.

- There must be a business.

- The alliance of business must be for sharing of profits.

- The business must be carried on by all or any of the partners acting for all – the fundamental

principle which constitutes partnership is the idea of agency. It will not be incorrect to say that the

law of partnership is a branch of the general law of agency. Each partner is both an agent and

principal for himself and others; a partner embraces the character both of a principal and an agent.

Each partner is an agent binding the other partners who are his principals and each partner again a

principal who in turn is bound by the acts of other partners. Thus, an implied agency flows from

their relationship as partners.

Co-ownership is very much akin to partnership, but there are differences. In partnership the partners

enjoy common right over an interest in the property of the firm which is not the case in co-ownership.

Moreover, partners are agents of one another but one co-owner is not the real or implied agent of the

other co-owners. A co-owner is entitled to partition, but partners are not entitled to partition. When the

partnership is wound up they are entitled to have the property sold and the proceeds divided.

A registered company and partnership have certain common elements but they differ from each other.

A partnership (firm) is not a distinct legal person. A company is a distinct legal person. A partner

cannot transfer his interest in the firm without the consent of other partners. In a company, the share

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holders are free to transfer their shares to others. Partners are liable for the entire liability of the firm.

Share holder’s liability is restricted to the amount of his shares. No partner can enter into a contract

with his firm. A share holder can enter into contract with the company. The number of partners in a

firm cannot be more than 20 (in case of a banking firm – 10). For a private company, the minimum

number of members is 2 and the maximum is 50. The same numbers for a public company being 7 and

unlimited respectively. If a partner dies or retires, partnership dissolves. This does not happen in the

case of a share holder in a company.

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(2003) 6 SCC 265

Syndicate Bank v. R.S.R. Engg. Works

K.G. BALAKRISHNAN, J.— The plaintiff-appellant filed two suits against the respondents. The

first respondent in both the suits is a partnership firm engaged in engineering works. Respondents 2 to

4 are its partners. In the first suit, namely, OS No. 1921 of 1980 which was filed for recovery of Rs

59,775.95 with interest thereon, the plaintiff alleged that for the purpose of expansion of industry of the

respondents, a loan of Rs 40,000 was sanctioned in favour of the respondents on 5-12-1974. The loan

was to be repaid after 9 months in instalments. The respondents had also executed the requisite

documents in favour of the plaintiff Bank. Respondents 2 and 3 in their written statement admitted that

the respondents had borrowed Rs 40,000 from the appellant, but they contended that the first

respondent firm was dissolved and the fourth respondent took over the entire liability and therefore,

they are not liable for the suit claim. The trial court passed the decree only against Respondent 1 and

Respondent 4 for the suit claim.

2. The appellant filed Regular First Appeal No. 632 of 1987 before the High Court and prayed that

decree shall be passed against all the respondents as all of them had joint and several liability. This plea

was rejected by the High Court and the High Court affirmed the decree of the trial court. Aggrieved by

the same, Civil Appeal No. 3765 of 1995 is filed.

3. In OS No. 1922 of 1980 filed against these respondents, the plaintiff alleged that these

respondents were given an overdraft facility to the extent of Rs 20,000 by the appellant Bank and that

the respondents availed that facility and committed default in paying the amount due from them and,

therefore, the appellant filed the suit for recovery of Rs 35,157.68 with interest thereon. The

respondents raised similar contention that the partnership was dissolved and the fourth respondent had

taken over the entire liability and that Respondents 2 and 3 stood absolved of the suit liability. The trial

court accepted this contention and passed a decree in favour of the plaintiff against Respondents 1 and

4. Aggrieved by the same, the appellant filed a regular first appeal being RFA No. 631 of 1987 before

the High Court and the High Court affirmed the trial court decree by its judgment and aggrieved by the

same, Civil Appeal No. 1337 of 1995 is filed.

4. We heard learned counsel for the appellant and also the learned counsel for the respondents. The

learned counsel for the respondents contended that by virtue of the dissolution deed dated 26-7-1976,

R-1 partnership firm was dissolved and the fourth respondent took over the entire liability and,

therefore, the trial court was justified in passing the decree against Respondents 1 and 4. The

respondents also contended that notice of dissolution of the firm was given to the plaintiff, but the

appellant Bank did not raise any objection and, therefore, it was urged that under Section 32(2) of the

Indian Partnership Act, 1932, Respondents 2 and 3 are not liable for any payment under the suit. The

learned counsel for the appellant, on the other hand, contended that the loan was availed of by these

respondents in the year 1974 and Respondents 2 to 4 jointly executed various documents and they have

admitted the execution of these documents. It was further contended that the dissolution of the

partnership on 28-7-1976 will not affect their liability to discharge the suit claim and inter se

arrangement between the partners, namely, Respondents 2, 3 and 4 is not binding on the appellant

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Bank. The contention of the appellant is that in view of sub-section (3) of Section 32 of the Indian

Partnership Act, 1932, Respondents 2 and 3 cannot escape the liability as regards the suit claims made

by the appellant.

5. At the time when the appellant advanced the money to the first respondent firm, Respondents 2, 3

and 4 were its partners. They admitted that they executed the requisite documents in favour of the

appellant. Thereafter the firm was alleged to have been dissolved on 28-7-1976. The contesting

respondents have no case that any public notice was given about the retirement of Respondents 2 and 3

from the firm as envisaged under Section 32(3) of the Indian Partnership Act. Respondents 2 and 3

have contended that the appellant was aware of the dissolution of the partnership but that by itself will

not absolve the liability of the retiring partners. Section 32 of the Indian Partnership Act, 1932, reads as

follows:

“32. Retirement of a partner.—(1) A partner may retire—

(a) with the consent of all the other partners,

(b) in accordance with an express agreement by the partners, or

(c) where the partnership is at will, by giving notice in writing to all the other partners of

his intention to retire.

(2) A retiring partner may be discharged from any liability to any third party for acts of the

firm done before his retirement by an agreement made by him with such third party and the

partners of the reconstituted firm, and such agreement may be implied by a course of dealing

between such third party and the reconstituted firm after he had knowledge of the retirement.

(3) Notwithstanding the retirement of a partner from a firm, he and the partners continue to be

liable as partners to third parties for any act done by any of them which would have been an act of

the firm if done before the retirement, until public notice is given of the retirement:

Provided that a retired partner is not liable to any third party who deals with the firm without

knowing that he was a partner.

(4) Notices under sub-section (3) may be given by the retired partner or by any partner of the

reconstituted firm.”

6. Under sub-section (2) of Section 32, the liability of the retiring partner as against third party

would be discharged only if there is an agreement made by the retiring partner, with the third party, and

the partners of the reconstituted firm. Of course, an agreement could be implied by the course of

dealing between such third party and the reconstituted firm, after retirement of a partner. In the instant

case, there was no agreement between the appellant Bank and Respondents 2 and 3 as regards their

liability in respect of the dissolved firm. There is also no evidence to show that there was an implied

contract between the appellant and Respondent 4 who allegedly agreed to discharge the liabilities of

Respondents 2 and 3. It is also pertinent to note that there was no public notice under sub-section (3) of

Section 32 of the Indian Partnership Act by Respondents 2 and 3. Even if there was a public notice, it

may not alter the position as the alleged liabilities of Respondents 2 and 3 were incurred by them prior

to the so-called dissolution of the firm.

7. The Division Bench wrongly placed reliance on the decision of the Andhra Pradesh High Court

in Thummaia Rama Rao v. Chodagam Venkateswara Rao1. That was a case where the suit was filed

based on three promissory notes executed by three of the partners of a firm. Prior to the execution of

the pronotes, Defendants 6, 7, 8 and 10 had retired from the partnership and the same was duly

published in the newspaper. It was in that context that the Court held that if a retiring partner who has

not given notice in the mode specified under Section 72, wants to escape liability for any subsequent

acts on behalf of the firm, it can only be on the basis of some other rule of law and not on the ground

that public notice was given in a manner different from that prescribed under Section 72. It was further

stated that the rule that makes a retiring partner liable for acts done on behalf of the firm after

retirement is based on estoppel, because the persons deal with it in the belief that all the partners of the

firm still continue; but when the third parties in fact knew that some of the partners have in fact retired

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from the partnership, there is no scope for the application of the rule of estoppel to make the partners

who had already retired, liable for the subsequent acts on behalf of the firm.

8. In the instant case, at the time when the partners entered into the agreement for overdraft facility,

they were the members of the partnership firm; so also Defendants 2 to 4 jointly executed an agreement

and obtained loan from the Bank. Subsequent retirement of Defendants 2 and 3 is of no consequence

unless there is a subsequent contract between these members of the partnership firm and the plaintiff.

The law on this aspect is succinctly made clear in the celebrated book Lindley & Banks on Partnership

(16th Edn.) and at pp. 358-59, it is stated as under:

“It is perhaps self-evident that a creditor’s rights will not normally be prejudiced by an

agreement transferring an accrued liability from one partner to another unless the creditor is made

a party to the agreement or assents to its operation. Otherwise the agreement will, as regards him,

be strictly res inter alios acta. Lord Lindley illustrated this proposition by the following example:

‘… Let it be supposed that a firm of three members, A, B, and C, is indebted to D; that A

retires, and B and C either alone, or together with a new partner, E, take upon themselves the

liabilities of the old firm. D’s right to obtain payment from A, B and C is not affected by the

above arrangement, and A does not cease to be liable to him for the debt in question. But if,

after A’s retirement, D accepts as his sole debtors B and C, or B, C, and E (if E enters the

firm), then A’s liability will have ceased, and D must look for payment to B and C, or to B, C

and E, as the case may be.’ ”

9. There is no a priori presumption to the effect that the creditors of a firm do, on the retirement of

a partner, enter into an agreement to discharge him from liability. An adoption by the creditor of the

new firm as his debtor does not by any means necessarily deprive him of his rights against the old firm

especially when the creditor is not a party to the arrangement and then there is no fresh agreement

between the creditor and the newly constituted firm. After the creditor has taken a new security for a

debt from a continuing partner, it may be a strong evidence of an intention to look at only the

continuing partner for the payment due from the firm.

10. It is also important to note that it has long been recognised that partnership is not a species of

joint tenancy and that, in the absence of some contrary agreement, there is no survivorship as between

partners, at least so far as it concerns their beneficial interests in the partnership assets.

11. Having due regard to these principles, the High Court erred in confirming the judgment passed

by the trial court and the plaintiff-appellant had every right to proceed against all the defendants in the

suit. Hence, the appeals are allowed and the impugned decree is modified to the extent that there shall

be a decree against all the respondents, namely, Respondents 1 to 4, in both the suits.

12. The appeals are allowed with costs.

———

† From the Judgment and Order dated 7-3-1994 of the Karnataka High Court in RFA No. 631 of

1987

1 AIR 1963 AP 154 : (1962) 1 An WR 247

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Company:

The Act defines ‘Company’ as a company formed and registered under the Act or an existing company

formed and registered under any of the previous company laws.

Characteristics of a Company:

1. Incorporated Association: minimum number is 7 for public company and 2 for private company.

2. Artificial person

3. Separate legal entity

4. Limited Liability (in case of a company limited by shares)

5. Separate property

6. Transferability of shares

7. Perpetual existence

8. Common seal

9. May sue and be sued in its own name

Kinds of Companies:

a. Company limited by shares – also called as a ‘Share Company’, the liability of its members is

limited to the unpaid amount, if any, on the shares held by them. Personal assets cannot be

called upon for the payment of the liabilities of the company.

b. Company limited by guarantee – also called as a ‘Guarantee Company’, the liability of the

members is limited to such amount as the members may respectively undertake to contribute

to the assets of the company in the event of its being wound up.

c. Unlimited Company – does not have any limit on the liability of its members, who are liable

in the event of its being wound up, to the full extent of their fortunes to meet the obligations of

the company.

Distinction between a Private and a Public Company:

1. Minimum number of persons: 2 (Pvt) 7 (Pub)

2. Maximum number of persons: 50 (Pvt) No limit (Pub)

3. Transferability of shares: Restricted (Pvt) Free (Pub)

4. Prospectus: Cannot issue (Pvt) Can Issue (Pub)

5. Commencement of business: Immediately after receiving certificate of incorporation (Pvt)

Only when certificate to commence business (Pub)

6. Statutory meeting: Holding not necessary (Pvt) Necessary (Pub)

7. Directors’ Consent: Written consent not necessary to be filed with ROC (Pvt), necessary

(Pub); Not required to sign MoA (Pvt) to sign MoA (Pub)

8. Some other issues related to directors and managerial remuneration, etc.

Promotion:

Process of formation of a company is divided in three: promotion, registration and floatation.

Promotion includes the preliminary steps taken for registering and floating a company. Promoters may

be an individual, syndicate, association, partnership or company.

Promoters have a fiduciary relationship (trust and confidence) with the company. He has to make a full

disclosure of all material facts relating to the formation of the company. He should not make any secret

profits at the expense of the company.

Registration / Incorporation:

Three documents to be filed with ROC: Memorandum, Articles and Agreement which company

proposed to enter into with any individual for appointment as its MD.

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ROC issues a Certificate of Incorporation, which is a conclusive evidence that all the requirements of

the Companies Act in respect of registration have been complied with and the company has come into

existence.

Floatation:

When a company has been registered and has received its certificate of incorporation, it is ready for

floatation, i.e., it can go ahead with raising capital sufficient to commence business.

Memorandum of Association:

It is the charter containing fundamental conditions upon which alone the company can be incorporated.

It tells the objects of the company and the utmost possible scope of its operations. Thus it defines and

confines the powers of the company.

Articles of Association:

These are the bye laws and regulations governing the management of the internal affairs and the

conduct of company’s business. They define the duties, rights, powers and authority of the shareholders

and the directors and the mode and the form in which the company’s business is carried out.

They are subordinate to and are controlled by the Memorandum.

Prospectus:

A private company is prohibited from inviting public to subscribe to its share capital and its arranges its

share capital privately. A public company may also decide to do the same. However, a public company

limited by shares, generally issues shares to the public for which it has to issue a prospectus.

A document shall be called a prospectus if its satisfies two things: it invites subscriptions to share or

debentures or invites deposits; and the invitation is made to the public.

Management of a Company:

A company, being an artificial person, acts through a human being. It is necessary for every company

to have a Board of Directors. In addition, a Managing Director and/or Manager may also be appointed.

The Act does not prohibit the employment of other managerial personnel, such as executive or whole

time directors, which do not come within the term “managing director” or “manager”. The names may

vary but the law is concerned with the role the person performs.

Meetings:

The Act provides for the following different types of meetings of shareholders:

(i) Statutory meeting

(ii) Annual General meeting

(iii) Extraordinary general meeting

(iv) Class meetings

Winding Up:

It is the process by which the life of a company comes to an end. ‘Liquidator’ is appointed, who takes

control of the company, collects its assets, pays its debts and finally distributes any surplus among the

members in accordance with their rights. Winding up of a company differs from insolvency of an

individual in as much as a company cannot be made insolvent under the insolvency law. Besides, even

a solvent company may be wound up.

A company may be wound up in any of the following three ways:

a) Compulsory winding up under an order of the court

b) Voluntary winding up (without intervention of the court)

(i) members’ voluntary winding up

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(ii) creditors’ voluntary winding up

c) Voluntary winding up under the supervision of the court.

~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~


(2000) 3 SCC 312

Before :- S. Rajendra Babu and S.S. Mohammed Quadri, JJ.

Civil Appeal No. 2595 of 1998. D\d. 8.3.2000

Subhra Mukherjee - Appellants

Versus

Bharat Coking Coal Ltd. - Respondents

S.S. Mohammed Quadri, J. - This appeal is directed against the judgment and decree of the High

Court of Judicature of Patna (Ranchi Bench) in Appeal from Appellate Decree No. 21 of 1979 (R)

passed on November 11, 1997. The appellants-plaintiffs filed Title Suit No. 28(A) of 1976 in the court

of the Subordinate Judge, 1st Court, Dhanbad, praying for a declaration of title in respect of a

bungalow and a piece of land measuring 1.38 acres consisting of survey plot Nos. 91 to 94 appertaining

to Khatian No. 2 of mouza Nichitpur (hereinafter referred to as `the suit property') and for permanent

injunction restraining the respondents from interfering with their possession.

2. The suit property was owned by M\s. Nichitpur Coal Company Private Limited (hereinafter referred

to as `the Company'), which is registered under the Indian Companies Act. By a resolution of the board

of directors of the Company dated September 21, 1970, it was resolved to sell the suit property to the

appellants for a consideration of Rs. 5,000\-. However, the appellants paid Rs. 7,000\- to one of the

directors under receipt dated December 20, 1979 (Ext. 10). An agreement to sell the suit property to the

appellants for Rs. 7,000\- (Rs. 5000\- as consideration of the Bungalow and Rs. 2,000\- as price of the

land) was executed by the Company on January 3, 1971 (Ext.8). The Company executed the sale deed

in their favour on March 20, 1972 (Ext.9).

3. The Coal Mines (Nationalisation) Act, 1973 (for short `the Act of 1973') came into force on May 1,

1973 and from that date the right, title and interest of the owners in relation to the coal mines specified

in the Scheduled appended to the Act of 1973 (the said Company is mentioned at serial No. 133 of the

Schedule) vested in the Central Government (they will hereinafter be referred to `as the vested

properties'). Thereafter under the order of the Central Government, the vested properties stood

transferred to and vested in the Government Company named M\s. Bharat Coking Coal Ltd. (for short

`BCCL'). As the appellants did not hand over the possession of the suit property to BCCL, it initiated

proceedings under the Public Premises (Eviction of Unauthorised Occupants) Act, 1971 (for short `the

P.P. Act') for their eviction from the suit property on October 15, 1976.

4. Being faced with eviction proceedings under the P.P. Act, the appellants filed the said suit against

BCCL for declaration of their rights in, title to and interest over the suit property. The suit was resisted

by BCCL, inter alia, on the ground that with effect from the appointed date the suit property vested in

it and that the alleged sale transaction in favour of appellants was sham, collusive, without any

consideration and was brought into existence to avoid the effect of vesting of the suit property under

the Act of 1973. It was also stated that the appellants were wives of the directors of the Company, who

are real brothers. On appreciation of the evidence placed before it, the trial could held that the

appellants got no title to the suit property and were, therefore, not entitled to any relief and thus

dismissed the suit on September 22, 1977. Aggrieved by the judgment and decree of the trial court, the

appellants filed Title Appeal No. 147 of 1977 before the learned District Judge, Dhanbad. On

reappraisal of the evidence on record, the learned District Judge allowed the appeal and set aside the

judgment and decree of the trial court and decreed the suit of the appellants, as prayed for on October 6,

1978. The BCCL then unsuccessfully carried the matter, in second appeal, before the High Court of

Judicature at Patna (Ranchi Bench). The judgment and decree of the High Court dismissing the second

appeal on October 7, 1985, was challenged by BCCL in Civil Appeal No. 838 of 1986 in this Court. On

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August 17, 1993, this Court set aside the impugned judgment and decree of the High Court and

remitted the matter to the High Court to decide the following two points :-

"(1) Whether transaction in question is a bona fide and genuine one or is a sham, bogus and

fictitious transaction as held by the trial court ? and

(2) Whether in view of Section 3(1) read with Section 2(h)(xi) and the entry at serial No. 133,

in the Schedule to the Act, the property in question stood transferred to and vested in the

Central Government free of all encumbrances, on the appointed day under the Coal Mines

(Nationalisation) Act ?"

It was observed that the result of the second point would depend on the decision of point No. 1.

5. However, after remand, in view of the submission made by the learned counsel for BCCL that point

No. 2 was covered by the judgment of this Court in Bharat Coking Coal Ltd. v. Madanlal Agrawal,

1997(1) SCC 177, the High Court decided it first. On Point No. 1 the High Court restored the judgment

of the trial Court holding that the transaction of sale between the appellants and the Company was sham

and bogus and was entered into to avoid the vesting of the suit property in Central Government under

Section 3(1) of the Act of 1973 and thus allowed the second appeal filed by the BCCL on November

11, 1997. That judgment and decree are under challenge in this appeal.

6. Mr. A.K. Srivastava, learned senior counsel appearing for the appellants, pointed out that contrary to

the observation of this Court, the High Court has proceeded to decide point No. 2 first and that resulted

in prejudice to the appellants. He argued that the High Court found that the appellants had proved three

facts, namely, (i) the board of directors of the Company passed a resolution on September 21, 1970

(Ext.12) to sell the suit property in favour of the appellants; (ii) the appellants paid Rs. 7,000\- to one of

the directors of the Company under receipt dated December 30, 1970 (Ext.10); and (iii) sale deed was

executed by the company on March 20, 1972 (Ext.9). He invited our attention to the evidence of P.W.8,

the accountant of the Company, to prove passing of the resolution, to substantiate payment of Rs.

7,000\- and its entry in the books of accounts of the Company and the execution of the sale deed dated

March 20, 1972 (Ext.9) by the Company. In view of these proved facts and in the absence of any

rebuttal evidence, it was contended, the High Court ought to have held that the sale of the suit property

under Ext.8 was genuine and valid.

7. Mr. Anip Sachthey, learned counsel appearing for the respondents, has contended that the suit

property is in the midst of the colliery and that the directors of the Company and the appellants are no

other than husbands and wives and that the transaction was entered into to save the suit property from

vesting in the Central Government under Section 3 of the Act of 1973.

8. We have perused the deposition of P.W.8 - accountant - and the impugned judgment. There can be

no doubt that the High Court in para 13 of its judgment mentioned that the resolution of the company

dated September 21, 1970 (Ext.12), receipt evidencing payment of Rs. 7,000\- on December 30, 1970

(Ext.10) under which one of the directors, husband of appellant No. 1, received the said amount and the

sale deed executed on March 20, 1972 (Ext.9), had been proved by the appellants. But, then the High

Court also noted with approval the following circumstances, pointed out by the first Appellate Court :

firstly, the resolution dated September 21, 1970 (Ext.12) was an ante dated document. Mr. Srivastava

submitted that the government authorities were in possession of all the records of the Company and

they should have produced the original record to substantiate the allegation that the resolution was

antedated and in the absence of such record the High Court was not justified in confirming the finding

of the First Appellate Court. The fact remains that the appellants themselves took no steps to summon

the record from the custody of the concerned authority. That apart, there is no mention of the resolution

dated September 21, 1970 (Ext.12) either in the receipt (Ext.10) signed by one of the directors or in the

agreement for sale of January 3, 1971 (Ext.8) or in the sale deed dated March 20, 1972 (Ext.9). On the

basis of the intrinsic evidence, pointed out above, the conclusion that the resolution was an antedated

document, appears to be irresistible. Secondly, it is pointed out by the High Court that though the

resolution mentions the sale consideration as Rs. 5,000\-, there is no explanation as to why it was

enhanced to Rs. 7,000\- for which receipt was signed by one of the directors of the Company. Thirdly,

a more telling aspect is that the appellants did not exercise their rights as purchasers over the suit

property till the date of the filing of the suit; the water and electricity connections were obtained during

the pendency of the suit by them; further till the date of vesting of the suit property under the Act of

1973, it was maintained by the Company for the use of the directors.

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9. It is rightly commented by the High Court that the agreement for sale (Ext.8) of the suit property is

not a registered document; it recites the suit property will be sold for Rs. 7,000\- even though the

consideration of Rs. 7,000\- was paid on December 30, 1970 (Ext.10) itself and neither the agreement

nor the sale deed is in terms of the resolution.

10. Two other aspects which have weighed with the High Court are : the transaction of sale was

between the husbands and the wives and that they had no independent source of their income, which

cannot be ignored altogether as irrelevant.

11. Mr. Srivastava submitted that undue emphasis was given to the fact that the directors of the

Company were brothers and the appellants are their wives. He argued that the Company is a separate

legal entity which is independent of its directors and shareholders and repeatedly referred to the oft-

quoted decision in Solomon v. Solomon. The principle laid down in Saloman's case more than a

century ago in 1897 by the Houses of Lords that the company is at law a different person altogether

from the subscribers who have limited liability, is the foundation of joint stock company and a basic

incidence of incorporation both under English law and Indian Law. Lifting the veil of incorporation

under statutes and decisions of the courts is equally settled position of law. This is more readily done

under American law. To look at the realities of the situation and to know the real state of affairs behind

the facade of the principle of the corporate personality, the courts have pierced the veil of

incorporation. Where a transaction of sale of its immovable property by a Company in favour of the

wives of the directors is alleged to be sham and collusive, as in the instant case, the Court will be

justified in piercing the veil of incorporation to ascertain the true nature of the transaction as to who

were the real parties to the sale and whether it was genuine and bona fide or whether it was between the

husbands and the wives behind the facade of separate entity of the Company. That is what was done by

the High Court in this case.

12. There can be no dispute that a person who attacks a transaction as sham, bogus and fictitious must

prove the same. But a plain reading of question No. 1 discloses that it is in two parts; the first part says,

`whether the transaction, in question, is bona fide and genuine one' which has to be proved by the

appellants. It is only when this has been done that the respondent had to dislodge it by proving that it is

a sham and fictitious transaction. When circumstances of the case and the intrinsic evidence on record

clearly point out that the transaction is not bona fide and genuine, it is unnecessary for the court to find

out whether the respondent has led any evidence to show that the transaction is sham, bogus or

fictitious.

13. For the afore-mentioned reasons, we are unable to say that the High Court erred in taking the view

that the sale, in favour of the appellants, is neither bona fide nor genuine and confers no right on them.

14. In view of the finding on point No. 1, the suit property remained the property of the Company and,

therefore, it vested in the Central Government under Section 3(1) of the Act of 1973. This is what the

High Court held on point No. 2, which is supported by the judgment of this Court in Bharat Coking

Coal Ltd. v. Madanlal Agrawal, 1997(1) SCC 177.

In the result, we find no merit in the appeal. It is accordingly dismissed with costs.

Appeal dismissed

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- 95 -


1996 Indlaw SC 3923: AIR 1996 SC 2005


Delhi Development Authority;

v

Skipper Construction Company Private Limited and Another

06/05/1996

BENCH

HON'BLE JUSTICE B. P. JEEVAN REDDY AND HON'BLE JUSTICE K. S. PARIPOORNAN

The Judgment was delivered by B.P. JEEVAN REDDY, J. :

A plot of land was put to auction by the Delhi Development Authority (DDA) in October 1980. Skipper

Construction Company (Skipper) offered the highest bid in a sum of Rs. 9.82 crores. It was supposed to

be a record bid at that time. According to the conditions of auction, twenty-five per cent of the amount

was payable immediately and the rest within ninety days. Skipper deposited the twenty-five per cent

but did not deposit the balance. It asked for extension repeatedly and it was granted repeatedly. As

many as seven extensions were granted spread over the period January 1981 to April 1982. Since

Skipper failed to deposit the balance consideration even within the last extended period, proceedings

were taken for cancelling the bid. Skipper went to court and on 29-5-1982 obtained stay of cancellation

[We are unable to see what jurisdiction or justification the court could have for passing such an order in

an ordinary case of sale and purchase of property, more so when Skipper had failed to pay the balance

consideration not only within the time stipulated but despite several extensions.].

DDA applied for vacating the stay. Nothing happened but usual adjournments. Skipper was

simultaneously making representations to DDA to give him further time. In January 1983, DDA

constituted a committee to consider the request of Skipper and other similar requests and to devise a

formula for ensuring timely payments by such purchasers. The committee reported that cancellation of

bids in such matters usually land DDA in protracted litigation and suggested that to enable them to pay

the monies due to DDA, the purchasers be given permission to commence development/construction on

the plot (though possession as such be not delivered) subject to the condition that the property in the

land would remain with the DDA until the entire consideration is paid; if the entire consideration is not

paid according to the revised schedule, the DDA should be entitled to re-enter the plot and take it over

along with the construction, if any, made thereon. (The idea was to enable the purchasers to undertake

development and go on with the construction which would make it easy for them to sell the space in the

building being constructed and thus raise funds for paying to DDA.)

The committee recommended further that a revised agreement be obtained from such purchasers

incorporating the above terms. When called upon to execute the revised agreement, in 1984, Skipper

raised all sorts of objections and executed it only in the year 1987. Even before permission to enter

upon the plot and to make construction thereon was granted under the revised agreement, Skipper

appears to have been selling the place in the proposed building to various persons and receiving

monies. Once it got the permission to enter upon the plot and to make construction thereon, it became

all the more easy for it to sell the space in the proposed building. It did not pay the first instalment

under the revised agreement in time but only after some delay. It did not pay the second instalment.

Bank guarantees furnished by it in terms of revised agreement were also found to be defective. Every

time the DDA thought of cancelling the agreement on account of the said defaults, an argument was put

forward that it would cause great hardship to hundreds of persons who have purchased space in the

proposed building and that they would be deprived of their hard-earned monies. Skipper has been

making some small token payments from time to time meanwhile.

While the endless correspondence and discussions were going on between Skipper and DDA, Skipper

went to the Delhi High Court by way of a writ petition, CW No. 2371 of 1989, asking for a writ of

mandamus to the DDA to sanction the building plans or in the alternative to grant permission to him to

start construction at his risk. On 19-3-1990, the High Court passed an order permitting Skipper to

commence construction in accordance with the sanctioned plans subject to deposit of a sum of rupees

twenty lakhs in two instalments and Rs. 1, 94, 40, 000 within one month. Against the said order, DDA

came to this Court by way of Special Leave Petitions (C) Nos. 6338 and 6339 of 1990. Meanwhile,

Writ Petition (C) No. 2371 of 1989 came up for final hearing on 21-12-1990. The Delhi High Court

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made an order on that day directing Skipper to pay to DDA a sum of Rs. 8, 12, 88, 798 within thirty

days and to stop all further construction with effect from 9-1-1991 till the said payment was made. It

was provided that in default of such payment, the licence (revised agreement dated 11-8-1987) would

stand determined and DDA would be entitled to re-enter the plot. Reasons for the order were given on

14-1-1991. Skipper failed to deposit the amount as per the direction of the High Court. It approached

this Court by way of Special Leave Petition (C) No. 186 of 1991.

On 29-1-1991, this Court granted an interim order subject to Skipper depositing Rs. 2.5 crores within

one month and another sum of Rs. 2.5 crores before 8-4-1991. Skipper was expressly prohibited from

inducting any person in the building and from creating any rights in favour of third parties. In spite of

the said prohibitory orders from this Court, Skipper issued an advertisement on 4-2-1991 in the leading

newspapers of Delhi inviting persons to purchase the space in the proposed building. It published such

advertisements repeatedly. Special Leave Petition (C) No. 186 of 1991 was ultimately dismissed on 25-

1-1993, whereafter, DDA re-entered the plot and took physical possession of property on 10-2-1993

along with the building thereon free from all encumbrances in terms of the revised agreement/licence

and as provided in the orders of the Delhi High Court dated 21-12-1990/14-1-1991. It also forfeited the

amounts paid till then by Skipper in terms of the revised agreement and the said judgment.

2. 29-1-1991 marks the watershed in these proceedings. Before the said date, Skipper had

collected about rupees fourteen crores from various parties agreeing to sell the space in the proposed

building. Even after 29-1-1991, Skipper issued several advertisements and collected substantial

amounts - rupees eleven crores, according to its own version - from various parties agreeing to sell the

space in the said building. It appears that same space was sold to more than one person and monies

collected. Not only did Skipper brazenly violate the orders of this Court dated 29-1-1991 by issuing

advertisements, it also filed a suit in the Delhi High Court being Suit No. 770 of 1993 seeking an

injunction restraining the DDA from interfering with its alleged title and possession over the plot and

for a declaration that the re-entry by DDA was illegal and void. It also sought for a declaration that it

has discharged all the amounts due to DDA and that nothing was due from it. It obtained interim orders

staying re-auction of the plot.

3. Against the interim order of the High Court staying the re-auction of the plot, DDA approached this

Court by way of Special Leave Petition (C) No. 21000 of 1993. Noticing the conduct of Skipper, this

Court initiated suo motu contempt proceedings against Tejwant Singh and his wife, Surinder Kaur,

directors of Skipper. They were asked to explain (1) why did they institute Suit No. 770 of 1993 in

respect of the very same subject-matter which was already adjudicated by this Court on 23-1-1993, i.e.,

by affirming the orders of the High Court dated 21-12-1990 and 14-1-1991 and (2) why did they enter

into agreements for sale and create interest in the third parties in defiance of the orders of this Court

dated 29-1-1991. After hearing the contemners, this Court found them guilty of contempt of this Court

in the following words :

"We, therefore, invoke our power under Article 129 read with Article 142 of the Constitution and order

as follows : We sentence contemner-Respondent 1, Tejwant Singh to undergo simple imprisonment for

six months and to pay a fine of Rs. 50, 000 (Rupees fifty thousand only). We further sentence

contemner-Respondent 2, Surinder Kaur to undergo simple imprisonment for a period of one month

and to pay a fine of Rs. 50, 000 (Rupees fifty thousand only). In default of payment of fine, the

contemners shall further undergo simple imprisonment for one month. The payment of fine shall be

made within one month from today.

All the properties and the bank accounts standing in the names of the contemners and the Directors of

M/s. Skipper Construction Co. (Pvt.) Ltd. and their wives, sons and unmarried daughters will stand

attached."

4. At that stage, Shri G. Ramaswamy, the learned counsel appearing for the contemners, requested for

deferment of the sentence of imprisonment subject to conditions indicated by him. On the basis of the

said offer, this Court deferred the sentence of imprisonment subject to the following conditions :

"(1) The contemners shall furnish bank guarantee in favour of the Registrar General of this Court in the

amount of Rs. 11 crores (Rupees eleven crores only) on or before 31-3-1995. The guarantee will be of a

nationalised bank or any foreign bank operating in India. The bank guarantee will be given for a period

of one year from the date of furnishing the bank guarantee.

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(2) The contemners shall deposit the entire amount of Rs. 11 crores by a bank draft in the Registry of

this Court on or before 30-11-1995. If they fail to do so, the bank guarantee will become encashable

and will be encashed forthwith after 30-11-1995.

(3) If the contemners fail to give the bank guarantee by 31-3-1995 as aforesaid, the sentence of

imprisonment will become enforceable at once.(4) No application for extension of time either to furnish

the bank guarantee or to make the payments aforesaid, will be entertained by this Court.

(5) The contemners shall not leave the country without the express permission of this Court.

(6) List of properties given by the contemners is taken on record. The contemners will also file a list of

properties held by their sons and unmarried daughters within one week from today.

(7) If and when any property that is attached under this order is sought to be alienated or encumbered to

raise money to pay the liability of Rs. 11 crores stated above, the contemners will be at liberty to

approach the court for permission to do so.

(8) The attachment of the properties and the bank accounts shall stand raised on the contemners

furnishing the bank guarantee as aforesaid.

(9) The order with regard to the disbursal of the amount deposited will be passed after the amounts are

deposited as aforesaid." *

5. The contemners deposited a sum of rupees two crores but failed to deposit the balance. They also

failed to furnish the bank guarantee. As a result of the said failure, they were committed to prison. Both

the contemners have served out their sentence.

6. Meanwhile, DDA invited tenders for the sale of the said plot of land along with the construction

raised thereupon. The highest offer received was in the sum of rupees seventy crores from M/s.

Banganga Investments. It was accepted with the permission of this Court. The consideration has been

deposited with the DDA and the property transferred in favour of the said purchaser. At this stage, the

question arose as to what should be done with the hundreds of persons who have been duped and

defrauded by Skipper and who had parted with substantial amounts on the basis of the fraudulent and

false representations made by Skipper. This Court made a distinction between persons who purchased

the space before 29-1-1991 and the persons who purchased the space thereafter. The first concern of

this Court was to reimburse the persons who purchased space in the said building prior to 29-1-1991.

Their claims were said to be in the region of rupees fourteen crores. Accordingly, this Court directed

DDA to set apart a sum of rupees sixteen crores (out of the said amount of rupees seventy crores) and

to make it available to such purchasers in accordance with the orders of this Court. This Court also

requested Justice R.S. Lahoti of the Delhi High Court to act as a one-man Commission to prepare a list

of persons who had paid the amounts prior to 29-1-1991 and to determine the amount paid by each of

them. After an elaborate enquiry, Justice Lahoti Commission submitted a Report dated 2-2-1996

according to which a sum of rupees 13, 27, 37, 561.59 crores was paid by more than seven hundred

persons. The Commission asked for directions of this Court whether the said persons should also be

paid the interest in addition to the principal, as claimed by them. When the report of the Commission

came up for orders before this Court, we directed that for the time being only principal amount shall be

paid to the said purchasers and that the balance amount along with interest accruing thereon shall be

kept apart. This was done keeping in view the interests of post-29-1-1991 purchasers. It is true that

these persons did purchase notwithstanding the warning notice of DDA but it is equally possible that

many of them may have seen only the subsequent advertisements of Skipper and not the warning notice

of DDA published on 13-2-1991.

7. We may clarify that our order dated 12-2-1996 does not mean that the pre-29-1-1991 purchasers are

not entitled to interest on the amounts paid by them for which they have a legitimate claim. We have

only kept that claim under consideration pending further developments in the matter.

8. We may also mention that this Court had appointed another Commission headed by Justice O.

Chinnappa Reddy, a former Judge of this Court, to enquire into the role played by the officials of the

DDA in the matter and to recommend appropriate action against them. Justice Chinnappa Reddy

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Commission submitted a Report promptly on 7-7-1995, after conducting a painstaking and elaborate

enquiry, on the basis of which this Court had directed disciplinary action to be taken against certain

officers of the DDA.

9. At this stage, several applications have been filed by the post-29-1-1991 purchasers to sell the

properties of Tejwant Singh, his wife and children, which were attached by this Court under its order

dated 8-2-1995 (in suo motu contempt proceedings) and utilise the proceeds so realised to reimburse

them along with interest and damages. Notice of the said applications was given to Tejwant Singh and

Surinder Kaur and to the sons of the said persons whose properties were attached under the aforesaid

orders. We have heard the parties at length on 18-4-1994.

10. S/Shri V.A. Bobde and Dushyant Dave, appearing for the claimants (post-29-1-1991 purchasers)

and Shri Arun Jaitley for the DDA submitted that undergoing the sentence of imprisonment by Tejwant

Singh and his wife Surinder Kaur does not erase their obligation to pay back the amounts to the said

claimants whom they had deliberately and fraudulently induced into parting with substantial amounts in

clear and direct violation of the orders of this Court. They submitted that the order of attachment of the

properties of Tejwant Singh and his wife and children was an order independent from the order of

punishment imposing sentence of imprisonment and that the attachment was meant for realising

amounts necessary for reimbursing the persons defrauded. The attached properties should now be sold

and the proceedings therefrom utilised for paying the post-29-1-1991 claimants, it is submitted. Shri

Arun Jaitley further submitted that the claim of the pre-29-1-1991 purchasers for interest on the

amounts paid by them is still there and has to be kept in mind while passing orders in these

applications. It is submitted that the contemners should not be allowed to keep or enjoy the fruits of

their contempt and that until all the persons defrauded by Skipper are fully re-compensated, the

contemner's liability does not cease.

11. S/Shri Harish Salve and Rajeev Dhavan, appearing for Tejwant Singh and Surinder Kaur

respectively, took the stand that while all the purchasers, whether pre or post-29-1-1991 should

undoubtedly be duty reimbursed, the monies for that purpose should come out of the monies collected

by the DDA on account of the said plot. Interests of justice and considerations of equity, which are the

guiding factors for this Court while acting under Article 142 of the Constitution call for such a

direction. They submitted that as against Rs. 9.82 crores payable to DDA, Skipper has paid more than

rupees fifteen crores in all to DDA. The amounts received from the purchasers has actually been

utilised for raising the construction which has now vested in the DDA in terms of the orders of the

Delhi High Court dated 21-12-1990/14-1-1991. DDA thus not only got back the plot of the land but

also the construction made by Skipper free of any encumbrances. They have realised a sum of rupees

seventy crores by selling the same. In other words, DDA has realised a total of rupees eighty-five

crores on account of the said plot. It is true that they have set apart rupees sixteen crores out of that but

yet they are in possession of about rupees sixty-nine crores of the said money. The claim of post-29-1-

1991 purchasers is in a sum of about rupees eleven crores. An amount of rupees five crores is lying

with the court. Whatever balance amount is required to pay interest to pre-29-1-1991 purchasers and to

pay off the post-29-1-1991 purchasers should come out of the said amount of rupees sixty-nine crores

now with DDA. Learned counsel submitted that on account of various proceedings taken against

Skipper and their directors and the attachment of their properties and the adverse publicity in that

behalf, it has become impossible for them to generate any monies for depositing in this Court. They

requested that a Commission be appointed to determine the value of the structure raised by Skipper on

the said plot and also to determine the amount received by Skipper from post-29-1-1991 purchasers and

to direct that the amount required to pay them should come out of the funds with the DDA.

12. Shri K. Madhava Reddy, learned counsel appearing for the two sons of Tejwant Singh and Surinder

Kaur (Prabhjot Singh and Prabhjit Singh), submitted that the businesses of the sons are independent

and distinct from their parents and that none of the monies received by their parents from the aforesaid

purchasers has been diverted to them or to the companies of which they are directors. In fact, the case

of the third respondent, Prabhjot Singh, is that he has separated from his father and that the company,

Technological Park (P) Limited, at NOIDA (of which he and his wife are directors) has nothing to do

with the funds or activities of their parents. The fourth respondent, Prabhjit Singh, also submitted that

he and his wife are the directors of Tej Properties Private Limited, of which his parents were directors

earlier but that the affairs of Tej Properties are in no way connected with the affairs and funds of his

parents. He is a director of Tej Properties as well as Skipper Properties Private Limited.

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13. DDA has filed a list of properties held by Tejwant Singh, his wife, Surinder Kaur, and their sons

and daughters which according to them really belong to and are the properties of Tejwant Singh and his

wife. They submitted that the various companies created by Tejwant Singh, his wife and his children

are merely fronts and devices to defraud and defeat the claims of the purchasers and that for doing

complete justice between the parties, the corporate veil should be lifted and all the said properties,

which have already been attached, should be proceeded with to realise the amounts necessary for

paying the pre-29-1-1991 purchasers in full (i.e., interest) and also the post-29-1-1991 purchasers. In

particular, Shri Jaitley has pointed out the transaction of lease relating to the property at No. 3,

Aurangzeb Road, New Delhi. The facts brought to our notice are the following : on 1-10-1993, Tej

Properties (P) Limited through its Chairman and Managing Director, Tejwant Singh, executed a lease

agreement in favour of "Maple Leaf Trading Company Limited, a company having its office at 111,

Claremont Road, Dublin, Ireland" for a period of five years (with an option to the lessee to have it

extended for another four years) at a rent of rupees one lakh per month. The lease agreement was to

take effect from 8-10-1993. On 8-10-1993, Maple Leaf executed a lease deed in respect of the said

property in favour of the Embassy of Israel in India, New Delhi for a period of nine years at the rate of

Rs. 8, 78, 360 per month. It is pointed out that Tejwant Singh and his wife, Surinder Kaur, were the

only two directors of Tej Properties and that in 1988 and 1991, one H.S. Sarna and Prabhjit Singh (one

of the sons of Tejwant Singh) were brought in as its directors. It is submitted that this property really

belongs to the contemners and that this property alone is sufficient to realise all the monies due to the

persons defrauded by the said contemners.

* * *

Lifting the corporate veil

24. In Salomon v. Salomon & Co. Ltd. 1897 AC 2 : (1895- 99 ALL ER 33 the House of Lords had

observed, "the company is at law a different person altogether from the subscribers .......; and, though it

may be that after incorporation the business is precisely the same as it was before, the same persons are

managers, and the same hands receive the profits, the company is not in law the agent of the

subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except

to the extent and in the manner provided by that Act."

Since then, however, the courts have come to recognise several exceptions to the said rule. While it is

not necessary to refer to all of them, the one relevant to us is "when the corporate personality is being

blatantly used as a cloak for fraud or improper conduct" [Gower : Modem Company Law - 4th Edn.

(1979) at p. 137.]

Pennington (Company Law - 5th Edn. 1985 at p. 53) also states that "where the protection of public

interests is of paramount importance or where the company has been formed to evade obligations

imposed by the law", the court will disregard the corporate veil.

A Professor of Law, S. Ottolenghi in his article "From peeping behind the Corporate Veil, to ignoring it

completely" says "the concept of 'piercing the veil' in the United States is much more developed than in

the UK. The motto, which was laid down by Sanborn, J. and cited since then as the law, is that 'when

the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend

crime, the law will regard the corporation as an association of persons'. The same can be seen in

various European jurisdictions." [(1990) 53 Modern Law Review 338].

Indeed, as far back as 1912, another American Professor L. Maurice Wormser examined the American

decisions on the subject in a brilliantly written article "Piercing the veil of corporate entity"[published

in (1912) XII Columbia Law Review 496] and summarised their central holding in the following

words: "The various classes of cases where the concept of corporate entity should be ignored and the

veil drawn aside have now been briefly reviewed. What general rule, if any, can be laid down? The

nearest approximation to generalisation which the present state of the authorities would warrant is this :

When the conception of corporate entity is employed to defraud creditors, to evade an existing

obligation, to circumvent a statute, to achieve or perpetuate monopoly, or to protect knavery or crime,

the courts will draw aside the web of entity, will regard the corporate company as an association of

live, up-and-doing, men and women shareholders, and will do justice between real persons."

25. In Palmer's Company Law, this topic is discussed in Part II of Vol. I. Several situations where the

court will disregard the corporate veil are set out. It would be sufficient for our purposes to quote the

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eighth exception. It runs: "The courts have further shown themselves willing to 'lifting the veil' where

the device of incorporation is used for some illegal or improper purpose.... Where a vendor of land

sought to avoid the action for specific performance by transferring the land in breach of contract to a

company he had formed for the purpose, the court treated the company as a mere 'sham' and made an

order for specific performance against both the vendor and the company."

Similar views have been expressed by all the commentators on the Company Law which we do not

think necessary to refer to.

26. The law as stated by Palmer and Gower has been approved by this Court in TELCO v. State of

Bihar [1964 Indlaw SC 109]. The following passage from the decision is apposite: "... Gower has

classified seven categories of cases where the veil of a corporate body has been lifted. But, it would not

be possible to evolve a rational, consistent and inflexible principle which can be invoked in

determining the question as to whether the veil of the corporation should be lifted or not. Broadly

stated, where fraud is intended to be prevented, or trading with an enemy is sought to be defeated, the

veil of a corporation is lifted by judicial decisions and the shareholders are held to be the persons who

actually work for the corporation."

* * *

28. The concept of corporate entity was evolved to encourage and promote trade and commerce but not

to commit illegalities or to defraud people. Where, therefore, the corporate character is employed for

the purpose of committing illegality or for defrauding others, the court would ignore the corporate

character and will look at the reality behind the corporate veil so as to enable it to pass appropriate

orders to do justice between the parties concerned. The fact that Tejwant Singh and members of his

family have created several corporate bodies does not prevent this Court from treating all of them as

one entity belonging to and controlled by Tejwant Singh and family if it is found that these corporate

bodies are merely cloaks behind which lurks Tejwant Singh and/or members of his family and that the

device of incorporation was really a ploy adopted for committing illegalities and/or to defraud people.

The concept of resulting trust and equity

29. In Attorney General for India v. Amratlal Prajivandas [ 1994 Indlaw SC 476 : 1994 Indlaw SC 400]

a Constitution Bench of this Court comprising nine Judges including one of us (B.P. Jeevan Reddy, J.)

dealt with the challenge to the validity of the definition of "illegally acquired properties" in clause (c)

of Section 3(1) of Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976

(SAFEMA). The said Act provided that where a person earned properties by smuggling or other illegal

activities, all such properties, whether standing in his name or in the name of his relations or associates

will be forfeited to the State. While dealing with the justification for such a radical provision, this Court

held : (SCC pp. 89-90, para 43)

"So far as justification of such a provision is concerned, there is enough and more. After all, all these

illegally acquired properties are earned and acquired in ways illegal and corrupt - at the cost of the

people and the Slate. The State is deprived of its legitimate revenue to that extent. These properties

must justly go back where they belong - to the State. What we are saying is nothing new or heretical.

* * *

32. We are of the opinion that the holding in Amratlal Prajivandas [ 1994 Indlaw SC 476 : 1994 Indlaw

SC 400] and in Reid [ 1993 Indlaw PC 3 : 1993 Indlaw PC 3 should guide us while exercising the

extraordinary powers of this Court under Article 142 of the Constitution. The absence of a statutory

provision will not inhibit this Court while acting under the said Article from making appropriate orders

for doing complete justice between the parties [In other words, while acting under Article 142 of the

Constitution, this Court will respect a statute, the absence of a statute or statutory provision will not

inhibit her from making orders necessary for doing complete justice between the parties.]. The

fiduciary relationship may not exist in the present case nor is it a case of a holder of public office, yet if

it is found that someone has acquired properties by defrauding the people and if it is found that the

persons defrauded should be restored to the position in which they would have been but for the said

fraud, the court can make all necessary orders. This is what equity means and in India the courts are

not only courts of law but also courts of equity.

* * *

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What are the directions called for in this matter?

34. In the light of the factual and legal position adumbrated hereinabove, the question arises what are

the appropriate directions to be made in the matter? In other words, the question is what directions and

orders are called for by this Court acting under its contempt jurisdiction under Article 129 and its

extraordinary jurisdiction under Article 142 to do complete justice between the parties before us? On

one hand, the position is that the pre-29-1-1991 purchasers have to be reimbursed in full which means

that they should also be paid interest at the appropriate rate on the amounts advanced by them to

Skipper. (They have only been paid the principal amount in the sum of Rs. 13, 27, 37, 561.59p pursuant

to the Report of Justice Lahoti Commission.) Secondly, the post-29-1-1991 purchasers have also to be

reimbursed in full. According to Skipper, the amounts collected from post-29-1-1991 purchasers is in

the region of rupees eleven crores. The counsel for the petitioners, however, say that some of them are

bogus purchasers set up by Skipper itself to defeat genuine claims. As against these claims, only an

amount of about rupees six crores is now available which is kept in fixed deposits in nationalised

banks. The balance has to be realised. In our opinion, as at present advised, it would be enough for the

above purpose if we proceed against one property, viz., No. 3, Aurangzeb Road, New Delhi, which

appears to us, on the facts and material placed before us, to belong wholly and exclusively to Tejwant

Singh and his wife. We ignore the corporate veil and we ignore the fact that at present their son,

Prabhjit Singh and his wife are the directors. (We have already held that Prabhjit Singh has not

explained in his affidavit how did he and his wife become directors in the place of his parents.) Tej

Properties Private Limited, which is said to own the said property, was initially having only two

directors, viz., Tejwant Singh and his wife, Surinder Kaur. It is Tejwant Singh who executed the lease

deed in respect of the said property in favour of "Maple Leaf" on 1-10-1993, effective from 8-10-1993.

On 8-10-1993 itself, Maple Leaf executed a lease deed in respect of the said property in favour of an

Embassy of Israel in India, New Delhi for a period of nine years at a rent of Rs. 8, 38, 360 per month. It

is crystal clear that the property belongs to Tejwant Singh and the corporate veil and the change of

directorships are all mere devices to screen the said property and its income from their creditors

including the purchasers aforesaid. Tej Properties Private Limited is nothing but a fig-leaf - and that too

an inadequate one - to cover up the reality. The reality is Tejwant Singh, the contemner, who is the

author of all these deals and devices. The transfer of shareholding, if any, between the father and the

son (and their respective wives) must also be treated as a sham transaction. The above course appears

justified and necessary looked at from any angle, viz., (a) that the contemners should not be allowed to

enjoy or retain the fruits of their contempt; (b) the interests of justice, which call for the lifting of the

corporate veil - the said property is in truth and effect the property of Tejwant Singh and members of

his family and must be available to satisfy the claims of the persons defrauded by him; (c) that while

acting under Article 142 of the Constitution, this Court must do complete justice between the parties

and for that purpose, it is necessary to ensure that a person who has defrauded a large number of

persons by issuing advertisements in the leading newspapers published from the capital inviting people

to come and purchase space in the said building in open and brazen violation of clear and specific

orders of this Court should not be allowed to benefit from his fraud and/or contemptuous acts.

35. Accordingly, it is directed that :

(1) the property at No. 3, Aurangzeb Road, New Delhi, shall be attached, if not already attached - and if

it has already been attached, it shall continue to be under attachment;

(2) the Embassy of Israel in India, New Delhi, the lessee of the said property, is requested to deposit the

monthly rent payable in respect of the said building in this Court with effect from the date of receipt of

a copy of this order and continue to deposit the same until further orders. Such deposit in court shall

discharge the Embassy of its obligation to pay rent to" Maple Leaf', its landlord;

(3) Tejwant Singh and his wife, Surinder Kaur, are directed to deposit in this Court a sum of rupees ten

crores within two months from today. In default, steps will be taken to sell the property at No. 3,

Aurangzeb Road, New Delhi by inviting tenders from the public. The said amount of rupees ten crores

is tentatively arrived at as the amount required to reimburse the pre-29-1-1991 purchasers in full, as

explained hereinabove, and also to reimburse the post-29-1-1991 purchasers in full. (This shall not be

treated as the final figure required in this behalf.) While fixing this amount, we have taken into account

the fact that about rupees six crores is now available with this Court as stated supra;

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(4) the attachment of properties belonging to Tejwant Singh, his wife and children, already effected,

including the properties mentioned in the application, IA No. 29 of 1996, filed by the DDA shall

continue to be in force pending further orders. It is, however, open to any of them to come forward with

a proposal to sell any of those properties and if this Court is satisfied about the bona fides of the deal,

the attachment will be lifted on condition that the consideration so received is deposited into this Court.

It is obvious that any such deposit will be treated as a deposit towards the direction regarding deposit of

rupees ten crores contained in Direction No. 3 above;(5) since it is necessary to ascertain the persons

who have paid amounts to Skipper after 29-1-1991 for purchasing the space in the said building and to

exclude the claims of non-genuine persons, we appoint Shri O. Chinnappa Reddy, a former Judge of

this Court, as the one-man Commission to ascertain the number and identity of the persons who have

purchased the space in the building being raised by Skipper after 29-1-1991 and also to determine the

amounts paid by each of them. The Commission is requested to submit its report within a period of six

months, as far as possible. The remuneration and the expenses of Shri Justice O. Chinnappa Reddy will

be borne entirely by the DDA out of the funds now lying with it, as per his terms.

36. Ordered accordingly.

37. Before parting with this case, we feel impelled to make a few observations. What happened in this

case is illustrative of what is happening in our country on a fairly wide scale in diverse forms. Some

persons in the upper strata (which means the rich and the influential class of the society) have made the

"property career" the sole aim of their life. The means have become irrelevant - in a land where its

greatest son born in this century said "means are more important than the ends". A sense of bravado

prevails; everything can be managed; every authority and every institution can be managed. All it takes

is to 'tackle' or 'manage' it in an appropriate manner. They have developed an utter disregard for law -

nay, a contempt for it; the feeling that law is meant for lesser mortals and not for them. The courts in

the country have been trying to combat this trend, with some success as the recent events show. But

how many matters can we handle. How many more of such matters are still there? The real question is

how to swing the polity into action, a polity which has become indolent and soft in its vitals? Can the

courts alone do it? Even so, to what extent, in the prevailing state of affairs? Not that we wish to launch

upon a diatribe against anyone in particular but Judges of this Court are also permitted, we presume, to

ask in anguish, "what have we made of our country in less than fifty years"? Where has the respect and

regard for law gone? And who is responsible for it?

38. On this occasion, we must refer to the mechanical manner in which some of the courts have been

granting interim orders - injunctions and stay orders without realising the harm such mechanical orders

cause to the other side and in some cases to public interest. It is no answer to say that "let us make the

order and if the other side is aggrieved, let it come and apply for vacating it". With respect, this is not a

correct attitude. Before making the order, the court must be satisfied that it is a case which calls for

such an order. This obligation cannot be jettisoned and the onus placed upon the

respondents/defendants to apply for vacating it. Take this very case : a person purchases a property in

auction. He does not pay as per the stipulated terms. He obtains a series of extensions. Still he doesn't

deposit and when the vendor proposes to cancel the allotment, the court is approached and it stays the

cancellation. The vendor (DDA) applies for vacating it but nothing happens except repeated

adjournments. This has happened more than once. We find that as and when Skipper was not able to

manage the DDA, he approached the court and it provided him a breather. He then gets time to manage

the DDA. This went on up to the end of 1990 when fortunately the Delhi High Court came with a tonne

of bricks upon Skipper and which order was affirmed two years later by this Court. Ultimately, no

doubt, Skipper has met its nemesis but meanwhile hundreds of persons are cheated out of their hard-

earned monies; their dreams of owning a flat are shattered rudely.

39. All this means that each of us in this land should wake up to his duty and try to live up to it. We do

not think we need say more.

40. List the matter for further orders on 16-7-1996.

~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~

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Nazir Hoosein v. Darayus Bhathena, (2000) 5 SCC 601


Misra, J.— Leave granted.

2. The present appeal is directed against the order dated 10-2-1999 passed by the Bombay High

Court in AO No. 1058 of 1998 in N/M No. 6325 of 1997 in Suit No. 6559 of 1997 dismissing the

appellants’ appeal from Bombay City Civil Court order dated 9-9-1998 dismissing the aforesaid

appellants’ notice of motion in the aforesaid suit. In the suit the following interim injunctions were

sought:

“(a) Respondents 1 to 3 from acting on the resolution dated 13-11-1997;

(b) respondents from enrolling new members;

(c) Respondents 4 to 8 from acting as Directors of the suit Club and restraining Respondents 1

to 8 and life members enrolled after 7-11-1995 from casting their votes at the AGM;

(d) Respondents 1 to 8 from holding Board of Directors’ meeting dated 19-12-1997; and

(e) for an order appointing Mr Satish Shah, Advocate as Chairman of the meetings of the

Club/Company.”

3. The appellants are the Directors of the Indian Automotive Racing Club (hereinafter referred to

as “the Company”). As per the appellants, Appellant 1 is the Chairman of the Board of Directors of the

said Company. Respondents 1 to 3 are the Directors and Respondents 4 to 8 are additional Directors

allegedly appointed along with 7 others under the challenged resolution dated 29-3-1997. The

appellants challenged this resolution to be illegal and void, as it stood obliterated by the agreed consent

order dated 30-6-1997/2-7-1997 in AO No. 274 of 1997 before the High Court.

4. In order to appreciate the controversy it is necessary to shortly dwell upon certain antecedents

and essential short matrix of facts. At the annual general meeting of the Company held on 29-12-1993

the appellants and Respondents 1 to 3 were elected as Directors and the first appellant as the Chairman

of the Board of Directors. The case of the appellants is, on 8-11-1995 Respondents 1 to 3 with

undercurrent designs, purportedly held a meeting, without serving any notice upon Appellant 1 and

other 4 Directors supporting him and passed the following resolutions:

“(a) to shift the office of the Club to Respondent 1’s office;

(b) to remove Appellant 1 as Chairman;

(c) appoint Respondent 1 as Chairman in his place; and

(d) appoint 12 additional Directors on the Board of Directors.”

5. Thereafter on 13-11-1995, another meeting was held by the same group, viz., Respondents 1 to

3, to approve the minutes of the meeting held on 8-11-1995. On 16-11-1995, the appellants and two

other Directors filed the first Suit No. 7179 of 1995, challenging the said resolutions passed at the

behest of Respondents 1 to 3 and 4 out of the 12 newly appointed Directors. On 18-3-1997, the City

Civil Court by means of an order did not interfere with the resolution, so far as the shifting of the office

and removal of Appellant 1 as Chairman was concerned but injuncted the 12 additional Directors which

included Defendants 4 to 8, from acting as Directors. Aggrieved by one part of the order, viz., non-

interference with shifting of the office and removal of Appellant 1, the appellants filed FAO No. 274

of 1997 before the High Court. On the other hand, Respondents 1 to 3 and 5 additional Directors being

aggrieved by the other part of the order, viz., injuncting 12 additional Directors from functioning filed a

cross-appeal.

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6. Subsequently on 21-3-1997 a notice was issued for a meeting of the Board of Directors for 29-3-

1997 for the co-option of another set of additional 12 Directors, in place of the injuncted Directors

which included Respondents 4 to 8. This led the appellants to file another application on 27-3-1997 for

injunction to restrain these respondents from holding the said meeting. The Court, by an order dated

27-3-1997, however, did not injunct the said meeting, but directed that any resolution passed at the

meeting shall not be implemented for two weeks which was subsequently extended. As scheduled, the

said meeting was held, in which again 12 new additional Directors were appointed, including

Respondents 4 to 8, till such time as the injunction against the first set of twelve additional Directors

remained in operation. Next on 11-4-1997 notices were issued and served upon Directors including

those covered by the aforesaid order dated 27-3-1997, proposing a meeting for 17-4-1997. This,

according to the appellants, was in breach of the order dated 27-3-1997, not to implement the resolution

appointing them as Directors. On an application thereafter made by the appellants, the Court by an

order dated 17-4-1997 recorded the respondents’ statement that co-opted Directors will not be

permitted to participate in the said meeting. That meeting was held on 17-4-1997, under the

Chairmanship of Respondent 1. The appellants though attended the meeting but did so under protest

and without prejudice, which was recorded in the minutes of the meeting. It is relevant to record, in this

meeting, question of the induction of more new life members came up for consideration. Relevant

portion of the discussion as recorded in the minutes is quoted hereunder:

“Mr Hoosein (Appellant 1) raised the topic of new applicant and whether the old practice

would be adopted in deciding membership of new applicant.

Regarding the interview the life member category applicant Mr Bhathena (Respondent 1)

pointed out that in the past each life member applicant was not physically called for the

interview.... Mr Bhathena proposed and Mr G.L. Goenka seconded and it was resolved that all life

members’ applications, as well as any other 3 categories, be invited and become members in their

respective categories.”

7. When this series of ongoing resolutions was going on at the behest of Respondent 1 and the

appellants were protesting repeatedly through various applications in court, as aforesaid, then reached

some understanding between the parties.

8. On 30-6-1997/2-7-1997, the appellants’ appeal from order, as aforesaid, came up for admission

in the High Court. On this date, a consent order was passed that a fresh meeting of the Board of

Directors be held with only those who were on the Board of Directors on 8-11-1995 under the

Chairmanship of Mr Satish Shah, Advocate to consider the earlier agenda of 8-11-1995. Hence, the

High Court passed the following order on 2-7-1997:

“In view of this, appeal stands disposed of civil application also does not survive. Same also

stands disposed of. In view of the fact that appeal has been disposed of, nothing survives in the

suit. Parties to withdraw the suit.”

This is how proceedings in the first Suit No. 6559 of 1997 are said to have culminated.

9. Thereafter pursuant to the aforesaid consent order, a meeting of the Board of Directors was held

on 4-7-1997 under the Chairmanship of Mr Satish Shah. Two major decisions were taken therein. First

16-9-1997 was fixed as the next date for holding the annual general meeting, and secondly, it turned

down the proposal to appoint 12 additional Directors by the group of Respondent 1 by the majority of 4

to 2. When parties are at variance then they try to pull each other down, disputes start cropping up from

insignificant ones to other magnified issues. One of such disputes raised is of the recording of the

minutes of the meeting dated 4-7-1997. According to Respondent 1, it was the prerogative of the

Secretary to write the minutes and thus the minutes recorded by him should be accepted. This dispute is

because of the difference in the recording of the minutes between one recorded by the Secretary of

Respondent 1 and the other submitted by Mr Satish Shah. The significant difference is in the recording

of Item 6 of the agenda of 8-11-1995, under which the appointment of twelve additional Directors was

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considered. There is neither recording nor any reference about this consideration in the minutes

prepared by the Secretary, while in the recording by Mr Satish Shah, it clearly records this. The

relevant part of his report under Item 6 is quoted hereunder:

“To appoint 12 additional Directors whose influence, contact would assist the Club to procure

attractive sponsorships as also those who could spare time to assist in organising and running

events.

Mr Hoosein (Appellant 1) said that this item did not survive because it had been agreed in

principle to hold the annual general meeting. Mr Swadi, Mr Futehally and Mr Bhiwandiwalla

concurred.

Mr Bhathena (Respondent 1) and Mr Goenka opposed. Mr Bhathena said that ‘he was

disagreeing because in his view fresh blood was required on the Board’. Mr Rao abstained. The

view of Mr Hoosein was adopted by a majority of 4 to 2.” (emphasis supplied)

10. It was thought, the aforesaid meeting will resolve the conflict and parties shall restrain

themselves from precipitating any other issue till the annual general meeting. But it was (sic not) so

done. Now the succeeding facts and resolutions gave rise to the cause for the filing of the present

second suit. On 6-11-1997, notice was issued proposing a meeting for 13-11-1997 for the “adoption of

the previous minutes” and for fixing a date for holding the annual general meeting. On 13-11-1997, a

meeting was held in which the appellants raised objection about Respondent 1 presiding over the

meeting instead of Satish Shah and about the presence of Respondents 4 to 8. The appellants’ demand

for fixing an early date of the annual general meeting was overruled and the minutes of the meeting

dated 13-11-1995, 29-3-1997, 17-4-1977, and minutes of the meeting dated 4-7-1997 (held as per

Court’s order under Chairmanship of Mr Satish Shah), as per the minutes prepared by the Secretary of

Respondent 1 and not as prepared by Mr Satish Shah, were approved. Thereafter a notice was served,

proposing for a meeting on 19-11-1977 to approve and confirm the minutes of the meeting dated 13-

11-1997. The appellants attended the meeting and reiterated their demand, but the same was overruled.

Thereafter, on 18-12-1997 the appellants filed the aforesaid Suit No. 6559 of 1997 for the declaration

that the resolutions dated 13-11-1997 and 19-11-1997 are null and void, including the induction of new

life members after November 1995, as also the appointment of 12 new additional Directors which

included Respondents 4 to 8.

11. The respondents contested the said claim of the appellants. Their reply is that the suit is

misconceived, non-maintainable, Mr Satish Shah’s minutes cannot be relied, because it is the

prerogative of the Secretary and it is his obligation to prepare the minutes of that meeting. Further, all

decisions and resolutions other than the resolution dated 8-11-1995 are valid and binding on the

appellants. When the earlier suit was withdrawn all interim orders came to an end.

12. The trial court dismissed the appellants’ injunction application and also the contention that the

consent order dated 30-6-1997 wiped off the earlier resolutions passed by the Board of Directors. The

appellants earlier sought injunction in the earlier suit, against holding of this meeting dated 17-4-1997

in which new life members were to be taken in and the Court did pass an order not to implement any

resolution passed therein. The appellants being aggrieved by the dismissal of the injunction application

filed an appeal before the High Court which was dismissed. The High Court held, there was no

effective resolution annulling, rectifying or modifying the resolution dated 8-11-1995. The Court

rejected the appellants’ contention that order dated 30-6-1997, wiped off all the earlier resolutions

passed. It held, neither party agreed nor the Court set aside the resolution dated 8-11-1995. It ordered

for holding the annual general meeting under the Chairmanship of Shri A.P. Kothari, the Company

Registrar, to hold the election afresh of the Board of Directors. Aggrieved by this the appellants have

filed the present appeal.

13. The main thrust of submission on behalf of the appellants is:

“Whether the consent order dated 30-6-1997 wipes off:

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(i) the resolution dated 8-11-1995, in which:

(a) 12 additional Directors were appointed;

(b) Appellant 1 was removed as the Chairman of the Board;

(c) Respondent 1 was appointed as the Chairman of the Board of Directors; and

(d) the administrative office of the Company was shifted.

(ii) the resolution dated 29-3-1997 appointing the second set of 12 additional Directors in

place of the 12 aforesaid injuncted additional Directors;

(iii) the resolution dated 17-4-1997 enrolling, according to Respondent 1, 57 additional

life members of the Company.”

14. The submission is, on a composite reading of the orders dated 30-6-1977 and 2-7-1997, in the

background of the aforesaid meeting dated 4-7-1997 of the Board of Directors, it clinchingly proves

that the impugned resolution dated 8-11-1995 is scored off. In further support, it is submitted that the

first respondent unambiguously admits this position in his affidavit-in-reply to the affidavit of

Appellant 1 in the notice of motion in Suit No. 6559 of 1997. There Respondent 1 clearly averred that

there could be no dispute that the meeting to be held under the Chairmanship of Mr Satish Shah would

consider the matter de novo and except the resolution passed in the meeting held after 8-11-1995 all

other resolutions are valid, impliedly admit that the meeting and the resolutions dated 8-11-1995 were

not valid. Thus, it proves that the clock was set back to 8-11-1995. Hence all edifices built on it

subsequently, through various resolutions lose their base and also go. In any case, the appointment of

the first respondent as the Chairman of the Board of Directors and of the 12 additional Directors is also

knocked off. In fact withdrawal of both the appeals before the High Court and the suit shows that the

entire dispute including removal of the first appellant as the Chairman, appointment of 12 additional

Directors including induction of life members stood dissolved and settled between the parties. In view

of this, all resolutions passed in a meeting at the behest of the first respondent where he presided as

Chairman, are patently illegal and have no force of law.

15. Challenge to the resolution dated 29-3-1997 is also the same. Its base is also the resolution

dated 8-11-1995, which was also held under the Chairmanship of the first respondent and it also stands

wiped off by the consent order dated 30-6-1997. As said before, when this meeting was to be held, the

appellants applied for injunction to restrain the respondents from holding this meeting. On this, the

Court ordered that any resolution passed in this meeting shall not be implemented. By this resolution,

as aforesaid, second set of 12 additional Directors was appointed.

16. Next challenge is to the resolution dated 17-4-1997. This resolution is also challenged on the

same ground, viz., it was illegally chaired by Respondent 1. Even for this meeting the Court directed

that the resolution passed therein shall not be implemented. Submission is, this meeting was also held

in hot haste to overreach the order of the Court. On 10-4-1997 the aforesaid AO No. 274 of 1997 was

adjourned to 21-4-1997 for admission. Coming to know of this, on 11-4-1997, notice was issued for a

meeting on 17-4-1997. This clearly exhibits the unholy motive of the respondents to overreach the

order of the Court. At this meeting it is said 57 new life members were enrolled. This was opposed by

the appellants in the meeting which was turned down by Respondent 1.

17. For the respondents the aforesaid submissions were challenged. Submission is, both meetings

dated 29-3-1997 and 17-4-1997, were validly held. Even the Court did not grant any stay against

holding of these meetings. These meetings were attended by duly qualified Directors. The meetings

were chaired by Respondent 1 whose appointment as the Chairman was held to be valid by a competent

court by an order dated 18-3-1997 in Notice of Motion No. 6337 of 1995 in the earlier Suit No. 7179 of

1995. Reference is also made to Section 175 of the Companies Act, 1956 — i.e. members present at the

meeting could elect one among themselves to be the Chairman, hence no illegality would arise even

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otherwise, if Respondent 1 presided the meeting. The order by consent on 30-6-1997 did not and could

not wipe off what was done on the aforesaid two dates of meetings. There is no order of the Court

setting aside these resolutions.

18. The crux of the grievance of the appellants which requires our consideration is threefold:

(i) removal of Appellant 1 and the appointment of Respondent 1 as Chairman of the Board of

Directors by means of resolution dated 8-11-1995;

(ii) the induction of 12 additional Directors through resolution dated 29-3-1997; and finally

(iii) the induction of 57 life members through resolution dated 17-4-1997, both of these two

last meetings were presided by Respondent 1.

19. The aforesaid facts reveal that the proceedings of the first suit culminated in the passing of the

consent order dated 30-6-1997/2-7-1997. It was expected that the litigation would come to an end but

that was not to be. The present second suit is filed in view of resolution dated 13-11-1997 which in

effect brings back to life the matter which was the subject-matter of the earlier suit. In the meeting

dated 13-11-1997, the minutes of the meeting dated 13-11-1995, 29-3-1997 and 17-4-1997 including

the minutes of the meeting dated 4-7-1997 as prepared by the Secretary and not by Mr Satish Shah,

were approved. The meeting dated 19-11-1997 approved and confirmed the minutes of meeting dated

13-11-1997. The question is, whether passing of the consent order in the earlier suit obliterates the

meetings and resolutions passed on 29-3-1997 and 17-4-1997. Also what was the resolution passed in

the meeting dated 4-7-1997 and in this context, whether the minutes prepared by the Secretary or what

is prepared by Mr Satish Shah should be accepted.

20. It is very unfortunate, though very common, in any organisation, including companies, there is

a tussle for holding a dominant position to control the functioning of such organisation. It is often said,

“it is not like sportsman spirit”. Meaning, the spirit of a sportsman is treated to be highly cooperative

even in the hour of defeat. He is always in the best of spirit. But such spirit now even in the field of

sports seems to have receded to oblivion. The present Company is also one of such companies, working

in the field of sports. But this spirit between the parties is lacking. The battle of supremacy to control

started between Respondent 1 and the appellant since 8-11-1995 leading to two separate suits and the

battle is still raging for about five years.

21. Now, we proceed to test the submissions for the appellants regarding the consent order

obliterating the resolutions dated 29-3-1997 and 17-4-1997. As we have said, the nucleus of conflict

started on 8-11-1995 when in this Board’s meeting, Appellant 1 was removed and Respondent 1 was

appointed in his place as the Chairman of the Board of Directors and 12 additional Directors were also

appointed. When the first suit was filed by the appellants, they challenged this meeting as it was held

without any notice to them. The very texture of this resolution shows two clear distinctive groups, and

the group of Respondent 1 by removing Appellant 1 came in full control of the Board. Next, another

meeting was held on 13-11-1995 to confirm the resolution dated 8-11-1995. It is at this stage, the

appellants filed their first suit on 16-11-1995 along with injunction application, in which 12 additional

Directors were injuncted to function. However, undaunted, another meeting was held under the

Chairmanship of Respondent 1, of the Board of Directors on 29-3-1997 in which resolution was again

passed appointing another set of 12 additional Directors till injunction against the earlier 12 additional

Directors remained in operation. When this stress and strain between the parties was going on, with

various interim orders of the Court, good sense prevailed on both the parties which led to the passing of

the consent order. Through the consent order dated 30-6-1997 and 2-7-1997, the parties agreed for

holding a fresh meeting of the Board, under the Chairmanship of Mr Satish Shah, to consider afresh

the original agenda of 8-11-1995. In this regard submission for the appellants is, even the respondents

concerned including Respondent 1 understood that agenda was going to be considered de novo. For

this, reliance is on the following affidavit filed by Respondent 1 in reply to the notice of motion filed

before the trial court by the appellants. The relevant portion of the said statement is reproduced below:

“I say that the gravamen of the charge, inter alia, levelled in the previous suit revolved round

the allegation that the meeting of the Board of Directors of the Club held on 8-11-1997 was never

held and no notice therefor was given. In view of the fact that the Club is primarily brought into

existence to promote motor sports, it was felt that no scope would be left for any complaint and

- 108 -


therefore it was agreed that the items of agenda of the said meeting which was held on 8-11-1995

should be convened de novo and under the said Mr Satish Shah, Advocate.”

22. On the other hand, learned counsel for the respondents submits that neither the said consent

order nor the resolution passed on 4-7-1997, in any way set aside any resolutions passed prior to the

said consent order. Thus, it would be deemed that they continued notwithstanding holding of the said

meeting dated 4-7-1997.

23. We have considered the submissions made by the parties including the various orders passed,

both in the earlier and the present suit. In our considered opinion, the culmination of the appeal, the

suit, by its withdrawal as per Court’s order, as a consequence of the consent order indicates one and the

only inference that once the parties agreed to hold a fresh meeting under the Chairmanship of Mr Satish

Shah to reconsider afresh the agenda of the meeting dated 8-11-1995, then it implicitly voices, what

was resolved in the said meeting earlier is wiped off and has become non est. The very reconsideration

of the earlier agenda clinchingly reveals that what was done then is wiped off. How can the earlier

resolution dated 8-11-1995, survive when it is to be considered afresh? Of course, it is open to the

Board to pass the same, modify or pass an entirely different resolution. Thus, the Company would be

bound by the resolution passed in this later meeting. The High Court committed an error of law by

concluding to the contrary. The High Court misdirected itself and misconstrued the consent order that

“neither parties agreed nor did the Court set aside the resolution of the Board of Directors dated 8-11-

1995”. The effect of the order passed by the Court was to undo what was done on 8-11-1995 and

consider the matter afresh. This was done in the background of the appellants’ case that it was held

without notice to the appellants. This is also clearly spelt out from the aforesaid quoted statement of

Respondent 1 himself. The meeting which was held under the Chairmanship of Mr Satish Shah was not

a meeting to confirm, modify or annul the resolutions dated 8-11-1995 but was to consider the agenda

afresh. Hence all that was passed on 8-11-1995 cannot be treated to be alive after the consent order

followed by resolution dated 4-7-1997. Thus, appointment of 12 additional Directors on that date also

goes. So far as removal of Appellant 1 and appointment of Respondent 1 in his place is concerned, it

was fairly agreed to that both will not preside over the meetings of the Board, instead Mr Satish Shah

will preside. In other words, no one could be treated to be the Chairman of the Board.

24. Next we proceed to scrutinise the resolution dated 4-7-1997, which was held as a consequence

of the Court’s order, under the Chairmanship of Mr Satish Shah. But here again we find a dispute is

raised, whether the minutes prepared by the Secretary or the one by the Chairman Mr Satish Shah be

accepted. We find that the minutes recorded are at variance with each other. The relevant variance is

under Item 6. In the Secretary’s report there is no reference of the consideration by the Board for the

appointment of 12 additional Directors, while in the report of Mr Satish Shah it records so under Item

6, which is reproduced below:

“6. To appoint 12 additional Directors whose influence, contact would assist the Club to

procure attractive sponsorships as also those who could spare time to assist in organising and

running events.

Mr Hoosein said that this item did not survive because it had been agreed in principle to hold

the annual general meeting. Mr Swadi, Mr Futehally and Mr Bhiwandiwalla concurred.

Mr Bhathena and Mr Goenka opposed. Mr Bhathena said that he was disagreeing because in

his view fresh blood was required on the Board. Mr Rao abstained. The view of Mr Hoosein was

adopted by a majority of 4 to 2.”

25. Before drawing our conclusion we may refer to Section 193 of the Companies Act, 1956. The

relevant portion of Section 193 is quoted below:

“193. Minutes of proceedings of general meetings and of Board and other meetings.—(1) *

* *

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(1-A) Each page of every such book shall be initialled or signed and the last page of the record

of proceedings of each meeting in such books shall be dated and signed—

(a) in the case of minutes of proceedings of a meeting of the Board or of a committee

thereof, by the Chairman of the said meeting or the Chairman of the next succeeding meeting;

* * *

Explanation.—The Chairman shall exercise an absolute discretion in regard to the

inclusion or non-inclusion of any matter in the minutes on the grounds specified in this sub-

section.

(6) If default is made in complying with the foregoing provisions of this section in respect

of any meeting, the company, and every officer of the company who is in default, shall be

punishable with fine which may extend to fifty rupees.”

With reference to minutes of the proceedings as to who shall initial or sign, sub-section (1-A)

mandates, every page of every book shall be initialled or signed including the last page of the record of

proceedings by the Chairman of the Board. Under the Explanation to sub-section (6) of the aforesaid

section, the Chairman is empowered to exercise an absolute discretion in regard to the inclusion or non-

inclusion of any matter in the minutes. Sub-section (6) makes defaulters for not complying with the

foregoing provisions punishable with fine. Thus, this section casts an obligation on the Chairman of the

Board to authenticate the minutes of the meeting of the Board. Further when the Court directs Mr

Satish Shah to preside over the meeting of the Board, he acts as the Chairman in the said meeting. This

apart, in the past, because of the conflict between the two groups, a via media was found to eliminate

this mistrust by appointing a third agreeable person then even if there be conflict, the minutes prepared

by such third person are to be accepted and not of the other who belonged to one of such conflicting

groups. Hence for all these reasons we have no hesitation to conclude that the minutes prepared by Mr

Satish Shah are to be accepted as authentic.

26. According to the minutes authenticated by Mr Satish Shah, under Item 6, the Board considered

the question of appointment of 12 additional Directors and after discussion between the two contesting

groups, which is also recorded therein, the proposal of Appellant 1 that this item does not survive as it

had been agreed to hold the annual general meeting was accepted and objection of Respondent 1 that

they should be appointed was rejected by a majority of 4:2. Thus, question of appointment of 12

additional Directors came to an end by the passing of this resolution. If this is the position how can

resolution dated 8-11-1995 or resolution dated 29-3-1997, survive so far as appointment of these 12

additional Directors is concerned? So if on 4-7-1997 it was resolved not to appoint 12 additional

Directors then any such resolution including 29-3-1997, cannot be sustained. It would be treated to

have died both on account of consent order and the resolution dated 4-7-1997. The resolution dated 27-

3-1997, was itself a consequential resolution to the resolution dated 8-11-1995, as it appointed second

set of 12 additional Directors in its place till injunction against the first set was in operation. This 27-3-

1997 resolution itself was temporary in nature. Hence we conclude that after passing of the consent

order and passing of the resolution dated 4-7-1997 so far appointment of 12 additional Directors cannot

survive.

27. This leaves us to the last relevant resolution dated 17-11-1997 in which 57 life members were

inducted. This is a meeting admittedly presided over by Respondent 1 of which the appellants had due

notice. Appellant 1 also participated, under protest and without prejudice. So far as those inducted life

members are concerned, we tried to find out from the parties, whether there is any prerequisite or

minimum qualification for their induction. Parties could not point any such. The dispute, if any, could

be that those inducted, were brought in by Respondent 1 to muster his majority in the annual general

meeting.

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28. Learned counsel for the appellants referred to The Conduct of Meetings by T.P.E. Curry and J.

Richard Sykes, 20th Edn., which is quoted hereunder:

“Board meetings.—To constitute a valid Board meeting the following conditions must be

complied with:

(1) The proper person must be in the chair.—His appointment is generally governed by

the articles. Regulation 101 of Table A, for example, provides that the Directors may elect a

Chairman of their meetings and determine the period for which he is to hold office, and that if

no such Chairman is elected, or if at any meeting the Chairman is not present within five

minutes after the time appointed for holding the same, the Directors present may choose one

of their number to be Chairman of the meeting.

An appointment of a Chairman of Directors made in contravention of the articles is void and is

not regularised by mere acquiescence, and consequently resolutions carried by the casting vote of

such a Chairman are inoperative.”

29. Learned counsel for the appellants also referred to a decision of Clark v. Workman1. Relevant

portion of the headnote is quoted hereunder:

“An appointment of a Chairman of Directors made in contravention of articles of association

is void, and is not regularised by mere acquiescence and consequently resolutions carried by the

casting vote of such a Chairman are inoperative.”

30. It cannot be disputed that the Chairman of the Board of Directors is the central figure in

holding the meeting and is the controlling factor in the conduct of the meeting. He authenticates the

minutes of the meeting and performs such other functions as empowered under the Companies Act. A

Chairman is always elected by the Board of Directors thus he has the full support of the majority of

Directors which helps him in the control of the meeting and recording authenticated minutes.

31. In the present case unfortunately since 1994 no annual general meeting could be held both on

account of the aforesaid dispute and also, as per the respondents, because the accounts could not be

finalised. When appointment of Mr Satish Shah to chair the Board meeting was made, both Appellant 1

and Respondent 1 fairly conceded their claim to preside over the meeting. Thus their serious dispute

got temporary respite. Still the question remains, as to who could have presided over the meeting dated

17-4-1997, which was antecedent to the consent order. It is true that by that date consent order was not

in existence and the tussle between the two was continuing. If the resolution dated 8-11-1995

evaporated, the authority of Respondent 1 to preside under it also dissolved, unless some fresh

authority was given to him. Thus without any fresh authority Respondent 1 could not preside over any

Board’s meeting. In fact this meeting dated 17-4-1997, at that point of time was challenged and the

Court on this date injuncted the respondents to implement the resolution passed in this meeting. It is

during continuation of this injunction order the said consent order was passed. Consent order was to

consider 8-11-1995 agenda de novo. In view of this then how could the resolution passed in this

meeting survive after passing of the consent order?

32. In the meeting dated 4-7-1997, no resolution was passed as to who shall henceforth preside

over the meeting of the Board of Directors. From the resolution dated 4-7-1997 it could be construed

that the parties differed over the question as to who shall preside over the meeting till holding of fresh

election of the Board of Directors in the annual general meeting. It is significant in the minutes

recorded by Mr Satish Shah that before Item 1 was taken up Mr Bhiwandiwalla and Mr Bhathena

(Respondent 1) stressed the need to hold an early annual general meeting. Another Director Mr Swadi

also suggested the same for electing a new Board which could finalise the accounts. Finally, Mr

Bhiwandiwalla suggested the following:

“(i) that the accounts be finalised and approved as soon as possible;

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(ii) that all the members of the present Board should resign and an entirely new Board should

be elected; and

(iii) that in any event the annual general meeting should be convened as early as possible even

if the accounts were not ready.

The other members were agreeable to this and it was resolved that the annual general meeting

should if possible be held on 16-9-1997.”

This also indicates that the Board desired holding an early annual general meeting and in favour of all

members of this Board resigning. In this context presiding by Respondent 1 as Chairman of the

meeting held on 17th April, cannot be held to be proper. However, on the other hand a submission is,

even where there is no Chairman or in case the Chairman is not present or as in the present case it is in

dispute, it is open for the Board of Directors to elect anyone to function as such in any meeting. But

this is neither the respondent’s case nor is it shown that he was elected as such on that date. His

authority if at all was only through the resolution dated 8-11-1995. A strong submission for the

respondents was that appointment of Respondent 1 as Chairman was held to be valid by a competent

court of law by order dated 18-3-1997 in Notice of Motion No. 6337 of 1995. But this order was

challenged by the appellants through AO No. 274 of 1997 in the High Court. It is in this extent that

consent order was passed which obliterated various resolutions including of 8-11-1995. So this

submission of the respondents has no force.

33. Lastly, we have considered the question of induction of 57 new life members. So far in their

application no defect could be pointed out. It is true, these new life members are not parties before us.

It will be in the best of interest that question of their induction as life members instead of rejecting, be

placed for consideration, in the annual general meeting to be held by the Company. So we come to the

conclusion, that meeting dated 17-4-1997 was not only not conducted in the proper perspective but it

also suffers from procedural irregularities. This was part of the tussle between the two groups to gain

the majority over the other. However, it would not be proper to reject the life members’ applications.

So in order to keep the interest of the life members, we direct that their cases be placed before the next

annual general meeting to be held for its consideration.

34. Since the dispute, as to who shall preside, is still not resolved, in spite of this long-drawn

litigation which can only come to an end by fresh election of the Board of Directors in the next annual

general meeting, it is proper in the interest of the Company that neither Appellant 1 nor Respondent 1

preside in any Board of Directors’ meeting.

35. Thus, so far the direction of the High Court to hold annual general meeting under the

Chairmanship of Mr A.P. Kothari, the Company Registrar seems to be proper, hence needs no

interference to that extent. The relevant portion of this is quoted hereunder:

“However, it is clear that a meeting of the Board of Directors has been held pursuant to an

order passed by this Court and it is common ground before me that the Board of Directors decided

to hold the annual general meeting of the Company immediately, in this view of the matter,

therefore, in my opinion, it would be just and proper to direct that the annual general meeting of

the Company should be held for holding elections to the Board of Directors of the Company. In my

opinion, considering that the parties are fighting, it would be proper to direct that the annual

general meeting should be held under the Chairmanship of Shri A.P. Kothari, the Company

Registrar.”

36. Hence for all the aforesaid reasons we allow the appeal of the appellants, set aside both the

judgments of the High Court dated 10-2-1999, except to the aforesaid extent, and the trial court order

dated 9-7-1998, and further direct holding of annual general meeting at the earliest under the

Chairmanship of Mr A.P. Kothari, Registrar, Company as aforesaid. Even if any prior meeting before

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the annual general meeting is to be held of the Board of Directors, the same shall also be presided over

by the same Mr A.P. Kothari, Registrar. In view of the aforesaid findings our conclusions are:

(A) Neither Appellant 1 nor Respondent 1 shall preside in any of the meetings of the Board of

Directors.

(B) The appointment of 12 additional Directors cannot be sustained. Hence resolutions dated

8-11-1997, 29-3-1997 and 17-4-1997 stand obliterated in view of the consent order dated 30-6-

1997/2-7-1997.

(C) So far as resolution dated 17-4-1997 for the induction of 57 life members is concerned, in

view of our findings, they shall not be deemed to have been inducted on that date as members but

their induction as such would be placed for consideration before the annual general meeting to be

held later.

(D) The annual general meeting shall be held under the Chairmanship of Mr A.P. Kothari,

Registrar, Company who shall expedite the holding of the annual general meeting at a very early

date, possibly within three months of this order being communicated to him.

37. Accordingly, the aforesaid appeal is allowed. Costs on the parties.

38. Office shall send a copy of this order to Mr A.P. Kothari, Registrar, Company.

~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~


(1998) 6 SCC 218

Bajaj Auto Ltd. v. Company Law Board

Advocates who appeared in this case :

Harish N. Salve, Shanti Bhushan, Sudhir Chandra Aggarwal and R.F. Nariman, Senior Advocates

(Shailendra Swarup, Ms Bindu Saxena, Ms Leena George, K. Ram Kumar, Ms Asha G. Nair, C.

Balasubramanian, Y. Subba Rao, Ms Santi Narayan, Dinesh Mathur, S. Ganesh, K.J. Desai and E.M.S.

Anam, Advocates, with them) for the appearing parties.


KIRPAL, J.— These appeals by special leave arise from the common order of the Company Law

Board (Respondent 1) which had partly upheld the decision of Bajaj Tempo Limited (Respondent 2) in

declining to register the transfer of its shares in favour of M/s Bajaj Auto Limited which had been

purchased by the appellants. These are essentially two groups of shareholders which control these

companies. While “Bajaj Group” has the control of the appellant, it is “Firodia Group” which controls

Bajaj Tempo Ltd.

2. Bajaj Auto Limited (appellant in Civil Appeal No. 3480 of 1986) is the holding-Company of

Bajaj Auto Holdings Limited (appellant in CAs Nos. 3480 and 3420-79 of 1986) and they, along with

other individuals who were members of their group (all of whom are appellants in these appeals) are

the existing shareholders of Bajaj Tempo Limited which is a public limited company. Bajaj Auto

Limited purchased 50 shares of Bajaj Tempo Limited and Bajaj Auto Holdings Limited purchased

13,150 shares of the said Company. These purchases were made in the year 1983 through different

brokers and they were sent to M/s Bajaj Tempo Limited for transfer of shares in the appellants’ names.

By three different resolutions dated 29-8-1983, 27-9-1983 and 19-11-1983, the transfer of shares was

rejected by Bajaj Tempo Limited. The minutes of the meeting dated 29-8-1983 contained the reasons

for refusal to transfer and the resolution passed thereto. The relevant portion of the said minutes is as

under:

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“The Directors, therefore, after the deliberation and considering all aspects unanimously

resolved not to approve the said transfers and declined to register the said transfers considering the

facts briefly stated above and grounds briefly summarised as under:

(1) Further acquisition of shares of this Company by Bajaj Group if permitted will lead to

interconnection between this Company and the companies of the Bajaj Group which is not

desirable in the interest of this Company.

(2) The Bajaj Group is not acquiring the shares of this Company with a view to or for the

purpose of genuine investments but with ulterior and oblique motives and purposes including

with a view to destabilise the management of this Company.

(3) Bajaj Auto Limited and this Company are competitors in business inasmuch as both

are manufacturing light commercial vehicles. The attempt of Bajaj Group to make inroads in

this Company by acquiring large block of shares is to cause detriment and prejudice to the

Company.

(4) In view of the facts stated above, although absolute discretion is conferred under the

Articles of Association of the Company, the Board has carefully considered the matter and has

decided to refuse to register the transfers. The transferees in the circumstances are also not

desirable persons from the larger point of view of the interest of Bajaj Tempo Ltd., as a whole.

Therefore, the proposed transfers are not in the interest of the Company.

RESOLVED that in pursuance of Article 52 of the Articles of Association of the Company,

the transfer of shares submitted in this meeting and hereinbelow mentioned be and are hereby not

approved and the Board of Directors do decline to register the said transfers and the Secretary to

give to the parties notice of this decision refusing the said transfers in the following terms:

‘I have to advise that in the meeting of the Board of Directors held on 29-8-1983 the

Board has decided that it will not give its approval to the transfer of the following shares. The

transfer forms and share certificates are being returned under a separate cover.’ ”

3. It is for the same reason as above that the other transfers were declined by the resolutions dated

27-9-1983 and 19-11-1983.

4. Appeals were then filed by the appellants under Section 111 of the Companies Act, 1956 before

the Company Law Board. On the basis of the pleadings before it and the submissions of the counsel for

the parties, the Company Law Board formulated the following five issues for its consideration:

“1. Whether the appellants and the respondents are rivals in business?

2. Whether the purchases of impugned shares were bona fide investments?

3. Whether the appellants can be termed as undesirable persons?

4. Whether apprehension of interconnection of the respondent-Company with Bajaj Group is

well founded and whether it can be a good ground for refusal to transfer shares?

5. Whether transfer of 7600 shares, sought to be transferred by Smt Suman Jain was intra-

group transfer and if so, whether the respondent-Company was justified in refusing transfer of

these shares?”

5. By a reasoned order, Issues 1, 3 and 5 were decided in favour of the appellants. It came to the

conclusion that the appellants were not rival in business nor were they undesirable persons and by

registering the transfer of 7600 shares, which transfers were intra-group, there would be no change in

the overall holding and, therefore, Bajaj Tempo was not justified in refusing the said transfer. Issues 2

and 4 were, however, decided against the appellants and the effect of this was that refusal to transfer 50

shares in favour of Bajaj Auto Limited and 5550 shares in favour of Bajaj Auto Holdings Limited was

upheld.

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6. In deciding Issue 2, the Company Law Board came to the conclusion that as Bajaj Auto

Holdings Limited was an investment company, it was not convincing that it would invest in the shares

of Bajaj Tempo by way of investment. It further came to the conclusion that the proposed investment in

the shares of the respondent-Company by the appellants was to increase its shareholding and was

motivated. It also noted that the return on the shares of the Company did not appear to be adequate

enough warranting successive purchases of the shares by the appellants.

7. Dealing with Issue 4, the Company Law Board noticed that on 29-8-1983, the total holding of

the appellants’ group was about 23.2% in Bajaj Tempo Ltd. At that time, the interconnection limit

under the Monopolies and Restrictive Trade Practices Act, 1969 (hereinafter referred to as “the MRTP

Act”) was 33 1/3% and the said limit has been reduced to 25% w.e.f. 1-8-1984 as a result of

amendment in the MRTP Act. The Company Law Board was of the opinion that even though at the

time of lodgement of shares the said amendment had not been made, there was a feeling prevalent in

trade and industry that the interconnection limit would be reduced to 25%. It then held that the limit up

to which shares may be allowed to be acquired by any group in the shareholding of the respondent-

Company in such circumstances, has to be the subjective opinion of its Board of Directors and when

the acquisition of the appellants “had already reached critical limit of over 23%, which is not widely off

the mark of 25%, the apprehension existing in the mind of the Board of Directors of the respondent-

Company cannot be assailed”. It, therefore, concluded that the apprehension of Bajaj Tempo Ltd. that it

was likely to get interconnected with the appellants, in the event of impugned transfer of shares being

allowed, was not baseless or ill-founded.

8. Assailing the aforesaid decision of the Company Law Board, Shri Shanti Bhushan and Shri Harish

Salve, learned counsel for the appellants, submitted that the power of the Directors to refuse transfer is

by way of an exception to the rule that the share transfer should generally be accepted by a listed

company. Impugning the findings in connection with Issues 2 and 4 of the Company Law Board, it was

contended that the conclusion of the Board that the return by way of dividend on the shares was very

low is not the only relevant factor in order to determine whether the purchase of shares was by way of

investment. An important factor which has been ignored by the Board was that capital appreciation was

more than ample to offset the low dividend return. It was submitted that refusal to transfer was not in

the interest of the Company and the non-transfer by the Firodia Group, which controls Bajaj Tempo,

was with a view to protect that group’s personal interest. It was also submitted that even if the transfers

were allowed, the shareholding of the appellants would be below 25% limit. In this connection, it was

submitted that it was in the hands of Bajaj Tempo Ltd. to avoid interconnection if any more transfers of

shares was sought for, if with the said transfer the transferability would reach the limit of 25%. Our

attention was also drawn to the fact that at the relevant point of time, Bajaj Tempo was already a

company to whom the provisions of Chapter 3 of the MRTP Act applied by virtue of the provisions of

Section 20(a) of the said Act inasmuch as its assets exceeded 20 crores and, therefore, interconnection

would not have made any difference. For the view we are taking, it is not necessary to refer to or deal

with the other contentions raised by the learned counsel for the appellants.

9. The crucial question is, as to what is the power and scope of the directors to refuse to register the

transfer of shares in the case of a public limited company whose shares are listed on the Stock

Exchange. In declining to register the transfer of shares, power is sought to be derived from Article 52

of the Articles of Association of the Company which reads as follows:

“52. The Board may at its own absolute and uncontrolled discretion decline to register or

acknowledge any transfer of shares, and in particular, may so decline in any cases in which the

Company has a lien upon the shares or any of them, or whilst any moneys in respect of the shares

desired to be transferred or any of them remain unpaid, or unless the transferee is approved by the

Board, and such refusal shall not be affected by the fact that the refused transferee is already a

member. The registration of a transfer shall be conclusive evidence of the approval of the

transferee by the Board:

Provided that the registration of any transfer shall not be refused on the ground of the

transferor either alone or jointly with any other person or persons indebted to the Company on any

account whatsoever except as stated above.”

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10. The power of the Board of Directors to refuse registering the transfer of shares is now settled

when these two adversaries had an earlier round of litigation which culminated in the decision reported

as Bajaj Auto Ltd. v. N.K. Firodia1. That was the case where Firodia Group (who controls Bajaj Tempo

Limited) had applied to Bajaj Auto Limited, one of the appellants in this appeal, for transfer of shares

of Bajaj Auto Limited which had been purchased by the Firodia Group. The Board of

Directors of Bajaj Auto Limited refused to register the transfers, inter alia, stating that N.K. Firodia and

his representatives had acted against the interest of the Company and that it was in the interest of Bajaj

Auto to refuse the transfer. The Company Law Board directed Bajaj Auto to register the transfer which

led to the filing of the appeal in this Court. Bajaj Auto had placed reliance on its Article 52 of the

Articles of Association, which was identical to Article 52 of Bajaj Tempo, and it contended that it gave

the Directors absolute and uncontrolled discretion to decline to register any transfer of shares. Dealing

with the question relating to the discretion of the Directors, it was observed at pp. 554-55 as

follows: (SCC para 12)

“12. Article 52 of the appellant-Company provided that the Directors might at their absolute

and uncontrolled discretion decline to register any transfer of shares. Discretion does not mean a

bare affirmation or negation of a proposal. Discretion implies just and proper consideration of the

proposal in the facts and circumstances of the case. In the exercise of that discretion the Directors

will act for the paramount interest of the Company and for the general interest of the shareholders

because the Directors are in a fiduciary position both towards the Company and towards every

shareholder. The Directors are therefore required to act bona fide and not arbitrarily and not for

any collateral motive.”

This Court then observed that where the directors give reasons, the Court would consider whether they

were legitimate and whether the directors proceeded on a right or wrong principle. In such a case, the

reasons of the directors have to be decided from three points of view. Firstly, whether the directors

acted in the interest of the company; secondly, whether they acted on a wrong principle; and, thirdly,

whether they acted with an oblique motive or for a collateral purpose. In this connection, reference was

made to the observations of this Court in Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala2

where it was observed that “the discretion of the directors would be nullified if it were established that

the directors acted oppressively, capriciously or corruptly or in some other way mala fide”. After

referring to some English decisions, this Court in Bajaj Auto case1 at p. 557 observed thus:

(SCC para 21)

“21. It follows that where the Directors have uncontrolled and absolute discretion in regard to

declining registration of transfer of shares, the court will consider if the reasons are legitimate or

the directors have acted on a wrong principle or from corrupt motive. If the court found that the

directors gave reasons which were legitimate, the court would not overrule that decision merely on

the ground that the court would not have come to the same conclusion.”

The Court then examined the facts of that case dealing with three reasons given by the Bajaj Auto for

refusing to transfer the shares. It observed that the Directors had a hostile feeling against Firodia and

they had the dominant desire to keep Firodia out of the Company. They did not act in the interest of the

Company and their discretion was tainted by unfair conduct and unjustifiable attitude against Firodia.

The Court rejected the ostensible reasons which were given for refusing the transfer of shares and it

observed (at SCC p. 560, para 29) that

“the reason given by the Directors was a camouflage to cover their collateral and corrupt motive of

preserving the hegemony of the Bajaj Group. The motive is corrupt because the Bajaj Group

acted for their personal interest and not in the bona fide general interest of the Company”.

Dealing with the third reason, it was observed as follows: (SCC p. 560, para 30)

“30. The third reason given by the appellant-Company was that the shares were being acquired

by the Firodia Group not with a view of bona fide investment but with a mala fide purpose and evil

design of obstructing the business of the appellant-Company. Acquisition or transfer of shares

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under the articles of the present case does not suffer from any restrictive impediment like pre-

emption or personal objections to the transferees. There is no evidence that the transferees

belonged to a rival concern. Equally, there is no evidence that the Firodia Group ever obstructed in

the management of the Company. On the contrary, the Firodia Group advanced large sums of

money. Firodia was largely responsible for the gradual growth of the appellant-Company and for

the prosperity of the Company. It was therefore an abuse of the fiduciary power of the Directors to

refuse to register transfer of shares.”

In the end, this Court noted that the refusal to register the shares was a sequel to the termination of the

appointment of Firodia as Chief Executive and it is manifest that the Director acted for collateral

reasons and in their own interest.

11. The shoe now is on the other foot. Whereas in the aforesaid case, it is Bajaj Auto which had

refused to register the transfer of the shares in favour of N.K. Firodia & Group, in the present case, it is

the N.K. Firodia-controlled company namely Bajaj Tempo which has refused to register the transfer of

shares in favour of Bajaj Auto and its subsidiary company. The strained relationship between the

groups, and the animosity among them, has been clearly brought out in the aforesaid judgment of this

Court.

12. Mr R.F. Nariman, learned counsel for Respondent 2, however contended that there were no

personal reasons for declining to register the transfer of shares in favour of the appellants. In this

connection, he submitted that during the period September 1982 to July 1983, the Directors of Bajaj

Tempo Limited had approved the registration of as many as 42,350 shares in favour of the appellants. It

was contended that the Board of Directors of Bajaj Tempo Ltd. had acted in bona fide and reasonable

manner even though the share acquisitions by the appellants were part of a plan of action on its part to

acquire a large block of shares of Bajaj Tempo Limited. He submitted that it is only when the said

share acquisitions had crossed the limit of 24% and a razor-thin margin remained before the danger

limit of 25% was reached that the Board decided to draw a line and to put an end to any further share

acquisition by the Bajaj Group, leaving an extremely slender margin of safety of only about 0.7%. He

further submitted that the Board of Directors had acted bona fide in rejecting the share transfer and the

Court should not interfere even though it may not agree with the decision of the Board. There was a

genuine apprehension, it was submitted, that if the appellants were directed to continue to acquire

further shares in Bajaj Tempo Limited, it might result in the Company becoming interconnected with

the Bajaj Group which would result in highly adverse consequences for the Company.

13. We have to consider whether the said apprehension in the mind of the Board of Directors of

that Company was genuine and was it the real reason for rejecting to register the transfer of shares. In

other words, what has to be determined, keeping in mind the principles enunciated by this Court in

Bajaj Auto Ltd. case1 is whether the Board of Directors had acted in the interest of the respondent-

Company.

14. As we see it, the power of the Board of Directors to refuse registration of transfer of shares

must be in the interest of the Company and the general body of shareholders. No doubt in the year

1983, Section 82 of the Companies Act provided that the shares or other interest of any member in the

company shall be moveable property, transferable in the manner provided by the articles of the

company. Article 52 sought to give absolute and uncontrolled discretion to the Board of Directors to

decline to register or acknowledge any transfer of shares. Even then, as already held in Bajaj Auto Ltd.

case1 the Board has to act bona fide, and not arbitrarily and for the benefit of the company as a whole.

In the case of a public limited company which is listed with the Stock Exchange, an important right of

the shareholder is to be able to sell his shares at a favourable price. It is seldom in the interest of the

general body of shareholders that transfer of shares be refused because that will have an adverse impact

on the market price of the shares. Free transferability of shares will not artificially deprive its market

price. This does not mean that if there is a good reason, then the Board has no power to refuse to

register the transfer of shares. This Court while examining the action of the Board of Directors is not

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expected to exercise original appellate jurisdiction and sit in appeal on question of fact. The judicial

review while hearing in appeal from the decision of the Company Law Board would be limited to see

whether there was a bona fide exercise of power by the Board of Directors while refusing to register the

transfer of shares.

15. The Company Law Board in the present case came to the conclusion that at least two of the

reasons stated by the Company while refusing to register the transfer of shares were not correct. It held

that the appellants and Bajaj Tempo were not rivals in business and even though there was hostility

between the managements of the companies, but that by itself could not mean that the appellants were

undesirable persons in the matter of transfer of shares. The only two reasons of the Directors which

found favour with the Company Law Board were that the appellants were not bona fide investors and,

secondly, there was a genuine apprehension about interconnection of the respondent-Company with the

appellants.

16. Reverting to Issue 2, we find that in the resolution of 29-8-1983, what had been stated was that the

appellants were not acquiring the shares with a view to or for the purpose of genuine investment “but

with ulterior motives and purposes including with a view to destabilise the management of this

Company”. The alleged reason, therefore, was that the shares were being purchased with ulterior

motives and purposes and with a view to destabilise the management of the Company. The Company

Law Board appears to have misunderstood this reason and framed the issue as “whether the purchases

of impugned shares were bona fide investments”. It opined that being an investment company, it was

not convincing that the appellants would prefer to invest in the shares of the Company other than the

respondent-Company and the purchases were made so as to increase its shareholding in the respondent-

Company and are, thus, motivated. It also observed that the return on the shares of the respondent-

Company did not appear to be adequate enough warranting successive purchases of its shares and

appeared to be lacking in bona fide. In our opinion, this was not a correct approach. Merely because the

appellants wanted to increase the shareholding cannot by itself be a ground in law for refusing to

transfer the shares. Realising this in the resolution of the Board of Directors, it was alleged that the

purchase was not by way of genuine investment but was made with ulterior/oblique motives and with a

view to destabilise the management of the Company. There is nothing placed on the record which can

possibly persuade anyone to come to the conclusion that the intention of the purchase of shares by the

appellants was with a view to destabilise the management of the Company or with an ulterior/oblique

motive. Prima facie, it appears to us that even if it is assumed that the appellants were trying to

purchase shares with a view to get a controlling interest in the Company, that itself cannot be a ground

for refusing to transfer the shares unless and until it can be shown that the purchasers were undesirable

persons and after gaining control of the Company, they will act against the Company and the

shareholders’ interest. In the instant case, the appellants would not even have 25% shares of the

Company even if the transfer of shares was registered and, therefore, the threat to the management,

assuming that could be a valid reason, could not be regarded as genuine.

17. It was submitted on behalf of the appellants that the Company Law Board overlooked the fact

that the return on the investment of such shares is not only by reason of dividend which is obtained but

the main income which was expected to arise was from the appreciation in value of the shares. It was

submitted by the learned counsel for the appellants that at the time when the purchases were made, the

share price was around Rs 145 per share and presently, it is around Rs 210 per share. In our opinion,

there is merit in this contention. Price appreciation, which may in future lead to issuance of bonus

shares or right shares, in the event of increase in capital, is a very valid and good reason for purchasing

shares of reputable companies by an investor. Therefore, the reason, which is given for refusing to

transfer the shares namely inadequate return on shares, cannot be regarded as being bona fide.

18. As regards the fear of being regarded a dominant undertaking, in the event to there being

interconnection between the appellants and the respondent-Company is concerned, it has been

contended on behalf of the appellants that the sections pertaining to concentration of economic power

in Chapter III of the MRTP Act, i.e., Sections 25 and 26 have been omitted w.e.f. 27-9-1991 and,

therefore, as of today, it would make no difference and the said reason cannot be regarded as valid.

While it is true that the fear of the respondent-Company being regarded as a dominant undertaking as

of today may not arise but what has to be seen is as to whether this could be a genuine apprehension in

the mind of the Board of Directors when in 1983, they had declined to register the transfer of shares.

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The admitted fact is that as on that date, interconnection could have been established only if the

appellants had acquired 33 1/3% shares of the respondent-Company. But, it is contended that in view of

the Sachar Committee’s Report, the Company apprehended that the Act would be amended so that

instead of 33 1/3% shares, it should be 25%. We would, therefore, proceed on the assumption that the

figure of 25% had to be avoided by the respondent-Company.

19. It is an admitted fact that even if the purchase of the shares was registered, the total percentage of

the holding of the appellants’ group would be short of 25%. The existing shareholding at that time was

23.232% and had the transfer of shares been registered then, according to the figures supplied by Mr

Nariman at the time of hearing, the percentage of the holding of the appellants’ group would have risen

to only 23.408%. The learned counsel for the appellants are right in contending that if fear of the

interconnection was the real reason in refusing to register the transfer, then such a reason could not

exist at that moment because even with the registration of the transfer, the total mark of 25% would not

be reached. We are in agreement with the appellants’ submission and are of the opinion that if the

number of shares which were purchased had been such that the total mark of 25% could be reached,

then the action of the Board of Directors could not have been faulted. But with the registration of the

transfer of shares in question, that danger mark would not have been reached. We are unable to accept

as correct the appellants’ (sic respondents’) contention that because the total holding of the appellants’

group would then become “dangerously close” to 25%, it was a good enough reason to refuse transfer.

There may not have been anything to prevent the Company if, after the shares in question had been

registered, any further purchase of shares was made which would have the effect of pushing the holding

of the appellants to 25% mark, to reject those subsequent transfers. As the transfers in question would

not have resulted in reaching the 25% mark, that cannot be regarded as a valid reason or consideration

for refusing the registration of transfer of shares.

20. Faced with this, Mr Nariman, learned counsel, however contended that because of the

provisions of the MRTP Act in determining the interconnection, the shares held by a financial

institution are required to be excluded. He submitted that even if the appellants did not purchase any

further shares, but further purchase by financial institutions of more shares could possibly lead to the

same result namely of the percentage of holding of the appellants’ group going beyond 25%. While it is

true that the shareholding of the financial institutions is not to be taken into account in determining

whether or not two or more bodies corporate are under the same management because of Explanation

IV to Section 2(g) of the MRTP Act, we find that if the shares in question had been registered, and the

existing shareholding of the financial institutions excluded, then the total percentage of shares of the

appellants’ group would come to only 24.405%. For this percentage to push up to 25%, the financial

institutions would have to acquire approximately 27,740 additional shares of Bajaj Tempo Limited,

which may not be very likely. In any case, if such a situation did arise namely financial institutions

purchasing more shares which would result in the danger mark of 25% to reach, there is nothing in law

which would then prevent the Board of Directors of Bajaj Tempo Limited to refuse the registration of

transfer in favour of financial institutions. In other words, just as the Directors can refuse to register

transfer of shares in the appellants’ name in order to avoid interconnection, similarly, and for the same

reason, they could refuse to register transfer of such further purchases by financial institutions if such

purchase would have had the effect of making the appellants interconnected with Bajaj Tempo Limited.

The Company Law Board was, therefore, wrong in rejecting the contention of the appellants that the

apprehension of the respondent-Company that it was likely to get interconnected with the appellants in

the event of the impugned transfer of shares being allowed was baseless and/or ill-founded.

21. In order to see whether the Board of Directors had acted in furtherance of a personal interest or in

the interest of the Company, the resolution dated 29-8-1983 should be read as a whole. It is apparent

that being aware of the state of law, every possible reason was stated in this resolution which could

justify the Directors in refusing to register a transfer. Of the four reasons given by the Board, two of

them were rejected by the Company Law Board, namely that the appellants were competitors of Bajaj

Tempo Limited and that the transferees were not desirable persons from the larger point of view of

interest of Bajaj Tempo Limited. There is also nothing on record to show that the purchase of shares by

the appellants was with ulterior/oblique motives and purposes and with a view to destabilise the

management of the Company. Lastly, we find that the acquisition in question would not have led to the

interconnection between the companies and it was not a bona fide exercise of power by the Directors to

take into account “further acquisition of shares” of Bajaj Tempo Limited which may take place in

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future which may then lead to interconnection. It is the extent of shareholding at that point of time

which had to be taken into consideration and not future acquisition which may or may not take place. It

was submitted by the appellants’ counsel that because of the provisions of Section 108-A of the

Companies Act as it stood at that time, further acquisitions could not take place so as to bring up the

shareholding to 25% without first getting Central Government approval. We, however, need not

examine this aspect because, in our opinion, on the facts which existed on the record, we are satisfied

that the exercise of discretion by the Board of Directors in refusing to register the shares in the name of

the appellants was not bona fide or in the interest of the Company or the general body of shareholders.

Accordingly, its decision not to register the transfer of shares was not correct.

22. For the aforesaid reasons, the appeals are allowed. The impugned order dated 28-7-1986 of the

Company Law Board is set aside and the resolutions dated 29-8-1983, 27-9-1983 and 19-11-1983 of

M/s Bajaj Tempo Limited are set aside and as a consequence thereof, direction is given to Respondent

2 to register the shares in question within four weeks from the date of this judgment. The appellants

will be entitled to cost.

———

† From the Judgment and Order dated 28-7-1986 of the Company Law Board, New Delhi in A.

No. 21 of 1984

1 (1970) 2 SCC 550

2 AIR 1961 SC 1669 : (1962) 2 SCR 339 : (1961) 31 Comp Cas 387

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MODULE IV

LAW AND TRADE PRACTICES

Consumer Protection Act

Objects:

Better protection of interests of consumers.

Provide for establishment of consumer councils and other authorities.

Empower the consumer councils and other authorities to settle consumers’ disputes and

matters connected therewith.

Definitions:

Consumer: A person who buys any goods or who avails of any services for consideration.

Defect: … is in relation to any goods.

Deficiency: … is in relation to any services.

Goods: under this Act have the same meaning as under the Sale of Goods Act, 1930.

Service: means service of any description but does not include any service rendered free of charge or

under a contract of personal service.

Redressal Machinery and Jurisdiction:

There are three tiers:

d. District Forum

e. State Commission

f. National Commission

All have territorial (district, state or country) and pecuniary (money value) jurisdiction. An appeal

from National Commission can be filed in the Supreme Court.

Remedies:

One or more of the following remedies may be ordered:

- remove the defect in goods

- remove the deficiencies in services

- replace the goods

- return the price

- compensation/damages for loss suffered

- discontinue the unfair or restricted trade practice

- not to offer the hazardous goods for sale

- provide adequate costs of litigation to the parties.

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(2004) 2 SCC 278

Before :- S.N. Variava and H.L. Sema, JJ.

Civil Appeal No. 3611 of 2002. D/d. 27.1.2004

Jose Philip Mampillil - Appellant

Versus

M/s Premier Automobiles Ltd. & Another - Respondents

For the Appellant :- In person.

For the Respondents :- Siddharth Dave, Senthil Jagadeesan, V. Ramasubramanian, Ramesh Singh, Ms.

Bina Gupta, Ms. Vanita Bhargava and Ms. Nina Gupta, Advocates.

S.N. Variava, J. - This Appeal has been filed by a party in person, against the Order of the National

Consumer Disputes Rederssal Commission dated 7th December, 2000.

2. Briefly stated the facts are as follows :

The Appellant had placed an order for purchase of a Premier 1.38 Diesel Car manufactured by the 1st

Respondent. The full price was paid by the Appellant. The 2nd Respondent was the Dealer of the 1st

Respondent at Kottayam. When the Appellant went to take delivery of the cases he found defects in the

paint of the car. He therefore complained to 2nd Respondent. 2nd Respondent promised to rectify the

defects and called him against after some days. The Appellant went after some days. He found that the

defects had not been cured. Therefore, he was not willing to take delivery of the car. However, he was

persuaded to take delivery of the car of the assurance that all defects would be cured. At this stage, it

was also noticed that the piston rings of the engine were defective and that there was heavy leakage of

oil. Thereafter the car was repeatedly sent to the dealer for repairs. Each time it was returned claiming

that the defects had been cured. However, in fact the defects were not cured.

3. The Appellant therefore filed a complaint before the District Consumer Disputes Redressal Forum

claiming that there should be an order directing the Respondent to take back the case and to replace it

with a brand new defectless car or to refund the total value with 24% interest thereon. He also claimed

compensation for hardship and mental agony and for costs. The District Forum appointed a

Commissioner to inspect the car. The inspection was done in the presence of the 2nd Respondent. The

Commissioner notes that the notice had been given to the 1st Respondent. However, nobody from 1st

Respondent remained present presumably because their agent was present. The Commissioner in his

report has set out that a large number of defects were found in the car. The District Forum acting on

this report directed repair of the car free of cost and replacement of the engine.

4. Both the Appellant as well as the 1st Respondent went in Appeal to the State Consumer Dispute

Redressal Forum. The State Consumer Forum dismissed the Appeal of the Appellant. The State

Consumer Forum by its Order dated 16th February, 1998, in the Appeal on the 1st Respondent, came to

the conclusion that there was no need to replace the engine, but directed repair of the car free of cost.

5. The Appellant then filed a Revision before the National Consumer Disputes Redressal Commission

which has been summarily dismissed by the impugned Order.

6. We have heard the parties at great length. We have seen the material on record. From the material on

record, it is clear that the care was defective at the time of delivery. There is no doubt hat there were

defects in the paint and that the piston rings of the engine had gone. The submission that the piston

rings got spoiled after the delivery was taken cannot be accepted. The agent of the 1st Respondent, i.e.

2nd Respondent, had acknowledged that the piston rings were defective. They would not have so

acknowledged unless it was defect at the time of the delivery. Had this defect occurred by virtue of the

Appellant's misusing the car, 2nd Respondent would never have accepted responsibility for repair of

the piston rings.

7. It must be remembered that these cars were manufactured in Maharashtra. During those days the cars

used to be driven down to various placed in India by drivers hired by the 1st Respondent. It is a well

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known fact that may drivers drove the cars rashly and negligently. The piston rings of a diesel engine

could only have gone if the car had been run for a long distance without proper lubricants and/or if it

was driven rashly. The piston rings of a diesel engine could never have gone in the small amount of

running which the Appellant did after he took delivery. If by rash and negligent driving the piston rings

of a new car got spoiled, the effect on other parts of the car would also be severe. Therefore, it is quite

believable that the suspension would also have got spoilt. This has been so noted by the Commissioner.

8. In our view, it is shameful that a defective care was sought to be sold as a brand new car. It is further

regrettable that, instead of acknowledging the defects, the 1st Respondent chose to deny liability and

has contested this matter. For this failure in service that Appellant is entitled to the following reliefs :

(a) The Appellant will get the car repaired from any reputed garage or mechanic, at Kottayam, of his

choice. A notice will be given by Registered post with acknowledgement due to the 1st and 2nd

Respondent intimating them the name and address of the garage where the care has been given for

repairs. Within a week of receipt of the notice they shall inspect the car. The repair work will then be

done and the cost thereof will be paid by the Respondents. The liability to pay the repair cost will be

joint and several of both the Respondents. The 2nd Respondent is being held jointly liable as it was the

duty of the 2nd Respondent have refused to deliver a defective car and in any case of have properly

repaired the car during the warranty period. It is clarified that the Garage to whom the car is given will

decide what repair work is to be carried out. Undoubtedly the work of complete overhaul of engine and

full body paint with necessary tin work on the body must be carried out. It will not be one to the

Respondents to dispute the nature of the work or repairs to be carried out. The purpose of granting them

inspection is merely to enable them to know that the car had been given to a Garage for repairs and not

for the purpose of enabling them to dispute the nature of the work required to be done.

(b) After the car is got repaired the Appellant shall, before taking delivery of the car, give a notice to

the Respondents that the repairs are carried out. They shall within a week of the receipt of that notice

inspect the car to ensure that the work claimed to have been done has been done. They shall then

forthwith pay the amount claimed by the Garage for repairs. The Appellant shall be entitled to take

delivery of the car. It is clarified that the liability to pay is, as stated above, joint and several. In the

event of the amount not being paid forthwith, the District Forum shall ensure execution expeditiously

and immediately, if necessary, by making 2nd Respondent pay initially. It will then be for the 2nd

Respondent to claim reimbursement from the 1st Respondent, if in law they are entitled to do so.

(c) There is no doubt that the Appellant had to suffer mental agony in taking delivery of a defective car

after having paid for a brand new car and in taking the car again and again to the dealer for repairs. For

this mental agony and torture, we direct that the Appellant shall be entitled to a sum of Rs. 40,000/-.

The liability to pay this amount shall also be joint and several of both the Respondents. This amount is

to be paid within a period of one month from today. The District Forum shall ensure payment, if

necessary, by execution.

(d) 1st Respondent had unnecessarily filed an Appeal before the State Forum. 1st Respondent is

therefore responsible for the expenses incurred by the Appellant in having to contest the matter all the

way to this Court. The Appellant claims that he has spend more than Rs. 3,00,000/- by way of legal

expenses. He however has no proof that he has spent so much amount. He, however, would have spent

at least Rs. 50,000/-. We therefore, direct the 1st Respondent to pay to the Appellant by way of costs a

sum of Rs. 50,000/-. The same to be paid within one month from today. The District Forum to ensure

payment, if necessary, by execution.

With these directions the Appeal stands disposed of.

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Punjab University v Unit Trust of India and others


Bench: Pinaki Chandra Ghose, C. K. Prasad, JJ.

Where Reported: 2014 Indlaw SC 451; 2014 (4) AWC 4194B; JT 2014 (8) SC 438; 2014(8) SCALE

536

9 July 2014

C.A. No. 400 of 2007, C.A. Nos. 503 of 2008 and 4664 of 2009

The Judgment was delivered by : Pinaki Chandra Ghose, J.

1. Delay in filing Civil Appeal No.503 of 2008 is condoned.

2. Civil Appeal No.400 of 2007 has been filed by the Punjab University which is a

statutory/autonomous body constituted under the Punjab University Act, 1947 for imparting education

to the general public. Civil Appeal No.503 of 2008 is the cross appeal Reason: filed by the Unit Trust

of India. Both the aforementioned appeals arise against the impugned judgment dated October 17, 2006

of the National Consumer Disputes Redressal Commission (hereinafter referred to as "National

Commission") in Original Petition No.97 of 2004, which was filed by Punjab University, being the

complainant against the Unit Trust of India (hereinafter referred to as "UTI"). Civil Appeal No.4664 of

2009 filed by the UTI arises against the impugned order dated April 17, 2009 passed by the National

Commission in Original Petition No.51 of 2005, which has been filed by the complainant Punjab

Agriculture University against the opposite party being the UTI.

3. As the consumer complaint filed in both the matters pertains to the same scheme being the

"Institutional Investors Special Fund Unit Scheme, 1998" (hereinafter referred to as "IISFUS-98") in

which the Punjab University (complainant in Original Petition No.97 of 2004) and Punjab Agriculture

University (complainant in Original Petition No.51 of 2005) invested and the National Commission

while passing the order in Original Petition No.51 of 2005 relied upon its earlier decision rendered in

Original Petition No.97 of 2004, all the matters were heard together and are being disposed of by

means of this common judgment.

4. To understand the controversy in these appeals, we will briefly discuss the factual matrix, which for

the sake of brevity is limited to the facts extracted from Civil Appeal No. 400 of 2007 and is stated as

under:

4.1. Punjab University employs thousands of employees for the smooth functioning of the University

and for this purpose it receives grants from the Central Government as well as from the State

Government for making payment to its employees towards salaries, provident funds, gratuity etc. The

University has a contributory Provident Fund Scheme for its employees and its fund is maintained and

administered by the University. In the year 1993, Punjab University invested an amount of Rs.9.6

crores in the "Institutional Investors Special Fund Unit Scheme-93" (hereinafter referred to as "IISFUS-

93") of UTI, which was an open ended scheme.

4.2. The amount was invested with the reinvestment option of the dividend and the said amount became

Rs.19.78 crores on termination of the scheme by the UTI on March 31, 1998. This Scheme guaranteed

protection of original capital and assured a return of 16% per annum payable half yearly. The IISFUS-

93 Scheme was unilaterally terminated by the UTI w.e.f. March 31, 1998 and the maturity amount

became Rs.19,78,26,299.44p.

4.3. Thereafter, in the year 1998, another Scheme i.e. IISFUS-98 was floated by the UTI and Punjab

University invested an amount of Rs.19 crores which was received by it on the maturity of IISFUS-93

with a specific understanding that the dividend receivable during the Scheme period would be

reinvested and it would be refunded with a minimum interest at the rate of 13.5% per annum.

4.4. In view of the conversion of Rs.19 cores from IISFUS-93 to IISFUS-98, the University also made

an investment of Rs.4.5 crores. This investment was made out of the funds "Foundation for Higher

Education & Research". The Head Office of UTI at Mumbai issued two IISFUS-98 certificates for

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1,90,00,000 units and 45,00,000 units worth Rs.19 crores and Rs.4.5 crores respectively, with each unit

having a face value of Rs.10/-. The dispute in this matter revolves around the question as to whether the

University is entitled to interest at the rate of 13.5% on the reinvested amount i.e the dividend which is

reinvested with the UTI.

4.5. On June 4, 2003, the UTI sent the cheques for the maturity amount of Rs.30,45,23,910.23 and for

Rs.7,13,81,520/- drawn on UTI Bank Limited and also furnished the details of the maturity payments

against the investments. On receiving the cheque for Rs.30,45,23,910.23, being the maturity amount of

Rs.19 crores from the UTI, the appellant University was surprised and shocked as according to the

"Terms of Offer" of IISFUS-98, the maturity proceeds would be Rs.48,76,88,935.12/- which is higher

than the amount received. The University served a legal notice to the UTI for the deficit payment of

Rs.18,31,65,024.89 and Rs.4,21,93,558/- along with interest. On November 10, 2004, the University

filed a complaint, being Original Petition No.97 of 2004, before the National Commission. The

contention of the appellant-University before the National Commission was that they were assured that

the dividend income would be reinvested in further units at Net Asset Value (hereinafter referred to as

"NAV") and on those units also, in any case, they were assured that they would get minimum return @

13.5% per annum and that it would be repurchased at par i.e. @ Rs.10/-. The respondents filed a

response to the said complaint filed by the appellant University.

4.6. The National Commission vide its order dated October 10, 2006 dismissed the said complaint filed

by the appellant-University 6 on merits. However, the Commission held that the complaint of the

appellant-University is maintainable under the Act for deficiency of services by the respondent-

Institution. Hence, the appellant University is before us challenging the order passed by the National

Commission and the respondent-Institution is challenging the locus standi of the appellant-University

before the National Commission in its cross-appeal before us.

5. The case of the appellant being Punjab University is that UTI failed to honour the assurance of

13.5% per annum returns and that they were in breach of contract as they invested more than 20% in

equity markets owing to which the NAV fell and the same amounts to deficiency of services. It has

been further submitted by the learned counsel appearing on behalf of the appellant that the respondents

failed to disclose the details of the alleged Non-Performing Assets and also failed to disclose the efforts

made by them to recover Non-Performing Assets and how they intended to treat them. It has also been

submitted that the National Commission was incorrect in considering the offer document which was

not binding on the parties especially in the light of the fact that UTI did not give them the offer

document and they were only given a letter dated March 9, 1998 addressed by the Executive Director

of UTI, terms of offer and the conversion application but not the offer document. It has been lastly

contended that the impugned order is incorrect in view of the fact that the appellant as per the terms of

offer was required to read the offer document without the same being binding on the parties and that

the terms pertaining to the Development Reserve Fund were not honoured.

6. In addition to the above, the Punjab Agriculture University the complainant in Original Petition

No.51 of 2005, being the respondent in Civil Appeal No 4664 of 2009 through the learned counsel

appearing on its behalf submitted that the investment made by the appellant University in the IISFUS-

98, cannot come under the term "commercial" as per the meaning of the word "commerce" as has been

held by the National Commission in the impugned judgment. For this purpose, he relied upon the

decision of this Court in Laxmi Engineering Works vs. P.S.G. Industrial Institute, (1995) 3 SCC 583

1995 Indlaw SC 126.

7. Learned counsel for Punjab Agriculture University further submitted that in the light of the specific

findings of the National Commission that "no benefit by way of profit was to accrue to the

complainant, improving its balance-sheet", there was no question of the University making any profit

and even if the University was making any profit after paying the statutory dues to its employees, it

cannot be called a commercial purpose as it had invested the money on the basis of the promise made

by UTI that the University would be paid interest at the rate of 13.5% per annum for the investment

made in the IISFUS-98, for the reason that the scheme was open only to the institutions, the UTI was

charging a consideration for the scheme floated by it.

8. It was further submitted by the learned counsel for the appellant University that the investors who

deposited their money in the UTI Scheme are the consumers and in the event of a breach by the UTI in

respect of the promise made by it, it would be open to them to approach the Consumer Forums for

"deficiency" of service, and the UTI cannot take a plea that the investments were made for profit and

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not for earning livelihood. The counsel of the Punjab Agriculture University concluded his arguments

by submitting that a distinction has to be made as to how the goods are further used; merely because

institutions at the invitation of the UTI had invested money in IISFUS-98, they cannot be called as

commercial people just because the investment is made for the purpose of earning a profit, and if such a

narrow view is taken then the institutions who deposit money with the financial institutions in order to

earn interest, in furtherance of their obligation of discharging their duties, would be deprived of

litigating their cases for breach of promise under the Act.

9. Mr. Amarendra Sharan, learned senior counsel appearing on behalf of UTI on the other hand,

submitted that the complainant Universities do not fall under the term "consumer" as defined u/s.

2(1)(d) of the Act and the respondent-UTI was not providing any "services" as defined u/s. 2 (1)(o) of

the Act and hence the complainant Universities are not entitled to any relief before the National

Commission. We will reproduce S. 2(1)(d) of the Act for ready reference:

"(d) 'Consumer' means any person who,-

(i) buys any goods for a consideration which has been paid or promised or partly paid and partly

promised, or under any system of deferred payment and includes any user of such goods other than the

person who buys such goods for consideration paid or promised or partly paid or partly promised, or

under any system of deferred payment, when such use is made with the approval of such person, but

does not include a person who obtains such goods for resale or for any commercial purpose; or

(ii) hires or avails of any services for a consideration which has been paid or promised or partly paid

and partly promised, or under any system of deferred payment and includes any beneficiary of such

services other than the person who 'hires or avails of the services for consideration paid or promised,

or partly paid and partly promised, or under any system of deferred payment, when such services are

availed of with the approval of the first mentioned person but does not include a person who avails of

such services for any commercial purpose;

Explanation.- For the purposes of this clause, "commercial purpose" does not include use by a person

of goods bought and used by him and services availed by him exclusively for the purposes of earning

his livelihood by means of self-employment."

10. It is the contention of the learned senior counsel appearing for the UTI that from the definition of

"consumer" as quoted above, it is clear that "consumer" means any person who hires or avails of any

services for a consideration, but does not include a person who avails of such services for any

commercial purpose and the "commercial purpose" does not include services availed by him

exclusively for the purposes of earning his livelihood by means of self-employment. Learned senior

counsel submitted that the services of participating in the Schemes of the UTI are for commercial

purpose if the same are not availed by any person exclusively for the purposes of earning his livelihood

by means of self-employment. He further submitted that as the University invested the money in the

UTI's Scheme for the purpose of getting higher returns through the Stock Market for commercial

enrichment of its fund, and no consideration was charged by the UTI for the returns on investment, the

University is excluded from the definition of "consumer".

11. Mr. Sharan, learned senior counsel further submitted that the University is not availing the Schemes

exclusively for the purposes of earning its livelihood by means of self-employment inasmuch as the

University's livelihood is by imparting education for consideration from students in the form of tuition

and other allied fees/charges and this activity of the University is not 'self-employment'. That it is an

admitted fact that the services availed by the University were neither for their self-employment nor for

their livelihood and therefore the transactions were for the purpose of investment in the Stock Market

with the object of earning profit and a higher rate of return and thus it would be for 'commercial

purpose'.

12. Mr. Sharan, learned senior counsel drew our attention to the fact that the University invested the

monies of the CPF/GPF and Pension Funds and it admitted before the National Commission that the

payment of pension to the pensioners/family pensioners is also made from the interest accrued from

these investments. As per Mr. Sharan, the aforementioned clearly established that the investment by the

University in the Stock Market is for earning profits and that these risks for higher returns are purely

commercial ventures with clear intention and motive to achieve the purpose of higher commercial

benefits to the University so as to enable it to discharge its liability of payments to the pensioners.

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13. Mr. Sharan, learned senior counsel further submitted that even assuming, without admitting, that

the UTI was providing services to the University, there is no deficiency in services as alleged by the

University. It is Mr. Sharan's case that the University opted for the reinvestment option and UTI

reinvested the income into further units at the then prevailing NAV and at the end of the Scheme, the

UTI has redeemed the parent units at par in terms of the Offer Document, and the reinvested units were

redeemed at the prevailing NAV rate in terms of the Scheme.

14. In addition to the above, Mr. Sharan submitted that the National Commission failed to appreciate

that the investment in the IISFUS-98 was of "commercial nature" as it provided higher return at the rate

of 13.5% per annum on reinvestment in commercial venture in the Stock Market Mutual Funds and/or

Debt market for earning higher commercial profit. The entire investment made in the scheme was for

the purpose of getting higher commercial returns and thus it is purely a commercial purpose.

15. Learned senior counsel for the UTI further submitted that the National Commission erred in not

taking into account the provisions of the IISFUS-98 but the fact that the investments were being made

from the funds generated by Employees Pension and Provident Funds and that the instant investment

made by the University for a commercial consideration, is itself a commercial venture. He concluded

his arguments by submitting that there was no direct investment by the individual employees nor they

were beneficiaries of higher income and it was purely an Institutional investment and the beneficiary of

such investment was only the Institution. Individual employees would not have been paid the higher

rate of interest on their EPF and pension contribution but they would have been entitled to fixed rate of

interest as per the applicable Provident Fund Schemes, irrespective of whether the funds were invested

or not. In support of his arguments, Mr. Sharan relied upon the decisions of this Court in Morgan

Stanley Mutual Fund v. Kirtick Das, (1994) 4 SCC 225 1994 Indlaw SC 342, and Laxmi Engineering

Works 1995 Indlaw SC 126 (supra).

16. The broad arguments of Mr. Sharan on merits are that UTI had instituted a closed ended IISFUS-98

for five years for Institutional Investors who wanted to invest large amounts in an exclusive Scheme

and that as per IISFUS-98, there were two options available to the investors, first option being that UTI

assured income of 13.5% on the invested amount and second option being that the investor had an

option to choose reinvestment of income @ 13.5% into further units, income of which would go to the

account of the investor. Punjab University had opted for the "reinvestment option" on its own volition,

which is evident from the application form duly signed on behalf of Punjab University and as per the

"reinvestment option" of IISFUS-98, all unit holders had an option to reinvest the income received @

13.5% annually on the outstanding units into further units at NAV in terms of Cl. XXVII of the 'offer

document' of the IISFUS-98, as per which the units allotted under the reinvestment option under Cl.

XXVII are not subject to the conditions and stipulations governing the parent units in respect of the

minimum holding, repurchase and other matters. That as per Clause XXVII, all the unit holders

including the complainant University under IISFUS-98 were paid maturity amount as per the

provisions of the Scheme i.e. the parents units were repurchased at par as guaranteed and accumulated

units acquired by way on reinvestment option at NAV prevailing at the time of maturity. That as per the

Scheme the income of the University was reinvested annually by UTI at the prevailing NAV as per the

provisions of the Scheme. Furthermore, the assurance given by the letter dated March 9, 1998 by the

Chairman of the UTI was with regard to the return of 13.5% per annum on the capital invested, and

along with the said letter the Terms of Offer were enclosed, which gave an option to the investor to

receive the amount of 13.5% p.a. in cash or to reinvest the said return by purchasing UTI units; the

Terms of Offer also provided that the option for reinvestment of income/return would be on prevailing

NAV without any sales load. Mr. Sharan concluded his arguments by submitting that in terms of the

above submissions the National Commission correctly dismissed the complaint of Punjab University on

merits.

17. Having heard the arguments of the parties concerned and after perusing the documents produced

before us, we find that the primary question to be answered in the present appeals is whether the

complainant-Universities fall within the ambit of the definition of "consumer" as laid down in S.

2(1)(d) of the Act and that the "services" hired by them are not for any "commercial purpose". Based

on the answer in the aforementioned question we need to consider whether the learned Commission has

correctly dismissed the complaint on merits.

18. We noticed that in the explanation given u/s. 2(1)(d), by means of an amendment in 2003 (w.e.f.

March 15, 2003) the term "sub-clause (i)" was substituted with "clause" to further widen the scope of

the applicability of the explanatory clause. The quandary which exists thus in light of the amendments



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is whether services availed by the complainants (being investment in the IISFUS-98 made through

UTI) precludes them from being consumers under the Act by virtue of those being availed for

"commercial purpose". To determine the same we will discuss the various interpretation of the term

"commercial purpose".

19. This Court in Laxmi Engineering Works 1995 Indlaw SC 126 (supra) has dealt with the meaning of

the term "commercial purpose" vis-'-vis the definition of "consumer" most exhaustively and the

position remains the same till date. We will refer to the relevant portion of the said decision as under:

"Now coming back to the definition of the expression 'consumer' in S. 2(d), a consumer means in so far

as is relevant for the purpose of this appeal, (i) a person who buys any goods for consideration; it is

immaterial whether the consideration is paid or promised, or partly paid and partly promised, or

whether the payment of consideration is deferred; (ii) a person who uses such goods with the approval

of the person who buys such goods for consideration (iii) but does not include a person who buys such

goods for resale or for any commercial purpose. The expression "resale" is clear enough. Controversy

has, however, arisen with respect to meaning of the expression "commercial purpose".

It is also not defined in the Act. In the absence of a definition, we have to go by its ordinary meaning.

"Commercial" denotes "pertaining to commerce" (Chamber's Twentieth Century Dictionary); it means

"connected with, or engaged in commerce; mercantile; having profit as the main aim" (Collins English

Dictionary) whereas the word "commerce" means "financial transactions especially buying and selling

of merchandise, on a large scale" (Concise Oxford Dictionary).The National Commission appears to

have been taking a consistent view that where a person purchases goods "with a view to using such

goods for carrying on any activity on a large scale for the purpose of earning profit" he will not be a

"consumer" within the meaning of S. 2(d)(i) of the Act.

Broadly affirming the said view and more particularly with a view to obviate any confusion the

expression large-scale" is not a very precise expression the Parliament stepped in and added the

explanation to S. 2(d)(i) by Ordinance/Amendment Act, 1993. The explanation excludes certain

purposes from the purview of the expression "commercial purpose" - a case of exception to an

exception."

It must be noted that in the aforesaid decision this Court was dealing with 'sale of goods', however, the

Bench in all its wisdom made it clear that post the 1993 amendment, what is 'commercial purpose' shall

be governed by 'the facts of each case'. This Court further held that the Explanation added by way of

amendment is clarificatory in nature and as the Act always meant the same, the amendment will apply

to all pending proceedings as well.

20. This Court in Laxmi Engineering Works 1995 Indlaw SC 126 (supra) relying upon another

judgement of this Court in Lucknow Development Authority vs. M.K. Gupta, (1994) 1 SCC 225 1993

Indlaw SC 200, observed as under:-

"In Lucknow Development Authority v. M.K. Gupta 1993 Indlaw SC 200 the question was whether a

public authority engaged in constructing and selling houses can be said to be rendering a 'service' and

whether the person purchasing such houses can be called a 'consumer' within the meaning of the said

definition. While answering the question in the affirmative, a Bench of this Court (Kuldip Singh and R.

M. Sahai, JJ) also examined the scheme and object of the Act and the ambit of the definition of the

expression 'consumer'. The following observations are apposite :

"To begin with the preamble of the Act, which can afford useful assistance to ascertain the legislative

intention, it was enacted, 'to provide for the protection of the interest of consumers'. Use of the word

'protection' furnishes key to the minds of makers of the Act. Various definitions and provisions which

elaborately attempt to achieve this objective have to be construed in this light without departing from

the settled view that a preamble cannot control otherwise plain meaning of a provision. In fact the law

meets long-felt necessity of protecting the common man from such wrongs for which the remedy under

ordinary law for various reasons has become illusory.

xxx xxx xxx xxx

The word 'consumer' is a comprehensive expression. It extends from a person who buys any commodity

to consume either as eatable or otherwise from a shop, business house, corporation, store, fair price






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shop to use of private or public services. In Oxford Dictionary a consumer is defined as, 'a purchaser

of goods or services'. In Black's Law Dictionary it is explained to mean, 'one who consumes'.

Individuals who purchase, use, maintain, and dispose of products and services. A member of that broad

class of people who are affected by pricing policies, financing practices, quality of goods and services,

credit reporting, debt collection, and other trade practices for which State and Federal Consumer

Protection Laws are enacted'. The Act opts for no less wider definition.

xxx xxx xxx xxx

It is in two parts. The first deals with goods and the other with services. Both parts first declare the

meaning of goods and services by use of wide expressions. Their ambit is further enlarged by use of

inclusive clause. For instance, it is not only purchaser of goods or hirer of services but even those who

use the goods or who are beneficiaries of services with approval of the person who purchased the

goods or who hired services are included in it.

The legislature has taken precaution not only to define 'complaint', 'complainant', 'consumer', but even

to mention in detail what would amount to unfair trade practice by giving an elaborate definition in

clause . and even to define 'defect' and 'deficiency' by classes (f) and (g) for which a consumer can

approach the Commission. The Act thus aims to protect the economic interest of a consumer as

understood in commercial sense as a purchaser of goods and in the larger sense of user of services."

It is thus seen from the above extracts that S. 2(1)(d)(i) is discussed exclusively by this Court. We are

of the opinion that cls. (i) and (ii) of S. 2(1)(d) of the Act must be interpreted harmoniously and in light

of the same, we find that Explanation following S. 2(1)(d)(ii) of the Act would be clarificatory in nature

and would apply to the present case and as held by this Court in Laxmi Engineering Works 1995

Indlaw SC 126 (supra), the term "commercial purpose" must be interpreted considering the facts and

circumstances of each case.

21. U/s. 20(6) of the Consumer Protection Act, 1986 of the United Kingdom, the definition of the term

"consumer" is thus:

"Consumer-- (a) in relation to any goods means any person who might wish to be supplied with the

goods for his own private use or consumption;

(b) in relation to any services or facilities, means any person who might wish to be provided with the

services or facilities otherwise than for the purposes of any business of his; and

(c) in relation to any accommodation, means any person who might wish to occupy the accommodation

otherwise than for the purposes of any business of his;"

As per Stroud's Judicial Dictionary the term "commercial" is defined as under:

"Commercial- (1) Commercial action includes any clause arising out of the ordinary transactions of

merchants and traders and, without prejudice to the generality of the foregoing words, any cause

relating to the constructions of a mercantile document, the export or import of merchandise,

affreightment, insurance, banking, mercantile agency and mercantile usage

(2) An incorporated canal company whose profits arose from tolls, was held a 'commercial company',

or a company associated for "commercial purposes," and, as such, liable to become bankrupt under

Joint Stock Companies Act 1844."

Thus, the words 'commercial purposes' would cover an undertaking the object of which is to make a

profit out of the undertakings. In the present case the services of UTI were availed by the complainant

for the betterment of their employees, that such an investment was made, and it is to be made clear that

no benefit by way of profit was to accrue to the complainant, improving its balance-sheet, in view of

the definition of the word 'commerce' given above, under no circumstances, the appellant could be said

to be indulging in any 'commercial' activity, thus excluding him from the definition of 'consumer' as

enshrined in the Act.

The intent of the Universities in the present dispute is not profiteering and the same is for benevolent

interest and there is no intention whatsoever that the investment is made for any commercial purpose or



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gain and therefore we find that the complainant Universities fall within the definition of "consumer"

under the Act and the complaints are maintainable before the National Commission.

22. Now, we need to consider whether in terms of the offer, is there any deficiency of services. The

National Commission's findings regarding the same are as under:

"The terms of the offer specifically provides that the UTI would pay an assured return of 13.5% p.a. for

all the 5 years of the scheme. The said return (income) for the first year was agreed to be paid in July,

1998. Thereafter, income for the subsequent years was to be paid in July each year. The balance period

from 1st July, 2002 to 31st May, 2003 the income was to be paid in May, 2003. After this, option was

given to the investors to reinvest the income at prevailing NAV. On maturity it is guaranteed that

repurchase price will not be less than the par value of the units, i.e. Rs.10/-.

However, there is no such guarantee for premature repurchase and the purchase price will depend on

NAV. Further, income assured under the scheme and protection of capital on maturity is guaranteed by

the Development Reserve Fund of the Trust.

With regard to capital invested, admittedly, the units are repurchased at par value of unit, i.e. Rs.10

and not at NAV.

Thereafter, the terms and conditions are provided in offer document. One of the highlights provides

that capital invested in the scheme will be protected on maturity and the units would not to be

redeemed below par.

However, it is made clear that there is no such guarantee for units purchased from the return/dividend.

It is true that there is vagueness in this term. There is no clarification whether the said term is

applicable to premature repurchase of the units or repurchase of units purchased from the yearly

return, i.e. dividend.

However, this is to be read along with para-X which provides method of repurchase of units. In this

also, the same phraseology is used as stated above. However, the clause makes it clear that return or

dividend at the rate of 13.5% p.a. is to be reinvested on the basis of NAV, that means, if the price of the

unit is Rs.9/-, the income would be invested in units and the purchase price for each unit would be

Rs.9/- even though its face value is Rs.10/-.

Thereafter, para XXVII provides for reinvestment of income distributable in further units. It specifically

provides that: "A unit holder who has repurchased the reinvested units may continue to avail of the

reinvestment facility in respect of the income distributable for the subsequent years. The units allotted

under the reinvestment facility under this clause are not subject to the conditions and stipulations

governing the parent units in respect of the minimum holding, repurchase are other matters."

We have considered the same in light of the documents produced before us and we find that on merits,

the complainants have no case. It has been clearly stipulated in the 'terms of offer' that the maturity

amount will depend on the NAV and that the same was guaranteed not to be below the par value of Rs.

10 per unit. All investments are subject to markets risks and fluctuations and an investor has to exercise

due caution while investing any amount in any Scheme just because the maturity amount is below their

expectations they cannot drag the service provider to Court for the same.

23. For the reasons stated and the discussion we had in the preceding paragraphs, we hold that the

National Commission correctly held that the University would come within the purview of "consumer"

as defined in S. 2(1)(d) of the said Act and correctly dismissed the claim of the complainants on merits.

24. In light of the aforesaid discussion Civil Appeal No.400 of 2007 lacks merits and the same is

dismissed. Civil Appeal Nos.503 of 2008 and 4664 of 2009 are disposed of in terms of this judgment.

Appeals disposed of.

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Business and Fundamental Rights:

The Constitution of India guarantees to all its citizens under article 19 the freedom to practice any

profession, or to carry on any occupation, trade or business throughout the territory of India. The

Constitution also guarantees under article 14, equality to all the persons; and the word ‘person’ can be

interpreted to include artificial persons also like the company.

An extremely interesting case is as follows:

2005 INDLAW SC 384


Global Energy Limited and Another

v

M/s. Adani Exports Limited and Others

03 May 2005

BENCH: R. C. Lahoti (CJI) & G. P. Mathur, JJ.

COMPARATIVE CITATIONS

2005 (4) SCC 435, 2005 INDLAW SC 384

The Judgment was delivered by : HON'BLE JUSTICE G.P. MATHUR

Leave granted.

2. These appeals have been preferred against the judgment and order dated 21.3.2005 of a Division

Bench of Calcutta High Court by which the appeals preferred against the interim order passed by a

learned Single Judge on 15.3.2005 were allowed and the interim directions contained in the said order

were set aside.

3. The West Bengal State Electricity Board (for short 'Electricity Board') issued a notice on 8.3.2005

inviting tenders (for short NIT) for sale of its surplus power to different State Electricity Boards or

Power Utilities on short term basis through Power Trading Agencies. Paragraphs 1 and 5 of the notice,

which are relevant for the decision of controversy in hand, are being reproduced below:

"1. Sealed tenders are invited by the Chief Engineer, Central Commercial Department, West

Bengal State Electricity Board, Vidyut Bhawan, 8th Floor, Block-A, Bidhannagar, Kolkata -

700 091 from experienced and interested Traders and Business Enterprises having Power

Trading or Clearance from the Central Electricity Regulatory Commission for export of

following approximate quantum of power.

5. Mode of deposit of Earnest Money:

5.1 Every quotation must accompany 'Earnest Money' in the form of Demand Draft or Pay

Order drawn on any Scheduled Bank of India in favour of West Bengal State Electricity Board

payable at Kolkata amounting to Rs.30,00,000.00 (Rupees thirty lakh) only. The Central/State

Government Organization(s) and CPSU(s) PSU(s) are exempted from submission of Earnest

Money.

5.2 Earnest Money shall be refunded to the successful bidder only after opening of irrevocable

and revolving LC by the successful bidder and commencement of supply as per Payment

Security Mechanism Clause. Earnest Money shall be refunded to the unsuccessful bidder after

finalization of Tender.

5.3 No interest shall be paid by WBSEB on Earnest Money."

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4. Global Energy Ltd. and H. Dhaul, the appellants herein, filed a writ petition in the Calcutta High

Court on 14.3.2005, where the principal relief claimed was that the Electricity Board be restrained from

enforcing the condition requiring deposit of Rs.30 lakhs as earnest money in respect of the aforesaid

tender and an injunction may be issued directing the Electricity Board to accept and evaluate their bid

without requiring deposit of Rs.30 lakhs as earnest money. The plea taken in the writ petition was that

the impugned condition for deposit of earnest money of Rs.30 lakhs by licensed traders and not by

Central/State Government Organizations and Public Sector Undertakings showed undue favour to

them. It was further pleaded that the said condition was not only discriminatory but was also contrary

to express mandate of Electricity Act, 2003 and, therefore, the same was liable to be struck down. The

writ petition was taken up for admission hearing by a learned Single Judge on 15.3.2005 and the

following order was passed on the same day:

"The petitioners herein have challenged the action of the respondent authorities regarding

publication of the notice inviting tender and also the condition regarding deposit of earnest

money by the intending tenders on various grounds mentioned in the writ petition.

According to the petitioners, the respondent authorities hereto have shown undue favour to the

public sector undertakings by granting exemption from submitting the earnest money.

Having heard the learned counsel appearing on behalf of the parties and considering the facts

and circumstances of this case, I am of the view that this petition should be decided only after

filing of affidavits.

Accordingly, respondents are directed to file affidavit-in-opposition within three weeks from

date. Reply thereto, if any, be filed within a week thereafter and let this matter be listed for

hearing four weeks hence.

Let there also be an interim order by granting liberty to the petitioners to participate in the

tender process in response to the notice inviting tender being Annexure 'P-1' to the writ

petition subject to the condition that the said petitioners will deposit the earnest money by

furnishing a Bank Guarantee or Bankers' Cheque in favour of the respondent No.2 within 18th

March, 2005."

5. Feeling aggrieved by the aforesaid order, M/s Adani Exports Ltd. and M/s PTC India Ltd. filed two

separate Letters Patent Appeals which were allowed by the Division Bench on 21.3.2005 and the

direction contained in the order under challenge, permitting the writ petitioners (appellants herein) to

deposit the earnest money by furnishing a bank guarantee or bankers' cheque in favour of the

Electricity Board by 18.3.2005 was set aside.

6. Learned counsel for the appellants has submitted that the condition requiring deposit of Rs. 30 lakhs

as earnest money by Power Utilities other than Central/State Government Organizations and Public

Sector Undertakings is discriminatory and illegal. He has further submitted that the notice inviting

tenders (NIT) was published on 8.3.2005 which required that every quotation must accompany earnest

money in the form of a demand draft or pay order in favour of the Electricity Board amounting to Rs.

30 lakhs and the last date fixed for submission of the tender was 14.30 hrs. on 15.3.2005. A very short

notice had been given by the Electricity Board in which it was difficult for the appellants to make

arrangement for the amount of Rs. 30 lakhs. In these circumstances, the learned Single Judge was

perfectly justified in issuing an interim direction, whereby the appellants were permitted to deposit the

earnest money by furnishing a bank guarantee or bankers' cheque by 18.3.2005. Learned counsel for

M/s Adani Exports Ltd. and M/s PTC India Ltd., who are respondents in the appeals, have submitted

that an important clause regarding deposit of earnest money in a NIT cannot be altered or changed by

Court as the said clause has to be strictly complied with, being in the realm of contract. The learned

single Judge, therefore, committed manifest error of law in issuing the interim direction on 15.3.2005

right on the first day a admission hearing of the writ petition, which was rightly set aside by the

Division Bench.

7. Before examining the contention raised it is important to understand the real import of the order

passed by the learned Single Judge on 15.3.2005. Though, apparently the order looks innocuous in the

sense that it has permitted the appellants (writ petitioners) to deposit the money by furnishing a bank

guarantee or a bankers' cheque by 18.3.2005, but in reality it completely altered the NIT in two ways. It

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allowed the appellants to participate in the tender process without depositing any earnest money as the

tenders/offers were to be opened at 15.00 hrs. on 15.3.2005 and thus the appellants' tender was directed

to be considered even though the same was not accompanied with the earnest money. Secondly, once

the tenders are opened, the relative position of each bidder is known and the appellants would have

avoided depositing any earnest money, had they felt that their bid was not competitive and there was no

chance of getting the contract. It is averred in the counter affidavit that the appellants adopted a similar

device while making bid for purchase of power in Orissa where they obtained a somewhat similar order

of not making the deposit of earnest money by the date fixed. When after opening the tenders it was

revealed that their bid was not competitive and they had no chance of getting the contract they did not

at all deposit the earnest money, which was a mandatory condition of NIT.

8. Clause 5.1 of NIT clearly provided that every quotation must accompany earnest money amounting

to Rupees thirty lakhs in the form of demand draft or pay order drawn on any Scheduled Bank of India

in favour of West Bengal State Electricity Board payable at Kolkata. However, the learned Single

Judge in his order dated 15.3.2004 also gave an option to the appellants to furnish a bank guarantee of

the said amount. Deposit of some amount of earnest money is a normal condition of tender. The object

is that only such parties who are financially sound and are serious in getting the work or contract,

should make a bid. Otherwise any number of persons who have no capacity, financial or otherwise,

would like to take a chance by making a bid. Normally, State/Central Government Organizations or

Central or State Public Sector Undertakings would not make a bid unless they are serious in getting the

work. The shareholding of the Government (State or Central) in any Public Sector Undertakings is

always more than 50 per cent. They cannot be equated with a company whose net worth may be very

small or may have a small shareholding. Therefore, the exemption granted in favour of State

Government Organizations and Public Sector Undertakings from making deposit of earnest money of

Rs. 30 lakhs was based upon a rational criteria and could not be faulted on any ground whatsoever.

Order XXVII Rule 8A CPC provides that no such security as is mentioned in rules 5 and 6 of Order

XLI shall be required from the Government or, where the Government has undertaken any defence of

the suit, from any public officer sued in respect of an act alleged to be done by him in his official

capacity. This provision shows that Government is always treated as a separate class. Even assuming

for the sake of argument that the exemption from depositing earnest money made in favour of

Central/State Government Organizations and Public Sector Undertakings was illegal, it could only

result in such exemption being struck down. This could not lead to a result where the condition in the

NIT requiring deposit of earnest money itself being set aside.

9. In Tata Cellular vs. Union of India 1994 Indlaw SC 17, a Three Judge Bench has explained what is a

tender and what are the requisites of a valid tender. It has been held that the tender must be

unconditional and must conform to the terms of the obligation and further the person by whom the

tender is made must be able and willing to perform his obligations. It has been further held that the

terms of the invitation to tender cannot be open to judicial scrutiny because the invitation to tender is in

the realm of contract. In Air India Ltd. vs. Cochin International Airport Ltd. 2000 Indlaw SC 7 the

same view was reiterated that the State can fix its own terms of invitation of tender and that it is not

open to judicial scrutiny. Whether and in what conditions the terms of a notice inviting tenders can be a

subject matter of judicial scrutiny, has been examined in considerable detail in Directorate of Education

vs. Educomp Datamatics Ltd 2004 Indlaw SC 194. The Directorate of Education, Government of

National Capital Territory of Delhi had taken a decision to establish computer laboratories in all

Government schools in NCT area and tenders were invited to provide hardware for this purpose. For

the final phase of 2002-03, tenders were called for 748 schools and the cost of project was approx,

Rs.100 crores. In view of, the difficulty faced in the earlier years where the lowest tenderers were not

able to implement the entire project, a decision was taken to invite tenders from firms having a turnover

of Rs.20 crores or more for the last three financial years ending with 31.3.2002, as it was felt that it

would be easier for the department to deal with one company which is well managed and not with

several companies. Some of the firms filed writ petitions in Delhi High Court challenging the clause of

the NIT whereby a condition was put that only such firms which had a turnover of Rs.20 crores or more

for the last three financial years would be eligible. It was contended before the High Court that the

aforesaid condition had been incorporated solely with an intent to deprive a large number of companies

imparting computer education from bidding and monopolize the same for big companies. The writ

petition was allowed and the clause was struck down as being arbitrary and irrational. In appeal, this

Court reversed the judgment of the High Court basically on the ground that the terms of the invitation

to tender are not open to judicial scrutiny, the same being in the realm of contract and the Government

must be a free hand in settling the terms of the tender. The courts would not interfere with the terms of

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the tender notice unless it was shown to be either arbitrary or discriminatory or actuated by malice. It

was further held that while exercising the power of judicial review of the terms of the tender notice, the

Court cannot order change in them.

10. The principle is, therefore, well settled that the terms of the invitation of tender are not open to

judicial scrutiny and the Courts cannot whittle down the terms of the tender as they are in the realm of

contract unless they are wholly arbitrary, discriminatory or actuated by malice. This being the position

of law, settled by a catena of decisions of this Court, it is rather surprising that the learned Single Judge

passed an interim direction on the very first day of admission hearing of the writ petition and allowed

the appellants to deposit the earnest money by furnishing a bank guarantee or a bankers' cheque till

three days after the actual date of opening of the tender. The order of the learned Single Judge being

wholly illegal, was, therefore, rightly set aside by the Division Bench.

11. Learned counsel for the appellants has submitted that the appellant M/s Global Energy Ltd. had

submitted a tender for Rs. 436 crores while M/s Adani Exports India Ltd. had submitted a tender for

Rs. 396 crores and as the tender of the appellants was Rs. 40 crores more than that of respondent No.1

the Electricity Board would gain the said amount if the contract is awarded to the appellant. Learned

counsel for the contesting respondents have submitted that appellant no.1 is not technically qualified to

be awarded the contract for the sale of electricity as it does not possess the requisite license for the said

purpose. The appellant no.1 applied for grant of license for interstate trading in electricity in all the five

electricity regions in the country for trading of 100 million units in a year to the Central Electricity

Regulatory Commission. The Commission vide its order dated 6.9.2004 granted an interim license for

category 'A'. The appellant no.1 challenged the said order before the Delhi High Court in which

initially an order was passed on 26.10.2004 and the interim license granted to it was extended till the

next date hearing. This order was extended and finally on 3.2.2005, the High Court directed that the

interim license granted to appellant no.1 shall be extended till further orders. It is, therefore, clear that

appellant no.1 is having an interim license of category 'S' in its favour on the basis of the order passed

by the High Court. It is averred in the counter affidavit filed by the Electricity Board that the total units

of power intended to be traded are 1471 million units. For trading over 1000 million units of power in

any year the license required is that of category 'F'. The computer website of Central Electricity

Regulatory Commission, as on 14.3.2005, contains the names of 12 licensed electricity traders, but the

name of the appellant no.1, M/s Global Energy Ltd. does not find mention therein. It is also averred in

the counter affidavit that the Electricity Board had been selling surplus power to electricity traders

since 1st April, 2003. In the course of such negotiations, the Electricity Board came to be associated

with appellant no.1 for entering into power purchase agreement for the period March to June 2004.

However, the appellant no.1, after accepting the terms and conditions offered by the Electricity Board

and after issuance of letters of awards, failed at the last moment to open the letter of credit for requisite

amount and submitted unacceptable letter of credit making the Electricity Board as a second

beneficiary. Due to this reason, the power purchase agreement failed to materialize at the last moment,

due to which the Electricity Board could not sell surplus power resulting in a loss of revenue to the

extent of about Rs.10.86 crores. In view of these facts, the contract was not awarded to appellant no.1.

12. The fact that M/s Global Energy Ltd. has a license of category 'A' and that the said licence is

subsisting in its favour on the basis of an interim order passed by the High Court is not in dispute.

Under the regulations of Central Electricity Regulatory Commission, a holder of category 'F' license is

entitled to trade in over 1000 million units of power in a year. The total power intended to be traded by

the Electricity Board is 1471 million units for which appellant no.1 does not possess the requisite

license. Having regard to these facts, we are clearly of the opinion that no ground has been made out by

the appellants, which may warrant interference by this Court with the decision taken by the West

Bengal State Electricity Board in not awarding the contract to the appellant No.1 as price offered

cannot be the sole criteria in the matter of trading of power where holding of relevant licence is

mandatory under the Regulations of Central Electricity Regulatory Commission.

13. The appeals lack merit and are hereby dismissed with costs, which we quantify as Rs.25,000/-. The

cost shall be paid by the appellants to the West Bengal State Electricity Board (respondent no.2).

- - -

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Competition Law

Shamsher Kataria v Honda Siel Cars India Limited and others (Abridged)

Competition Commission of India

Bench: M/s Ashok Chawla (Chairman), Anurag Goel (Member), M. L. Tayal (Member)

Where Reported: 2014 Indlaw CCI 50

25 August 2014

Case No. 03/2011

The Order of the Court was as follows :

1. Factual Background

The present information has been filed by Shri Shamsher Kataria (hereinafter, referred to as the

"Informant") u/s. 19 (1)(a) of the Competition Act, 2002 (hereinafter, referred to as "the Act") against

Honda Siel Cars India Ltd (hereinafter, referred to as "Honda" or OP-1), the Volkswagen India Pvt Ltd

(hereinafter, referred to as "Volkswagen" or OP-2) and Fiat India Auomobiles Ltd (hereinafter, referred

to as "Fiat" or OP-3), alleging anti-competitive practices on part of the OPs whereby the genuine spare

parts of automobiles manufactured by OP-1, OP-2 and OP-3, respectively, are not made freely

available in the open market. OP-1 to OP-3 are involved in the business, inter alia, of manufacture,

sale, distribution and servicing of passenger motor vehicles in India. It has been averred that the

Opposite Parties also operate/authorize/regulate or otherwise control the operations of various

authorized workshops and service stations which are in the business of selling automobile spare parts,

besides, rendering aftersale automobile maintenance services.

1.1 The Informant has also alleged, that even the technological information, diagnostic tools and

software programs required to maintain, service and repair the technologically advanced automobiles

manufactured by each of the aforesaid OPs were not freely available to the independent repair

workshops. The repair, maintenance and servicing of such automobiles could only be carried out at the

workshops or service stations of the authorized dealers of OP.

1.2 The Informant has further alleged that the restriction on the availability of genuine spare parts and

the technical information/know-how required to effectively repair, maintain or service the automobiles

manufactured by the respective OPs is not a localized phenomenon. The OPs and their respective

dealers, as a matter of policy, refuse to supply genuine spare parts and technological equipment for

providing maintenance and repair services in the open market and in the hands of the independent

repairers. In support of his allegations, the Informant has submitted letters from some independent

service stations, where they have expressed their inability to service the Informant's vehicle due to the

lack of access of such independent repairers to genuine spare parts and other technological information

required to service /maintain the automobiles manufactured by the respective OPs. It has been stated by

the Informant that he earlier owned a Maruti Suzuki vehicle and could easily get it repaired at

independent workshops because the spare parts and the technological tools required to repair and

maintain a Maruti Suzuki vehicle were freely made available by the company in the open market.

1.3 It has been further alleged that the OPs 1-3, by restricting the sale and supply of the genuine spare

parts, diagnostic tools/equipment, technical information required to maintain, service and repair the

automobiles manufactured by the respective OPs, have effectively created a monopoly over the supply

of such genuine spare parts and repair/maintenance services and, consequently, have indirectly

determined the prices of the spare parts and the repair and maintenance services. Additionally, the

Informant has alleged, that such restrictive practice carried out by the OPs in conjunction with their

respective authorized dealers, amounts to denial of market access to independent repair workshops.

1.4 The Informant has stated that the cost of getting a car repaired in an independent workshop is

cheaper by 35-50% as compared to the authorized service centers of the OPs. The Informant has

alleged that the OPs charge arbitrary and high prices to the consumers who are forced to avail the

services of the authorized dealers of the OPs for repairing and maintaining their automobiles since the

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genuine spare parts, diagnostic tools and the technological information required to service their cars are

not made available by the OPs to independent repair workshops. It has been also stated that the prices

charged for the genuine spare parts and for repair and maintenance services by the authorized dealers of

the OPs are even higher than what they charge in other markets in Europe. The Informant has alleged

that such practices which allow the OPs to charge arbitrary and high prices result in significant increase

in the maintenance cost to car owners.

1.5 It has been stated in the information that the components and parts used in the manufacture of their

respective brand of automobiles are often sourced from independent original equipment suppliers

(hereinafter, referred to as "OESs") and other suppliers who are restrained by the OPs from selling the

parts/components in the open market. Such restriction on the ability of the OESs to sell the spare

parts/components further limits the access of such spare parts/components in the open market, thereby,

allowing the OPs to create a monopoly-like situation wherein they become the sole supplier of the

spare parts/components of their respective brand of automobiles. Such restrictions allow the OPs to

influence and determine the price of the spare parts/components used to repair and maintain the

respective brands of automobiles.

1.6 The Informant has alleged that the restrictive and monopolistic trade practices, as detailed above, of

the OPs and their authorized dealers have a negative effect not only on the consumer but also on the

whole Indian economy since such practices increase the cost of the consumer to maintain an

automobile. The Informant has stated that in a country like India where road transport is essential for

the mobility of people and goods, the increased cost of vehicle maintenance may hamper the overall

economic growth of the country. The Informant has stated that as per a CII report, the size of the Indian

automotive industry is estimated to be US$ 122-159 billion by the year 2016, which will be larger than

the U.S. automotive market. It has been stated that growth in the market for genuine spare parts and

repair and maintenance services is expected to be proportionate to the growth in the vehicle sales, as

enumerated above.

1.7 The Informant has stated that effective competition at each level of automotive aftermarket is

essential for fostering innovation and keeping mobility affordable. It has been contended that if a

consumer is given a choice of getting his vehicle serviced/repaired at a workshop of his choice, it will

foster competition among service providers which will in turn will not only lead to improvement in

quality of service and a competitive pricing policy by the OPs, but also encourage innovation in the

market. The Informant has alleged that due to the restrictive trade practices of the OPs, effective

competition at each level of the Indian automotive industry is getting adversely affected.

1.8 The Informant has also alleged that the anti-competitive practices by the OPs have resulted in

denial of market access to independent workshops which are usually micro, small and medium

enterprises (MSMEs). The Informant has stated that MSMEs give employment to 45% of industrial

workers. Furthermore, on the one hand the Government has introduced several policies and initiatives

to encourage and support the MSMEs and on the other hand the current practices of the OPs are

adversely affecting the sector.

1.9 The informant has stated that the European Commission has the so called 'Block Exemption

Regulation' in place since the year 2002 to compel auto manufacturers to provide spares and tools etc.,

to independent operators. These regulations prohibit discrimination between authorized service dealers

and independent operators. The European Commission had also taken commitments from auto majors

to ensure supply of spares and technological knowhow to independent operators. To ensure effective

competition in the auto repair and maintenance market, the European Commission issued the new

regulation no. 461/2010 in the year 2010, which included specific guidelines apart from the earlier

block exemption rules.

1.10 The Informant has stated that there are regulations in place in United States to ensure that

emissions related diagnostic tools and information is available to independent vehicle repair shops.

Several states of the U.S. have introduced the 'Right to Repair Act' to curb restrictive practices by

automobile manufacturers. The Informant has further stated that all over the world consumers and

governments are seeking to implement a free and fair competition regime in the automotive sector, with

varying degree of success.

1.11 The Informant has alleged that the Acts of the OPs in restricting the sale and supply of spare parts

and technical information, diagnostic equipments and tools to independent automobile service

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providers indirectly determine the purchase or sale prices of both the price of automobile spare parts as

well as the price of repair and maintenance services. The Informant has alleged that the anti-

competitive acts of the OPs are arbitrary, illegal and devastating to free and fair competition. The

Informant has alleged that such practices are in direct contravention of ss. 3(3)(a) and 3(3)(b) of the

Act. By refusing to sell the spare parts to independent operators the OPs are in violation of s. 3(4)(d) of

the Act. Further, the denial of access to the repair and maintenance market to the independent service

workshops are in violation of s. 4(2)(a), 4(2)(b) and 4(2)(c) of the Act.

1.12 The Informant has also filed additional information wherein it has been alleged that that the OPs

and other vehicle manufacturers impose restrictions on their OESs from supplying automobile parts

into the open market. It has been alleged that such practices amount to limiting and controlling

production and supply of components/spares in the Indian automobile aftermarket and are in violation

of s. 4(2)(d) of the Act. As per the Informant the European Commission has effectively tackled the

abovementioned restrictive practice aspect under their block exemption regulations by affording a

statutory right to OESs to sell vehicle parts in the open market.

1.13 The Informant has also alleged in the supplementary information that the restriction by the OPs on

their authorized dealers from taking up dealerships of other competing vehicle manufacturers is in

contravention to the provisions of s. 4(2)(a), 4(2)(b) and 4(2)(c) of the Act.

1.14 The Informant has sought the following reliefs:

"(a) hold an enquiry into the trade practices of the Respondents and/ or any other vehicle manufacturer

and their authorized dealers/ service centers indulging in similar activities as detailed herein and give

a finding that such parties have committed restrictive and/ or unfair trade practices in contravention of

the Act;

(b) order the Respondents to cease and desist from such restrictive, unfair, monopolistic trade

practices and misusing its dominant position;

(c) pass appropriate orders directing the Respondents No.1-3 and other contravening vehicle

manufacturers and their authorized dealers/ services centers to provide spare parts, technical

information, diagnostic tools, software and any other information and goods required for the repair,

maintenance and servicing of the vehicles to independent repair workshops and also make the same

freely available in the open Indian automotive aftermarket;

(d) pass appropriate orders directing the Respondents and other contravening vehicle manufacturer

indulging in similar activities as detailed herein to allow authorized dealers the right to undertake

franchises/dealerships from different vehicle manufacturers without fear of malevolent action from the

respondents or other defaulting vehicle manufacturers;

(e) pass appropriate orders ensuring that access tro the spare parts, tools, technical information,

technical training and equipment for repair, maintenance and service of the vehicles and

manufacturers by OESs is provided to the independent service providers, consumers and in the open

market upon request and without undue delay and the price charged from such parts, tools, equipment

should not be fixed by the vehicle manufacturers but be determined by independent market forces and

free and fair competition;

(f) award reasonable amount for costs incurred towards legal fees;

(g) pass such further order as this Hon'ble Commission may deem fit and proper in the facts and

circumstances of the case.

2. Prima Facie Opinion

The Commission after forming an opinion that a prima facie case exits in the matter, vide an order

dated February 24, 2011, passed u/s. 26(1) of the Act directed the Director General (hereinafter,

referred to as the "DG") to conduct an investigation into the matter and submit a report.

3. Investigation and Findings of the DG









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3.1 In pursuance of the direction of the Commission the DG conducted investigation into the matter and

submitted his investigation report (hereinafter, referred to as, the "DG Report") to the Commission.

3.2 From the submissions of the Informant, initial discussions held and the preliminary enquiries made

during the investigation, the DG gathered that other automobile manufactures (other than the OPs (1-

3)) may also be indulging in similar restrictive trade practices in the areas of after sales service,

procurement and sale of spare parts from the OESs, setting up of dealership etc. In view of the fact that

these practices may not be confined to the OPs (1-3) and considering that the case involved the larger

issue related to prevalent anti-competitive conduct of the players in the Indian automobile sector and its

implications on the consumers at large, the DG realized that the investigation should not be restricted to

the OPs (1-3) mentioned above. Accordingly it was proposed by the DG that the investigation may be

allowed to examine the alleged anti-competitive trade practices of all car manufacturers in India, as per

the list maintained by the Society of Indian Automobile Manufacturers ("SIAM"). The DG, therefore,

requested the Commission for direction to initiate investigations against all car manufacturers in India.

3.3 The Commission considered the abovementioned request of the DG to include within the scope of

its investigations all automobile manufacturers in India as per the list maintained by SIAM and, vide

order dated 26.04.2011, allowed the request to initiate investigation against other automobile

manufactures of India (in addition to the OPs(1-3)). Such car manufactures were:

(1) BMW India Pvt. Ltd. (hereinafter, referred to as "BMW")

(2) Ford India Pvt. Ltd. (hereinafter, referred to as "Ford")

(3) General Motors India Pvt. Ltd. (hereinafter, referred to as "GM")

(4) Hindustan Motors Ltd. (hereinafter, referred to as "Hindustan Motors")

(5) Hyundai Motor India Ltd. (hereinafter, referred to as "Hyundai", "HMIL")

(6) Mahindra & Mahindra Ltd. (hereinafter, referred to as "M & M")

(7) Mahindra Reva Electric Car Company (P) Ltd. (hereinafter, referred to as "Reva")

(8) Maruti Suzuki India Ltd, (hereinafter, referred to as "MSIL")

(9) Mercedes-Benz India Pvt. Ltd. (hereinafter, referred to as "Mercedes")

(10) Nissan Motor India Pvt Ltd. (hereinafter, referred to as "Nissan")

(11) Premier Ltd. (hereinafter, referred to as "Premier")

(12) Skoda Auto India Pvt. Ltd., (hereinafter, referred to as "Skoda")

(13) Tata Motors Ltd., (hereinafter, referred to as "Tata")

(14) Toyota Kirloskar Motor Pvt. Ltd. (hereinafter, referred to as "Toyota")

3.4 During the course of the investigation, the DG issued detailed questionnaires to seek information

from each of the OEMs listed above, including their group companies, engaged in the automobile

aftermarket in India. The DG also recorded statements on oath of representatives of the OEMS, the

OESs and other multi-brand retailers. Besides, information was also collected from various third party

stakeholders, such as:

(a) OES (original equipment suppliers)

(b) Authorized dealers appointed by each of the OEMs

(c) Multi brand service providers

(d) Independent repairers

(e) Discontinued dealers of the OEMs

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3.5 Additionally, the DG obtained information from the following entities, namely:

(a) trade associations related to the Indian automotive industry, including SIAM, Automotive

Component Manufacturer Association ("ACMA") and Federation of Automobile Dealers Association

("FADA"); and

(b) SPX India Limited ("SPX"), which supplies the specialized diagnostic tools for aftermarket

servicing and repairing requirements to a large number of the OEMs.

***

19. Oral Submissions of the Informant

19.1 The counsel to the Informant submitted that about 95% of workshops (over 3 lakhs) are operating

in Indian automobile aftermarket which work outside the authorized dealer network and spare parts/

diagnostic tools are not made available to such independent repairers in the aftermarkets. This has

resulted in the development of an industry of spurious spare parts in aftermarkets, which cause death/

injuries besides causing revenue and employment loss. The counsel to the Informant though conceded

that TATA/ Maruti/ M & M make available some spare parts in aftermarkets in respect of some of their

car models, but that the consumers do not have a choice or right in this regard.

19.2 The counsel to the Informant submitted that none of the OEMs provide life cycle expenditure/ cost

to the customers. Neither such information is available on the website of any of the OEMs. Had it been

so, the OPs would not have relied upon materials available publicly or through third party research

reports, to argue the availability of such information to their respective customers. Further, the counsel

argued that OEMs do not provide lifetime warranties. The counsel also refuted the submissions of the

OPs made on the basis of reputational damage and argued that, on the contrary, availability of spare

parts in aftermarkets would strengthen the reputation of OEMs. It was further argued that the profit

margins in secondary markets are substantially higher than primary markets. It was urged that none of

the OPs submitted evidence to support their theory that higher prices in aftermarkets affected the prices

of their products in the primary market.

19.3 The counsel to the Informant suggested that even if a customer of an OEM is desirous of

calculating the life cycle costs, no price list of spare parts is made available to the customers and was

made available only to the dealers. It was contended that due to frequent and random changes in the

prices of spare parts in the aftermarket, the consumers cannot work out the lifetime costing of the

product.

19.4 The counsel supported the findings of the DG and submitted that the secondary market would not

be different from the primary market only in the following two cases:

(i) If the consumers are able to switch spare parts or

(ii) If it is possible for the consumers to switch product in the primary market. The counsel argued that

none of the aforesaid conditions were met in the present matter as switching costs are too high and

referred to various case laws to support his submissions.

19.5 On the issue of relevant market, the counsel to the Informant argued that there are two relevant

markets. The primary market is for sale of car and the secondary market is for spares/ services. In the

context of determining the 'relevant market' the counsel reiterated his earlier submission that since life

cycle costing of a car could not be effectively worked out by the car users, therefore, the submissions of

the OPs suggesting a unified systems market do not stand.

19.6 Lastly, the counsel argued that IPRs do not have absolute overriding effect on competition law. In

this regard, it was also highlighted that the OPs have already admitted before the Commission that their

agreements contain restrictions and have tried to justify such restrictions under s. 3(5) of the

Competition Act.

20. Decision of the Commission

20.1 The Commission has carefully gone through information, report of the DG and averments of the

parties in the present case. The Commission notes that in addition to substantive issues involved in the


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matter, some of the Opposite Parties have also raised objections regarding jurisdiction of the

Commission to inquire the conduct of those OPs which were not named specifically in the information

filed by the Informant.

***

20.4 The Commission notes that the following substantive issues arise for determination in the case.

Issue 1: Whether the Opposite Parties have violated the provisions of s. 4 of the Act as has been

alleged?

Issue 2: Whether the Opposite Parties have violated the provisions of s. 3 of the Act as has been

alleged?

20.5 Determination of Issue No. 1

The determination of this issue involves determination of following three sub issues:

i. What is the relevant market?

ii. Whether OPs are dominant in the relevant market?

iii. If yes, whether the OPs have abused their dominance in violation of s. 4 of the Act?

***

20.5.14 We now turn to our substantial analysis of the relevant market for the present case.

20.5.15 The Commission is in agreement with the DG's findings that there exists a primary market for

"sale of cars in India" and two aftermarkets for "sale of spare parts" and "repair and maintenance

services" respectively. An aftermarket is a market for a secondary product, that is, a product which is

purchased only as a result of buying a primary product. For example, replacement heads for razors (the

secondary product) and razors (the primary product). The primary product and the secondary product

are complementary. Competition issues in the aftersales market usually emerge in cases where the firm,

the supplier, is also able to control the aftersales markets. The common allegation of competition

infringements in such markets is that the producer of durable goods prevents other aftermarket firms

from offering complementary goods or services, thereby abusing its dominant position in the

aftermarket. The allegation of infringing competition resulting from a conduct that affects both primary

market and aftermarket of specific durable consumer goods is different from competition issues at other

markets. Therefore, it is pertinent to understand if the durable goods and the related consumable goods

form a part of the same relevant market.

20.5.16 It is observed that one of the parameters to consider the issue of interchangeability /

substitutability is to determine the compatibility between the secondary products vis-à-vis the various

brands of primary products. From the point of view of the present case in order to gauge

compatibility/substitutability between the primary markets and the secondary markets it needs to be

ascertained whether the owner of a particular brand of car is capable of substituting the use of the spare

parts of his brand of car with that of another brand of car, manufactured by a different OEM or is his

choice of spare parts limited to that of his own brand of car. Therefore, a consumer of the automobile

market in India, e.g., the owner of a Maruti Alto cannot switch to using the spare parts of a Honda Brio.

Further, the Maruti Alto owner has very limited ability to use the spare parts of Maruti Ertiga. Such

limited interchangeability, is primarily due to technical differences between the various primary

products, which often mean that the choice of complementary products or services compatible with the

primary product is limited. If the owner of a brand of car needs necessarily the spare parts of that brand

of car, then it would imply that there is no supply side substitutability and the primary market for cars

for each brand of car and their respective secondary market (aftermarket) are distinct relevant product

markets.

***

Whole life cost analysis:




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20.5.28 The Commission is of the opinion that a significant proportion of buyers in the primary market

do not take into account the life cost of motor vehicles before purchasing such products. The DG,

during the course of its investigation has asked the OEMs to confirm the after sale services and

maintenance cost of their vehicles. Several OEMs have expressed an inability to provide such

information and has contended that it is difficult to estimate the repair and maintenance costs as the

same are dependent on several factors including the driving expertise, geographical conditions, road

conditions etc. As per the DG's Report, many of the OEMs have even contended that such data is

confidential in nature thereby indicating that the same is not shared and made available to the

consumers at the time of sale of the cars.

***

22. Conclusion

22.1 In view of the aforesaid discussions and for reasons recorded earlier, the Commission is of the

considered opinion that the Opposite Parties (OPs)have contravened the provisions of ss. 3(4)(b),

3(4)(c), 3(4)(d), 4(2)(a)(i) and (ii), 4(2)(c) and 4(2)(e) of the Act, as applicable. As elucidated in detail

in the order, the Commission does not accept the "unified systems market" in this case specifically, and

in the Indian market conditions in general. The kind of parameters which have been defined even in

other jurisdictions and literature for accepting the systems market approach do not normally exist in the

Indian market, including in regard to availability of relevant information (e.g. life-cycle cost) to the

consumers, his ability/inability to take a rational/analytical decision based on complex data which may

or may not be available, the reputational impact of anti-competitive conduct in the aftermarket on the

firm's product in the primary market etc. These factors are aggravated in the Indian market situation

due to some globally recognised different characteristics of Indian consumer (including cost-

consciousness) and the complex nature of aftermarkets.

22.2 In deciding the remedies in this case, the Commission's primary objective is to correct the

distortions in the aftermarket, to provide corrective measures to make the market more competitive, to

eradicate practices having foreclosure effects and to put an end to the present anti-competitive conduct

of the parties. The aim of the Commission is to provide more freedom to Original Equipment Suppliers

(OESs) in sale of spare parts, and more choice to consumers and independent repairers. The

Commission considers it necessary to (i) enable the consumers to have access to spare parts and also be

free to choose between independent repairers and authorized dealers and (ii) enable the independent

repairers participate in the aftermarket and provide services in a competitive manner and to have access

to essential inputs such as spare parts and other technical information for this purpose, as part of a more

competitive eco-system which is equally fair to the OPs and their authorized network also.

22.3 In view of the foregoing, the Commission, therefore, orders the following u/s. 27 of the Act:-

(i) The parties are hereby directed to immediately cease and desist from indulging in conduct which has

been found to be in contravention of the provisions of the Act.

(ii) OPs are directed to put in place an effective system to make the spare parts and diagnostic tools

easily available through an efficient network.

(iii) OPs are directed to allow OESs to sell spare parts in the open market without any restriction,

including on prices. OESs will be allowed to sell the spare parts under their own brand name, if they so

wish. Where the OPs hold intellectual property rights on some parts, they may charge royalty/fees

through contracts carefully drafted to ensure that they are not in violation of the Competition Act, 2002.

(iv) OPs will place no restrictions or impediments on the operation of independent repairers/garages.

(v) The OPs may develop and operate appropriate systems for training of independent repairer/garages,

and also facilitate easy availability of diagnostic tools. Appropriate arrangements may also be

considered for providing technical support and training certificates on payment basis.

(vi) The OPs may also work for standardization of an increasing number of parts in such a manner that

they can be used across different brands, like tyres, batteries etc. at present, which would result in

reduction of prices and also give more choice to consumers as well as repairers/service providers.




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(vii) OPs are directed not to impose a blanket condition that warranties would be cancelled if the

consumer avails of services of any independent repairer. While necessary safeguards may be put in

place from safety and liability point of view, OPs may cancel the warranty only to the extent that

damage has been caused because of faulty repair work outside their authorized network and

circumstances clearly justify such action.

(viii) OPs are directed to make available in public domain, and also host on their websites, information

regarding the spare parts, their MRPs, arrangements for availability over the counter, and details of

matching quality alternatives, maintenance costs, provisions regarding warranty including those

mentioned above, and any such other information which may be relevant for full exercise of consumer

choice and facilitate fair competition in the market.

22.4 As regards imposition of penalty, the Commission notes that the OPs have violated the provisions

of both ss. 3 & 4 of the Act. It is further noted that cars are an intrinsic part of life and living in today's

world, and the owners have to take care of their maintenance over a long period of time with significant

financial implication. As such, anti-competitive conduct of the opposite parties impacts a very large

number of consumers in the country estimated to be around 2 crore. Further, as noted in earlier

paragraphs, the anti-competitive conduct of the opposite parties has restricted the expansion of spare

parts and independent repairers segment of the economy to its full potential, at the cost of the

consumers, service providers and dealers. It is also noted that despite the fact that most attractive

markets for the automobile manufacturers and some OPs have made consumer-friendly commitments

in other jurisdictions like Europe, they have failed to adopt similar practices in India which would have

gone a long way in significantly diluting their present anti-competitive conduct. This makes their

conduct even more deplorable.

22.5 On the other hand, there are mitigating circumstances while fixing the quantum of penalty. The

OPs have argued that the absence of appropriate legislative and regulatory framework for safety and

standards relating to spare parts and after sales services is a handicap vis-à-vis the position prevailing in

many other jurisdictions like EU, France, USA and even developing nations like Brazil, China and

South Africa. This is something which may be separately brought to the notice of the government for

appropriate action, which could include suitable legislation and setting up of an appropriate regulator as

stated earlier in this order. The other mitigating circumstance to which the Commission assigns weight

is the fact that many of the opposite parties, though not all, indicated willingness to voluntarily

discontinue many of these practices and offer greater choice and freedom to the consumers, repairers

and dealers

22.6 In view of the foregoing, the Commission imposes a penalty of 2% of total turnover in India of the

opposite parties. As such, the penalty imposed on different parties is as follows:-


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S.No Name

Turnover

for 2007-

08 (in

Crores)

Turnover

for 2008-

09 (in

Crores)

Turnover

2009-10

(in

Crores)

Turnover

2010- 11

(in

Crores)

Turnover

2011-

2012 (in

Crores)

Total

Turnover

for three

years (in

Crores)

Average

Turnover

for three

years (in

Crores)

@2% of

average

Turnover

(in

Crores)

1. Honda Siel 4039.72 3526.08 4204.43 -- -- 11770.23 3923.41 78.47

2.

Volkswagen

India Pvt

Ltd*

26.01 95.77 366.16 -- -- 487.94 162.65 3.25

3.

Fiat India

Automobiles

Ltd

369.96 792.02 3334.66 -- -- 4496.64 1498.88 29.98

4. BMW India

Ltd 826.93 964.07 1270.12 -- -- 3061.12 1020.37 20.41

5. Ford India

Pvt ltd 2068.89 1754.32 2144.38 -- -- 5967.59 1989.20 39.78

6. General

Motors** -- -- -- 4031.33 442657 8457.90 4228.95 84.58

7. Hindustan

Motors 781.08 656.18 639.73 -- -- 2076.99 692.33 13.85

8. Mahindra &

Mahindra 11671.64 13364.02 18801.46 -- -- 43837.12 14612.37 292.25

9. Maruti

Suzuki 18823.8 21453.8 30392.8 -- -- 70670.40 23556.80 471.14

10. Mercedes-

Benz 989.77 1152.64 1318.93 -- -- 3461.34 1153.78 23.08

11. Nissan

Motors 87.67 46.16 110.79 -- -- 244.63 81.54 1.63

12. Skoda Auto

India 1587.90 2095.75 3275.06 -- -- 6958.72 2319.57 46.39

13. Tata Motors 35918.96 71737.81 94312.37 -- -- 201969.14 67323.05 1346.46

14.

Toyota

Kirloskar

Motors

4268.74 3948.89 5790.11 -- -- 14007.73 4669.24 93.38

*Volkswagen has provided turnover for year 2007-2008 (From February 6, 2007 to March 31, 2008);

for the Year 2008-09 (April 1, 2008 to December 31, 2008) and for the year 2009-10 (January 1, 2009

to December 31, 2009).

** General Motors has provided financial statements only for 2 years (2010-11 and 2011-12)

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22.7 The directions of the Commission contained in para 22.3 of this order will be complied with by

the opposite parties in letter and spirit. Each OP is directed to file individual undertakings, within 60

days of the receipt of their order, about compliance to cease and desist from the present anti-

competitive conduct, and initiation of action in compliance of other directions. This will be followed by

a detailed compliance report on all directions within 180 days of the receipt of the order. The amount of

penalty will be paid by the OP within 60 days of the receipt of the order.

22.8 A copy of this order may also be forwarded to the Ministry of Road Transport and Highways and

ACMA (Automotive Component Manufacturers Association).

22.9 In terms of the order passed on 29.04.2013 by the Hon'ble High Court of Delhi in Writ Petition

No. W.P. (c) 2734/2013 filed by MSIL, it is ordered that the operation of the present order shall not be

given effect to till after the expiry of a period of 10 days from the date of this order.

22.10 The Secretary is directed to inform the parties accordingly.

Order accordingly.

- - -

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INTELLECTUAL PROPERTY RIGHTS

Introduction

A high degree of protection to intellectual property is the sine qua non for development and prosperity

of any society, and India is no exception. Such a protection encourages inventors, authors, artists and

other creative people to invest time, effort and money in the process of creation. It fosters invention and

innovation. Without such protection, others can copy or otherwise imitate the intellectual work without

incurring the cost and effort of creation, thereby inhibiting the original creators from reaping a

reasonable return on their investment. With the changing economic and legal scenario, it has become

imperative for India to encourage creative persons to invest in intellectual property and also to have

better laws and strict enforcement of intellectual property rights.

Let us have a brief overview of the basic concept of property and intellectual property.

Property

Property may be defined as that is capable of ownership or as a right of ownership. The three essential

features of any property are: possidendi, utendi and dispodendi – the rights to possess, use and dispose

off.

Intellectual Property

All new creations of human brain may be loosely known as ‘intellectual property’ and by its nature it is

intangible incorporeal property. Tangible property, whether land or chattels, is composed of atoms,

physical things that can occupy only one place at any given time. This means that possession of a

physical thing is necessarily “exclusive” – if A has it, B does not have it. Intellectual property does not

have this characteristic of excludability. If A knows a particular piece of information, and tells it to B –

A has not been deprived of it. Rather, both possess it. The fact that the possession and use of ideas is

largely “non-rivalrous” is critical to intellectual property theory.

Now, we may move on to the developments in the field of intellectual property.

International Initiative

The importance of framing some sort of an internationally recognized agreement for co-operation

among nations for the protection of intellectual property was realized as early as the year 1883, when

the Paris Convention came into existence. However, this arrangement and the later steps taken were not

very satisfactory. In the absence of universal legal provisions, each country followed its domestic

legislation on intellectual property law, which was often lax or even in some cases absent. This resulted

in almost unrestricted infringement of intellectual property rights on a large scale in a number of

jurisdictions causing great deal of economic loss to the developed world, which started campaigning for

a universally applicable and enforceable system of intellectual property law. The result was the signing

of the “Final Act” in Marrakesh on April 15, 1994 and the formation of WTO containing 28

agreements including TRIPS (Agreement on Trade Related Aspects of Intellectual Property Rights).

TRIPS

Members are under an obligation to: (1) provide minimum intellectual property rights protection

through domestic laws, (2) ensure effective enforcement of these rights, and (3) agree to submit

disputes to the WTO dispute settlement system. TRIPS Agreement consists of seven parts. Part II titled

‘Standards Concerning the Availability, Scope and use of IPRs’ enumerates the following types of

intellectual property in 8 sections:

Section 1. Copyright and Related Rights

Section 2. Trade Marks

Section 3. Geographical Indications

Section 4. Industrial Designs

Section 5. Patents

Section 6. Layout designs of Integrated Circuits

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Section 7. Protection of Undisclosed Information

Section 8. Control of Anti-Competitive Practices in Contractual Licences

Copyright

It is a right, as the name suggests, given against copying of defined types of cultural, informational and

entertainment productions. Classically, these have been, in international jargon, ‘literary and artistic

works’ – the creations of authors, playwrights, composers, artists and film directors. It includes

computer programmes as well. Protection is given for the expression and not the idea. The term is life

of the author plus 60 years in India and 50 years under TRIPS.

In India, the law is contained in the Copyright Act, 1957. The 1999 Amendment Act made this law

fully compatible with TRIPS. Also, India as a signatory to the Berne Convention, had earlier passed the

International Copyright Order, 1958 which has now been replaced by the International Copyright

Order, 1999. With these amendments the Indian Copyright law has become one of the most modern

copyright laws in the world.

Trademarks

Trade mark means a mark capable of being represented graphically and which is capable of

distinguishing the goods or services of one person from those of others and may include shape of

goods, their packaging and combination of colours.

In India, the law is contained in the Trade Marks Act, 1999, which came into force on September 15,

2003 and is fully compatible with TRIPS. It provides for service marks, collective marks, recognition

of well known trademarks, shape of goods, packaging and combination of colours, term has been

extended to 10 years, and procedure at the Trade Marks Registry has been streamlined.

Geographical Indications

‘Geographical Indications’ mean any indication which defines the goods as originating in the territory

of a country or a region or locality in that territory, provided a given quality, reputation or other

characteristics of the products are essentially attributable to their geographical origin. Examples being

Basmati Rice, Darjeeling Tea, Scotch Whisky, Irish Whiskey, Champagne, Sherry, etc. In India, the

law is contained in the “The Geographical Indication of Goods (Registration and Protection) Act,

1999”, which came into force on September 15, 2003 and is fully compatible with TRIPS.

Industrial Designs

Much thought, time and expense are incurred by companies in finding a design, which will increase

sales. The object of design registration is to see that the originator of a profitable design is not deprived

of his reward by others applying it to their goods without his permission. The features of the design

should appeal to the eye and should be judged solely by the eye and not by any functional

considerations. In India, the law is contained in the Designs Act, 2000, which came into force on May

11, 2001 and is compatible with TRIPS.

Patents

A patent is a monopoly right granted to a person who has invented a new and useful article or an

improvement of an existing article or a new process of making an article. Patent law has been the most

contentious law for complying with TRIPS. It has raised legal, ethical, pricing and health issues. In

India, the law is contained in the Patents Act, 1970. A number of amendments were required in this law

to make it compatible with TRIPS. These were planned in a phased manner. The amendments done in

2002 have come into force on May 20, 2003 and the last amendments came into effect from January 1,

2005.

Layout designs of Integrated Circuits

The original layout design (topography) of a semiconductor integrated circuit is the result of creator’s

own intellectual efforts, although he works with CAD tools. This layout design is not commonly

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known to the creators of layout designs and needs to be protected. The law in India is contained in the

Semiconductor Integrated Circuits Layout-Design Act, 2000.

Undisclosed information

There is no copyright in ideas or information as such and accordingly there is no remedy under the

copyright law for unauthorized use of confidential ideas or information obtained directly or indirectly

by one person from another. Remedy lies in seeking legal proceedings for breach of confidence or

breach of trust. Injunction and damages are the common reliefs sought. Different countries have

responded in various ways, some confining protection to general civil remedies affecting contract, tort,

property and perhaps unjust enrichment; some – particularly common law jurisdictions – building

specific provisions into their law of unfair competition; some generating a form of ‘sui generis’

protection. However, there is reluctance to give them the absolute character of ‘property’. The law is

not well developed in India and there is no specific legislation regulating this area of law. India follows

the common law approach of protection based on the case laws.

Anti-Competitive Practices

Competition is the mid-wife of development. For the society to progress, it is essential that competition

is encouraged and all monopolistic tendencies are nipped in the bud. All the nations of the world are

trying their best to have laws against unfair competition and monopolies. In India, the law is contained

in the Monopolies and Restrictive Trade Practices Act, 1969 that will shortly be replaced by the

Competition Act, 2002 and the formation of the Competition Commission. The Competition Act has

not yet come into force fully.

The Indian Perspective

India has its own concerns about the new IP regime. Out of all the branches of IP discussed above,

patent law is the most controversial – issues of product patent in pharmaceuticals, rising cost of drugs

and thus drugs going out of reach of masses are some of those major concerns. India being a socialistic

country, such issues, which have a direct effect on the health of one billion Indians, are surely going to

be of importance – economically, legally and politically. The other issues relate to copyright

infringement – music, video, software and even text. Trademark infringement – counterfeit goods, sub-

licensing; issues related to Geographical indications – basmati rice, turmeric, questions related to

traditional knowledge; designs – rampant copying; trade secrets, etc. are also getting noticed.

However, there is ignorance about the subject and the implications it may have on business as well as

the society are underestimated. Thus, there is an urgent need to disseminate information about IPRs.

Concerted effort by the government, legal fraternity, educational institutions, enforcement agencies and

chambers of commerce towards spreading awareness and preparing skilled manpower is the need of the

hour lest we should lag behind in the race for development.

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lab-pgp reading material, oct-dec 2014.pdf

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