Thursday, August 29, 2013

Supreme Court on Novation and Arbitration clauses

A couple of days ago, we had pointed out a judgment of the Bombay High Court on separability. In that case, a MoU between the parties treated an earlier SPA as “null and void”. The SPA contained an arbitration clause, while the MoU did not. The Division Bench held, however, that the dispute between the parties (inter alia pertaining to validity of the MoU) was governed by the arbitration clause in the SPA, which was separable and was not washed away with the ‘cancellation’ of the SPA. The Supreme Court has considered the issue recently in separate proceedings: the judgment of the Supreme Court has been handed down a week after the High Court judgment. The Supreme Court has stated the law in the following terms:

"Learned counsel also submitted that arbitration clause is a collateral term in the contract, which relates to resolution of disputes and not performance and even if the performance of the contract comes to an end on account of repudiation, frustration of breach of contract, the arbitration agreement would survive for the purpose of resolution of disputes arising under or in connection with the contract… We are of the view that survival of the arbitration clause, as sought by the appellant in the agreements dated 01.04.2007 and 01.04.2010 has to be seen in the light of the terms and conditions of the new agreement dated 01.02.2011. An arbitration clause in an agreement cannot survive if the agreement containing arbitration clause has been superseded/novated by a later agreement… if the contract is superseded by another, the arbitration clause, being a component part of the earlier contract, falls with it. But where the dispute is whether such contract is void ab intio, the arbitration clause cannot operate on those disputes, for its operative force depends upon the existence of the contract and its validity…"


Perhaps, we have not yet seen the end of this issue. The decision of the Supreme Court in Young Achievers v. IMG is available on judis, and also here.

Wednesday, August 28, 2013

RBI releases discussion paper on banking structure in India

The RBI issued guidelines for licensing of new banks in the private sector, vide its press release dated February 22, 2013 (covered here). It was stated in the guidelines that there was a need for an explicit policy on banking structure in India, keeping in view the recommendations of the Narasimham Committee, Raghuram Rajan Committee and other viewpoints. Accordingly, it was announced in the Monetary Policy Statement 2013-14 on May 03, 2013 that a discussion paper on ‘Banking Structure in India – The Way Forward’ would be issued. 

The RBI has released this discussion paper on August 27, 2013. The discussion paper identifies certain building blocks for the reorientation of the banking structure to address various issues such as enhancing competition, financing higher growth, providing specialized services and furthering financial inclusion.The paper also emphasizes the need to address the concerns arising out of such changes with a view to managing the trade-off for ensuring financial stability. The issues covered in the discussion paper include small banks v. large banks, universal banking model, block licensing v. continuous licensing, presence of foreign banks in India (and Indian banks overseas), deposit insurance, Government presence in the banking sector and so on.

Comments, if any, on the issues raised in the discussion paper may be forwarded by September 30, 2013 to the RBI. Readers are encouraged to share their thoughts/ analyses with us by way of comments.

-- Satyajit Gupta

Monday, August 26, 2013

No More Front Running Through The Back Door

[This post is contributed by Anjali R. Menon, who is a Senior Associate at a leading law firm in Mumbai. She also runs a blog at http://atlawggerheads.wordpress.com/. She can be reached at anjali.r.m@gmail.com.

It relates to the issue of front running, which has been previously discussed on this Blog in the context of cases decided by the Securities Appellate Tribunal (SAT) and the Securities and Exchange Board of India (SEBI). In this post, Anjali discusses some new proposals by SEBI intended to plug some loopholes that exist under the current legal regime]

On 12 August 2013, the Securities and Exchange Board of India (SEBI) at its Board meeting decided to put an end to front running once and for all. Through its press release, SEBI announced that the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (FUTP Regulations) will soon be amended to ensure the following:

(i) the current provisions prohibiting front running will not be regarded as exhaustive; and

(ii) illegal mobilisation of funds without SEBI registration as a collective investment scheme (CIS) would be regarded as a fraudulent and unfair trade practice.

So what does all this imply? What is 'front running' and why are these proposed amendments required?

'Front running' has not been defined in any Indian statute. Although the term sounds like a proactive, diligent act, it is not at all laudatory. The easiest way of explaining 'front running' may be by drawing a parallel with insider trading. Why is the latter prohibited? Because an insider has access to unpublished price sensitive information which could be misused to manipulate the market and reap profits. Front running is like insider trading by an outsider. Who are these outsiders? Now that's the question!

The FUTP Regulations as they currently stand prohibit an 'intermediary from buying or selling securities in advance of a substantial client order' (Regulation 4(2)(q) of the FUTP Regulations). Stock brokers, merchant bankers, portfolio managers, investment advisers, FIIs, asset management companies are some of the intermediaries regulated by SEBI.

SEBI and the Securities Appellate Tribunal (SAT) faced several instances (here and here) of persons benefitting from the price movement of a company's shares by trading in shares of the company based on information of forthcoming orders of another trader in the market. But the authorities could not book the individuals for 'front running' as these individuals were not intermediaries - even though some of these individuals traded on the shares after the confidential information had been passed on to them by intermediaries, and the number of shares traded by such persons were synchronized with and identical to the subsequent price-influencing orders.

There are several other broad provisions in regulation 3 of the FUTP Regulations which ban any person from buying, selling or otherwise dealing in securities in a fraudulent manner, or from employing any manipulative/deceptive device during purchase/sale of any listed security. However, the hands of the authorities were tied because the specific regulation prohibiting front running applied only to intermediaries. The authorities observed that the front running prohibition did not always read this way - the 1995 regulations (which were replaced by the FUTP Regulations in 2003) barred any person and not merely intermediaries from front running.

This is why SEBI has proposed amendments to the FUTP Regulations to ensure individuals and unregistered CISs do not take advantage of this loophole and circumvent the law by undertaking front running. SEBI intends to amend the FUTP Regulations to clarify that the manipulative, fraudulent and unfair trade practices listed in regulation 4 of the FUTP regulations will not be regarded as exhaustive and the general provisions of regulation 3 will have an overriding effect. To put an end to CISs operating without SEBI registration, SEBI has also passed the Securities Laws (Amendment) Ordinance, 2013 (SEBI Ordinance) and declared that any pooling of funds involving a minimum corpus of INR 100 crores will be deemed to be a CIS. The SEBI Ordinance has also intensified SEBI's investigative and enforcement powers - i.e. SEBI can now conduct search and seizure, call for records and information (including telephone call data records), record statements on oath, obtain information from overseas regulators, arrest and detain defaulter’s or attach his assets and bank accounts. SEBI can also establish special courts for speedy disposal of cases.

In one particular case SEBI did not follow the trend set by SAT and sought to impose sanctions on non-intermediaries (an equity dealer of a listed company and his wife) for indulging in front running. But this case will not serve as a precedent for prohibiting non-intermediaries from front running because the rationale for punishing the offenders in this case was very different. Relying on regulation 3 of the FUTP Regulations, SEBI alleged that the ill-gotten profits of the husband-wife duo were nothing but losses suffered by the public listed company, its shareholders and customers and the investors in the securities market.

All in all, the walls are closing in on the front runners - their finishing line is near!

- Anjali R. Menon

Saturday, August 24, 2013

Guest Post: Abuse of Dominant Position by ESPN

(In the following post, Mr Sapan Parekh, a student at the National Law School of India University, Bangalore, considers whether the telecast policies of ESPN are consistent with competition law)

Football fans in India received the shock of their lives when ESPN Star Sports (“ESS”) did not broadcast the opening English Premier League match between Liverpool and Stoke City on any of its regular channels (Star Sports and Star Cricket) but only on Star Cricket HD (here). This caused an outrage among the fans as was quite apparent from the nasty comments on various fora operated by ESS. While ESS’s actions have been condemned, whether the same can lead to any legal remedy is a question which involves deep consideration of the Competition Act, 2002( “Act”).
The Act stipulates that no enterprise shall abuse its dominant position [section 4(1)]. In order to come to any conclusion regarding contravention of this provision, a step-by-step analysis is imperative.
1.      1. Is ESPN Star Sports an “enterprise” for the purposes of the Act?
A fundamental issue that must be addressed at this stage is whether the Act would be applicable to companies not incorporated in India or in cases where the anticompetitive acts are carried outside the territory of India. Generally, when determining the applicability of the Act in such circumstances, the deciding factor is whether a company’s activities have any anticompetitive effects in the territory of India [s.3(1) and  explanation to s.4]. It is not necessary for the alleged anticompetitive acts (like an agreement) to have been committed in India; just  that the acts must cause/likely to cause anticompetitive effects in India. Thus, though ESS has not been incorporated in India, the Act nevertheless governs its activities as far as its effects on the Indian market are concerned.
Section 2(h) of the Act defines enterprises as any person (which includes a company) who engages in, inter alia, production of articles or goods, or the provision of services of any kind. Further, section 2(u) defines “service” as including service of any description made available to potential users in connection with, inter alia, entertainment and amusement. ESS is a corporation engaged in the broadcast of various national and international sporting events (services for entertainment/amusement). Evidently,  ESS falls squarely within the definition of “enterprise” for the purposes of section 2(h), thus attracting the full force of the Act.
2.      2. Does ESPN Star Sports have a dominant position?
The Act defines a dominant position as a position of strength which would allow an enterprise to operate independent of competitive forces prevailing in the relevant market or  affect its competitors/consumers/ relevant market in its favor (Explanation to section 4).
From the definition of dominant position it is clear that a dominant position is always with respect to a relevant market. The Act, in section 2(r), states that the relevant market is to be determined with respect to the relevant geographic market [area in which the conditions of competition for goods/services are distinctly homogenous] and the relevant product market [market comprising all products/services which are regarded as interchangeable by the consumer]. In order to determine relevant product market reliance is placed on the conditions stated in section 19(7). In the given circumstances, strong consumer preference (as most football fans would attest to) and specialized producers of the content [see section 19(7)(c) and 19(7)(e)] ensure that these services provided by ESS cannot be substituted by services provided by any other channel. Thus, the relevant market for ESS would be the market for service of a broadcaster for Premier League matches in India.
Moreover, ESS is the only company with a license to broadcast Premier league matches in India. Unarguably this constitutes a commercial advantage over competitors [section 19(4)(d)]. This means that ESS has a complete share of the relevant market. Thus, prima facie ESS is dominant in the relevant market.
3. Has ESPN Star Sports abused its dominant position?
Section 4(2) of the Act comprehensively lists down the acts of dominant enterprises which would be termed as abuse for the purposes of this statute. For the purpose of this discussion, it can be argued that ESS abused its dominance by (a) imposing supplementary obligations which have no connection with the subject of contract, and (b) leveraging  dominant position in one relevant market [service of a broadcaster for Premier league matches in India] to protect another relevant market[service of providing HD sports channels in India].
a.        Supplementary obligations which have no connection with the subject of contract 
The consumers, till recently, paid a fixed amount for viewing Premier League matches on the regular channels. However, suddenly ESS expects consumers to pay for provision of the same service of broadcast but only in HD i.e. ESS has bundled HD quality with the Premier League matches. This would prima facie constitute “tying”, i.e. it is impossible to take one product without another. The acts of ESS would therefore constitute an abuse of its dominant position. However, one should remember that not all forms of tying are anticompetitive.  For instance, railways on their certain long distant trains bundle food charges with travel charges. However, it is not likely that this would be held as an abuse of its dominant position as according to commercial usage there is a rational nexus between availing the service of travel by trains on long distant routes and the  provision of food on trains. 
b.  Leveraging dominant position
The market for service of broadcast of HD sports channels in India is populated by channels like Ten HD, Trace Sports HD and SONY Six HD. These are competitors to ESPN HD and Star Cricket HD which are operated by ESS. It is arguable that ESS used its dominant position in the relevant market (broadcast of Premier league matches in India) to protect (and in all likelihood expand) its share in another market (the market for broadcast of HD sports channels in India). Given the frenzy surrounding Premier League matches, if such anticompetitive acts of ESS are allowed to continue, it would not be surprising if the demand for ESS’s HD channels hit the roof while its competitors lose market share.
While a prima facie case has been made out against ESS, however it would be hasty and incorrect to conclude that any act of an enterprise which adversely affects consumers would contravene the provisions of the Act. For instance, a broadcaster with an exclusive license for the broadcast of Cricket World Cup could definitely price his services higher than regular channels due to the high cost of the license or to possibly take advantage of the inelastic demand. This price hike would become anticompetitive and be categorized as an abuse of dominant position only if the new price is exorbitant, to the extent of being unfair to the consumers. Thus evidently, every act of an enterprise affecting consumers adversely would not be considered as anticompetitive. Only those acts which are committed by a dominant enterprise and which satisfy the conditions of abuse as enunciated under section 4 would be anticompetitive for purposes of section 4.
Remedy
The remedy is available under section 19 of the Competition Act. Any person can file “information” regarding a supposed contravention of the Act in the Competition Commission of India. If the Commission finds a prima facie case against ESS, it shall order the Director General to investigate the allegations in the information and subsequent procedures would kick in, as has been mandated under the Act (section 26).
Whether the machinery of the Competition Act shall be used as a remedy for the alleged anticompetitive practices of ESPN Star Sports, only time will tell.

The Indian Fiona Trust?


In an important judgment, the Bombay High Court has examined in depth the doctrine of separability in the law of arbitration. The judgment and its implications will be analysed in further detail subsequently; for the convenience of readers, however, some important principles laid down are extracted below.
----

 
…[A]n arbitration agreement can and does survive a termination, repudiation or frustration of the contract. The law has evolved the doctrine of separability as the basis for enabling parties to arbitrate, independent of the status of their contract. Judges in the common law world – and we in India are no exception – have advanced the doctrine of separability to ensure that the sanctity of arbitration is not destroyed by disingenuous litigants.                                                                                                        

(Para 22)

 

… [S]ection 45 requires the Court to focus upon whether the arbitration agreement is null and void, inoperative or incapable of being performed. Parliament has carefully, in selecting the language of the statutory provision, required the Court to apply its mind to the subsistence and validity of the arbitration agreement and not to whether the main contract of which the arbitration agreement is but a collateral part is valid or continues to subsist. This must, with the evolution of the law on the subject, necessarily be so because an arbitration agreement is capable of surviving the invalidation or termination of the main contract between the parties. Undoubtedly, there may be cases where the arbitration agreement may perish with the main contract itself. For instance, where the main contract between the parties is held not to have been executed at all as for instance when a party to the agreement asserts that its signature on the contract is forged, it is but evident that the arbitration agreement would not exist, if the signature of the executant on the contract itself is found to be forged. But even in such a case, the reason why the arbitration agreement perishes is because, in the finding of the Court, the arbitration agreement itself is found not to have been executed by both the parties

                                                                                                                                                                                (Para 28)

 

… [T]he issue as to whether the arbitration agreement survives or perishes along with the main contract would depend upon the nature of the controversy and its effect upon the existence or survival of the contract itself… If the nature of the controversy is such that the main contract would itself be treated as non est in the sense that it never came into existence or was void , the arbitration clause cannot operate, for along with the original contract, the arbitration agreement is also void. Similarly, though the contract was validly executed, parties may put an end to it as if it had never existed and substitute a new contract solely governing their rights and liabilities thereunder. Even in such a case, since the original contract is extinguished or annihilated by another, the arbitration clause forming a part of the contract would perish with it… There may, however, be cases where it is the future performance of the contract that has come to an end. Such an eventuality may arise due to a number of circumstances, in which one or both the parties may be discharged from further performance. Termination of the contract by one party, repudiation of the contract by one party and its acceptance by the other and frustration of the contract are some of the circumstances… In all such cases, the contract is not put an end to for all purposes because there may be rights and obligations which had arisen earlier when it had not come to an end. The contract subsists for those purposes and the arbitration clause would operate for those purposes… The doctrine of separability requires, for the arbitration agreement to be null and void, inoperative or incapable of performance, a direct impeachment of the arbitration agreement and not simply a parasitical impeachment based on a challenge to the validity or enforceability of the main agreement. In other words, arguments for impeaching the arbitration agreement must be based on facts which are specific to the arbitration agreement. There may, of course, be facts which are specific to both the main agreement and the arbitration agreement, but there may well be facts which are specific to the main agreement, but not to the arbitration agreement. In the former case, the arbitration clause would perish with the main contract while in the latter case, it would not…

                                                                                                                                                                                (Para 31)

 

It is interesting to note that the Court recognizes that “there may be facts which are specific to both the main agreement and the arbitration agreement”, in which case the
arbitration clause would perish…” – only when the case is one which is based on “facts which are specific to the main agreement, but not the arbitration agreement” would the arbitration agreement not “perish”. Lord Hoffmann’s decision in Fiona Trust [2007] UKHL 40 was cited by the Court, where Lord Hoffmann had held:

… [an arbitration agreement] can be void or voidable only on grounds which relate directly to the arbitration agreement. Of course there may be cases in which the ground upon which the main agreement is invalid is identical with the ground upon which the arbitration agreement is invalid. For example, if the main agreement and the arbitration agreement are contained in the same document and one of the partners claims that he never agreed to anything in the document and that his signature was forged, that will be an attack on the validity of the arbitration agreement. But the ground of attack is not that the main agreement was invalid. It is that the signature to the arbitration agreement, is a “distinct agreement”, was forged.

------ 
Justice Chandrachud’s judgment for the Court, Mulheim Pipecoatings v. Welspun Fintrade – delivered on 16 August (Coram: DY Chandrachud and SC Gupte JJ) – is now available on the Bombay High Court website, and can be accessed here. We will discuss the issue further in the coming days.

Thursday, August 22, 2013

Guest Post: Swastik Gases v Indian Oil Corporation

(In the following post, Ms Renu Gupta, Advocate, analyses the recent judgment of the Supreme Court on exclusive jurisdiction clauses)

The recent Supreme Court decision of Swastik Gases Private Limited v. Indian Oil Corporation Limited, relating to ouster of jurisdiction clauses has been discussed on this blog here. In this article I have discussed that this judgment does not provide any helpful guideline to understand the application of “expressio unius est exclusio alterius”, i.e., expression of one is the exclusion of another.

The question in Swastik Gases was whether an ouster of jurisdiction clause, without the use of expressions such as “only”, “alone”, “exclusive”, “exclusive jurisdiction”, could still be construed to oust the jurisdiction of all courts except the one mentioned, in case of an application made under Section 11 of the Arbitration and Conciliation Act, 1996 (“Act”).

The agreement was “subject to jurisdiction of courts at Kolkata”. According to Indian Oil the agreement had been signed at Kolkata; while Swastik’s stand was that it was signed at Jaipur and except execution of the agreement at Kolkata, all necessary facts forming part of the cause of action arose at Jaipur (see para 12).
                                                                                                                                              
Lokur J., in his separate but concurring judgment, rightly stated that there are two categories of decisions regarding ouster clauses. First, where the intention of the parties can be culled out from use of the expressions “only”, “alone”, “exclusive”. Second, where the exclusion clause is not specific in as much as words like “only”, “alone” or “exclusively” are not used.

We are here concerned with the second category of decisions. The underlying basis of all the decisions in the second category is reliance on the maxim “expressio unius est exclusio alterius”, based on ABC Laminart.

The Supreme Court in ABC Laminart while discussing this maxim observed at paragraph 16 that:

“As regards construction of the ouster clause when words like ‘alone’, ‘only’, ‘exclusive’ and the like have been used there may be no difficulty. Even without such words in appropriate cases the maxim ‘expressio unius est exclusio alterius’ - expression of one is the exclusion of another - may be applied. What is an appropriate case shall depend on the facts of the case. In such a case mention of one thing may imply exclusion of another. When certain jurisdiction is specified in a contract an intention to exclude all others from its operation may in such cases be inferred. It has therefore to be properly construed.”

Thus, the Court in ABC Laminart did not lay down any guideline to determine what may be “an appropriate case” to apply “expressio unius est exclusio alterius” to an ouster clause, and left it to be determined based on facts of each case.

In the table below, I have analysed the decisions in the second category:

Case
Clause
Part of cause of action arising in the court not specified in the ouster clause

Decision
Comments
ABC Laminart

Any dispute arising out of this sale shall be subject to Kaira jurisdiction.
Goods were delivered at the address of the respondent at Salem.
Jurisdiction of Courts other than in Kaira were not clearly, unambiguously and explicitly excluded and therefore, the Court at Salem had jurisdiction.


This work order is issued subject to the jurisdiction of the High Court situated in Bangalore in the State of Karnataka. Any legal proceeding will, therefore, fall within the jurisdiction of the above Court only.

Contract was entered into and executed within Dhanbad.

Jurisdiction clause is not void under Section 23 and 28 of Contract Act. Therefore, jurisdiction of all other courts is excluded.
Relies on ABC Laminart without any factual analysis as how does the clause unambiguously and explicitly exclude jurisdiction of all other courts.
Subject to Anand jurisdiction.
Part of cause action arose in Bombay.
The ouster clause does not use words like ‘alone’, ‘only’, ‘exclusive’ and the like. Thus the maxim ‘expressio unius est exclusio alterius’ cannot be applied under the facts and circumstances of the case and it cannot be held that merely because the deposit receipt contained the endorsement, the jurisdiction of all other competent courts is barred.

Relies on ABC Laminart and in the facts of the case held that the jurisdiction clause is not exclusionary.
Any legal proceeding arising out of the order shall be subject to the jurisdiction of the Courts in Mumbai.
According to plaintiff, ordered goods were delivered to the defendant in Delhi and the value of goods was to be paid by the defendant to the plaintiff at Delhi.
Since (i) order was placed at Bombay, (ii) order was accepted at Bombay, (iii) advance payment was made at Bombay, (iv) final payment was to be made at Bombay, there was a clear intention to confine the jurisdiction of the Courts in Bombay to the exclusion of all other Courts.

Relies on ABC Laminart and in the facts of the case held that the jurisdiction clause is exclusionary.

Seemingly the decision was based on larger part of the cause of action having arisen in Bombay.
The place of arbitration shall be Kolkata.
For section 9 application - After discharge of goods at port Pipavav in Gujarat, they were stored in a godown within the jurisdiction of the Bhavnagar Court.
Parties had knowingly and voluntarily agreed that the contract would be subject to Kolkata jurisdiction and even if the courts in Gujarat also had jurisdiction, it has to be held that the agreement to have the disputes decided in Kolkata was valid.

Relies on ABC Laminart without any factual analysis as how does the clause unambiguously and explicitly exclude jurisdiction of all other courts.


Shriram City Union Finance Corporation v.  Rama
Mishra

…. differences and for disputes arising out of this agreement shall be filed and referred to the courts in Calcutta for the   purpose   of jurisdiction.


Through the jurisdiction clause in the agreement, the parties have bound themselves that the courts in Calcutta alone which  will have jurisdiction.
Relies on ABC Laminart without any factual analysis as how does the clause explicitly exclude jurisdiction of all other courts.


Evidently, relying on “expressio unius est exclusio alterius” stated in ABC Laminart, the Courts have applied this maxim, without any discernible guideline as to its usage.

In Hanila Era, the only seeming rationale for applying “expressio unius est exclusio alterius” is that a larger part of cause of action arose within the territorial limits of the courts mentioned. However, Section 20(c) of Code of Civil Procedure, 1908, specifies that all courts where cause of action, wholly or in part arises have jurisdiction. It does not say that Courts where larger part of cause of action arose will have preference. Thus, even applying the test of where a larger part of cause of action does not seem right.

In Swastik Gases the Court held that:

“31…It is a fact that whilst providing for jurisdiction clause in the agreement the words like  ‘alone’,  ‘only’,  ‘exclusive’ or ‘exclusive jurisdiction’ have not been used but this, in our view, is not decisive and does not make any material difference

The intention of the parties  - by having clause 1 in the agreement  – is clear and unambiguous that the courts at Kolkata shall have jurisdiction which means that the courts at Kolkata alone shall have jurisdiction. It is so because for construction of jurisdiction clause, like clause 18 in the agreement, the maxim expressio unius est exclusio alterius comes into play as there is nothing to indicate to the contrary.

Further, Lokur J. held that:

“4. The use of words like “only”, “exclusively”, “alone” and so on are not necessary to convey the intention of the parties in an exclusion of jurisdiction clause of an agreement.”

With respect, the aforesaid findings of the Court are contrary to the settle principle of law that intention of the parties can be culled out from use of the expressions “only”, “alone” and “exclusive” (see New Moga Transport Co v United India Insurance).

In a situation where there seemed to be no denial by Indian Oil of the fact that except execution of the agreement at Kolkata, all necessary facts forming part of the cause of action arose at Jaipur (see para 12), perhaps relying on Hanila Era, the test of larger part of cause of action could have been applied and jurisdiction of Jaipur courts could have been respected.

Therefore, just like the other decisions in the second category, explained above, Swatik Gases also does not lay down any clear guideline for applying “expressio unius est exclusio alterius”.

With the facts of Swatik Gases, could the Court have applied some other principles of law regarding interpretation of contracts and come to the same conclusion as it did with the aid of the maxim “expressio unius est exclusio alterius”? I will attempt to address this question in a separate post.

Wednesday, August 21, 2013

Legal Metrology: Clarity on Institutional and Retail Consumers – Part 2


[The following post is contributed by Sunayna Jaimini, who is an Associate at Singhania and Partners, New Delhi and can be contacted at s.jaimini@singhania.in. The post contains research inputs from Kriti Kaushik, Associate at Singhania & Partners, New Delhi who can be contacted at kriti@singhania.in

This is a continuation from a previous post available here]

Judicial Analysis

Before discussing the judicial decisions on the matter, it is important to mention that the judgments below analyze the issue of direct and indirect sale to industrial and institutional consumers under the Standards of Weights and Measures (Packaged Commodities), Rules, 1977. In the year 2009, Legal Metrology Act replaced the Standard Weights & Measures Act, 1976 and as a result the rules made under the erstwhile Act were replaced with the rules under the Legal Metrology Act. However, the below mentioned judicial decisions are still relevant as the same errant drafting that was present in the new Packaged Commodity Rules.

The Indian courts have taken different views on the interpretation of these provisions. The Hon’ble Bombay High Court in the matter Larsen & Toubro Limited vs. Union of India [2012 (275) ELT 153 (Bom)] while deciding on the issue whether Rule 6 declarations (under the erstwhile Standard Weights and Measures (Packaged Commodities), Rules, 1977) are required on packaged commodities sold to institutional or industrial consumer through a stockiest, has held that Rule 6 would not apply to industrial and institutional consumers who buy the commodities directly from the manufacturer. All other industrial and institutional consumers of the packed commodity to whom the retail package are not sold directly to the provisions of Rule 6 shall apply.

On the other hand the in the matter of Ewac Alloys Limited v. Union of India [2012(2) Kar LJ 324] the Hon’ble Karnataka High Court, differed from the decision above and held:

In the case of retail package, the manufacturer of goods meant for industrial use may not be able to supply the goods directly. Therefore, they may take the assistance of a stockiest. If the customers are spread over the country and if the manufacturing unit is in one part of the country and they want to concentrate on manufacturing activity, they may not have resource or ability to arrange for sale of their product throughout the country. In those circumstances, it is quite but natural that they need middle men or stockiest, as distributors, through whom they would distribute their product or sell their products to an industrial or institutional user. In such an event, that packaged commodity cannot be construed as a retail package…

…Therefore, it is clear that the protection under this Act is confined only to individuals and persons who are eking out livelihood by self employment and not to institutional and industrial consumers or consumers who purchase goods in large quantities. Therefore, requirement of Rule 6 is not required to be complied with by a manufacturer who sells his packaged goods to an industrial or institutional consumer through a stockiest.”

The decisions of the Karnataka and Bombay High Courts are conflicting with each other. On one hand the Bombay High Court has considered that only direct sale by manufacturer to the distributor would be considered under the exception to Rule 3, however, any sale made through a stockiest would be considered a retail sale. On the other hand Karnataka High Court has emphasized on the intent of packaging, and has held that if the intent of the package was for industrial or institutional it does not matter whether the sale was made through a stockiest or the manufacturer directly.

Upon the detailed analysis of the judgments above, we are more partial to the decision of the Bombay High Court, the reason being, that the main intention of Chapter II and specifically declaration under Rule 6 is that the consumer should be able to locate the manufacturer or the packer in case of any grievances with the product. The individual retail consumer is not in direct contact with the manufacturer and the product and declaration thereon are the only connection between the manufacturer and the ultimate consumer. Therefore, declarations regarding the product are required to be placed directly on the product.

However, the packages for industrial or institutional consumers do not require declarations as the products are sold directly by the manufacturer and the consumer has a direct link or connection with the manufacturer. Such an industrial or institutional consumer, in case of any grievances with the product, knows the person and point of contact with the manufacturer. Further, it could also be argued that the manufacturer has either had the opportunity to prove its worthiness to such an industrial or institutional consumer at the time of sale, or that the industrial and institutional consumer has contacted the manufacturer on the basis of the goodwill of the manufacturer. In either of the above scenarios the consumer is making an informed choice and the details of the manufacturer and the product are known to the consumer. Therefore, the requirement to make compliances under Chapter II does not arise for packages directly sold to institutional and industrial consumers. 

Clarity by Legislative Intervention

From the above we can see that the judicial decisions were divergent on the status of packaged commodities meant for institutional and industrial consumer sold through a distributor or stockiest. Therefore, the need of the hour was either a Supreme Court ruling, at the cost of being reprimanded for judicial legislation in the face of legislative apathy to the whole situation, or a (divine!) legislative intervention by amendment of the provisions of the Package Commodity Rules.

Much to the relief of manufacturers catering solely to institutional and industrial consumers, on June 6, 2013, an amendment was made to the Packaged Commodity Rules by which the exclusion of ‘industrial and institutional consumers’ from the meaning of ‘ultimate consumers’ in the definition of “retail package” was removed. Thereby, any package intended for industrial or institutional sale may be considered retail package. Further, the explanation under Rule 3 providing the meaning of ‘industrial’ and ‘institutional consumers’ has been lifted and placed under the Rule 2 the definitions clause.

The effect of the above-mentioned amendment is such that any product purchased by an industrial or institutional consumer from an entity other than the manufacturer itself will come under the purview of retail package. Meaning thereby, the declarations required under Rule 6 of the Packaged Commodities Rules will be applicable on packages sold through a distributor.

Simply put, the provisions of Chapter II shall be applicable to all such industrial or institutional consumers who buys the product from an entity other than the manufacturer.

(concluded)

- Sunayna Jaimini