Justice, Scalia and ‘The Merchant of Venice’

Posted on May 30, 2008 by Law Matters

Portia ang Shylock Ever since Justice Scaliaâ€™s book â€˜Making Your Case: The Art of Persuading Judgesâ€™ about legal writing and advocacy which he co-wrote with Bryan A. Garner came out, Iâ€™ve read quite a few interviews with and articles about him. Heâ€™s always made me laugh.

Consider his dissenting decision in US Supreme Court case, PGA v. Martin which he didnâ€™t think should have been brought before a court at all. While the majority held that Casey Martin, a professional golfer suffering from a degenerative circulatory condition, could use a motorized cart during tournaments under the Americans with Disabilities Act, Justice Scalia had this to say:

â€œIt has been rendered the solemn duty of the Supreme Court of the United States to regulate Commerce with foreign Nations, and among the several States, to decide What Is Golf. I am sure that the Framers of the Constitution, aware of the 1457 edict of King James II of Scotland prohibiting golf because it interfered with the practice of archery, fully expected that sooner or later the paths of golf and government, the law and the links, would once again cross, and that the judges of this august Court would some day have to wrestle with that age-old jurisprudential question, for which their years of study in the law have so well prepared them: Is someone riding around a golf course from shot to shot really a golfer? The answer, we learn, is yes. The Court ultimately concludes, and it will henceforth be the Law of the Land, that walking is not a â€œfundamentalâ€ aspect of golf. Either out of humility or out of self-respect (one or the other) the Court should decline to answer this incredibly difficult and incredibly silly question. â€¦ many, indeed, consider walking to be the central feature of the game of golfâ€”hence Mark Twainâ€™s classic criticism of the sport: â€˜a good walk spoiledâ€™.â€

More recently, speaking to the WSJ Law Blog, he referred to ‘The Merchant of Venice’ pointing out that, â€œ[I]f you write a contract to take a pound of flesh, then obviously you take whatever blood goes with it. Thatâ€™s implicit. That was terrible. But who cares! The good guy won, and the bad guy lost. And thatâ€™s basically what happens [in the press]. What we do here does not get faithfully conveyed.â€

The courtroom scene in ‘The Merchant of Venice’ have always struck me as being of the â€˜My Cousin Vinnyâ€™ variety: fun, easy to relate to, not difficult to understand and not entirely legally sound. However, I canâ€™t help but wonder whether such an absurd technicality would actually have wound up defeating Shylock in Shakespeareâ€™s play had he not been a Jew. Perhaps the Courtâ€™s acceptance of the Portia’s interpretation of the contract had less to with legal accuracy (or lack thereof) than it had to do with social acceptability and expedience.

I’m quite certain that Shakespeare’s audience would not have wanted to see a Jew ‘get the better of’ a Christian. And although I’m probably taking Justice Scalia’s comments completely out of context here, most cases, like almost all literature — not counting such books as A Hailey’s in which the nicest people always die rather pointlessly — require those who are perceived to be good or right to win. It doesn’t matter if, in reality, at worst, they are truly awful people, or if, at best, they have nothing in particular to recommend them.

Coming back to Justice Scalia though, in one of his recent interviews, he said something to the effect of â€˜once you realise that good people can have bad ideas, you can get along fine with those you disagree withâ€™. I fell in love with the thought of separating ideas from people although itâ€™s not something which Iâ€™m particularly good at doing.

Unconscionable Contracts

Posted on May 30, 2008 by Nandita Saikia

“This contract is so one-sided, I am astonished to find it written on both sides of the paper.” – Lord Evershed M.R.

The Doctrine of Unconscionability is one of the exceptions to the freedom of parties to contract. It comes into play where bargaining power is not evenly distributed. As a general rule, as long as a contract involves some form of consideration, courts do not get involved. However, if a contract is excessively one-sided, courts are willing to step in and come to the aid of the injured party.

Section 16 of the Indian Contract Act 1972 deals with undue influence. It says that a contract is said to be induced by undue influence if 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. For example, a person who is in a position of authority over another, or who stands in a fiduciary relation to the other, or who makes a contract with a person of sub-normal mental capacity is deemed to be in a position to dominate the will of that other person. If, in such situations, the transaction appears, on the face of it or on the evidence adduced, to be unconscionable the person who is in a position to dominate the will of the other is required to prove that the contract was not induced by undue influence.

Further, under Section 19A of the Act, the party whose consent was obtained by undue influence may choose to avoid the contract. The Court may set the contract aside either absolutely or, if the party entitled to avoid it has received any benefit under it, upon such terms and conditions which the Court thinks are just.

However, the application of the doctrine under Indian statutory law is on a much firmer footing under Section 23 of the Act which says that the consideration or object of an agreement is not lawful if it is immoral, or opposed to public policy. And if the consideration or object is not lawful, the contract is void and unenforceable.

Deciding whether or not a contract is unconscionable though is often difficult to do – in some instances, it is obvious such as in Employment Contracts which contain absurdly broad non-compete clauses or in boilerplate contracts which favour sellers and other drafters. In others, however, it is more difficult to tell the difference between a well negotiated deal (for one party) and between the imposition of an unconscionable contract term on another party to the contract. Also, the decision as to whether or not a contract is actually unconscionable relies heavily on morality. As such, the factors which come into play to reach a decision are decidedly subjective.

Augusto C. Lima says, “The defense of freedom of contract, which finds contemporary resonance in the economic analysis of contract law, usually entails the narrow application of unconscionability. The concept of unconscionability for such a purpose is narrowed by the assignment of a procedural, rather than substantive, nature to it. In such a procedural view, unconscionability is but a device to fill in the gap between a defect in contract formation (such as fraud or duress) and unconscionability as substantive unfairness (focused on the morality of the transaction),” in ‘When Harry Met Kreutziger: A Look into Unconscionability Through the Lenses of Culture‘.

Indian courts have generally been willing to interfere in boilerplate contracts on the ground that they are unconscionable. However, proving unconscionability in other situations can be an uphill task in the absence of clear evidence either within the agreement itself or otherwise.

Some Indian cases on the subject:

(This article is by Nandita Saikia and was first published at LawMatters.in.)

Assignments and Contracts

Posted on May 27, 2008 by Law Matters

The doctrine of privity mandates that a third party cannot enforce a contract. Assignment is in a way an exception to this doctrine. It has been defined by Blackâ€™s Law Dictionary to mean a â€˜transfer or making over to another of the whole of any property, real or personal, in possession or in action, or if in estate or in right thereinâ€™.

A party to a contract can assign the benefits which are to accrue to him under the contract to a third person. The third person is not a third party beneficiary and he can, once the assignment is complete, enforce the contract of his own accord. The assignor may, subject to the terms of the contract, still be liable on it. However, post-assignment, the contract retains its bilateral character with the contract virtually becoming one between the other party to the contract and the assignee.

Section 37 of the Indian Contract Act, 1872 (which speaks of the obligations of parties to contracts) enables parties to assign their contractual obligations by saying:

â€œThe parties to a contract must either perform, or offer to perform, their respective promises, unless such performance’ is dispensed with or excused under the provisions of this Act, or of any other law.
Promises bind the representatives of the promisors in case of the death of such promisors before performance, unless a contrary intention appears from the contract.â€

However, although some statutes such as the Copyright Act speak of assignments, there is no explicit provision in the Contract Act which allows for the assignment of a contract in spite of the fact that Common Law countries usually allow for much freedom in the assignment of contracts.

Under Indian law, the matter of whether or not a contract can be assigned is determined by considering the intention of the parties as spelt out by the contract if at all it has been spelt out. Assignments may be of the rights under a contract or of the obligations under the contract. Generally, rights under a contract can be assigned unless the rights in question cannot be assigned under law.

In addition to this, the obligations under contracts of a personal nature invariably cannot be assigned and must be performed by the parties who have contracted to perform them. The classic example is that of a commission to paint a portrait â€“ the artist in such a contract cannot have someone else perform his obligation viz. have someone else paint the required portrait.

This obviously does not apply where a would-be assignor obtains the consent of the other party to the contract. In the case of Khardah Co. Ltd. v. Raymon and Co. (India) Pvt. Ltd., 1962 the Supreme Court laid down the law quite clearly by saying:

â€œAn assignment of a contract might result by transfer either of the rights or of the obligations thereunder. But there is a well-recognised distinction between these two classes of assignments. As a rule obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in substitution of liabilities. On the other hand rights under a contract are assignable unless the contract is personal in its nature the rights are incapable of assignment either under the law or under an agreement between the parties. â€¦
An arbitration clause does not take away the right of a party to a contract to assign it if it is otherwise assignable. â€¦
There is in law a clear distinction between assignment of rights under a contract by a party who has performed his obligations thereunder, and assignment of a claim for compensation which one party has against the other for breach of contract. The letter is a mere claim for damages which cannot be assigned in law, the former is a benefit under an agreement, which is capable of assignment.â€

While the substantive provisions of Indian law are almost invariably in favour of honouring the intention of the parties to a contract, figuring out exactly what their intention vis-Ã -vis the contract is has often proved to be difficult. As a matter of practical expedience, it is therefore advisable to include a clause in every contract stating exactly what the intention of the parties is with respect to assignment.

(This article is by Nandita Saikia and was first published at LawMatters.in.)

Supreme Court Comes to the Aid of Coop. Societies

Posted on May 26, 2008 by Law Matters

In the case of Indian Bank v. Godhara Nagrik Cooperative Credit Society Ltd. and another, decided on May 16, 2008, a Bench of the Supreme Court comprising Justices S B Sinha and Lokeshwar Singh Panta devised a formula to ensure that genuine cooperative societies are not caused hardship because of a scam.

In this case, some cooperative societies which had deposited certain amounts in cash in fixed deposits of Banks for which Fixed Deposit Receipts (FDRs) were to be issued through some so-called Commission Agents of the Banks on payment of huge commission. This is ordinarily not allowed by the Nationalized Banks.

Applications for grant of loans by various persons were filed before the prescribed authorities of the banks on the basis of the FDRs. Allegedly a large number of officers of the banks were involved in a scam whereby unofficial investments of the said amount were being made.

As and when the FDRs matured, the investors requested the Banks for their encashment. The banks refused to accede thereto stating that the amount under the FDRs had already been paid by way of loans and, thus, no further amount was payable. It was contended that a fraud on the banks has been practiced to which the depositors and the officers of the banks were parties.

The Cooperative Societies filed a writ petition in the High Court. Neither party disputed that Writ Petitions against the banks being `State’ within the meaning of Article 12 of the Constitution of India were maintainable. The Supreme Court also said that a writ petition indisputably would be maintainable even in relation to a matter arising out of contract qua contract.

A Committee was set up to investigate the matter. It was found that principally the officers of the banks were involved in the matter of commission of the alleged fraud on the Banks.

Relying on and/or on the basis of the report of the Committee, the Division Bench of the High Court opined that as the writ petitioners were not parties to the fraud, subject to any other or further orders that may be passed in the criminal case, appellant-banks should be directed to pay the amounts under the FDRs to the depositors.

The core question which arose for consideration in the writ petitions was whether, keeping in view the apprehension in the mind of the Bank that it has been subjected to fraud by its own officers possibly with the connivance of the cooperative societies, it unfair and unreasonable of the Bank to refuse to make payment. The Supreme Court said that the answer to that question prima facie must be rendered in the negative. The next question was: if the cooperative societies were not parties to the fraud, whether even in a matter involving private law, as a trustee of the investors’ money, the Bank may be held to be liable to refund the amount.

Indisputably, whether as a public sector undertakings or otherwise the banks cannot refuse to accede to the just demand of the investors to pay any amount lawfully due to them inter alia on the premise that their officers are guilty of commission of any fraud.

However, it is one thing to say that fraud has been committed by their officers to cause wrongful loss to the bank but it is another thing to say that the banks are constructively liable for the acts of their officers.

Adopting the Alter Ego approach adopted in the theory of corporate liability, the Supreme Court assumed, for the purpose of this case, in theory, not only that the Banks are constructively liable for acts of their employees but also that the Banks are liable to pay the amount under the contract for which the FDRs were issued.

In this case, however, it was unclear if some of the cooperative societies were parties to the fraud.

And so, with regard to this particular case, the court asked, â€œCould those cooperative societies which had absolutely no role to play in the entire episode should suffer in any manner whatsoever? The cooperative societies/cooperative banks for the purpose of their day-to-day functioning, require the amount which they have invested in FDRs on their maturity. Should they wait till the criminal cases are over? Should they be pushed to institute civil suits? They can indisputably be compensated by grant of interest. What, however, happens if in the meanwhile in the absence of the requisite funds being available to them, they find it difficult to run the day-to-day affairs?â€

The Supreme Court issued directions saying:

The Bank being a `State’ within the meaning of Article 12 of the Constitution of India with the assistance of officer(s) of the Central Bureau of Investigation should make all attempts to ascertain as to which of the cooperative societies/cooperative banks are in no way involved with the scam, and subject to such precautions as may be found necessary to be taken, release the amount in their favour.

The quantum of the amount which all the depositors would have otherwise received, in the event their investment in FDRs is found to be genuine, should be informed thereabout. Once the liability of the bank is determined, the bank may invest the said amount in its own account and issue fresh FDRs therefor. Whereas the bank may keep the original FDRs with itself, it may issue the duplicate copies thereof to the eligible cooperative bank. Such an exercise should be completed within a period of four weeks.

In the event, the cooperative society intending to avail loan facilities from the banks for running their business, may approach them which may apart from usual conditions release the same on a further condition that the amount of FDR would remain with them and on that basis, loans may be granted of such amount. The usual precautions in regard thereto may also be taken by the Bank(s).

The Court, however, specifically said that it not intend to lay down any law and that the directions it had given in this case should not be treated to be precedent.

(This article is an edited extract of the judgment.)

The Renewal of Insurance Policies

Posted on May 23, 2008 by Law Matters

A bench of the Supreme Court comprising Justices S B Sinha and V S Sirpurkar has ruled that public sector insurance companies, being included in the definition of â€˜Stateâ€™ under Article 12 of the Indian Constitution, cannot refuse medical insurance to persons suffering from pre-existing diseases.

In its judgment of May 16, 2008, in the cases of (1) United India Insurance Company Limited v. Manubhai Dharmasinhbhai Gajera & Ors, (2) New India Assurance Company Limited v. Consumer Education and Research Society & Ors., and (3) United India Insurance Company Limited v. Mukat Lal Duggal & Anr., the Court, among other things, said:

â€œWhether renewal of a mediclaim policy on payment of the amount of premium would be automatic, is the question involved herein.

The action was brought by private individuals. The writ petition, however, had wider ramification. They not only would affect the writ petitions, but also others who would be similarly situated. Such cases may not be dealt with as individual cases. In appropriate case, such litigation may be regarded as public interest litigation. Even if it not so regarded, the High Court may consider the same to be `Public Law Litigation’

While determining a lis having public law domain, the courts would be entitled to take a broader view. It would not consider it to be case involving contract-qua-contract question only. Even cases involving contracts may be determined by the High Court in exercise of its jurisdiction under Article 226 of the Constitution of India.

In each of these cases, the action on the part of the authorities of the insurance companies was highly arbitrary. Respondents though were not entitled to automatic renewal, but indisputably, they were entitled to be treated fairly.

What was necessary is a pre-existing disease when the cover was inspected for the first time. Only because the insured had started suffering from a disease, the same would not mean that the said disease shall be excluded. If the insured had made some claim in each year, the insurance company should not refuse to renew insurance policies only for that reason.

Renewal of a medi-claim policy subject to just exceptions should ordinarily be made. But the same does not mean that the renewal is automatic. Keeping in view the terms and conditions of the prospectus and the insurance policy, the parties are not required to go into all the formalities. The very fact that the policy contemplates terms for renewal, subject of course to payment of requisite premium, the same cannot be placed at par with a case of first contract.

It is essential that the Regulatory Authority must lay down clear guidelines by way of regulations or otherwise. No doubt, the regulations would be applicable to all the players in the field. The duties and functions of the Regulatory Authority, however, are to see that the service provider must render their services keeping in view the nature thereof. It will be appropriate if the Central Government or the General Insurance Companies also issue requisite circulars.

The appellants in this case being subsidiaries to General Insurance Corporation [and therefore public sector companies] cannot ignore the statutory provisions. They are bound by the directions issued by the Central Government.

We would request the IRDA to consider the matter in depth and undertake a scrutiny of such claims so that in the event it is found that the insurance companies are taking recourse to arbitrary methodologies in the matter of entering into contracts of insurance or renewal thereof, appropriate steps in that behalf may be taken.â€

Laws

The basic laws involved in this case were:

The General Insurance Business (Nationalisation) Act, 1972
The Parliament enacted the General Insurance Business (Nationalisation) Act, 1972 to provide for the acquisition and transfer of shares of Insurance Companies and undertakings of other insurers in order to serve better the need of the economy by securing the development of general insurance business in the best interest of the community and to ensure that the operation of the economic system does not result in the concentration of wealth to the common detriment, for the regulation and control of such business and for other matters connected therewith or incidental thereto.

The Insurance Act, 1938
The business activities of the insurance companies are governed by the Insurance Act, 1938. In terms of the provisions of that Act, an authority known as Insurance Regulatory and Development Authority (the Authority) was constituted by the Central Government in exercise of its power conferred upon it by Section 114 (2)(c) of the 1938 Act.

The Insurance Regulatory and Development Authority Act, 1999
The Parliament also enacted the Insurance Regulatory and Development Authority Act, 1999. By the 1999 Act the Parliament inserted Section 24A in the 1972 Act directing cessation of the exclusive privilege of the Corporation and the acquiring companies in relation thereto. In exercise of the powers, the Authority made Regulations known as Insurance Regulatory and Development Authority (Protection of Policyholders’ Interest) Regulations, 2002.

(This post comprises an edited extract of the judgment.)

Mobile Hoardings Challenged

Posted on May 20, 2008 by Law Matters

In recent years, there has been some amount of controversy about whether billboards and hoardings are legal. In some cities, they have been made illegal while in others, such as Delhi, after having been made illegal, they were once again made legal.

The main complaints against billboards are that they make cities ugly and that they distract drivers thereby putting human life at risk.

Some time ago, the Bombay High Court restrained an advertiser from operating mobile hoardings on main roads. The advertiser, Supri Advertising & Entertainment Pvt. Ltd., who had been granted a contract by the Municipal Corporation of Brihan Mumbai for the purpose, appealed against the High Courtâ€™s order in the Supreme Court.

A vacation Bench of the Court headed by Justice C K Thakker has issued notices to the Maharashtra government, the Municipal Corporation of Brihan Mumbai and others asking them to explain why the advertiser who has allegedly invested over 25 crore INR in pursuance of the contract towards licence fee, occupancy charges, etc. should be so restrained from operating mobile hoardings.

Link

Obligations under Bank Guarantee Unconditional

Posted on May 19, 2008 by Law Matters

The Bank of India refused to pay a bank guarantee to a construction company when its client committed a breach of contract.

Calling the action of the Bank unprofessional, a Bench of the Supreme Court comprising Justices Tarun Chatterjee and Dalveer said, â€œIn case the banks are permitted to dishonour their commitments by adopting such subterfuges, the entire commercial and business transactions will come to a grinding halt.â€

The Bank claimed that it had no obligation to pay since the two companies involved had substituted their original contact and by doing so, they made the original contract inoperative.

It had earlier been directed to pay the guarantee by both a single judge and a Bench of the Delhi High Court which had said, “It is surprising that a nationalised bank wants to use delays of law in order not to comply with its unconditional obligations under a bank guarantee.â€

The Supreme Court spoke in similar terms saying, “It is unfortunate that a nationalised bank is finding excuses for refusing to make the payment on totally untenable and frivolous grounds. â€¦ The entire trust, faith and confidence of people depend on the conduct and credibility of the nationalised bank.”