Reserch article on One Person Company

One-Person-CompanyBackground of One Person Company (OPC)
The New Companies Act, 2013 was approved by the Parliament in 2013. Some of the provisions of New Company’s Act 2013 came into force on September 20th 2013 while majority of sections came into force from 1st April 2014. The Companies Act, 2013 has introduced some new concepts in India’s Corporate Legal System which were not part of the erstwhile Old Companies Act, 1956.

One Person Company (OPC) is one of those new concepts which has been introduced in the New Act. According to this concept, a single person could constitute a Company. The introduction of OPC in the legal system will boost corporatization of micro businesses. In India, in the year 2005, the JJ Irani Committee recommended the formation of OPC. It had suggested that such an entity may be provided with a simpler legal regime through exemptions so that the small entrepreneur is not compelled to devote considerable time, energy and resources on complex legal compliance.

Position of OPC in India under the Companies Act, 2013:
Various countries permit this kind of a corporate entity. In countries like UK, Australia, Singapore, etc: a single person can form a company, it is a very popular concept in such countries. As per section 2(62) of the Companies Act, 2013, “One Person Company” means a company which has only one person as a member” An OPC shall have a minimum of one director, therefore an OPC will be registered as a private company with one member and one director. Such OPC may be either a company limited by shares/guarantee or an unlimited liability company.
Only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate an OPC or be a nominee for the sole member of an OPC. No Minor shall become member or nominee of the OPC or can hold shares with beneficial interest.
# According to the National Stock Exchange (NSE) an OPC as described in the New Companies Act can act as a stock broker provided it satisfies the condition of two minimum directors .

Benefits of OPC:
The concept of OPC is quite revolutionary. It gives the individual entrepreneurs all the benefits of a company, which means they will get credit, bank loans, and access to the market, limited liability and legal protection available to companies.
Prior to the new act coming into effect, at least two shareholders were required to start a company. Now the concept of OPC would provide tremendous opportunities for the small businessman, traders including those working in areas of handicrafts, pottery etc. Earlier they were working as artisans on their own, so they did not have a legal entity of a company. Now the OPC will help them to do business with ease as an enterprise and give them the opportunity to start their own venture with a formal business structure. Further, the amount of compliance by an OPC is much lesser of filing returns, balance sheets, audit etc.

# The first OPC in India was incorporated on 28th April, 2014 at Delhi under ROC- Delhi jurisdiction, the company name being, ‘Vijay Corporate Solutions OPC Pvt Ltd’
However, there are also some restriction and terms imposed on an OPC. These are as follows:
1. Any natural person cannot incorporate more than one OPC.
2. Any natural person who has not attained the age of majority cannot become a member or nominee of an OPC.
3. An OPC cannot be converted into a Company i.e. Company Not for Profit.
4. An OPC cannot carry out The Non-Banking Financial Investment Activities.
5. NRI’s are not allowed to incorporate One Person Company
Exemptions Provided to an OPC:
An OPC is provided with certain exemptions which the other types of companies cannot avail. Such exemptions are as follows:
1. Cash Flow Statement is not required to be prepared by an OPC as a part of their financial statement .
2. An OPC is not required to hold an Annual General Meeting
3. The Annual Returns in the case of an OPC shall be signed by the Company Secretary or where there is no company secretary, then by the director of the company

Inter-Country Comparison:
The idea of OPC is new in India, but this concept has been already been prevailing and running successfully in many other countries like, China, Singapore, France, and U.S.A. The Great Britain was the nation which first made the way for such concept through its decision in Saloman & Saloman Co Ltd. It was in the year 1925 when Britain gave statutory status to this concept in their country. In due course, many other countries adopted this concept i.e. OPC in their own respective Corporate law. However the structure or perquisites for the incorporation of OPC may differ from country to country wherever they are adopted but the main motive behind is the same that is of promoting entrepreneurship and accelerating their economic development.
(i) Capital Requirement: According to the rules of countries like U.S.A. and U.K regarding the incorporation of OPC, the capital of the company should ‘meet the expectable strains of a business of its size and its nature’ . Whereas countries like India, China, Pakistan and France has expressly provided minimum capital requirement with respect to OPC.
(ii) Legal and Natural Person: Most of the counties with respect to incorporation of OPC does not put restrictions in terms of natural and legal persons.
But India, only permits natural persons to incorporate OPC.

Conversion of One Person Company into Private Company:
An OPC can be converted into Private limited company in the following two situations:
1. Voluntary Conversion
2. Compulsory Conversion
Voluntary Conversion:
An OPC cannot be converted into a private limited company for a period of not less than two(2) years from its date of incorporation and if the time has elapsed and the period of two years is over, it can apply for converting itself into a Private Limited Company or Public Limited Company.
The aforesaid conversion should be done in accordance with the rules and regulations laid down under section 18 and Rule 7(4) .
Compulsory Conversion:
When an OPC has a paid-up capital equal to or more than Rs.50 Lakhs or its Annual turnover for the relevant financial year exceeds Rs.2 Crore, then in such a situation the OPC has to be converted itself into Private Limited Company or Public Limited Company as per Rule 7(4)

Impact of an OPC in Indian Entrepreneurship:
Despite the fact that the concept of OPC is still new in Indian Entrepreneurship and hence extremely progressive, it will set aside time for such a concept to be consolidated with full efficiency, however as the time will pass by, OPC will have a sparkling future and will be considered as one of the best business idea. The reason behind it is the ease of incorporation of same with fewer compliances and less paper work. The foreign investor will be dealing with only a single member to form his corporate relationship and not with a score of other shareholders or directors where the chances of disparity in ideas. Any foreign company or investor who proposes to establish any business in India, could do so through merger or joint venture with the member of OPC. The concept of OPC has a bright and promising future in India, and is also expected to get good foreign investments, Joint Ventures, and Mergers etc.

Criticisms:
The accomplishment of the idea of OPC is doubtful due to the following reasons:
1. The current sole proprietors can raise funds and reserves from their relatives/friends or others but whereas an OPC being a private limited company is not allowed to acquire such funds from others.
2. In India, there are few existing proprietors who don’t want to go by the OPC concept since they prefer doing the business in their own traditional way and they don’t want to engage themselves with this concept due to legal compliances.
3. The desire that the financial institutions will provide funds to OPC is unrealistic. At present, the financial institutions demand guarantee and different securities for providing credit facilities to small proprietors. Since OPC now permits the same individual proprietors to claim limited liability, the risk factor is more to the financial institutions.

Suggestions:
In regard to the above-mentioned criticisms, the suggestions for the same are as follows:
1. The introduction of OPC in the legal system is a move that would encourage corporatization of micro business and entrepreneurship. The same concept should have been introduced much earlier into the market.
2. The legal compliances should be made less complicated and the registration process should be made more flexible to the common man, so that more and more individuals are encouraged.
3. The awareness of OPC should be brought into broad daylight with the much wider scope since a lot more are not aware of the concept of OPC.
4. Legal persons should be given an opportunity to incorporate an OPC apart from the regular natural persons.
5. Also, foreign companies and NRI’s should be given a platform to form an OPC without any harsh restrictions and stringent legal formalities.
6. The Income Tax Act, 1961 should recognize OPC and impose different tax schemes upon them.

# There has been total 7127 number of OPC’s incorporated in India since past 2 years out of which :
1. 7185 number of OPC’s are at current actively functioning in India,
2. 20 number of OPC’s are under process of striking off,
3. 7 OPC’s are already struck off,
4. 3 OPC’s are declared dormant under section 455 and
5. 2 OPC’s are captured.

Conclusion:
With the Companies Act, 2013 the concept of OPC has now become reality. This concept has been a keen interest among entrepreneurs looking forward to doing business with the entrepreneurial freedoms as afforded by proprietorships but without the baggage of personal liability that a proprietorship is bound to carry .OPC provide many opportunities to all those who are looking forward to kick start their own venture with a structure of organized business. This concept will help the young or start up entrepreneurs test a business model, a product or a service before attracting new investors. The compliance pressure which has to be mandatorily followed is comparatively less and the feature of limited liability is an added privilege to it. Such a concept will benefit a lot to all the individual proprietors and proprietors engaged in small scale industries. It will provide a greater flexibility to an individual to manage his business at the same time enjoy the benefits of a company. The point to be noted here is that with the use of this concept it will make a way for more favorable banking facilities, particularly loans and advances to individual proprietors. At the same time it will also boost the foreign funds in India as the requirement of nominee shareholder would be done away with.

Proposed Changes to the Companies Act

The Companies Act, 2013 (“Companies Act”), while beneficial, has also been perceived as overzealous over regulation in part. With a view to facilitating the ease of doing business in India, addressing stringent compliance requirements, harmonising company law with other regulations, the Companies-Act-Amendment(“Bill”)was introduced in the Lok Sabha in March 2016 and is currently under review by the Parliamentary Committee on Finance. We present below, a brief summary of a few pertinent amendments proposed by the Bill.

Generic Objects Clause: The Bill proposes to dispense with the listing of specific objects in the Memorandum of Association and permits a universal objects clause i.e. “to engage in any lawful act, activity or business”. Only if the company prefers to restrict its activity or objects, will specific object(s) be required in the MOA. This is seen as a positive change in keeping with today’s fast changing business landscape.

CSR: Currently CSR compliance in the current year is required where the net worth, turnover or net profit exceed the thresholds in any financial year. The Bill clarifies that CSR compliance will be mandatory only where the thresholds are met in the immediately preceding financial year. Further, unlisted private companies only require two or more directors to constitute their CSR committee, and will not require an independent director. Unfortunately, the Bill also allows for certain sums to be excluded in the computation of ‘net profit’. This may be a cause for concern as it may significantly increase the actual amount to be spent on CSR activities.

Sweat Equity to be issued anytime: It is proposed to permit issuance of sweat any time post incorporation of a company without the earlier mandatory waiting period of one year post incorporation. Start-ups and small companies will find this a useful tool to acquire and retain senior talent.

AGM of Unlisted companies can be anywhere in India: Currently AGMs are to be held in the same city, town or village as the registered office of the company. The Bill proposes to permit unlisted companies to hold their AGM anywhere in India,if consented to by all members.

Shareholder meetings can be outside India: Extraordinary General Meetings (EGMs) are currently required to be held only within India. The Bill, proposes to permit EGMs of an Indian company which is a wholly owned subsidiary of a foreign company, to be held anywhere in the world. Unfortunately, AGMs of such companies still need to be held within India even where all the shareholders are outside India.

Voting through Postal Ballot and electronic voting: This amendment will enable items of business currently required under the law to be transacted only by postal ballot to also be transacted through electronic voting at general meetings.

Video Conference meetings:Currently, the Board may conduct meetings via video conference except on prohibited matters which require a physical meeting. The Bill now clarifies that if the minimum quorum is physically present, the remaining directors may attend via video conference even on these restricted matters.

If Shareholder numbers fall below minimum: The Bill proposes a six month period to cure any shortfall in the minimum number of shareholders (i.e. two for a Private Company and seven for a Public Company). Beyond such six month period, the remaining shareholders who were aware of such shortfall in minimum shareholders shall be severally liable to bear all the debts of the company contracted during such period.

Relief from Registration of Charges:Currently companies need to register all charges created on their assets or undertakings. The Bill proposes to grant relief by way of rules exempting certain charges from registration. It remains to be seen however, which charges will be exempted by the rules. The earlier companies act (1956) did not require the registration of pledges. Nomination and Remuneration Committees and Audit

Committees only for listed public companies: Currently all listed companies (even private companies with debt listing) are required to constitute N&R Committees and Audit Committees. The Bill proposes this only apply to listed public companies, not to private companies. Management remuneration exceeding 11%:It is proposed to delete the requirement for a public company to obtain central government approval prior to payment of management remuneration exceeding 11% of net profit.

Independent Director can have limited pecuniary interest in Company: The Companies Act currently prohibits an Independent Director having any pecuniary relationship with the company. The Bill proposes to permit an independent director to have a pecuniary interest in the Company of up to 10% of his total income, without being liable to disqualification as an independent director. Disqualified Director to vacate office in all other companies:The Bill proposes that any director of a company that has not filed its financial statements or annual returns for a continuous period of three financial years or failed to file its financial statement or annual returns, failed to repay deposits, redeem debentures or pay dividend etc., will immediately be disqualified from directorship in all other companies in which he is a director, other than the contravening company. This may act as a serious deterrent.

Deletion of restriction on investment through not more than two layers of investment companies: Post the amendment, companies will be able to invest through any number of layers of investment companies. Given that companies will need to maintain a beneficial ownership register as set out below, concerns about declaration of ultimate beneficial ownership stand addressed.

Register of Significant Beneficial Ownership: The Bill has created the concept of ‘significant beneficial ownership’ (i.e. alone or with others holds beneficial interest of 25% or more in the shares or significant influence or control). Persons holding /acquiring such significant beneficial interest are required to declare such interest/change to the company and the company is to maintain a register accordingly.

Changes on Related Party Transactions: Currently, companies are prohibited from entering into certain related party transactions except with a special resolution and members who are related parties are not permitted to vote on such resolutions. The Bill proposes to do away with the restriction on voting by relatives for companies in which 90% or more members, in number, are related parties.

Deletion of Forward Dealing and Insider Trading provisions: The prohibitions on Forward Dealing in Securities and Insider Trading are proposed to be deleted and will be inapplicable to private companies. Public / listed companies will need to comply with the relevant SEBI regulations in this regard.

No consolidation: The current requirement of consolidating accounts of joint ventures is proposed to be omitted.

Conclusion:The Parliamentary Committee continues to receive recommendations on the Bill and the question remains whether the above changes will in fact see the light of day as law. It is hoped that the Bill once passed, eases the conduct of business in India.

By Ms. Hufriz Wadia (Partner, Kochhar & Co.) with Mr. Sandeep Thomas (Intern) and Mr. Nikhil Gupta (Intern).”

Payment for live coverage of events – whether qualifies as fees for technical services?

Sama Ahmed

Foreign service providers engaged in covering live events have been facing issues as to taxability of payments received by them from India. In the past, the Delhi Bench of the Tribunal[1] had with reference to the India-Singapore tax treaty taken a view that services of production of and generation of live television signals rendered by a service provider is a technical service, hence liable to tax in India as ‘fees for technical service’.

 

A contrary view was recently taken by the Mumbai Bench of Tribunal in the case of IMG Media Ltd[2]. The Hon’ble Tribunal after undertaking a detailed analysis of the nature of services rendered by a service provider engaged in the coverage of live events held that the payments received for capturing and delivering of live audio and visual coverage of cricket matches is not taxable as fees for technical services, under the India-UK tax treaty. An analysis of this decision is as under:

live coverage

IMG Media Limited (‘IMG’), a tax resident of UK, was engaged by the Board of Cricket Control of India (‘BCCI’) for capturing and delivering live audio and visual coverage of cricket matches, which business was conducted under the brand name Indian Premier League, 2008 and 2009. Under the arrangement, IMG was to produce the program content and deliver it to the licensed broadcasters in the form of digitalized signals. BCCI was obligated to supply the equipments like cameras, microphones etc. which were required for undertaking the activity of producing the program content to the service providers. The broadcasters appointed by BCCI were in turn responsible for broadcasting the live matches.

 

In this factual matrix, the Tribunal observed that the consideration received for rendition of agreed services were not fees for technical services and was not exigible to income tax in the hands of the IMG in India for the following key reasons:

·         IMG possessed the required expertise in live audio-visual coverage of matches. The technology used in the production of live feeds was different from the one used by the broadcasters to broadcast the same.

·         Equipments such as cameras, microphones, etc. of the required quality were supplied by BCCI to IMG.

·         IMG’s activity was restricted to produce the feed (program content) and deliver the same to the broadcasters (licencees) in the form of digitalised signals, and the broadcasters (licencees) undertook the job of broadcasting the live coverage of cricket matches on behalf of BCCI. IMG did not deliver, or make available any technology/ knowhow to BCCI or any other person. It only produced the ‘program content’ by using its technical expertise.

·         Neither the broadcasters nor BCCI had acquired the technical expertise from IMG which would enable them to in turn produce the live coverage feeds on their own. Consequently, the essential conditions of ‘make available’ clause under the Article 13(4)(c) of the India-UK tax treaty fails hence, the amounts received by the IMG could not be regarded as fees for technical services;

·         The Hon’ble Tribunal distinguished payments made for mere production of program content or live feed by using the technical expertise and there made for the provision or supply of technology which involves delivering or making available a technology/ knowhow.

The Hon’ble Tribunal has given a decision in favour of IMG by distinguishing the decision of the Delhi Bench of the Tribunal. This distinction was made on the premise that the Delhi Bench of Tribunal did not examine the issue as to ‘make available’ when rendering its decision.

In the decision of Delhi Bench of Tribunal, the Singapore based company had entered into an agreement with Prasar Bharti for producing, broadcasting live television signals of international quality as per Prasar Bharti’s specifications. The Hon’ble Delhi Bench of Tribunal had concluded that the payment for live feed was in the nature of fees for technical services on the basis that the Singapore based company:

·         Made available the services which are based on technical knowledge, experience, skill, know-how or processes; and

·         Such services consisted of development and transfer of technical plan and design relating to production and generation of live television signal under the specific clause of the agreement.

At this juncture it is noteworthy that insofar as assessees entering into agreement with Indian entities from countries whose treaty with India does not have the clause of make available, the observations and findings in the decision of Delhi Bench of Tribunal will be useful for such assessees.

One of the other noteworthy aspects of this decision is that if the payment is not fees for technical services then, whether it can qualify as ‘royalty’. The Mumbai Bench of the Tribunal, relying on a judicial precedent[3] of Delhi High Court, which is in the context of taxability of broadcasters, observed that there was absence of transfer of any right from the service provider as the job of IMG ended upon the production of the program content, the payment cannot be considered as payment for ‘royalty’ under the provisions of section 9(1)(vi) of Income-tax Act, 1961 and India-UK tax treaty.

Yet another aspect which needs to be appreciated is that IMG’s personnel were present in India for a period exceeding the threshold limit of 90 days specified under the India-UK tax treaty. IMG contended that due to the extent of its business activities carried on by its personnel, it had a taxable presence in the form of service Permanent Establishment in India. Also, IMG offered the income attributable to its Indian operations to tax in India. Thus, in cases where due to beneficial clause of make available, the payments for coverage of live events may not be taxable as ‘fees for technical services’ or even ‘royalty’, however, it may leave open the issue that a Permanent Establishment may be triggered under the specific provisions of tax treaty.

DISCLAIMER: This article has been authored by Ranjeet Mahtani, who is an Associate Partner and Hardik Choksi, who is an Associate Manager at Economic Laws Practice (ELP), Advocates & Solicitors. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.

 

[1] Nimbus Sport International Pte. Ltd. v. DDIT (Intl. Taxation) [2012] 18 taxmann.com 105 (Delhi)
[2] IMG Media Ltd. v. DDIT (Intl. Taxation) [2015] 60 taxmann.com 432 (Mumbai – Trib.)
[3] CIT v. Delhi Race Club [2015](273 CTR 503) (Delhi High Court)

Distribution arrangement, whether it creates a permanent establishment?

A foreign company can arrange to sell its products in another jurisdiction (say in this case “India”), where there is a ready market for its products. Various models are adopted  o sell their products in foreign jurisdictions such as, (1) direct sale which is generally implemented through a marketing and sourcing agent, (2) commissionaire arrangement and 3) distributor arrangement. Broadly, the difference between these arrangements is that in case of direct sale and commissionaire arrangement, the title to goods continues to be with the foreign company till the goods are sold to the customer, whereacooperative societys under a distribution arrangement, the goods are sold to the distributor on a principal to principal basis and the distributor further sells  goods to the ultimate customers.

Arrangements involving direct sale and commissionaire arrangement prima facie raises a tax questions as to creation of a permanent establishment (“PE”) of the foreign company in India mainly on the premise that contracts are concluded by the agent in India on behalf of the foreign company but, in terms of strict reading of law (Double Taxation Avoidance Agreement), such arrangements do not ordinarily constitute PE. A distribution arrangement is a principal to principal arrangement, wherein goods are purchased by the distributor and sold to the ultimate customer; so in such an arrangement PE implications should not ordinarily arise, since the distributor cannot be termed to be acting on behalf of the foreign company and he effectively holds and transfer title.

There are various flavours to them but, effectively two types of distribution model are prominent: a) Normal distribution model and b) Low risk distributor (“LRD”). In a normal distribution model, all the risks associated with the product are borne by the distributor. Whereas in the LRD model, the distributor sells the goods in its own name; however, most of risks are borne by the principal, and only limited risks are borne by the LRD. Further, LRD is remunerated on a standard margin and such margin again is determined based on an arm’s length basis. Distribution arrangement, whether as normal distribution model or LRD usually does not create a PE risk for the principal foreign entity; however, factual analysis is required to be undertaken in each case to definitely conclude and rule out such an exposure.

The issue of taxation of revenues arising in a case of distribution model was before the Income-tax Appellate Tribunal (“Tribunal”), Mumbai Bench in the case of Reuters Limited (“assessee”) [ITA No 7895/Mum/2011]. The assessee provided its products (worldwide news and financial information products) to its Indian subsidiary and in turn the Indian subsidiary distributed the products to the Indian subscribers independently and in its own name. The revenues arising from such distribution arrangement became the subject matter of dispute, as the assessing officer held that the revenues resulting from the distribution agreement is chargeable to tax in India either under Article 5(2)(k) [dealing with Service PE] or Article 5(5) [dealing with Dependant Agent PE] of the Double Taxation Avoidance Agreement between India and UK (“Tax Treaty”).

The first issue which the Hon’ble Tribunal examined was whether the Indian subsidiary constitutes a dependent agent PE of the assessee (Reuters Limited) or, not. The following aspects are statutorily required to be examined as to whether a person can constitute a dependent agent PE of the foreign enterprise in India:

Whether such an agent has an independent status (legally and economically independent) or not;
If such agent has an independent status, such agent will not be regarded as an agency PE in India for the foreign enterprise, even if requirements of Article 5(5) of the Tax Treaty are fulfilled; the requirements under Article 5(5) are as follows:
Habitually exercises an authority to conclude contracts on behalf of the enterprise;
Habitually maintains stock of goods or merchandize from which he regularly deliver goods or merchandize on behalf of the enterprise; or
Habitually secures orders solely or almost wholly for the enterprise.
If the agent is not of an independent status, i.e. it is a dependent agent and any of the tests prescribed above in Article 5(5) are fulfilled then the foreign enterprise creates an Agency PE in India. In other words, if the agent is dependent, but does not fulfill any of the tests prescribed in Article 5(5) (refer to serial number (i) to (iii) above), then such an agent cannot be regarded as a PE of the foreign enterprise in India.

The Hon’ble Tribunal after examining the various clauses of the distribution agreement of Reuters India concluded as follows:
The Indian subsidiary does not habitually exercise authority to negotiate and to conclude contracts on behalf of the assessee which binds the assessee;
The Indian subsidiary has an independent contract with subscribers, and does all the activities to protect its interest.
The Indian subsidiary earned substantial portion of its income from its own dealings i.e. independently with third party customers.

 

One important fact which the Hon’ble Tribunal noted was that there was no income by way of “commission” which the Indian subsidiary earned and thus, concluded that nothing is flowing from the distribution agreement for the Indian subsidiary to act as an agent of the assessee. Another facet was that even the activities of the Indian subsidiary were not devoted wholly or almost wholly on behalf of the assessee and revenues generated from its independent transactions were far in excess from the transactions with the assessee. Thus, it was concluded the Indian subsidiary was not a dependent agent of the assessee.
The second issue the Hon’ble Tribunal examined was whether the assessee created a Service PE in terms of Article 5(2)(k) of the Tax Treaty. On this issue, the Hon’ble Tribunal observed that since no services were rendered to the Indian subsidiary by the employee of the assessee which had lead to earning of the distribution fee in the hands of the assessee, the employee did not constitute a Service PE of the assessee in India. Based on the above, the Hon’ble Tribunal held that neither under Article 5(2)(k) nor under Article 5(4) read with 5(5) of the Tax Treaty, the assessee has a PE in India and, therefore the distribution fee is not taxable in India.

Even though distribution arrangements in general do not appear to constitute a PE, the Income-tax department has often raised these issues. This ruling of the Hon’ble Tribunal in Reuters case, has laid down certain important aspects which can guide the assessees with respect to the issue of creation of a PE in case of distribution activities.

The following takeaways may be gleaned from the judgement:

Firstly, it is important to evaluate the distribution agreement as a whole to conclude whether a dependent agent PE is created or not. Secondly, the flow of money also plays role to determine who is rendering services to whom. Thirdly, the commercial activities of the agent are subject to instructions or comprehensive control by the foreign enterprise and whether the agent bears the entrepreneur risk or not. Lastly, in relation to Service PE, an important condition being rendition of services by the employees of the foreign enterprise to the Indian enterprise i.e. if no services are rendered, Service PE cannot be constituted.

All the above aspects appear to be of generic nature; but, these play an important role when examining creation of a PE, and are useful to counter the contention (by the income-tax department) of creation of a PE in India, in relation to distribution arrangements.

Looking forward, one important facet which the distribution arrangement should take into account is the upcoming OECD’s Base Erosion & Profit Shifting Project, which proposes to extend the definition of PE to include commissionaire arrangements and similar arrangements. These arrangements will need a revisit to analyze PE risk.

DISCLAIMER: This article has been authored by Ranjeet Mahtani, who is an Associate Partner and Vidushi Maheshwari, who is an Associate Manager at Economic Laws Practice (ELP), Advocates & Solicitors. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.

 

 

 

 

Power To Amalgamate – “An inherent right of the Company”

company-amalgamationMergers and acquisitions has become an indispensible part of the external corporate restructuring in the wake of modern economic scenario. They have been playing an important role in the growth of a number of leading companies the world over. They have become popular because of the enhanced competition, breaking of trade barriers, free flow of capital across countries and globalization of businesses. In order to achieve synergistic operational advantage and economies to scale, the concept of merger & acquisitions has been embraced by the Indian Companies also. In fact, Hon’ble Supreme Court of India in the landmark judgment of HLL-TOMCO merger has said that “in this era of hypercompetitive capitalism and technological change, industrialists have realized that mergers/acquisitions are perhaps the best route to reach a size comparable to global companies so as to effectively compete with them.”

In Indian context, the concept of corporate restructuring is governed by section 390 to 396A of the Indian Companies Act, 1956. This article is intended to address an important legal issue that the companies face in the event of amalgamation – “whether it is essential for two or more companies under a scheme of reconstruction or arrangement to have power in their memorandum to go for reconstruction or arrangement”.

Before going into the core issue we have to develop an understanding about the concept of amalgamation and importance of Memorandum of Association. The term Amalgamation is the blending of two or more existing undertaking into one undertaking, the shareholder of each blending company becoming substantially the shareholder in the company, which is to carry on the blending undertaking. There maybe amalgamation either by the transfer of two or more undertaking to a new company, or by the transfer of one or more undertaking to an existing company. In generic sense, amalgamation is non-organic (external) unification of two entities or undertakings or the fusion of one with another.

Whereas the Memorandum of association (MOA) of a company contains the fundamental conditions upon which alone the company has been incorporated. According to section 2 (28) of the Indian Companies Act, 1956 ” memorandum” means the “memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act”. It contains the object for which the company is formed and therefore identifies the possible scope of its operation beyond which its actions cannot go. In the case of Ashbury Railway Carriage and Iron Co Ltd v Riche (1875) LR 7 HL 653, the role of MOA has been enunciated, wherein Lord Cairns observed that the “memorandum states affirmatively the ambit and extent of vitality and power which by law is given to the corporation and it states, if it is necessary to state, negatively, that nothing shall be done beyond that ambit”.

Therefore from the above analysis it is evident that anything done beyond the powers expressed in the memorandum will be ultra vires the company and thus void.

Now let us address the moot issue – “Memorandum of Association of a company should contain express power to amalgamate with another company and in the event if the same is missing, whether it is essential to alter the MOA before presenting the scheme to the court for sanction”. According to Companies Act, any scheme of amalgamation is subject to the sanction of the jurisdictional High Court. The statue has conferred wide powers upon the court in this regard. Now the issue rose before the court was whether it can sanction a scheme of merger/amalgamation where the object clause of MOA of the companies (intending to merge/amalgamate) is silent in this regard (i.e. power to amalgamate). According to the decision of the English Court in the case of Oceanic Steam Navigation Co. Ltd., In re [1938] 3 ALL ER 740, it was held that the court has no jurisdiction to sanction a scheme of amalgamation if it ultra vires the MOA. This position was maintained in the Indian context also but in the year 1970, the Calcutta High Court in the landmark judgement of Hari Krishna Lohia v Hoolungooree Tea Co Ltd., In re [1970] 40 comp cas .458. took a contrary viewpoint. In this case the court held that “The power to amalgamate may flow from the memorandum or it may be acquired by resorting to the statute. Section 17 of the Companies Act indicates that a company which desires to amalgamate with another company will take necessary steps to come before a court for alteration of its memorandum in aid of such amalgamation. The statute confers a right on a company to alter its memorandum in aid of amalgamation with another company. The provisions contained in Sections 391 to 396 and 494 illustrate some instances of statutory power of amalgamating a company with another company without any specific power in the memorandum.” Similar view has been expressed by the Calcutta High Court in the case of Marybong & Kyel Tea Estates Ltd., In re [1977] comp.cas.802 and by the Bombay High Court in the case of Sir Mathuradas Vesanji Foundation, In re [1992]8 CLA 170.

The Gujarat High Court dealing with such questions, in the matter of Maneckchowk’s case [1970] 40 comp cas.819 held that “Basically, the court is given wide powers under section 391 of the Companies Act to frame a scheme for the revival of the company. Section 391 of the Companies Act is a complete code under which the court can sanction a scheme containing all the alterations required in the structure of the company for the purpose of carrying out the scheme, except reduction of share capital which requires a special procedure to be followed by virtue of rule 85 of the Companies (Court) Rules. In the absence of rule 85, procedure for alterations in the memorandum and articles of association of a company prescribed under other provisions of the Companies Act is not required to be followed before sanctioning a scheme involving such alterations. The whole purpose of section 391 is to reconstitute the company without the company being required to make a number of applications under the Companies Act for various alterations which may be required in its memorandum and articles of association for functioning as a reconstituted company under the scheme.”

The Bombay High Court following the dictum of the Gujarat High Court in the matter of PMP Auto Industries Ltd., In re [1994] 80comp.cas.289 held that “Thus, the position in law appears to be clear. Section 391 invests the court with powers to approve or sanction a scheme of amalgamation/ arrangement which is for the benefit of the company. In doing so, if there are any other things which, for effectuation, require a special procedure to be followed—except reduction of capital—then the court has powers to sanction them while sanctioning the scheme itself. It would not be necessary for the company to resort to other provisions of the Companies Act or to follow other procedures prescribed for bringing about the changes requisites for effectively implementing the scheme which is sanctioned by the court. Not only is section 391 a complete code as held by the courts, but in my view, it is intended to be in the nature of a ‘single window clearance’ system to ensure that the parties are not put to avoidable, unnecessary and cumbersome procedure of making repeated applications to the court for various other alterations or changes which might be needed effectively to implement the sanctioned scheme whose overall fairness and feasibility has been judged by the court under section 394 of the Act.” The Uttaranchal High Court and the Madras High Courts in the matters of Jindal Photo Ltd., In re [2005] 65 CLA 246 and W. A. Beardsell & Co. Ltd. & Mettur Industries Ltd., 38 comp.cas 197 have also held to the same effect.

In the case of Liqui Box India (P.) Ltd., In re [2006] 131 Comp. Cas. 645 (Punj. & Har.) – In a petition filed for sanctioning of scheme of amalgamation as approved by the members and the creditors of the transferor-company and the transferee-company, the Regional Director of Company Affairs raised objection that the Memorandum of Association of the transferee company could be amended only after following the procedures prescribed under the relevant provisions of the Act, which included passing of special resolution by the members of the company in the general meeting and filing of relevant form with the office of the Registrar of Companies. “Held that in view of decisions of the different High Courts, the objection raised by the Regional Director that the Memorandum of Association of the transferee-company was required to be amended by passing a special resolution had no substance and was, thus, to be rejected.”

In fact the court is empowered to sanction a scheme where the transferor and the transferee companies are in the dissimilar business. This position is enunciated in the case of E.I.T.A. India Limited And Others vs Unknown on 20 March, 1996 (Equivalent citations: AIR 1997 Cal 208, (1997) 1 CALLT 414 HC), Morarji Goculdas Spinning & Wvg. Co. Ltd., In re: S.S. Miranda Ltd. reported in (1994) 80 Com-Cases 289.

It has been held in the case of Sadanand S Varde vs State of Maharastra, that the provision contained in section 390 to 394 of the companies act constitutes a complete code on the subject of the amalgamation. Thus, it implies that if a scheme of compromise or arrangement for the purpose of or in connection with amalgamation of two or more companies is sanctioned by the court, then no separate provisions and procedures are required to be complied with for other events which are part and parcel of the scheme of amalgamation and consequent mention of power to amalgamate in MOA is of least relevance

Thus from the above discussion it is evident that power under section 390 to 394 are not circumscribed on the powers derived from the object clause to amalgamate.

 

 

Ravi Kapoor

[B.com (International Business), Fin Dip (Irvine University), Six Sigma (USA), CA (Final)]

Media & Tort of Defamation

Freedom of Media

One of the paradoxes is that Freedom of the Media to which our Founding Fathers were greatly attached finds no mention in Part III of our Constitution which guarantees certain fundamental rights. There is no specific guarantee of Freedom of the Media as in the Constitutions of other countries.

In the course of the Constituent Assembly debates, Dr. B.R. Ambedkar expressed the same view, and thought that “no special mention is necessary of the Freedom of the Media at all”. This view has been vindicated by the Supreme Court of India. In a series of decisions from 1950 onwards the Supreme Court has ruled that Freedom of the Media is implicit in the guarantee of freedom of speech and expression in Article 19(1)(a) of the Constitution. Thus Freedom of the Media by judicial interpretation has been accorded the constitutional status of a fundamental right. However there is a strong body of opinion which favours specific mention of Freedom of the Media as a fundamental right.

The fundamental right guaranteed is not merely the individual right of the proprietor of the newspaper, or the editor or the journalist. It includes within its capacious content the collective right of the community, the right of citizens to read and to be informed, to impart and receive information. In substance, it is right of the people to know.

When we are speaking about the Freedom of the Media it must be remembered that freedom of expression and Freedom of the Media are not absolute and unlimited. Under our constitutional scheme Freedom of the Media also can be restricted provided three distinct and independent prerequisites are satisfied. The restriction imposed must have the authority of law to support it. The law must fall squarely within one or more heads of restrictions specified in Article 19(2), namely,

a)      Security of the State

b)      Sovereignty and integrity of India

c)      Friendly relations with foreign States

d)       Public order

e)      Decency or morality

f)       Contempt of court

g)      Defamation

h)      Incitement to an offence.

 

The restriction must be reasonable.

One of the permissible heads of restrictions is defamation. In our country there can be criminal prosecution for defamation with imprisonment up to two years and fine. There is also the civil remedy for damages for defamation. The possibility of criminal prosecution and imposition of heavy damages in civil suits against the press can have a chilling effect which can at times be freezing. Thus the potentiality of clash between Freedom of the Media and laws or measures protecting reputation which is the purpose of the law of defamation is inevitable. This is a real problem.

The constitutional guarantee of free speech and Freedom of the Press does not confer a fundamental right to defame persons and harm their reputations by false and baseless allegations and by innuendoes and insinuations. The Press enjoys no talismanic immunity from legal proceedings when it has indulged in malicious falsehoods. A person’s right to good name and honor is also a basic human right.

Defamation

Salmond define the wrong of defamation as publication of a defamatory statement about a person without any lawful justification. Blackburn and George define tort of defamation as publication of a statement which brings down reputation of a person before the right thinking members of the society generally. The word “to bring down reputation of a person before the right thinking members of the society generally” is taken from the test suggested by Lord Atkin.

The difference between libel and slander

As mentioned above, libel is tends to be in permanent form whereas slander is spoken words. Legislation has made clear that TV broadcasts or theatre plays are to be treated as libel. For other methods of communication it is necessary to consult the common law which applies a test of permanence or transience of the statement.

In Monson vTussauds, the court had to decide whether a wax statue was capable of being libel. The court hold that it was, the court said that anything which has a permanent of lasting form can be libel including an effigy or chalk marks on a wall. Lopes, J. said that libel need not be always written and can be of any other permanent form.

Another important distinction is that libel is actionable per se, which means without any proof of damage. Whereas slander, like most areas of law, requires proof of some injury before a lawsuit can be brought.

 

What kind of injury can be shown?

Mere damage to reputation is insufficient, so is the loss of friends (though losing out on the hospitality of friends may be sufficient). Something like loss of a job or reduced business profits would be sufficient.

As an aside, the requirement of damage has often been criticized. It is not clear why libel should be more easily actionable. It is true that words in permanent form, such as book, have more potential to reach large numbers of people than simply spoken words, but this may not necessarily be the case where someone is making a speech to large groups of people.

There are, however, some types of slander actionable per se:

• Imputation of criminal conduct – Where a Defendant accuses the Claimant of criminal conduct which is punishable by imprisonment; there is no need for proof of damage. However, words which express suspicion will not be actionable per se.

• Imputation of a contagious disease – This rule is largely outdated but would have had significance during the periods where serious diseases were rampant. Clearly an imputation that someone has a disease can lead to job loss or social exclusion. This exception would be applicable today for something like HIV/AIDS.

• Imputation of unchastity – This applies to the imputation of adultery or unchastity to a woman or girl or even homosexual is actionable per se. The imputation of unchastity was introduced throughout England by Slander of Women Act 1891.  There is no version for men.

• Imputation in unfitness to run a business – It used to be the case that the exception only applied to comments directed at specific professional tasks, thus accusing the boss of an affair with the caretaker would not be under this exception. It would have been if they were accused of an affair with an employee as that affects how they do their job. Now, however, the exception is much broader and applies to the whole job generally.

Requirements to Take Defamation Action

1.      The Statement must be Defamatory

The first requirement for a defamation action is that the statement is defamatory. A defamatory comment is one that injures a person’s reputation. The basic test is from Partimerv. Coupland“[Was the statement] calculated to injure the reputation of another by exposing him to hatred, contempt or ridicule.”

It does not matter if the statement is not believed in fact by the people they are published to, but it does matter if no reasonable person would believe them, in which case they are not actionable. The statement must be assessed in its context and regard must be had to the characteristics of the Claimant. In Monson v. Tussuads, a wax statue of the Claimant had been placed in the same room as some murders next to the Chamber of Horrors. The Claimant had been tried for murder but a verdict of ‘not proven’ was entered and he was successful in his claim.

Defamation must go beyond mere insults and strike at the claimant’s reputation. Insults and jokes may hurt people and even be the cause of a civil action in employment law i.e. between employees, but discourtesy and insults are not on the same level as defamation. Defamation is one of the only areas of civil law to retain a jury, and it would be for the jury to decide whether the words were defamatory.

2.      The Statement Must Refer to the Claimant

The Claimant doesn’t have to be identified by name but as long as a reasonable inference can be made this criterion is satisfied.

However, it is important to remember that the question is not who the publisher intended to hit, but who they actually hit. Thus in Hulton v Jones, Artemus Jones was a barrister who brought an action against the defendants in respect of a newspaper article which allegedly referred to him. The article referred to a man called Artemus Jones who worked as a warden and alleged that he had behaved immorally during a motor festival. The Claimant had contributed pieces to the newspaper before. The Defendants argued that they had never intended the ‘real’ Artemus Jones but instead had created a fictional character and given it a fancy name. The Defendants lost at trial, in the Court of Appeal and in the House of Lords. This case has been called ‘the most famous case in the law of libel’ and has been heavily criticized. Arguably it is quite unfair to the newspaper. At the same time, however, it is not open to anyone with the same name to sue. Rather the jury must reasonably believe that the person in the statement is the Claimant. It will be hard to convince them when the Claimant has no connection at all with any of the facts.

However, in Morgan v.Odhams Press, the court said that ordinary members of the public do not read a newspaper article surgically, as a lawyer would, but simply skim over it. Thus if a person would think the article was referring to the Claimant after a brief skim then that will be sufficient, even if upon a close reading it is clear that it did not refer to the Claimant. However, what often happen in cases where the evidence against the Defendant isn’t strong is that the jury will find the Defendant liable but only give nominal damages.

In cases where there the article accidentally refers to an unintended person, the publisher can make an offer of amends. This is situations where the Defendant neither knew nor had reason to suspect that the statement referred to the claimant or was likely to be understood as referring to the claimant. The offer of amends requires the Defendant to publish an apology and offer to pay compensation.

3.      The Statement must be published

In defamation, ‘publish’ does not have its ordinary definition meaning the printing of words in a book or leaflet. Publishing, here, means communicating the defamatory statement to a third party, whether that is in a conversation or the people at home who are watching a television show in which a defamatory comment is made.

A statement can be published in many ways including by omission, such as where you have a duty to clear graffiti from the walls. The one exception is that communication to the Defendant’s spouse is not publication but communication to the Claimant’s spouse may be.

In Theaker v. Richardson, a husband opened a letter which defamed his wife. It was held that the defamation had been published to the husband as it natural and probable that the husband would open it.

A particular problem for the courts is not the first communication by the Defendant himself but any subsequent communication. Every repetition of a defamatory statement gives rise to a new cause of action against the Defendant provided it was foreseeable the document would be passed on.

In Slipper v BBC, the Claimant was a retired police officer was the subject of a film about trying to capture some men who had committed the Great Train Robbery. The Claimant alleged that the film showed him as a complete idiot. The film had been shown to some journalists before its release to the public and those journalists had published reviews contained the defamatory sting of the film i.e. that he was an incompetent police officer. The Claimant sued not only for the release to the public but the repetitions in the journalists’ reviews. The defendants argued that the repetitions are only actionable where the defendant has authorized them. The court rejected this argument and said that the Defendant can be liable for any re-publication of the defamatory material as long as it was reasonably foreseeable.

The rule of re-publications is stricter in respect of publication on the internet. Every time an internet user accesses an article on a website there is a fresh publication. In Loutchanksyv. Times Newspapers, the defendant argued that the court should adopt a single publication rule as in some US states where an article put online is published once regarding of many times it is accessed. The court rejected this though accepted that the rule may be disproportionate and was somewhat at odds with the 12 limitation period for defamation.

Times Global Broadcasting Co. Ltd. and anr.v. ParshuramBabaramSawant2011(113)BomLR3801

 

The progress of the case, Times Global Broadcasting Co. Ltd. and anr.v.ParshuramBabaramSawantwas watched closely by all news media, politicians, celebrities and other targets of alleged defamation. The verdict of this case is expected to change the face of media reporting forever and also verdicts in pending defamation cases. The verdict of this case was applauded as well as criticized by different sections of judiciary and media. Some argued that this will make media and press more responsible in their reporting while other said that this will discourage media reporting as verdict was too harsh on the defendant. The verdict of this case is also expected to encourage more number of people to file defamation case for damages. Also, some critics of this case expressed their concern because they felt that the verdict was partial because the plaintiff belongs to the legal fraternity and wondered if same damage would have been awarded if the plaintiff would have belonged to some other section of the society.

Facts of the case:

  • The plaintiff has stated that, he is the former judge of Supreme Court, former chairman of the Press Council of India, the former president of the World Association of Press Councils.
  • The defendant no. 1 is a duly incorporated company in the business of news reporting and broadcasting. It belongs to well known “Times Group”. It runs a news channel by the name “Times Now”.
  • The defendant no. 2 is the employee of defendant no. 1 and is the Editor in chief of the said News Channel and as such responsible for all its publication.
  • On 10.9.2008, while the News relating to Provident Fund scam was being telecast by the said channel, a photograph of the plaintiff was flashed as that of Justice P.K. Samantha (an accused in the said scam).
  • The said flashing of photograph created false impression amongst all the viewers in India and abroad that plaintiff was involved in PF Scam which is per se highly defamatory.
  • The said channel stopped publishing the photograph of the plaintiff when the mistake was brought to their notice.

Proceedings before the trial court:

  • The plaintiff filed a suit against the defendant stating that the defendant took belated action which cannot undo the wrong committed.

Questions before the trial court

  • Was the telecast defamatory per se of the plaintiff?
  • Whether the plaintiff is entitled for the damages?

Arguments of the respondent:

  • The defendants argued that the photograph of the plaintiff was only flashed only once for a short duration. It was without malice and without any intention.
  • The defendants have corrected the mistake by withdrawing it from all subsequent news on the channel. Therefore, the act of the defendants was quick and therefore denied carrying any defamation.
  • The defendants have submitted that they have not received any queries from the public.
  • The claim with regard to compensation is baseless and therefore is liable to be dismissed.

Decision of the trial court

  • The court gave decision in the favour of the plaintiff.
  • The court held that:
  • In the light of broadcasting of photo of the plaintiff, according to him, the act of the plaintiff is nothing but a tort for which the plaintiff defamed in the society.
  • The plaintiff is entitled to damage for Rs.100 Crores.

Question before the high court

  • Whether the trial court is correct in its finding?
  • Whether the damages awarded to the plaintiff viable or not?

Decision of the high court

  • The high court gave decision in the favour of the plaintiff.
  • The court asked the defendant to deposit the damage amount to the bank as directed by the court.

 

 

Dispute Resolution – The Commercial Way

DISPUTE RESOLUTIONSaloni Aggarwal

I] INTRODUCTION

‘It bids us remember…to settle a dispute by negotiation and not by force; to prefer arbitration to litigation- for an arbitrator goes by the equity of a case, a judge by the strict law, and arbitration was invented with the express purpose of securing full power for equity.’- Aristotle

With globalization magnifying at an uncontrolled rate, companies increasingly demand arbitration services for business related conflicts and agreements. It is because arbitration avoids costly and lengthy lawsuits. This demand can be well catered to with the form of arbitration that specifically concentrates on the commercial aspects of disputes and since commercial dispute resolution has been the talk of big corporate, this paper aims at differentiating the scope of commercial arbitration as a separate field of arbitration and not as a subset of Domestic arbitration as commercial transactions have acquired considerable importance.

The ministry of law and justice has introduced the term ‘commercial disputes’ in its recent consultation paper discussed over the proposed amendments in Arbitration and Conciliation Act, 1996 which indicates that the Government acknowledges the importance of Commercial disputes. And Commercial Arbitration is indeed a means to resolve such disputes.

The main object of the Bill was to provide for the establishment of dedicated divisions called the Commercial Division in each High Court of India to expertise the disposal of commercial disputes.

Today’s global economy makes channels of dispute resolution more important than ever and efforts of establishing such an effective system of commercial arbitration are finding success.

In comparison with various jurisdictions across the world like London, New York etc there are, undoubtedly, some of the most successful frameworks of Commercial Arbitration and they have been applauded and exploited by the business community. A step in the same direction by India will not only project its determination to fast track justice but also to meet the demanding world standards.

 

II] UNDERSTANDING COMMERCIAL ARBITRATION

Arbitration, as a layman understands is resolving disputes with the help of a third person. Quoting the words of eminent jurist Sir Edward Blackstone,

‘Arbitration is a bond entered into by two or more parties to abide by the decision of the arbitrator’.

A distinguished French lawyer wrote of arbitration as an “apparently rudimentary method of settling disputes, since it consists of submitting them to ordinary individuals whose only qualification is that of being chosen by the parties.

Also, read in one sound in arbitration these days is the word ‘commercial’, which according to the dictionary means any activity or transaction which turns out to be a source of any gain, profit, benefit, or advantage to the parties is commercial.

With changing times, the meaning of the word, commercial arbitration has undergone various considerations. A noteworthy increase in the role of domestic trade in the economic development of the nation over the last few decades has been accompanied by a considerable increase in the number of commercial disputes which must be looked into and a changing definition of dispute resolution mechanism needs appreciation. Ever since globalization, rapid development has meant increased caseloads of the already overburdened courts, further leading to notoriously slow adjudication of commercial disputes. As a result, alternative dispute resolution mechanisms, which now includes commercial arbitration has become more crucial and pivotal for operating businesses in India as well as for those doing businesses with Indian firms, as also reported by foreign authors.

In spite of best efforts, disputes do arise during performance of business contracts and they arise for various reasons. Unresolved disputes have a tendency to upset the smooth performance and successful completion of business contracts and may, therefore, render an otherwise profitable transaction into a probable loss. Therefore it is necessary for carrying on business transactions smoothly and profitably that the area of disputes during performance of contracts is narrowed down and provision is made for amicable and quick settlement of disputes that may arise. The facts discussed above do call for the concept of Commercial Arbitration in India.

Whereas commercial arbitration when put to practice, one will find that less has been written to understand the definition of the term in Indian context. The United Nations Commission on International Trade Law (UNCITRAL) Model Law on Commercial Arbitration 1985; defines the term commercial arbitration as; to cover matters arising from all relationships of a commercial nature, whether contractual or not.

“Relationships of a commercial nature include, but are not limited to, the following transactions: any trade transaction for the supply or exchange of goods or services; distribution agreement; commercial representation or agency; factoring; leasing; construction of works; consulting; engineering; licensing; investment; financing; banking; insurance; exploitation agreement or concession; joint venture and other forms of industrial or business cooperation; carriage of goods or passengers by air, sea, rail or road.”

This definition is a broad reflection of what is being practiced within the small scope of our Arbitration and Conciliation Act, 1996. It can be easily inferred, that the scope of the word commercial is different when compared to other transactions which are presently being resolved by the arbitration in India under the 1996 Act.

This does give rise to the need of a new definition of commercial arbitration under the existing laws so that the humongous need of this corporate India in resolving commercial disputes arising out of different transactions and relationship be countered, which can in some cases be contractual. The author would here like to point out that Commercial arbitration as such is not defined in any law, but the raw understanding of the term says that is it is one of the methods of resolving business disputes arising out of commercial transactions by arbitration.

 

III] PRESENT STATUS OF COMMERCIAL ARBITRATION IN INDIA

In the present Arbitration and Conciliation Act 1996, the term commercial arbitration is not used, but it is evident that the commercial arbitration although different in nature still it is being dealt under the head of the present arbitration laws. It is necessary to acknowledge that commercial arbitration is important and is worthy of special attention from the Government and the Judiciary, looking at the quantum of the increasing amount of commercial disputes.

Although the UNCITRAL model of 1985, contains the definition of the term commercial. The question arises why the legislators at the time of drafting 1996 Act, did not adopt the meaning of term commercial in spite of UNCITRAL model already defining it?

The reason inferred could be that there was no need felt for the commercial arbitration at that particular point of time as it is felt today.

Understanding the term commercial in judicial sense, Kerala High Court quotes in case S.G of Assissi Sisters v. K.S.E.B with the approval of the Webster’s Third International Dictionary, the meaning of the word ‘commercial’ as engaged in ‘commerce’ and ‘commercialize’ means ‘to engage in, conduct, practice, or make use of for profit-seeking purposes as distinguished from participation, practice, or use for spiritual or recreational purposes or for other non-pecuniary satisfactions.

Looking from the constitution perspective, in the context of Article 301 which assures freedom of trade, commerce and intercourse, it has been held:

‘Trade and commerce do not mean merely traffic in goods, i.e. exchange of commodities for money or other commodities. In the complexities of modern conditions , in their sweep are included carriage of persons and goods by road, rail, air, and waterways , contracts, banking , insurance , transactions in the stock exchanges and forward markets, communication of information , supply of energy , postal and telegraphic services and many more activities-too numerous to be exhaustively enumerated which may be called commercial intercourse’.

The word ‘commercial’ has a restrictive meaning and excludes disputes in regard to boundaries, political matters, employment and family disputes and the like. The aspect can be better understood by referring to the jurisdiction of the English Commercial Court which deals with disputes arising out of trading and other Commercial relationships.

Though, the expression ‘commercial’ is not definite but it is construed broadly having regard to the manifold activities which are an integral part of the domestic trade.

 

IV] COMPARATIVE ANALYSIS OF COMMERCIAL ARBITRATION AT A GLOBAL LEVEL

To understand the need of Commercial Arbitration in India, it is important to acknowledge and compare the laws relating to commercial arbitration in different jurisdictions across the world like that of New York, London etc.

(i) In London

As London is a major business city, there exists a separate commercial court which is meant to be a popular forum for resolving commercial disputes.

It deals with complex cases arising out of business disputes, both national and international. There is particular emphasis on:

• international trade

• banking

• commodity

• arbitration disputes

The work of the Commercial Court is governed by Part 58 of the Civil Procedure Rules.

Direction 58.1 defines ‘commercial claim’ as any claim arising out of the transaction of trade and commerce and includes any claim relating to arbitration also.

ii) In New York

The New York Supreme Court Commercial Division is part of the Supreme Court of New York State and “handles complicated commercial cases.” The Supreme Court of New York State, including the Commercial Division, is one of the lower courts of the state court system referred to as a “court of original instance.” The Supreme Court is a trial court where a case is first filed and decided. The Commercial Division is bound by the Uniform Rules for New York State Trial Courts, including Section 202.70 which contains rules specific to the Commercial Division only and the definition of Commercial cases include:

“Applications to stay or compel arbitration and affirm or disaffirm arbitration awards and related injunctive relief pursuant to Civil Procedure Law and Rules, Article 75 involving any of the foregoing enumerated commercial issues — without consideration of the monetary threshold.”

Working on the similar lines, it is high time that India adopts the concept of commercial arbitration and reflects the same in form of an amendment in the present act of 1996. It is to further the intention of the bill passed by Lok Sabha.

 

V] PROSOPED AMENDMENTS DISCUSSED UNDER THE CONSULTATION PAPER

In the year 2001, the Law Commission of India recommended many amendments to the Arbitration and Conciliation Act in its 176th Report submitted to the Government which was later accepted by the Government. Later on, the Arbitration and Conciliation (Amendment) Bill 2003 was introduced in Rajya Sabha, and for the in depth study of its proposed amendments, a Committee under the Chairmanship of Justice Dr. B. P. Saraf was constituted in 2004 .

The Lok Sabha passed the Commercial Division of High Courts Bill, 2009 in the recent consultation paper issued under Ministry of Law and Justice by the Government of India which bring in scope for commercial arbitration and would eventually help in better resolution of commercial disputes in India.

The Bill is undoubtedly a step forward to enable fast and efficient delivery of justice in India and has manifold advantages. This Bill seeks to bring in uniformity across the country with regard to Commercial Disputes of a Specified Value as such disputes would be dealt with by the Commercial Divisions of High Courts.

It highlights some developments in relation to the commercial arbitration and they are:

a) Defining commercial dispute

Commercial dispute under S.2(a) of the Commercial Division of High Courts Bill, 2009 means a dispute arising out of ordinary transactions of merchants, bankers and traders such as those relating to enforcement and interpretation of mercantile documents, export or import of merchandise, affreightment, carriage of goods, franchising, distribution and licensing agreements, maintenance and consultancy agreements, mercantile agency and mercantile usage, partnership, technology development in software, hardware, networks, internet, website and intellectual property such as trademark, copyright, patent, design, domain names and brands and such other commercial disputes which the Central Government may notify.

Explanation I — A dispute, which is commercial, shall not cease to be a commercial dispute merely because it also involves action for recovery of immovable property or for realization of monies out of immovable property given as security or for taking any other action against immovable property.

Explanation II —A dispute which is not a commercial dispute shall be deemed to be a commercial dispute if the immovable property involved in the dispute is used in trade or put to commercial use.

Explanation III — An application under section 34 or section 36 or an appeal under section 37 of the Arbitration and Conciliation Act, 1996 shall be deemed to be a commercial dispute if the amount in dispute or claim relates to a specified value.

Therefore, the Bill proposes a wide, exhaustive and exclusive definition of Commercial Dispute which encompasses within its scope disputes not only between tradesmen but also relating to commercial property, both immovable and movable including intangible property like patents, copyrights, trademarks, etc. It also empowers the Central Government to add to the list of Commercial Disputes as and when necessary.

The proposed amended version of Sec 11 of the Arbitration and Conciliation Act, 1996 is as follows:

After sub-section (12), following sub-sections shall be inserted, namely:-

“(13) Notwithstanding anything contained in foregoing provisions in this Sections, where an application under this Section is made to the Supreme Court or High Court as the case may be for appointment of arbitrator in respect of ‘Commercial Dispute of specified value’, the Supreme Court or the High Court or their designate, as the case may be shall authorize any arbitration institution to make appointment for the arbitrator.

Explanation:- For the purpose of this sub-section, expression ‘Commercial Dispute” and “specified value” shall have same meaning assigned to them in the Commercial Division of High Court Act, 2009.” In a way, not directly the definition of Commercial Dispute has been adopted in the Arbitration and Conciliation Act, 1996 Act which highlights the fact that even the legislators feel that Commercial disputes have to be given special preference.

b) Constitution of a separate Commercial division in the High Court to specially resolve Commercial disputes

The consultation paper favours setting up of a separate commercial division in the High Court to look into commercial disputes. The Indian law relating to commercial arbitration has to be made responsive to these changes in the Indian economic scene.

Now, by a separate law it is proposed to constitute ‘Commercial Division’ in the High Court. In the said law it is also proposed that the said Commercial Division will also entertain applications under Section 34 and Section 36 and appeals under Section 37 of the Arbitration and Conciliation Act, 1996 where the arbitration relates to “Commercial Disputes” of specified value.

c) Existence of a valid Arbitration Agreement

In order to avoid raising of an issue of existence of a valid arbitration agreement and also to promote institutional arbitration, it has been suggested by certain persons that in respect of commercial contract of high threshold value, there should be a deemed arbitration clause in every such contract, unless the parties expressly and in writing agree otherwise. To achieve this object, insertion of following clause in the Arbitration and Conciliation Act, 1996 has been suggested:

Unless parties expressly and in writing agree otherwise, every commercial contract with a consideration of specified value( Rs. 5 crore or more) shall deemed to have in writing specified arbitration agreement. Also, in this Section “Commercial Contract” shall mean every contract involving exchange of goods or services for money or money’s worth and includes carriage of goods by road, rail, air, waterways, banking, insurance, transactions in stock exchanges and similar exchanges, forward markets, supply of energy, communication of information, postal, telegraphic, fax and Internet services, and the like.”

The amendment bill can prove to be advantageous regarding induction of the concept of commercial arbitration in India as it for the first time has defined the term commercial disputes in relation of Arbitration. This bill would make way for initiating the idea of commercial arbitration in India .

 

VI] CONCLUSION

It is lucid from the above discussion that the model of Commercial Arbitration has great scope.

Taking a look at the laws relating to the resolution of commercial disputes across different jurisdiction and appreciating the proposed changes in the consultation paper by the ministry of law, most importantly looking at the need of this developing economy where commercial transactions are increasing both in quantum and quality, commercial arbitration needs the required attention and this is a hand down solution. Hence it is felt that commercial arbitration which to some extent has been accepted as a separate field under the broad head of domestic arbitration is considered as a commendable step towards making Commercial Dispute Resolution an easier task.

 

Effect of Compitition Law on Mergers and Acquisition

INTRODUCTION 

Mergers and acquisitions (or combinations) refer to a situation where the ownership of two or more enterprises is joined together. A merger is said to occur when two or more companies combine to form a new company. In this, two or more companies may merge with an existing company or they may merge to form a new company. The assets and liabilities of the transferor company become the assets and liabilities of the transferee company after the merger. The purpose of a merger is usually to create a bigger entity, which accelerates growth and leads to economies of scale. However, a merger may lead to unwanted socio- economic implications that are often frowned upon.

This was proved when the European commission on competition blocked the merger of GE and Honeywell, which would have been one of the largest industrial mergers in history. This merger however, was earlier cleared by the concerned US agency – the Department of Justice. This clearly shows each country has its own rules on competition. What one perceives as a threat may not be taken the same way by the other. India, which has now opened itself to global competition, now has its own competition law.

This new law, which seems to be in line with the trend globally, replaces the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969. In the pursuit of globalisation, India has responded to opening up its economy, removing controls and resorting to liberalisations. The natural corollary of this is that the Indian market must be geared to face competition from within the country and outside.

The MRTP Act, 1969 had become obsolete in certain respects in the light of international economic developments relating more particularly to competition felt to shift the focus from curbing monopolies to promoting competition so that the Indian market is equipped to compete with the markets worldwide.

The preamble of the Competition Act, 2002 states that it is a law to foster and maintain competition in the Indian market to serve consumer interest while protecting the freedom of economic action of various market participants and to prevent practices, which affect competition, and to establish a commission for these purposes (Competition Committee of India or CCI).

In India, mergers are regulated under the Companies Act, 2002 and also under the SEBI Act, 1992. With the enactment of the Competition Act in 2002, mergers have also come within the ambit of this legislation. In the Companies Act, 1956, mergers are regulated between companies inter alia to protect the interests of the secured creditors and the SEBI Act it tries to protect the interests of the investors. Apart from protecting the interests of private parties, these objectives are different and mutually exclusive. In the Competition Act, 2002, the objective is much broader. It aims at protecting the appreciable adverse effect on trade-related competition in the relevant market in India (AAEC).

 

 

THE COMPETITION ACT

The Competition Act (CA) attempts to make a shift from curbing monopolies to curbing practices that have adverse effects on competition both within and outside India. It is interesting to see that under the new regime the legislature has chosen to regulate unfair trade practices under only the Consumer Protection Act 1986 and not the Competition Act. In 2007 the Competition (Amendment) Act introduced significant changes to the competition law regime . Most noteworthy of these changes was the introduction of a mandatory notification process for persons undertaking combinations above the prescribed threshold limits. In early 2008 the Competition Commission of India also promulgated and circulated a draft of the Competition Commission (Combination) Regulations.

The regulations provide a framework for the regulation of combinations which include M&A transactions or amalgamations of enterprises. The merger provisions are not yet in force. Nonetheless, it is only a matter of time before the relevant provisions will be notified.

 

POSITION ON COMBINATIONS

Before considering combinations, it is necessary to look at two important sections of the CA. On May 15 2009 the government formally notified certain provisions in the CA relating to anti-competitive agreements and abuse of dominance, covered in Sections 3 and 4 of CA respectively, which came into force on May 20 2009. Section 3 of CA governs anti-competitive agreements and prohibits: agreements involving production, supply, distribution, storage, acquisition or control of goods or provision of services, which cause or are likely to cause an ‘appreciable adverse effect on competition’ in India .

Section 4 of CA prohibits the abuse of a dominant position by an enterprise . Under the Monopolies Act, a threshold of 25% constituted a position of strength. However, this limit has been eliminated under the CA. Instead, the CA relies on the definitions of ‘relevant market ’, ‘relevant geographic market ’ and ‘relevant product market ’ as a means of determining an abuse of a dominant position.

Under Section 6, the CA prohibits enterprises from entering into agreements that cause or are likely to cause an ‘appreciable adverse effect on competition within the relevant market in India ’. Under the new regime, the Competition Commission has investigative powers in relation to combinations . Various factors are provided for determining whether a combination will or is likely to have an appreciable adverse effect on competition in India, and penalties are provided for such violations .

 

CRITERIA UNDER SECTION

One of the most significant provisions of CA, Section 5, which defines ‘combination’ by providing threshold limits in terms of assets and turnover is yet to be notified. There is no clarity as to when it will be made effective. At present, any acquisition, merger or amalgamation falling within the ambit of the thresholds constitutes a combination.

Section 5 states that:

The acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises, if-

 

(a) any acquisition where-

(i) the parties to the acquisition, being the acquirer and the enterprise, whose control, shares, voting rights or assets have been acquired or are being acquired jointly have,-

(A) either, in India, the assets of the value of more than rupees one thousand crores or turnover more than rupees three thousand crores; or

(B) in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars or turnover more than fifteen hundred million US dollars; or

 

(ii) the group, to which the enterprise whose control, shares, assets or voting rights have been acquired or are being acquired, would belong after the acquisition, jointly have or would jointly have,- (A) either in India, the assets of the value of more than rupees four thousand crores or turnover more than rupees twelve thousand crores; or (B) in India or outside India, in aggregate, the assets of the value of more than two billion US dollars or turnover more than six billion US dollars; or

 

(b) acquiring of control by a person over an enterprise when such person has already direct or indirect control over another enterprise engaged in production, distribution or trading of a similar or identical or substitutable goods or provision of a similar or identical or substitutable service, if-

(i) the enterprise over which control has been acquired along with the enterprise over which the acquirer already has direct or indirect control jointly have,- (A) either in India, the assets of the value of more than rupees one thousand crores or turnover more than rupees three thousand crores; or (B) in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars or turnover more than fifteen hundred million US dollars; or

(ii) the group, to which enterprise whose control has been acquired, or is being acquired, would belong after the acquisition, jointly have or would jointly have,- (A) either in India, the assets of the value of more than rupees four thousand crores or turnover more than rupees twelve thousand crores; or (B) in India or outside India, in aggregate, the assets of the value of more than two billion US dollars or turnover more than six billion US dollars; or

 

(c) any merger or amalgamation in which-

(i) the enterprise remaining after merger or the enterprise created as a result of the amalgamation, as the case may be, have,- (A) either in India, the assets of the value of more than rupees one thousand crores or turnover more than rupees three thousand crores; or (B) in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars or turnover more than fifteen hundred million US dollars; or

(ii) the group, to which the enterprise remaining after the merger or the enterprise created as a result of the amalgamation, would belong after the merger or the amalgamation, as the case may be, have or would have,- (A) either in India, the assets of the value of more than rupees four thousand crores or turnover more than rupees twelve thousand crores; or

(B) in India or outside India, the assets of the value of more than two billion US dollars or turnover more than six billion US dollars.

 

CROSS BORDER MERGERS AND THE POWERS OF THE COMMISSION

Expectations regarding the enforcement ambitions of the Competition Commission of India(hereinafter CCI) along with risks of hefty financial penalties for firms as well as imprisonment for individuals means that it is vital for all companies that deal with India to factor antitrust law into decisions affecting their Indian businesses. Antitrust impacts on firms’ longer-term as well as day-to-day operational issues. Additionally, antitrust must be factored into the due diligence and contractual negotiation processes of mergers and acquisitions to ensure that any risks arising from antitrust compliance are addressed properly. The powers of merger review of CCI thus impacts the feasibility of certain deals. The Competition Act, 2002(hereinafter CA) introduces three enforcement areas usually found in modern competition law regimes: prohibition of anticompetitive agreements , prohibition of abuse of dominance and merger regulation . Many concepts of the new law are similar to those found in other jurisdictions, such as European Union or US competition law.

But since the market conditions are very different in India, these concepts may not be interpreted or applied in the same way . The first confession that needs to be made and accepted without any reservations is that in an interdependent world economy everything affects everything else.

Economic and industrial globalization has increased international competition and given rise to the need for an increasingly integrated and evolving legal system. A number of trends have contributed to the accelerated globalization of industry and the integration of international economies. For instance, the growing similarity in available infrastructure, distribution channels, and marketing approaches has enabled companies to introduce products and brands to a universal marketplace . However this is not to suggest that the Competition Act, 2002(hereinafter CA) should govern all the international economic conduct. There is a need to identify ways of distinguishing those international matters affecting Indian commerce sufficiently to warrant sufficient attention from our law.

It needs to be kept in mind that many ordinary difficulties of applying antitrust principles are compounded by the different mores and economic circumstances of international markets . These issues would have been at the background with a much lesser significance if the basis of jurisdiction was territorial and focused on the question as to where the relevant conduct occurred. However, with the judicially created “effects” test having come to the fore and the rise of its dominance these issues have acquired tremendous prominence.

 

Commission’s Extra-Territorial Powers

Section 32 of the Competition Act explicitly allows the Competition Commission to examine a combination already in effect outside India and pass orders against it provided that it has an ‘appreciable adverse effect’ on competition in India. This power is extremely wide and allows the Competition Commission to extend its jurisdiction beyond the Indian shores and declare any qualifying foreign merger or acquisition as void.

An ‘appreciable adverse effect’ on competition means anything that reduces or diminishes competition in the market. Section 32 states that

The Commission shall, notwithstanding that,- (a) an agreement referred to in section 3 has been entered into outside India; or (b) any party to such agreement is outside India; or (c) any enterprise abusing the dominant position is outside India; or (d) a combination has taken place outside India; or (e) any party to combination is outside India; or (f) any other matter or practice or action arising out of such agreement or dominant position or combination is outside India, have power to inquire into such agreement or abuse of dominant position or combination if such agreement or dominant position or combination has, or is likely to have, an appreciable adverse effect on competition in the relevant market in India

 

The wording of Section 32 succinctly lays down the scope of the applicability of the provision as far as the subject matter is concerned. It shall apply to:

• Anti-competitive agreements

• Abuse of dominant position

• Combinations

 

Combinations in the terminology of CA or cross border mergers have thus been included within the domain of the regulatory and investigative powers of the Commission. This provision needs to be read along with Section 18 of CA. Section 18 specifies in rather generic terms the duties of the Commission and the steps it can take to perform its functions under CA. It states that:

Subject to the provisions of this Act, it shall be the duty of the Commission to eliminate practices having adverse effect on competition, promote and sustain competition, protect the interests of consumers and ensure freedom of trade carried on by other participants, in markets in India: Provided that the Commission may, for the purpose of discharging its duties or performing its functions under this Act. enter into any memorandum or arrangement with the prior approval of the Central Government, with any agency of any foreign country

 

Appreciable Adverse Effect

The Commission has been granted wide powers under Section 32 read with Section 18 of CA. However, the caveat is that such agreement or abuse of dominant position or combination if such agreement or dominant position or combination has, or is likely to have, an appreciable adverse effect on competition in the relevant market in India.

 

Section 20(4) is indicative of the factors or the circumstances when ‘appreciable adverse effect on competition’ can be inferred. There are fourteen factors under this subsection and any one or all shall have to be considered by the Commission so as to ascertain the cause of AAEC in any given case:

1. actual and potential level of competition through imports in the market;

2. extent of barriers to entry into the market;

3. level of competition in the market;

4. degree of countervailing power in the market;

5. likelihood that the combination would result in the parties to the combination being able to significantly and sustainably increase prices or profit margins;

6. extent of effective competition likely to sustain in a market;

7. extent to which substitutes are available or are likely to be available in the market;

8. market share, in the relevant market, of the persons or enterprise in a combination, individually and as a combination;

9. likelihood that the combination would result in the removal of a vigorous and effective competitor or competitors in the market;

10. nature and extent of vertical integration in the market;

11. possibility of a failing business;

12. nature and extent of innovation;

13. relative advantage, by way of the contribution to the economic development by any combination having or likely to have appreciable adverse effect on competition;

14. whether the benefits of the combination outweigh the adverse impact of the combination, if any.

 

However, there is nothing to indicate that is the list is exhaustive. The exercise of the powers of the Commission over cross border mergers is crucially hinged on the meaning that the phrase ‘appreciable adverse effect on competition’ is given and how the jurisprudence surrounding the phrase develops.

The test thus laid down under the Act is that the Commission can investigate into a cross border merger taking place outside India if the (i) agreement or (ii ) abuse of dominant position or (iii) combination has or is likely to have an appreciable adverse affect on competition in the relevant market in India. Cross border merger regulation in India has only been partly taken care under the regulatory landscape of Securities and Exchange Board of India(SEBI). With the emergence of the new Competition Law regime in India a host of issues need to be looked into as far as cross border merger regulation is concerned and recognize the need to find a purposive solution to the possible conflicts and grey areas.

 

Example:

Air India and Indian (erstwhile Indian Airlines) have combined. Consequent upon that, the market share of the combined entity has increased considerably. The enhanced market share may cause, barriers to entry to other competitors; (competitors may not have market to trade), rise in passenger fares and poor quality of service.

On the contrary, it may not cause any concern at all if we look at the following factual issues:

(1) passengers have wider choice (Jet Airways, Spicejet, Kingfisher, Air Deccan, Indigo, Go Air, foreign airlines etc.);

(2) with wider choice, the combined entity may not be able to create entry barriers; and

(3) in order to maintain an optimal passenger base (for successful and viable business venture) the combined entity may have to provide competitive level price for tickets and maintain highest or at least similar levels of quality of services that its competitors would extend.

 

The Companies Act, 1956 and SEBI Act, 1992 (though mutually exclusive) aim to protect the interests of private individuals. Whereas, in the Competition Act, 2002, the impact of combinations directly affects the market and the players in the market including the consumers. We may, therefore, safely say that apart from the fact that all these legislations are mutually exclusive, the Companies Act, 1956 and the SEBI Act, 1992 are the sub-sets of Competition Act, 2002 in so far as legal scrutiny of mergers are concerned.

 

MERGER CONTROL UNDER THE COMPETITION ACT, 2002

Legislative Background 

The provisions of Competition Act, 2002, s.5 relating to regulation of combinations have been sought to check concentration of economic power. The Monopolies Inquiry Commission (1964-65) divided concentration of economic power in two broad categories, namely product wise concentration and country- wise concentration. Vertical and conglomerate mergers were relevant to be considered in the context of country-wise concentration, i.e.-, to say concentration of over-all economic power. The MRTP Act, 1969 thus regulated mergers, amalgamations and takeovers by providing for their approval by the Central Government.

To turn a new leaf to the obsolete competition laws laid down in the MRTP Act, 1969, the Report of the High level Committee on Competition Policy and Law was submitted by the Raghavan Committee that was constituted for this very purpose.

The Committee suggested revival of earlier provision for seeking approval of Competition Commission relating to mergers, amalgamations, acquisitions and takeovers with certain threshold limit of asset such value of the merged entity or the group to which it belonged.

As in the case of agreements, mergers are typically classified into horizontal and vertical mergers. In addition, merger between enterprises operating in different markets are called conglomerate mergers.

Mergers are a legitimate means by which firms may grow and are generally as much part of the natural process of industrial evolution and restructuring as new entry, growth and exit. From the point of view of competition policy it is horizontal mergers that are generally the focus of attention.

As in the case of horizontal agreements, such mergers have a potential for reducing competition. In rare cases, where an enterprise in a dominant position makes a vertical merger with another firm in (vertically) adjacent market to further entrench its position of dominance, the merger may provide cause for concern. Conglomerate mergers must generally be beyond the purview of any law on mergers.

Thus, the general principle, in keeping with the overall goal, is that mergers must be challenged only if they reduce or harm competition and adversely affect welfare.

Another important issue with regard to mergers that needed to be addressed according to the Committee was regarding the requirements for prior notification. There were two possibilities. The first is that approval or disapproval of the merger may be obtained possibly within a specified time) before going ahead with the merger. This will be subject to a threshold requirement based on assets or market share. The second option is that no notification of permission is required and that the threat of action in case of a violation must generally enforce legal behaviour. Although both the US and EU laws require prior approval for mergers above certain thresholds, they also impose a timeless requirement on the relevant authority, with delays being subject to limitation. However, there is no pre-notification requirement in the existing UK law.

The Committee apprehending that a prior approval is likely to lead to delays and unjustified bureaucratic interventions did away with it in the Indian context as well. This according to them was likely to hamper the vital process of industrial evolution and restructuring and is, thus, not recommended. In any case, all mergers have to be approved by the High Court under the Companies Act, 1956 and shareholders’ interests are protected in this way.

It may also be stipulated that if no reasoned order is received within a time limit, say of 90 days, prohibiting the merger, the merger must be deemed to have been approved.

The current Competition Act, 2002, s. 5 which deals in particular with combinations-which includes mergers, is based on the above recommendations of the Raghavan Committee.

 

Mergers and Amalgamations

Mergers and amalgamations with the threshold limit as to the value of assets and turnover under Competition Act, 2002, s. 5, cls. (c) are covered.

Mergers or Amalgamations may be broadly classified as follows:

(1) cogeneric—within same industries, (which are of two types, horizontal merger and vertical merger); and

(2) conglomerate—between unrelated businesses.

 

APPROVAL OF NATIONAL COMPANY LAW TRIBUNAL UNDER THE COMPANIES ACT, 1956

The Companies Act, 1956, ss. 394 read with 391 provides for approval of the Tribunal (in place of High Court) for any compromise or arrangement proposed between a company and its shareholder and/or its creditors where the compromise or arrangement has been prepared for the purposes of, or in connection with, a scheme for reconstruction of any company or the amalgamation of any two or more companies or where the whole or any part of the undertaking or properties or liabilities of any company concerned in the scheme is to be transferred to another company.

The Tribunal may consider the scheme of arrangement or amalgamation after obtaining consent of shareholders and creditors of the transferor and transferee companies. This is an additional requirement for the companies concerned apart from seeking clearance from the Competition Commission. A listed company, that is, a company whose shares are listed for public dealing in any recognised stock exchange is also required lo comply with the requirements of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In terms of these Regulations, if an acquirer acquires 15 per cent or more of the shares or voting rights of any company, the acquirer will make public announcement to acquire shares in accordance with the regulations.

 

 

PROVISIONS UNDER THE MRTP ACT, 1969 VIS-À-VIS THE COMPETITION ACT, 2002

In the MRTP Act, 1969, ss. 23 read with 20 states that the originally required approval of the Central Government for any scheme of merger or amalgamation or any proposed takeover relating to an undertaking the value of assets of which (along with its interconnected undertakings) was not less than Rs. 100 crores or which was a dominant undertaking having the value of assets (alongwith its inter- connected undertakings) not less than Rs. one crore.

These provisions were deleted by the MRTP (Amendment) Act, 1991 and the said provisions of law have again been revived under the Competition Act, 2002, s. 5 with certain changes as to the threshold limit of the value of assets or turnover. The concept of assets/turnover ‘outside India’ is, however, new in the Competition Act, 2002. No distinction has been made under the Competition Act, 2002, between different types of mergers or amalgamations. Instead of restricting the regulatory framework to only horizontal mergers, vertical and conglomerate mergers have also been covered under the Competition Act, 2002, although they are primarily meant to curb concentration of economic power.

Under the extent provisions the power has been vested in the Competition Commission while under the MRTP Act, 1969, the power was rested with the Central Government. It is a modern piece of economic legislation. Worldwide, competition or anti-trust laws have three main contours. They are:

(1) prohibition of anti-competitive agreements;

(2) prohibition of abuse of dominance; and

(3) regulating mergers amd acquisitions.

Indian law has all these essential ingredients of anti-competitive practice provisions. Anti-competitive agreements and abuse of dominance are intended to be prohibited by orders of the Commission; whereas, combinations (mergers etc) are to be regulated by orders. This distinction in law indicates the intentions of the legislators.

Combinations ensure economic growth, more economic opportunities for businesses to compete with their overseas counterparts and consumer welfare ultimately. On the other hand, anti-competitive combinations harm markets and subvert the interests of the consumers. In amicable and consensual mergers the parties have a unanimity of interests and any Competition Authority would really have not much to do but to allow such proposals.

On examination of Annual Reports of several Competition Authorities it is seen that in almost all jurisdictions across the globe 90 per cent cases of merger notifications are allowed and in the remaining 10 per cent cases they are either modified or rejected. This clearly indicates that our law is moving in the right direction. Besides, it is a regulatory act of the Commission, there are at lease four ‘filters’ available in the law before a notification of merger may be taken up for investigation and inquiry by the Competition Commission of India. The filters are as under:

(1) establishment of ‘prima facie’ case – s. 29

(2) exceeding thresholds – s. 5

(3) establishing AAEC in relevant market – s. 20(4) (4) effect in relevant market only – ss. 19(5) to (7)

 

Apart from the aforesaid conditions required to be fulfilled before any matter is formally admitted for inquiry and investigation, the AAEC also needs to be happening in a relevant product/geographic market in India. If the cause of AAEC is not conclusively proved to have happened in a relevant product/geographic market then again the action against a merger notification fails. In short, the entire process is business-friendly and not that the moment a reference or information comes to the Commission it sets out to serve a notice and then proceeds to pass quasi-judicial order.

The Competition Act, 2002 has mandatory provisions under s. 49 to promote the provisions of the law through public awareness campaigns amongst stakeholders. Besides, the Act also empowers the CCI under s. 64 to frame regulations to conduct the business of the CCI in accordance with the provisions of the enactment. When one reads these two provisions of the law together, one tends to believe, keeping the international best practices in view, that the CCI may also come up with Merger Guidelines for information of general public and stakeholders. The above guidelines clearly bring out the fact that the ‘acquirer’ and not the ‘target’ is the repository of all business, commercial and legal information and, therefore, it is the only entity that would be liable to share all such information with the Commission transparently before any acquisition (formal or informal) is taken up for clearance or otherwise.

Thus, a merger notification is generally a regulatory action between an ‘acquirer’ and the Commission unlike a prohibitory action of settling disputes between two parties. Secondly, on perusal of some of the Competition Authorities’ role in handling merger notification in some selected jurisdictions, it is reiterated that over 90 per cent cases are allowed by Competition Authorities in these jurisdictions and out of remaining ten per cent (or so) some are allowed with conditions and others are rejected outright. Combinations have been brought within the purview of the Competition Act. The acquisition of enterprises by persons, the acquisition of control by enterprises, and the merger or amalgamation of enterprises is considered combinations when their asset value and turnover cross certain threshold limits. S. 5 contains provisions regarding acquisitions, acquiring of control, mergers and amalgamations.

However, the Competition Act, 2002 does not delve into the repercussions of arrangements on competition. The Companies Act, 1956, s. 390 (b) defines the term arrangement as ‘including a re-organisation of the share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes or, by both those methods’. This term is of wide import and includes all modes of re-o rganisation of the share capital, takeover of shares of one company by another including interference with preferential and other special rights attached to shares. Arrangements may have dire consequences on competition and must, therefore, be specifically included in the provisions regarding combinations under the Competition Act, 2002.

The Raghavan Committee (the committee that introduced the enactment) had suggested much lower limits than those mentioned above. But these limits were raised for the reason, that very few Indian companies are of international size and in the light of continuing economic reforms, opening up of trade, and foreign investment, a great deal of corporate restructuring is taking place in the country and that there is need for mergers, amalgamations as part of the growing economic process. This change also resulted in the exclusion of more enterprises with a lower asset value and turnover from the purview of this stipulation. It must be noted that although s. 5 limits its application to companies with the prescribed asset value and turnover limit, smaller companies are kept from being anti-competitive by virtue of Competition Act, 2002, s. 4 which prevents a company from abusing its dominant position.

Moreover, another prevailing dissenting opinion seems to be that a company’s assets do not accurately reflect the company’s presence in the market and instead only the turnover test should be used to check whether a merger leads to a monopoly or not. Therefore the cap of Rs. 1,000 crores of assets on mergers between single entities and of Rs.4,000 crores in case of groups should be done away with. The Competition Act, 2002, s. 6(2) gives enterprises and persons the option to notify the CCI of the proposed combination. However, it is subject to s. 6(1), which renders the proposed combination, if it has an adverse effect on competition, void ab initio. Furthermore, pursuant to the Competition Act, 2002, s. 20(1), the CCI can inquire into any combination, suo moto or upon receiving information, within one year from when such combination takes effect. The pre-notification option granted to enterprises under s. 6(2) and the power of the CCI to inquire suo moto under s. 20 may lead to an anomalous situation, since companies that do not exercise their option under s. 6(2) are not automatically exempt from the investigations of the CCI.

 

Example:

Company ‘A’ merges with company ‘B’. A and B do not consider their merger anti-competitive even though they have an asset value and turnover above the prescribed threshold limit. The two companies do not notify the CCI about their merger. The companies invest a large amount on their merger within the first six months. The CCI on receipt of information from a competitor carries out an inquiry and passes a judgment within one year of the merger, that the merger has an adverse effect on competition and must not take effect. In this case, the two merged companies will incur huge losses as a result of the CCI’s order.

All these inconsistency may be removed by making pre-notification of combinations mandatory for all enterprises that have the prescribed asset value and turnover. Competition Act, 2002, s. 6 refers to ss. 29, 30 and 31, which provide the procedure for investigation into the combination by the CCI. By virtue of s. 29(1), the CCI may issue a notice to the parties to a combination that the CCI considers anti-competitive, to show cause against an investigation into the combination. Under s. 29(2), the CCI may require the parties to a combination to publish the details of the combination. Pursuant to s. 29(3), the CCI may invite any person or member of the public affected or likely to be affected by the combination, to file a written objection. This provision gives the CCI excessive discretion to decide as to which persons are eligible to be invited to file their objection against the combination. The provision must, therefore, be amended to allow anyone affected by the combination to file a written objection against the combination.

Pursuant to the Competition Act, 2002, s. 31(2), the CCI may direct that the combination will not take place, if it is of the opinion that the combination will have an appreciable adverse effect on competition. S. 20(4) sets out the factors that the CCI must consider while determining whether a combination has an adverse effect on competition.

Under s.31(3), the CCI may also propose a modification to such combinations. However, the CCI must pass an order with respect to the combination within 90 days of the publication under s. 29(2), failing which, the combination is deemed to be approved by the CCI. And even though it might be asking for too much from the ‘already struggling to keep pace jury’, the 90 day rule if reduced to 30 days, might prevent unnecessary delays.

 

International Transactions

Competition Act, 2002, s. 32 permits the CCI to inquire into agreements, abuse of dominant position, or combinations taking place outside India, if they have or are likely to have an appreciable adverse effect on competition in the relevant market in India. As a result of a recession in the global market, a large number of companies are merging with other companies in order to consolidate their position. Consider a situation where there is a merger between tw o enterprises abroad, such as Compaq and Hewlett Packard, which have subsidiaries in India. The CCI will have the power to inquire into the combination abroad by virtue of s. 32. Therefore, international companies having subsidiaries in India will have to adhere to the provisions of the Competition Act, 2002, ss. 3, 4 and 5 when enacted. Referring to the above instance of Hewlett Packard and Compaq, if their asset value and turnover exceed the prescribed limits, they will have to notify the CCI about their combination.

Some critics of this enactment feel that the Committee’s fear of mergers seems to stem from the fear that they would lead to monopolies that may hamper competition. But there seems to be no reason why these may not be considered by the high courts, which necessarily have to approve mergers under the Companies Act, 1956.

Hence instead of an additional set of procedures before the Competition Commission that may lead to a delay, these issues may be addressed in a holistic and cohesive manner by the high court, where the commission may play an advocacy role. However, it is easy to point to the Microsoft’s case in the US in support of the Committee’s recommendation for the creation of a regulatory authority to prevent abuse of dominance.

 

Example:

Microsoft neatly executed the ‘embrace, extend and extinguish’ policy, which proved lethal to its friends and foes alike. The way the computer giant altered its programming language like Java to suit the Windows environment or the encryption language used by servers or the Windows 2000 system created an empire for windows, in which everything works best only if it is a Windows product.

And though India might not have a giant like Microsoft which requires a ten member committee today, it must always be remembered that precaution is better than cure and even though as of date, the competition law is not well established in India, the competition law is indeed forward looking because it keeps a watch on the behavior and the practices of firms such that no firm may abuse the freedom given to them and in the process create an economy which will enable all to enjoy the fruits of development through vigorous competition.

 

CONCLUSION

International examples can be of some assistance for the purpose of serving a broad guideline or a roadmap. They cannot be definitive for other jurisdictions where the legal systems are differently positioned. The routes taken by Europe and US need not be necessarily followed by India. They can be digressed from and other alternatives more suitable to the mores and needs of socio-economic scenario of India can be followed. In fact, the legislative and administrative mechanism for cross border merger control as prevalent in US and Europe can serve little purpose while determining the competition policy for India.

Practical experience has shown that the majority of mergers notified are cleared quite quickly. The Competition Act, 2002 itself lays down stringent time lines – the Commission must take a view within 90 working days from the day it has obtained complete information failing which the merger is deemed to have been approved . Further, the Commission may initiate suo-motu enquiry into merger only within a period of one year from the day the merger has taken effect . These provisions adequately dispel any apprehension of inordinate delay or unbridled scrutiny into mergers Further global experience suggests that hardly four per cent of the all notified mergers are taken up for a detailed scrutiny by the competition authorities, of which 50 per cent are approved, and a further 25 per cent are approved with modifications.

Even the proposed merger of the two largest steel producers in the world did not attract many competition concerns. Whereas the US authorities have already cleared the proposed merger, recent news reports indicate that the controversial Mittal Steel/ Arcelor takeover bid which has been notified to the European Commission will be cleared ‘due to the largely complementary nature of the combined group’ .In other cases, where the authority comes to the conclusion that a proposed merger would lead to an appreciable adverse effect on competition, it may yet allow the merger but subject to one of several directions including divestment, requiring access to essential inputs/ facilities, dismantling exclusive distribution agreements, removing no -competition clauses, imposing price caps or other restraints on prices, refrain from conduct inhibiting entry, and so on.

The Commission needs to swing into action undertaking substantial capacity building to implement the extra territorial jurisdiction that is embodied in the Competition Act, 2002. As India integrates at a fast pace with the global economy there is a need to ensure international co-operation to tackle cross border challenges.

Combinations are economic enhancing trade practices hence they necessarily need to be encouraged by all so as to ensure ultimate benefit to the end consumers. However, there is a flip side of it too. Today’s combination may be tomorrow’s dominance and though dominance is not frowned upon under the CA but its abuse surely is. Abuse of Dominance (AoD) is mandatorily prohibited under the law. Therefore, every acquirer (not the target) has to be Competition Law Compliant even post combination and has to remain so forever if it desires to remain in healthy business practices. Except sovereign functions and functions relating to Atomic Energy, Space Research, Defence and Currency – all commercial activities of the departments of Union and States and their statutory bodies come within the ambit of the CA, which warrants the policy makers to seriously consider taking suitable steps before it is too late. Likewise, any department of a government is also a procurer of goods and services even from a non-government agency – hence it too may fall prey to an anti-competitive practice of a private supplier and the law does not preclude it to refer such matters, if any, to the CCI against such private supplier.

Therefore, private – public participation is the need of the hour if one is serious about seeing the Competition Law in its full steam. The CCI too needs to have appropriate professional manpower to understand and then implement the provisions of the law effectively. Professional and academic institutes too need to upgrade their academic curricula so as to provide the future manpower to all stakeholders and help implement the intents and purposes of this legislation for overall economic and social well being of the country.

– By Rohit Choudhary

TORT OF PASSING-OFF

 CHAPTER 1

THE CONCEPT OF PASSING OFF

Passing off is a wrong, a common law tort which protects the goodwill of a trader from misrepresentation. Misleading the public into believing falsely, that the brand being projected was the same as a well known brand is a wrong and is known as the tort of “passing off” .

As held in the famous case of N. R. Dongre Vs. Whirlpool Corporation

“A man may not sell his own goods under the pretence that they are the goods of another man.”

Law aims to protect traders from this form of unfair competition.

Legally, classifying acts under this tort aims to protect the right of property that exists in goodwill. Goodwill is defined as the part of business value over and above the value of identifiable business assets. So basically it is an intangible asset .

It enables a business to continue to earn a profit that is in excess of the normal or basic rate of profit earned by other businesses of similar type. It might be due to a particularly favourable location, reputation of the brand in the community, or the quality of its employer and employees. The value of goodwill of a brand can be calculated by a number of methods, like

• subtracting the value of all tangible assets from the total value to establish the value of the intangible assets

• the amount of earnings that are in excess of those normally earned by a similar business

• averaging the past five years net income and subtracting a reasonable expected rate of return for tangible assets and salary requirements capitalising the resulting value

Goodwill can be classified into two zones, viz. institutional goodwill and professional practice goodwill. While institutional goodwill associates itself with business houses, their market position, professional practice goodwill, as is quite obvious from the name, associates itself with professional practices like law, medicine, architecture, engineering and many others .

In itself, professional practice goodwill can be divided into practitioner goodwill, where the skill and reputation of the individual practitioner comes to play, and practice goodwill, which is very similar to institutional goodwill and depends on the institute reputation.

The Dutch Advocaat case was the first case where the basic elements of the wrong of passing off were put forth by Lord Fraser. They were as follows

• a misrepresentation

• made by a trader in the course of trade,

• to prospective customers of his or ultimate consumers of goods or services supplied by him,

• which is calculated to injure the business or goodwill of another trader (in the sense that this is a reasonably foreseeable consequence) and

• which causes actual damage to a business or goodwill of the trader by whom the action is brought or (in a quia timet action) will probably do so.

Later in the Jif Lemon case, Lord Oliver reduced these principles to three basic features (now known as the classical trinity) which included

• reputation

• misrepresentation

• damage to goodwill

To sum it up, the tort of passing off covers those cases where one trader falsely misrepresents his goods as those of another trader/brand, which has a good reputation/goodwill in the market and thus leads to damaging his goodwill.

In a passing off action, the plaintiff must prove that there is a similarity in the trade names or marks and that the defendant is passing off his goods as those of the plaintiff’s . Remedies could include injunction or damages or both. Damage or likelihood of damage form the core all passing off actions. The concepts of reverse passing off and extended passing off also hold significance.

Extended passing off consists of those cases where misrepresentation of a particular quality of a product or services causes harm to the plaintiff’s goodwill. A famous case example would be Diageo North America Inc v Intercontinental Brands (ICB) Ltd ., where the defendant marketed a drink named “Vodkat”, which was actually not vodka, but the marketing did not actually make it clear that it wasn’t so. The plaintiffs were the biggest manufacturers of vodka and they filed a suit against the defendants for passing off and it was held so.

If a defendant markets the products made by the plaintiff as the products of the defendant, the tort committed is known as reverse passing off.

CHAPTER 2

EVOLUTION AND DEVELOPMENT OF THE CONCEPT

Liability in the tort of passing off ultimately boils down to misrepresentation. It all started in the 17th century, in the cases Southern v. How and Dean v. Steel . Usually, the judges categorised such torts under deceit or defamation .

Later in the eighteenth century, all cases of passing off were classified as cases of deceit, where the action was usually brought not by the deceived, but by the one whose mark was used to deceive. (Blanchard v. Hill ), limiting the tort to cases where there was a proof of bad faith .

Later, in the nineteenth century, in the case Millington v. Fox , it was decided that proof of fraud was not necessary in such a wrong and it was from here that the actual tort of passing off began building its own definition .

The concept of equity was largely used to realise the scope of passing off. The predominant view was that equity intervened to restrain what would be a fraud if allowed to go ahead and that it protected proprietary rights. This particular viewpoint led to the equity courts to awarding compensations instead of injunctions. This idea was based on the theory that, in such a tort, constructively, the defendant was an agent of the plaintiff .

Later, in the case Cartier v. Carlile , it was decided that a “man must be taken to intend” the natural consequences of his act and mere proof of likelihood of deception was sufficient to prove the wrong.

In Edelsten v. Edelsten , it was put forth that mere notice of plaintiff’s rights satisfied the requirement of fraud and a man could be held liable in such a case whether or not his actions were honest.

Whatever the case be, fraud continued to remain an essential element in the tort. Where fraud was not proved, usually an inquiry into the damages caused was ordered.

Finally it was concluded gradually, that fraud need not be shown while judging such a case.

The final question would be, if the defendant was unaware of the existence of the plaintiff or his brand, would he still be liable for such a tort. The question remained open ended for a long time and at one point, the authorities were opposed to the imposition of liability in such a case. But as of now, the motive of the defendant is not very important in such an action. The only thing that needs to be proved is the reputation established by the plaintiffs .

CHAPTER 3

ANALYSIS OF JUDICIAL DECISIONS

1. Southern v. How

The earliest documented case where there was an indication of passing off, this one dates back to 1618. In this case mark of an eminent clothing brand was used to dupe a customer, who bought the defendant’s low grade clothing thinking it was the plaintiff’s brand.

The defendant was held liable. This though was more a case of deceit, but the principle of passing off clearly started its journey from this case.

2. A.G. Spalding & Brothers v. A.W. Gamage, Ltd.

The defendants had organised a sale where they announced they would sell the plaintiffs’ footballs at a nominal price. But in reality, the intention of the defendants was to sell a different ball, belonging to the plaintiffs’ company of course, than the one advertised.

An action was brought by the plaintiffs seeking to recover damages, which they contended, they had incurred from the dip in sale of their genuine footballs.

It was held that in this type of a wrong, actual passing off was unnecessary. What was important was a description of this wrong in terms of representation. Referring to the defendants’ contention that the writ was issued before there was any kind of sale, there lay no basis in the action and hence, it could not succeed, it was declared that offering to sell was an actionable act. It was also declared that there could be no sort of a limit for awarding damages for such a wrong.

3. Hendricks v. Montagu

The plaintiffs, the “Universal Life Assurance Society” brought an action against the defendants to stop them from carrying on business with the trade name “Universal Life Assurance Association”. The injunction sought was granted and it was mentioned that since the names were too similar for differentiation, the tort of passing off was indeed committed.

4. J Bollinger v Costa Brava Wine Co. Ltd.

Popularly known as the Spanish Champagne case, this particular case saw an action being brought by twelve biggest champagne manufacturers of France, on behalf of every champagne manufacturer in their country, seeking injunctions on use of the word “champagne” while describing Spanish wine, and passing it off as champagne. An injunction was granted.

5. The Dutch Advocaat Case

Erven Warnink B. V. v. J. Townend & Sons is popularly known as the Dutch Advocaat case. This was the first case where basic elements of passing off were first put forth. Lord Fraser, while delivering the judgment had listed five principles of such a tort, which have already been discussed.

In the present case, the first plaintiff was a company from the Netherlands which manufactured a beverage made from eggs and brandewijn spirit. The drink was called Advocaat. The defendants were an English company manufacturing a drink of a similar name (Old English Advocaat), but altogether different in nature, being prepared from eggs and fortified wine. Being a wine based drink, the excise duty on the defendants’ product was much lesser than that on the plaintiff’s product, which had a huge share of the English “Advocaat” market. This resulted in the defendants taking over much of the plaintiff’s market share. An injunction was sought to stop the defendants from using the name “Advocaat”.

Initially it was held that the term “Advocaat” had earned a good reputation and goodwill, being recognised as a drink of good quality and taste, something which the defendants’ product did not comply with, with it having a different recipe. It was held that the defendants were guilty of the tort of passing off. The Court of Appeal reversed this decision by Goulding J., only to see the House of Lords restoring it.

6. The Jif Lemon case

Reckitt & Colman Products Ltd. v. Borden Inc. is popularly known as the Jif Lemon case. The judgment in this case finally formulated three basic principles of the tort of passing off.

The facts of this case go as such;

The plaintiff was a manufacturer of lemon juice and, since 1956, had been selling such juice under the name “Jif” in plastic containers resembling real lemons. The defendant’s product, manufactured in 1985-86 marketed three different kinds of lemon juice in containers precariously similar to those of the plaintiffs’, the only difference being a differently coloured cover and a different brand name, “ReaLemon”.

The plaintiffs’ brought an action for passing off and were successful, with both the Court of Appeal and the House of Lords upholding the decision.

Walton J., observed that a careful shopper might be able to distinguish between the different brands, but, to quote him;

“the slightest peradventure that the effect of the introduction of any of the defendant’s lemons on to the market would be bound to result in many housewives purchasing them in the belief that they were purchasing the well known and liked Jif brand.”

The fact that the brand “Jif” was identified by the shape of its container and not by its label provided the ultimate evidence.

7. Calvin Klein Inc. USA v. International Apparel Syndicate

In this case, the plaintiff, an internationally reputed US company with a tremendous goodwill for designer clothing brought an action for passing off and trademark infringement against International Apparel Syndicate, an Indian company to stop them from using the trade name Calvin Klein and the mark CK.

Calvin Klein did not have a market in India, but their goodwill was based on their reputation earned through advertisements. They also had worldwide trademark registrations in 136 countries including India. In India, their registration covered only textile goods, while their application for trademark registration for clothing, footwear and headgear was still pending. False representation by the Indian company that they were official CK licensees and marketing their products under the trade name of Calvin Klein led to the Calcutta High Court passing an interim order for injunction, stopping International Apparel Syndicate from using the name Calvin Klein and the mark CK, which subsequently became permanent.

The defendants’ contention that the plaintiffs could not bring an action because they did not sell their goods in India was disallowed. The court said that the marks were used with an intention to deceive the customers and to trade riding on the international reputation of Calvin Klein.

8. Honda Motors Co. Ltd. v. Mr. Charanjit Singh and Ors

The defendants manufactured pressure cookers under the name “Honda”, in India. Their application for registration had already been rejected once before and they had applied for registration again, while continuing to sell their products.

The plaintiffs, popular all over the world for their motor goods and electrical appliances brought an action against the defendants. In India, they ran a joint venture with the Siddharth Shriram Group.

In the judgment, it was held that with an established business and sale of quality products, the name “Honda” had become associated with the plaintiffs’ reputation and its goods. It was said that it is very easy for the public to associate the plaintiffs with any product that carries the name of “Honda”. Further, the honourable judges also held that by using the name “Honda” the defendants were creating confusion in the consumers’ minds, which was indirectly affecting the business of the plaintiffs in an adverse way. An injunction was ordered to stop the defendants from using the name “Honda”.

9. Colgate Palmolive Company and Anr. v. Anchor Health and Beauty Care Pvt. Ltd.

Both the plaintiffs and the defendants manufacture well known toothpaste brands. The plaintiffs sued the defendants for passing off. The contention of the plaintiffs was that the defendants’ use of colour and pattern of colours in their dental products was dangerously similar to the plaintiffs’. According to the plaintiffs the proportion of colours (red and white) used by the defendants was almost identical to that of the plaintiffs (1/3:2/3). The reason for bringing in such an action was that the plaintiffs were established in the Indian market since 1951, and had a tremendous goodwill in the country, while the defendants had entered the market only in 1996.

It was held by the court that though there cannot be any monopoly over colour, in a country with a huge number of illiterate and semi-literate people, by marketing a new product with a design closely resembling that of the older product, it is easy to create confusion in the minds of the public, especially when a similar product has been prevailing in the market for close to half a century. It was adjudged that the defendants were using the trade dress of the plaintiffs. The court ordered an injunction, restraining the defendants from using the red/white combination in the disputed order.

10. Smithkline Beecham v. V.R. Bumtaria

The defendants used the name “ACIFLO” for one of their pharmaceutical preparations. The plaintiffs’ sued the defendants for passing off since they had been using the name of “ARIFLO” for the same product, a name which was registered. They did not have a market in India. The plaintiffs contended that advertisements in medical journals amounted to building of a goodwill in India, which was being misused by the defendants. The court held that the reach of medical journals was restricted to a specific class of people and so was the reputation, hence, there was no passing off.

CHAPTER 4

PASSING OFF AND TRADEMARK INFRINGEMENT

Passing off is different from trademark infringement.

To understand the differences between passing off and trademark infringement in India, we need to analyse the scope of trademark infringement and the Trademarks Act, 1999.

Trademark is a company’s identity enabling a customer to distinguish products under that trademark according to the goodwill of the company and quality of the products. Trademarks help the owners to avoid their competitors from using the trademark to their own benefit. The most important and significant point is that the name and reputation of a company is deeply rooted within the trademark. A company cannot afford to let any other person misuse its trademark and in the process harm the reputation, goodwill, and not to forget the business, which must have taken years to become solid .

Section 29(1) of the Trademarks Act, 1999 helps define infringement;

“A registered trade mark is infringed by a person who, not being a registered proprietor or a person using by way of permitted use, uses in the course of trade, a mark which is identical with, or deceptively similar to, the trade mark in relation to goods or services in respect of which the trade mark is registered and in such manner as to render the use of the mark likely to be taken as being used as a trade mark.”

Passing off is not defined in the Trademarks Act, 1999. But various courts have tried to follow the common law in helping build an idea of passing off. Passing off is said to take place when a trademark, registered or unregistered is infringed in a manner where not only is the mark dangerously similar to that of the plaintiffs’, but also it rides on the plaintiffs’ goodwill to help establish a market and thus ruin the plaintiffs’ market. “Goodwill” plays a big part in instituting an action against the tort of passing off.

Trademark infringement is protected by Section 29 of the Trademarks Act, 1999, as its ambit stretches up to registered trademarks only.

“29. Infringement of registered trade marks

(1) A registered trade mark is infringed by a person who, not being a registered proprietor or a person using by way of permitted use, uses in the course of trade, a mark which is identical with, or deceptively similar to, the trade mark in relation to goods or services in respect of which the trade mark is registered and in such manner as to render the use of the mark likely to be taken as being used as a trade mark.

(2) A registered trade mark is infringed by a person who, not being a registered proprietor or a person using by way of permitted use, uses in the course of trade, a mark which because of-

(a) its identity with the registered trade mark and the similarity of the goods or services covered by such registered trade mark; or

(b) its similarity to the registered trade mark and the identity or similarity of the goods or services covered by such registered trade mark; or

(c) its identity with the registered trade mark and the identity of the goods or services covered by such registered trade mark, is likely to cause confusion on the part of the public, or which is likely to have an association with the registered trade mark.

(3) In any case falling under clause (c) of sub-section (2), the court shall presume that it is likely to cause confusion on the part of the public.

(4) A registered trade mark is infringed by a person who, not being a registered proprietor or a person. using by way of permitted use, uses in the course of trade, a mark which-

(a) is identical with or similar to the registered trade mark; and

(b) is used in relation to goods or services which are not similar to those for which the trade mark is registered; and

(c) the registered trade mark has a reputation in India and the use of the mark without due cause takes unfair advantage of or is detrimental to, the distinctive character or repute of the registered trade mark.

(5) A registered trade mark is infringed by a person if he uses such registered trade mark, as his trade name or part of his trade name, or name of his business concern or part of the name, of his business concern dealing in goods or services in respect of which the trade mark is registered.

(6) For the purposes of this section, a person uses a registered mark, if, in particu1ar, he-

(a) affixes it to goods or the packaging thereof;

(b) offers or exposes goods for sale, puts them on the market, or stocks them for those purposes under the registered trade mark, or offers or supplies services under the registered trade mark;

(c) imports or exports goods under the mark; or

(d) uses the registered trade mark on business papers or in advertising.

(7) A registered trade mark is infringed by a person who applies such registered trade mark to a material intended to be used for labelling or packaging goods, as a business paper, or for advertising goods or services, provided such person, when he applied the mark, knew or had reason to believe that the application of the mark was not duly authorised by the proprietor or a licensee.

(8) A registered trade mark is infringed by any advertising of that trade mark if such advertising-

(a) takes unfair advantage of and is contrary to honest practices in industrial or commercial matters; or

(b) is detrimental to its distinctive character; or

(c) is against the reputation of the trade mark.

(9) Where the distinctive elements of a registered trade mark consist of or include words, the trade mark may be infringed by the spoken use of those words as well as by their visual representation and reference in this section to the use of a mark shall be construed accordingly.”

To make things crystal clear as far as unregistered trademarks are concerned, Section 27 of the same act would be enough;

“27. No action for infringement of unregistered trade mark

(1) No person shall be entitled to institute any proceeding to prevent, or to recover damages for, the infringement of an unregistered trade mark.

(2) Nothing in this Act shall be deemed to affect rights of action against any person for passing off goods or services as the goods of another person or as services provided by another person, or the remedies in respect thereof.”

Unregistered trademarks are not protected against pure infringement by the Trademarks Act, 1999 and infringement of such marks can only be protected by bringing an action for passing off. Similarly, confusion between two registered trademarks can be solved by bringing in an action for passing off. Clause 2 of Section 27 gives clear mandate that nothing mentioned in the entire act would affect the rights of any person for instituting an action for passing off.

Unregistered trademarks are granted protection against passing off under Section 134 of the aforementioned act. Sub-clause c of clause 1 of Section 134 says that no suit for passing off arising out of the use by the defendant of any trade mark which is identical with or deceptively similar to the plaintiffs trade mark, whether registered or unregistered, shall be instituted in any court inferior to a District Court having jurisdiction to try the suit.

Section 135 of the act deals with relief in suits for infringement or for passing off and basically includes injunction and damages.

CHAPTER 5

CONCLUSION

In a country where a considerable percentage of the population lives in rural areas, it is very easy to pass off goods. Thousands of instances of passing off can be found out throughout India. Right from garments to tobacco to toothpaste to pencils to pens, you name it, you find it. Unfortunately, a legal solution has evaded most of these. But with the Trademarks Act, 1999 providing protection against passing off, situation has improved, as can be observed from a huge splurge in the number of Indian cases concerning passing off in the recent past. Passing off has come a long way through the common law system and now has some well defined principles and ambit. Perhaps the time is ripe to bring in legislation and enact a statute concerning passing off.

REFERENCES

1. R.F.V. HEUSTON AND R.A. BUCKLEY, SALMOND & HEUSTON ON THE LAW OF TORTS, 395-399 (20th Ed. 2004).

2. W.L. Morison, Unfair Competition and ‘Passing-off’, 2 Sydney Law Review. 50. (1956)

3. Suman Naresh, Passing-Off, Goodwill and False Advertising: New Wine in Old Bottles, 45(1) The Cambridge Law Journal. 97 (1986).

4. Andrew Christie, Of Passing off and Plastic Lemons, 49(3) The Cambridge Law Journal. 403 (1990)

5. Peter Russell, Passing off by Misdescription, 43(3) The Modern Law Review, 336-340 (1980).

6. http://www.valuadder.com/glossary/business-goodwill.html

7. http://www.ventureline.com/accounting-glossary/G/goodwill-definition/

8. http://www.legalserviceindia.com/article/l226-Trademark-Infringement-&-Passing-Off.html

9. The Trademarks Act, 1999.

LIST OF CASES REFERRED

1. Southern v. How, (1618) Cro. Jac. 468, Poph. 14.3, 2 Roll. Rep. 26.

2. Dean v. Steel, (1626) Latch 188.

3. Blanchard v. Hill, (1742) 2 Atk. 484.

4. Millington v. Fox, (1838) 3 My. & Cr. 338.

5. Cartier v. Carlile, (1862) 31 Beav. 292.

6. Edelsten v. Edelsten, (1863) 1 De G., J. & S. 185.

7. Hendricks v Montagu, (1881) 17 Ch.638

8. Spalding & Brothers v. Gamage (A W) Ltd, (1915) 84 LJ Ch 449

9. J Bollinger v. Costa Brava Wine Co. Ltd., [1960] Ch 262

10. Erven Warnink v. J Townend & Sons (Hull) Ltd, [1979] AC 731

11. Reckitt and Colman Ltd. v. Borden Inc., [1990] 1 All E.R. 873

12. Calvin Klein Inc. USA v. International Apparel Syndicate, MANU/WB/0083/1994

13. N. R. Dongre v. Whirlpool Corporation, (1996) 5 SCC 714

14. Kishore Zarda Factory (P) Ltd. v. J.P. Tobacco House, AIR 1999 Delhi 172

15. Honda Motors Co. Ltd. v. Mr. Charanjit Singh and Ors, 101 (2002) DLT 359

16. Colgate Palmolive Company and Anr. v. Anchor Health and Beauty Care Pvt. Ltd, 108 (2003) DLT 51

17. Smithkline Beecham v. V.R. Bumtaria, MANU/DE/2890/2005

18. North America Inc. v. Intercontinental Brands (ICB) Ltd., (2010) EWHC 17 (Ch)

A CRITICAL ANALYSIS OF THE DOCTRINE OF LEGAL PRECEDENTS

ADITI GHOSH

 INTRODUCTION:

Judicial methods are the techniques adopted by the judges in deciding cases. Judicial method plays an important role in the development of law, irrespective of the fact whether a community lives in rural simplicity or modern complexity, or whether it follows case laws to decide cases or codified laws. In this paper the researcher is going to discuss the judicial method of legal precedents and the fundamental issues raised by following this method.

There are two types of law – statute law and common law. The first category refers to the law passed by the parliament, it is written and must be adhered to. The second type is the common law where judges decide cases by looking at previous decisions that are sufficiently similar and utilize the principle followed in that case. This is called stare rationibus decidendi, usually referred to as stare decisis, which means ‘Let the decision stand’.

Hence a court may be bound by the statutes or by the decisions of the superior courts. And to understand what judicial precedence and ratio decidendi are, we must study this area of the legal system ie following case laws and legal precedents.

One of the functions of the judicial opinion is to help preserve the confidence of the bar and the public in the ability, learning, fairness and open mindedness of the judiciary as a whole, as well as the careful attention due to the particular case, by indicating the grounds upon which the decision is based whenever the case is one not entirely clear.

WHAT IS MEANT BY A PRECEDENT?

A precedent or authority in common law parlance means a previously decided case which establishes a rule or principle that may be utilized by a court or a judicial body in deciding cases that are similar in facts or issues.

TYPES OF PRECEDENTS

There are different types of precedent within the law.

ORIGINAL PRECEDENT

The first is ‘original precedent’ which refers to a case having a point of law which has never been decided before, then the decision of the judge in such a case forms an original precedent. Eg. The famous case of Donoghue v Stevenson (case of negligence of the manufacturer and the duty of care he owes to his customers). In such a case the judge has to reason by analogy and look at cases that are similar and are closest in principle and thus arrive at a judgment by using similar reasoning.

AUTHORITATIVE OR BINDING PRECEDENT

As the name suggests authoritative precedent or decision (a.k.a binding decision) is one which judges must follow whether they approve it or not. It is also known as mandatory precedent or binding authority. As per the doctrine of stare decisis, a court lower in the hierarchy follows and honours the findings of law made by a court higher in the hierarchy. The decisions of lower courts are not binding on courts higher in the system.

Lower courts are bound by precedent (that is, prior decided cases) of higher courts within their region.

PERSUASIVE PRECEDENT

And a persuasive decision or precedent is one which the judges are under no obligation to follow but which they will take into consideration and attach as much weight as it deserves.

It is a precedent that the court need not follow, but may consider when a decision is being made as it is relevant and might be useful. Persuasive precedent comes from many places. Courts lower in the hierarchy can create a persuasive precedent.

These cases could be cases that are decided by lower courts, or courts equivalent in the hierarchy or in some exceptional circumstances, cases of other nations, judicial bodies of the world etc.

Once a persuasive precedent has been adopted by a higher court it becomes a binding precedent for all the lower courts that time onwards.

THE DOCTRINE OF STARE DECISIS?

“Stare decisis” is an abbreviation of the Latin phrase “stare decisis et non quieta movere” which translates as “to stand by decisions that are already settled and not to disturb those settled matters”. And “Stare decisis” literally means “to stand by decided matters”.

Stare decisis is a policy adopted by the court to stand by a precedent. The word “decisis” means ‘the decision’. Under the doctrine of stare decisis, the decision of the court for a case is only what is important and not the real facts and proceedings of the case. In other words it is the ‘what’ of a case which is important and not the ‘how’ and ‘why’.

The principle of stare decisis can be divided into two components or principles:

The first is the rule that a decision made by a higher court is binding precedent which a lower court cannot overturn.

The second is the principle that a court should not overturn its own precedents unless there is a strong reason to do so and should be guided by principles from lateral and lower courts. The second principle is an advisory one which courts can and does occasionally ignore.

Basically, under the doctrine of stare decisis, the decision of a higher court within the same provincial jurisdiction acts as binding authority on a lower court within that same jurisdiction. The decision of a court of another jurisdiction only acts as persuasive authority. The degree of persuasiveness is dependent upon various factors, including, first, the nature of the other jurisdiction. Second, the degree of persuasiveness is dependent upon the level of court which decided the precedent case in the other jurisdiction. Other factors include the date of the precedent case, on the assumption that the more recent the case, the more reliable it will be as authority for a given proposition, although this is not necessarily so. And on some occasions, the judge’s reputation may affect the degree of persuasiveness of the authority.

Glanville Williams in Learning the Law (9th ed. 1973), describes the doctrine in simple terms :

What the doctrine of precedent declares is that cases must be decided the same way when their material facts are the same. Obviously it does not require that all the facts should be the same. We know that in the flux of life all the facts of a case will never recur, but the legally material facts may recur and it is with these that the doctrine is concerned.

The ratio decidendi [reason of deciding] of a case can be defined as the material facts of the case plus the decision thereon. The same learned author who advanced this definition went on to suggest a helpful formula. Suppose that in a certain case facts A, B and C exist, and suppose that the court finds that facts B and C are material and fact A immaterial, and then reaches conclusion X (e.g. judgment for the plaintiff, or judgment for the defendant). Then the doctrine of precedent enables us to say that in any future case in which facts B and C exist, or in which facts A and B and C exist the conclusion must be X. If in a future case A, B, C, and D exist, and the fact D is held to be material, the first case will not be a direct authority, though it may be of value as an analogy.

For stare decisis to be effective, each jurisdiction must have one highest court to declare what the law is in a precedent-setting case. In India, The Supreme Court of India is the supreme authority in legal matters as it is the highest judicial body and the cases decided by it form the precedent for all the other courts in India; it includes the High Courts, district courts and the other lower courts. The Supreme Courts serves as the precedential body, resolving conflicting interpretations of law. Whatever this court decides becomes judicial precedent.

It has been stated by The United States Court of Appeals for the Ninth Circuit :

“For the system of precedents to work effectively there are three elements that are very important to be present in the legal system of that country. First, there needs to be an undisputed and accepted hierarchy of courts with one court having the supreme authority over all the other courts of the land. The second is the presence of an efficient law or case reporting system. And the third element is to strike a balance between the need of having consistency and certainty in legal matters resulting from following the previously decided binding cases and on the other hand to avoid the restricting effect on the development of law by following such a method. ”

HOW RELEVANT IS THE IDEA OF JUDICIAL PRECEDENTS?

In the words of one British journalist, “Judicial precedent means a trick which has been tried before, successfully.”

In the language of a layman the term ‘precedent’ implies that what was done before should be done again the same way. The method adopted in any problem solving exercise is to find out if a similar problem has been tackled before. If yes, then the next step is to find out the degrees of similarity that exists between the problems. If the similarities are found to be significant then next it needs to be analysed whether the same principle that was applied to the previously solved problem can be applied successfully to solve the problem at hand. This way the precedent works as an effective guide to solve new problems having similarity with the earlier one. This helps in achieving consistency and certainty in legal matters. And the corollary of this situation is that people making decisions are often afraid to do something new and striking in case ‘it creates a precedent’. In the words of a renowned legal philosopher and Scottish politician, MacCormick:

“To understand case-law . . . is to understand how it is that particular decisions by particular judges concerning particular parties to particular cases can be used in the construction of general rules applying to the actions and transactions of persons at large.”

WHAT IS THE BINDING ELEMENT OF A CASE?

What is binding on the lower court??

Every judgment contains four major elements:

• statement of material (relevant) facts

• statement of legal principle(s) material to the decision – the ratio decidendi

• discussion of legal principles raised in argument but not material to the decision – obiter dicta

• the decision or verdict

It is not the entire judgement that is binding on the lower courts but only the ratio decidendi. The ratio decidendi of a case is the underlying principle or legal reason on which the result of the case depends. This ratio is different from the obiter dicta which is not held to be binding but may be regarded as having persuasive control. And what we are concerned with is not who won or lost but the legal principles that can be extracted from the case which is known as the ratio decidendi. In the words of the Supreme Court: “A decision is binding not because of its conclusion but in regard to its ratio and the principle laid down therein.”

WHY SHOULD WE FOLLOW PRECEDENTS IN DECIDING CASES?

The weight attached to precedent in every department of life is closely connected with the force of habit, and has its root deep in human nature. That judicial precedents have exercised great influence in all systems of law is more than probable; the feeling that a rule is morally right has often arisen from the fact that it has long been followed as a rule; but the degree in which judicial decisions have been openly recognized as authoritative, simply because they are judicial decisions, has varied greatly in different systems. Judges are everywhere largely influenced by what has been done by themselves or their predecessors, but the theories to explain and control such influence have been diverse, and the development of the law has not been unaffected by them.

The purpose is to create certainty and fairness. Precedent is created by the judgements on past cases. The judgement is the speech made by the judge who has made the decision on the case, and it is split into two parts. It should be noted that there is often more than one judge hearing a case, and so there may be many judgements on one case. The first part is the “ratio decidendi” (“reason for deciding”). This is the most important part as it gives the judge’s decision.

That the doctrine of stare decisis is related to justice and fairness may be appreciated by considering the observation of American philosopher William K. Frankena as to what constitutes injustice:

The paradigm case of injustice is that in which there are two similar individuals in similar circumstances and one of them is treated better or worse than the other. In this case, the cry of injustice rightly goes up against the responsible agent or group; and unless that agent or group can establish that there is some relevant dissimilarity after all between the individuals concerned and their circumstances, he or they will be guilty as charged.

The critics of the doctrine accept it as the general rule but chafe under it when the staleness of old law leads to unfairness and injustice. For example, Lord Denning, the former Master of the Rolls has argued:

“If lawyers hold to their precedents too closely, forgetful of the fundamental principles of truth and justice which they should serve, they may find the whole edifice comes tumbling down about them. Just as the scientist seeks for truth, so the lawyer should seek for justice. Just as the scientist takes his instances and from them builds up his general propositions, so the lawyer should take his precedents and from them build up his general principles. Just as the propositions of the scientist fail to be modified when shown not to fit all instances, or even discarded when shown in error, so the principles of the lawyer should be modified when found to be unsuited to the times or discarded when found to work injustice.”

The benefit of following precedents in deciding cases provides certainty to judges in deciding cases, people to plan and lawyers to advice their clients. It provides sufficient flexibility to common law to develop in order to meet the changing times. This method balances these two competing aims.

How significant are the differences?

Similarities and differences both are equally important in deciding the precedents to be applied to a case. Only because the fact looks apparently similar does not necessarily mean that both the cases should be decided in the same manner.

For example if a dog of German Shepherd breed called Tommy howls in a way similar to that of wolf doesn’t mean that every other German Shepherd dog would howl similarly. This syllogism here is thus faulty.

CIRCUMSTANCES WEAKENING AND STRENGTHENING THE AUTHORITY OF A PRECEDENT

There can be ways through which precedents may be overruled or judges may chose to deviate from using the precedent.

The first is called per incuriam. Here due to a significant oversight, an important statute was overlooked and this affected the decision significantly. In other words per incuriam means that a court failed to take into account all the relevant and vital statutes or case authorities and that this had a major effect on the decision. The second reason is the ‘lapsed rule’, this simply means that the previous decision was valid when it was made but has simply been outdated. The final reason is if there are conflicting decisions within the Court of Appeals own decisions, this could occur if two similar cases were being tried at the same time but different verdicts were reached. This would mean that the next time a similar case came to be heard there would be two conflicting precedents from which to choose. Therefore one of those decisions would have to be overruled. In extraordinary circumstances a higher court may overturn or overrule mandatory precedent, but will often attempt to distinguish the precedent before overturning it, thereby limiting the scope of the precedent.

The relief or tool available to a judge who wishes to avoid following a previous decision which they would otherwise be bound to follow is called distinguishing. When a judge finds the material facts of the present case to be sufficiently different from the earlier case he may distinguish the two cases and refuse to follow the earlier decision. An advantage of distinguishing is that it helps to keep judicial precedent and the law flexible.

The lawyer can argue that while the precedent case does stand for the legal proposition for which it has been cited, the case at bar is different; that is, the cases are factually distinguishable. Glanville Williams suggests that there are two kinds of “distinguishing”: restrictive and non-restrictive and states:

“Non-restrictive distinguishing occurs where a court accepts the expressed ratio decidendi of the earlier case, and does not seek to curtail it, but finds that the case before it does not fall within this ratio decidendi because of some material difference of fact. Restrictive distinguishing cuts down the expressed ratio decidendi of the earlier case by treating as material to the earlier decision some fact, present in the earlier case, which the earlier court regarded as immaterial.”

There are various factors that strengthen the authority of a precedent. The number of judges constituting the bench, their eminence and the majority strength in the decision (a unanimous decision is considered more valuable). Also the lapse of time meaning thereby the years that have passed after the judgement and its relevance in present times. All these factors help in strengthening the hold of a precedent.

ADVANTAGES AND DISADVANTAGES OF THE DOCTRINE OF JUDICIAL PRECEDENTS

There are both advantages and disadvantages in following the method of precedents in deciding cases.

The most significant advantage is the element of consistency and certainty that is brought in with the application of precedents. A good decision making process must be consistent. Similar cases must be decided similarly to avoid inconsistency. Consistency is perhaps the most important advantage claimed for the doctrine of judicial precedent. It may also allow persons generally to order their affairs and come to settlements with a certain amount of confidence. The interests of justice also demand impartiality from the judge. In this method the Judges have clear cases to follow. This is assured by the existence of a binding precedent, which he must follow unless it is distinguishable. If he tries to distinguish an indistinguishable case his attempt will be obvious. And hence this method ensures impartiality from the judge. Case law is practical in character. It is based on the experience of actual cases brought before the courts rather than on logic or theory. Case laws are viable statute law and the rules and principles are derived from everyday life. This means that it should work effectively and be intelligible and is thus practical. It removes any element of ambiguity regarding the authority of the binding precedents and enables lower courts to follow the decisions of higher courts unanimously. The making of law in decided cases offers opportunities for growth and legal development, which could not be provided by Parliament. The courts can more quickly lay down new principles, or extend old principles, to meet novel circumstances. There has built up over the centuries a wealth of cases illustrative of a vast number of the principles of English law. Also the hierarchy of the courts ensures that lower courts follow higher courts and this leads to an orderly development of law. It is also a convenient timesaving method. If a problem has already been answered, it is natural to reach the same conclusion by applying the same principle. It also helps save unnecessary litigation. The existence of a precedent may prevent a judge making a mistake that he might have made if he had been left on his own without any guidance. The doctrine of precedent may serve the interests of justice. It would be unjust to reach a different decision in a similarly situated case.

The most evident disadvantage of this method is the rigidity it confers on the development of law. The doctrine of stare decisis is a limiting factor in the development of judge-made law. Practical law is founded on experience but the scope for further experience is restricted if the first case is binding. The cases exemplify the law in great detail, therein lies another weakness of case law. It is in bulk and its complexity makes it increasingly difficult to find the law. There are so many cases that it is hard for judges to find relevant cases and the reasoning may not be clear. The convenience of following precedent should not be allowed to degenerate into a mere mechanical exercise performed without any thought. Judicial mistakes of the past are perpetuated unless bad decisions happen to come before the court of appeal for reconsideration. A system that was truly flexible could not at the same time be certain because no one can predict when and how legal development will take place. However, the advantage of certainty is lost where there are too many cases or they are too confusing. The overruling of an earlier case may cause injustice to those who have ordered their affairs in reliance on it. Precedent may produce justice in the individual case but injustice in the generality of cases. It would be undesirable to treat a number of claimants unjustly simply because one binding case had laid down an unjust rule.

CONCLUSION

This paper has focused on one aspect of legal reasoning and argument, that of the use of precedent. However, it must be conceded that stare decisis is only a part of this topic. There is much more. There are substantive rules for the interpretation of statutes, there are unique considerations when principles of the law of equity are involved and problems caused by the evidentiary rules of onus of proof. Yet, while the multitude of these rules provides the lawyer with a large variety of other tools and techniques for legal reasoning and legal argument, it also has to be conceded that stare decisis continues to play the pivotal role. The great American judge, Oliver Wendell Holmes Jnr, had said ‘The life of the Law has not been logic; it has been experience’. It can be concluded that for an organized and orderly development of law the method of using judicial precedents is inevitable.

Lord Halsbury has said that there is more to the law than a mechanical process of logical deduction. It is obvious that the Judge has in every case to decide for himself which of the circumstances of the alleged precedent were relevant to the decision and whether the circumstances of his own case are in their essentials similar. Once he has decided which principle to apply, a bit of logic may enter into his application of principles. But there cannot always be a principle which imposes itself or an absolutely inescapable logical deduction. Generally there is a choice. And this has been explained by Chandrachud, C.J. in Deena v. Union of India as “Any case, even a locus classicus, is an authority for what it decides. It is permissible to extend the ratio of a decision to cases involving identical situations, factual and legal, but care must be taken to see that this is not done mechanically, that is, without a close examination of the rationale of the decision cited as a precedent.”