Contemporary Issues

Substituted performance: A new perspective in Specific Relief (Amendment) Act, 2018

[ Sayak Banerjee ]   The author is a 2nd year student of NLU, Jodhpur. The Specific Relief (Amendment) Act, 2018( the Act), published in the official gazette on 1stAugust, 2018 amends the Principal Act, the Specific Relief Act, 1963. The Act came with multitude of changes relating to the enforcement of contracts in India. The said Act was passed without discussing the importance of its impact in both Houses of Parliament, disregarding the scope of this Amendment impacting not only contractual obligations of businesses but also of common people. The Amendment was passed without taking the opinions of other stakeholders, judges, advocates, businessmen, alike. With the amendment coming hastily, the objective sought to be achieved was preventing any hindrances to infrastructure projects. It can also be seen as a genuine effort by India to climb the ranks in World Bank’s Ease of Doing Business Index. But in achieving the said objectives, the Parliament forgot that the Act applicable to everyone personally also. The most important change has been brought in Chapter II of the Specific Relief Act, 1963, dealing with specific enforcement of contracts. Within the Chapter, the Act has introduced the concept of ‘substituted performance.’[[i]] This essentially means that on breach of contract, the party who has been affected by such breach, has the option of substituted performance through third parties or by his own agency, the cost of which is to be borne by the defaulting party. This cost cannot burden the party who has been affected by such breach gives a 30 day notice obligating the defaulting party to fulfil the obligations of the contract. If there is failure on part of the defaulting party to perform after receiving the said notice, then the affected party has the option of substituted performance. It needs to be noted that if the party exercises the option of substituted performance he forfeits the right to sue for specific performance, though the parties are not precluded from obtaining compensation from the defaulting party. Section 11 of the Act has removed the discretion of court by replacing “may, in the discretion of the court, be enforced” with “shall be enforced by the court,” thereby making specific performance a statutory remedy, subjected to preclusion due to the limited grounds mentioned in the statute.[ii] Prior to the amendment, Section 14 allowed specific performance wherein compensation was not provided as adequate relief. The amendment has done away with this requirement, ensuring the generality of specific performance as a remedy in the statute. One of the grounds mentioned now in Section 14, is substituted performance. In addition, specific performance is precluded from being granted as a relief to a person, if substituted performance has been availed, notwithstanding, that Section 20(3) already provided for preclusion to avail specific performance when substituted performance has been availed. A conundrum therefore, arises on considering substituted performance as option available to the parties, on one hand, the Court is implicitly enforcing the contract through substituted performance. And on the other hand, the substituted performance as a ground for contracts cannot be specifically enforced in Sections 14 and 16. This shows redundancy on the part of the lawmakers, but the main question remains unanswered whether substituted performance is equivalent to enforcing the contract, because if that is not the case, then why is the option under Section 20 available to the parties. A cross-jurisdictional analysis reveals that UK gives third parties the right to enforce contractual terms, and availability of specific performance as a remedy.[[iii]] The concept of substituted performance  as specific performance was introduced in UK through the case of Liberty Merican Ltd. v. Cuddy Civil Engineering Ltd., wherein in place of defaulting performance bonds, Court directed the defaulting party to deposit a sum of money as substituted performance.[[iv]] In Canada, as per Article 1602 of the Quebec Civil Code, a promisee can avail the right of substituted performance provided the promisor is notified, allowing the promisee to get the contract performed at the expense of the promisor.[[v]] When we consider contractual remedies, damages do not help in mitigating the losses that arise from expenses that are indirectly incurred in getting the contract performed. Moreover, injunctions are a way by which the status quo is protected, but specific performance in the form of substituted performance helps in bringing the changed relationship between the parties that was originally intended to be brought,  and allows the aggrieved party to restore to the position it would have been in had the breach not occurred. Therefore, it is the most effective alternative to the event of breach, in comparison to injunctions and compensations. [[i]]Specific Relief (Amendment) Act, 1963 No. 18 of 2018, s 20. [[ii]]Specific Relief (Amendment) Act, 1963 No.18 of 2018, s 11. [[iii]]Contracts (Rights of Third Parties) Act 1999, s 1(5). [[iv]]Liberty Merican Ltd. v. Cuddy Civil Engineering Ltd. [2013] EWHC 4110 (TCC). [[v]]Civil Code of Quebec CCQ-1991, Article 1602, Chapter VI.

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Data Privacy Protection: Corporate Social Responsibility or not?

[Aditi Jaiswal]   Aditi is a 3rd year student Dr. Ram Manohar Lohiya National Law University, Lucknow What is Corporate Social Responsibility? United Nations Industrial Development Organisation (UNIDO) defines Corporate Social Responsibility (hereinafter “CSR”) as, “A management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders.” It is a concept where Companies strive to strike a balance between the financial, social and environmental imperatives, while addressing the expectations of the stakeholdersThe nature of CSR is such that it is not static in nature, rather is ever evolving.[2] With a view to keep the local players at par with the global standards, India became the first country to mandate and quantify CSR expenditure under the Companies Act, 2013.[3] Schedule VII of the Companies Act, 2013 lays down the list of CSR activities and suggests that communities should be kept at the focal point, but the draft rules suggest that the CSR needs to go beyond the concept of philanthropy.[4] Data – a Significant Corporate Asset The present day world can, without a shred of doubt, be called the digital age. The devices like mobile phones, wearable devices and personal computers, with their apps, social media, e-commerce platforms etc. have penetrated our lives and produce large amount of data.[5] Such data today has become a vital corporate asset which proves beneficial in a variety of ways, from identifying potential customers, improving customer services, predicting sale trends to recognizing patterns and reasons leading to performance breakdown in a company. A Pricewater Cooperhouse research points out that the total intangible assets comprise, on an average, some 75% of companies’ value.[6] Rearranging CSR endeavours The Digital India initiative was introduced in 2014 with a vision to transform the nation into a digitally empowered society. But till date, the Government hasn’t come up with a robust regime for data protection. Considering this, the data privacy protection becomes, important as the companies are heavily relying on the personal data of individuals for multifarious purposes and in lack of any law or regulation protecting such data, the Companies owe an ethical obligation to improve the data privacy protection by framing policies. The Indian Companies venturing in the global arena, need to rearrange their Corporate Social Responsibility endeavours and include data protection of their stakeholders in the list. Data privacy protection would majorly be covered under the domain of the social dimension of the Triple Bottom Line approach on which the Stakeholder model of CSR works. Social variable of the Triple Bottom line approach focuses on the social dimensions of the community and includes measurements of education, equity and access to social resources, health and well-being, quality of life, and social capital.[7] In the present times, data privacy protection is also one of the significant societal dimensions, as privacy and autonomy of an individual cannot be overlooked due to unregulated and arbitrary use of data, particularly after the Puttaswami judgement, in which the Supreme Court has recognized the informational privacy as an important facet of the Right to Privacy.[8] Consequences of data breach As already discussed, data plays a very vital role in identification and targeting of the particular consumer group. However, the data collected includes different forms of information which may include habits, financial details, personal details etc. Here it becomes necessary to point out that the effects of any data breach can be multi-faceted. On one hand, a single incident of data breach can harm the consumers psychologically, socially or economically, depending on the type of information leaked. Certain information may be central to the identity of an individual, like their sexuality, etc., which if revealed would affect the person psychologically. Disclosure of some kind of sensitive information, many a times, results in the stereotyping and pre-judging of an individual or lowering his reputation, which affects his social life negatively.[9] Leakage of an individual’s social security numbers or financial details can lead to a huge economic loss for him. On the other hand, companies may lose out trust which people have in them, leading to the existing as well as probable customers switching to another company or service provider. Corporate integrity is ensured by maintaining the brand value and goodwill. A company’s goodwill by breaching the promises of data care, both explicit and implicit, gets contaminated not only in the minds of the consumers, but also the partners, shareholders and all the other stakeholders. This leads to a decrease in the value of its investments in brand identity building by eroding the commercial trust. Attenuation in the goodwill of a Company would diminish the value of a Company’s assets, in turn distressing the Company, thus financially harming the employers, partners, shareholders and other stakeholders at large. According to a study in 2016, 25 percent of the leaders of the largest global companies consider the most serious impact that a cyberattack can have on their organization is the loss of reputation among their customers.[10] Skeptics may argue that keeping in mind the present scenario, investment in privacy protection is nonessential and would lead to swelling of costs of the Company in India. But this criticism comes due to a lack of a proper understanding of the long term negative effects when the privacy of the stakeholders is breached. A Company may face severe consequences, by ignoring the Data Privacy Protection Principles, especially if such a breach leads to a severe privacy violation of a consumer, or some other abuse of confidentiality, then the expenses involved in covering fines, court fees, advocates’ fees, settlement costs, paying damages and other working out other mechanisms further diminish the capital of a Company.[11] Above that, these days the databases of personally identifiable information are becoming a lucrative target for the cybercriminals who use this data for identity theft and even extortion rackets, where they can easily blackmail the Companies to pay the ransom otherwise they would leak the data.[12] These cybercriminals may even threaten with attacks from zombie drones, which could disrupt operations of

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The Judicial Debate on Discharge of Surety

The Judicial Debate on Discharge of Surety. [Debanga Goswami] The author is a 4th year student of B.A.LLB (Hons.) of NUJS, Kolkata. Introduction According to Section 126 of the Indian Contract Act, 1872, (hereinafter referred to as “the Act”) a surety is a person who provides a guarantee in a contract of guarantee.[1] The same section defines a contract of guarantee as a contract to “perform the promise, or discharge the liability of a third person in case of his default”.[2] A contract of guarantee consists of three parties- the creditor, the principal debtor (hereinafter referred to as the “PD”) and the surety, (or the guarantor) and there is a privity of contract between all of them.[3] The liability of the surety is co-extensive with that of the PD.[4] Since a surety guarantees the performance of the obligations of a third party, the laws related to him are interpreted by the Court in his favour. The legislature has made provisions to discharge the surety in circumstances under which it would be inequitable to hold him responsible for the failure of the PD. Here, the author is making an attempt to critically examine the judicial debate pertaining to the circumstances which lead to the discharge of the surety. Issue 1 The Rule Any variance made in the terms of the contract between the PD and the creditor, without the consent of the surety, discharges him as to the transactions subsequent to the variance.[5] But, Section 133 only applies to the concept of continuing guarantee, which is clear from the phrase ‘transactions subsequent to the variance’, present in the provision.[6] This implies that the surety would be liable only for the transactions that are precedent to the variance in the contract between the creditor and the PD, without his consent.[7] He would be discharged for all the subsequent transactions.[8] The Debate Section 133 is based on the premise that the surety can’t be bound to do something which he hasn’t contracted to.[9] The Indian courts have interpreted this section to mean that in order for the surety to be discharged, the variance has to be a substantial one.[10] The test to ascertain substantial variance is that whether the variance materially affects the position of the surety or not.[11] But, the courts have not been able to reach at a uniform opinion pertaining to a peculiar situation. The situation arises when the variance is of a beneficial nature for the surety. In an English case[12], it was ruled that the though the surety was not prejudiced by the variance, yet he stood discharged. The same was reiterated in an Indian case.[13] Here, the creditor and the PD contracted to reduce the mortgage amount. The Court discharged the surety by stating that in such cases, the surety is the sole judge to decide whether he wants to continue with the contract or not. However, in another Indian case[14] the debt amount was decreased from Rs. 25,000 to Rs. 20,000 through a variance in the terms of the contract. But, the Court held that the change was unsubstantial and was for the benefit of the surety. Hence, he was not discharged. The guarantee of the protection of the assets of the creditor is crucial for the commercial world to thrive. Thus, the author opines that the surety should be discharged by the courts only in cases where there is a material alteration which goes against his interests. Issue 2 The Rule Section 134 inter alia states that the surety is discharged by any act or omission of the creditor, the legal consequence of which is the discharge of the PD.[15] The omission of the creditor, the legal consequence of which is the discharge of the PD also includes failure to sue PD within the limitation period. The Debate The issue on which courts have differed is that whether failure of the creditor to sue the PD within the limitation period discharges the surety or not. The judges who believe that the surety is discharged in such a situation have a three-pronged argument. First, liability of the surety is co-extensive with that of the PD[16] and thus his discharge should lead to the discharge of the surety. Second, the liability of the surety being a secondary one, when the PD with a primary obligation is discharged, then there is no reason to hold the surety liable.[17] Third, discharge of the PD and consequent lack of a debt on his part can be used by him as a defense to not indemnify the surety after the surety fulfills his contractual obligations.[18]Viewing the same from PD’s perspective, if he remains liable to indemnify the surety even after he is discharged from his liability towards the creditor, then the effect would be to render his discharge of little or no consequence.[19] But, courts have also come up with a counter view. When Section 134 is read along with Section 137 of the Act, the phrase ‘mere forbearance’[20] implies that except express contracts, the surety is not discharged. The Madras High Court has made a distinction between barring of the remedy and complete extinction of the debt.[21]It said that when the suit of the creditor becomes time-barred against the PD, his remedy against the latter is gone. It means that he cannot approach the Court to get an order for the PD to repay his debt. But, it doesn’t mean that his right over the debt is non-existent. The debt as well as his right over it are very much existent. So, after the surety had paid off the debt to the creditor, he can get indemnified by the PD. [22] This was re-affirmed in the case of Mahant v U Ba Yi.[23] The author also supports the above-mentioned line of reasoning. Even after the suit gets time-barred against the PD, the debt and the creditor’s right over it are not extinguished. Thus, the surety should be directed to pay the creditor and later get indemnified by the PD. This would also justify the

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Financial Resolution and Deposit Insurance Bill, 2017: An Analysis

Financial Resolution and Deposit Insurance Bill, 2017: An Analysis. [Shajal Sarda] The author is a fourth-year student at National Law Institute University, Bhopal. The Financial Resolution and Deposit Insurance Bill, 2017 (hereinafter referred to as the “Bill“) proposed by the government attempts at providing for a comprehensive law for the resolution and restoration of financial/covered service providers who are classified under certain heads of risk to viability with respect to the timely payment of their liabilities. The Bill provides for the establishment of the Resolution Corporation whose general direction and management shall be done by a board which, in consultation with the appropriate regulator, shall lay down the objective criteria to classify covered service providers in terms of their viability into five categories viz. low, moderate, material, imminent and critical.[1] The appropriate regulator, after inspection or otherwise, shall classify the covered service provider under one of the categories mentioned above.[2] Based on the category of the covered service provider with respect to the risk to viability, the covered service provider shall be asked to submit a resolution plan to the resolution corporation and a restoration plan to the appropriate regulator under the Bill.[3] The Bill provides for various methods or combinations thereof that can be adopted for the resolution of the covered service provider under the risk category above moderate.[4] These methods can be transfer of the whole or part of the assets or liability of the service provider to another person under the terms agreed upon by the corporation, merger or amalgamation, creation of a bridge service provider as per section 50 of the Bill, acquisition of the service provider, or bail-in in accordance with section 52 of the Bill.[5] The Resolution Corporation shall replace the present Deposit Insurance and Credit Guarantee Corporation (DICGC), a Reserve Bank of India subsidiary which insures all kinds of deposits with the banks up to an amount of Rs. 1 lakh. Till now, it has been mandatory for the banks to pay an amount as premium to DICGC for the insurance of deposits.[6] The Resolution Corporation has been endowed with the same function under the Bill, though the amount of deposit insurance has not been specified, something which the Board is required to do in consultation with the appropriate regulator.[7] Purpose of the Bill The government has time and again attempted to increase the trust of consumers in the credit delivery system and create a business friendly environment. The biggest example is the Insolvency and Bankruptcy Code, 2016, which aims to provide a comprehensive and exhaustive code for the insolvency resolution of corporate entities, partnerships and sole proprietorships. The Code was enacted to provide for a speedy and efficient resolution of the claims of unpaid creditors. Other examples include the opening of Jan Dhan accounts and recapitalisation of banks. Statistical data reveals that, in public sector banks, private sector banks and foreign banks, the gross non-performing assets to total advances ratios stands at 9.39%, 2.90% and 4.26% in the financial year 2016.[8] If the banks are not being paid by their debtors, the former in turn may not be able to perform their obligations; therefore arises the problem of trust in the banking system at large. Further, only secured credit dominates the credit market in the country; therefore, the credit analysis of the business prospects of the firm has shrivelled.[9] Hence, it has become important for the government to introduce comprehensive reforms in the banking system. Accordingly, the present Bill enables resolution of banks- which are on the verge of failure with respect to payment of their obligation- by providing for a framework of resolving the risk of failure of banks to pay their obligations. Concerns over the Bail-In Provision Section 52 of the Bill provides for bail-in as a method for resolution of banks. A bail-in provision may provide for any or a combination of the following: (a) cancelling of the liability of the bank; (b) modification of the form of liability owed by a covered service provider; (c) provision that a contract or service under which a covered service provider has a liability is to be treated as if a specified right has been provided under the contract.[10] The Corporation shall specify the liability or the class of liabilities that may be subject to a bail in. The provisions of this section shall not apply to deposits to the extent they have been insured,[11] and shall not cover any liability owed to workmen including pension.[12] Further, it is to be noted that the definition of deposit in the Bill does not include deposit made by the Government of India or any state government or foreign government, though the provisions may apply to any liability created under a contract with the three above-mentioned entities. Whenever the Corporation invokes a bail-in provision, a report regarding the bail-in stating the need for the bail-in and the consequences of the bail-in must be sent to the Central Government.[13] Further, a copy of such report must be laid before both the Houses of Parliament.[14] The concerns regarding these provisions are that they have created higher risks for the depositors. Previous examples of bail-ins include the bail-in made under the resolution of the Bank of Cyprus in which the depositors had to face a 47.5% haircut in their deposits. ASSOCHAM has raised an argument that deposits such as fixed deposits and saving deposits must not be considered as similar to other liabilities owed by banks because this may reduce the trust of people in the banking system in light of the rising healthcare prices, among other things.[15] On the other hand, an argument in favour of the bail-in provision is that, in the absence of such provision, the government, in order to recapitalise a bank, may use the tax payers’ money, print more notes or borrow money, which will result in inflation and thus a reduction in the interest rates on the deposits.[16] Further, the system created through the Bill is a process-driven system which creates transparency, and bail-in is just one method which may be used for the resolution

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The Fugitive Economic Offenders Bill, 2017: The Mallya-Chidambaram Effect

The Fugitive Economic Offenders Bill, 2017: The Mallya-Chidambaram Effect. [Param Pandya, Tarika Jain, Margi Pandya] In the wake of the rising non-performing assets crisis, the Indian legal system seems to be grappling with major challenges than before. While turnaround of debt remains a problem, wilful default of debt adds to this menace. As banks and the government are dead beat trying to prosecute Mr. Vijay Mallya for wilful default of loans and Mr. Karti Chidambaram on money laundering charges, they continue to evade law by residing out of India. The Fugitive Economic Offenders Bill, 2017 (the “Bill”) seems to be a knee-jerk reaction which attempts to remedy such regulatory fiascos. The Bill was put in public domain on May 19, 2017 for comments.   Background To state that the existing legal framework to deal with high value multi-jurisdictional economic offences is inadequate would be an understatement. The RBI Master Circular on Wilful Defaulters (July 01, 2015) provides for barring a wilful defaulter from (a) raising any loans from banks, financial institutions and non-banking companies; and (b) floating a new venture. The other remedies available to banks and financial institutions are contained in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Recovery of Debt due to Banks and Financial Institutions Act, 1993 which are time consuming since they involve prolonged litigation. Moreover, even though the Insolvency and Bankruptcy Code, 2016  aims to provide for a speedy bankruptcy process, the National Company Law Appellate Tribunal  by holding that the timelines prescribed in Sections 7, 9 and 10 of the Code are directory in nature[1] has reduced its effectiveness to an extent. Further, liquidation/ bankruptcy process is not a sufficient deterrent in case of high value economic offences. The provisions of civil law in India do not address the issue of high value multi-jurisdictional fugitive economic offenders whereas the process prescribed under the Code of Criminal Procedure, 1973 is time consuming and hence inefficient. The Explanatory Note appended to the Bill states that fleeing of economic offenders leads to several “deleterious” consequences such as (a) hampering investigation in criminal matters; (b) wasting the precious time of the court; (c) undermining the rule of law; and (d) cases which involve non-payment of bank loans cause strain on the banking system. The Bill aims to deter fugitive economic offenders by providing for confiscation of all properties of a wilful defaulter prior to conviction. Key Features (1) Definition of Fugitive Economic Offenders The Bill defines a “Fugitive Economic Offender” as any individual against whom a warrant for arrest in relation to a scheduled offence[2] has been issued by any court in India who (a) leaves or has left India so as to avoid criminal prosecution; or (b) refuses to return to India to face criminal prosecution. Further, in order to ensure that the courts are not overburdened with such cases, only such cases where the total value involved is INR 100 crores or more shall be within the purview of the Bill. This is a higher threshold and must be reduced. (2) Applicability The provisions of the Bill shall apply to any individual who is, or becomes, a Fugitive Economic Offender on or after the date of coming into force of this law. It may be argued that the Bill (when becomes law) will be an ex post facto law i.e. it will impose penalties retroactively.[3] It may appear that such a provision shall the violate Article 20(1) of the Constitution of India. In case this line of argument is upheld by the court, by application of doctrine of severability, the remainder of the Bill may survive as good law which means that those individuals who fall within the definition of a “Fugitive Economic Offender” on the date of enactment of the Bill may be excluded from penalties under the Bill. [4]   (3) Process The Director[5] or any authorised officer shall make an application to the Special Court[6] for declaring an individual as a Fugitive Economic Offender. The Director or any authorised officer may pass an order attaching the properties as described in the application. Such attachment shall be valid for a period of 180 days from the date of the order. The Special Court shall serve notice and call upon the said individual to present himself before the Special Court within a stipulated time period. The Special Court may terminate such proceedings if the said individual appears in person within the specified time. However, the prescribed time may be provided by the Special Court if the individual seeks to be represented by a counsel. If the Special Court concludes that the individual is a Fugitive Economic Offender, the Special Court is required to record the reasons in writing. (4) Penalty Upon an individual being declared as a Fugitive Economic Offender, the Special Court shall pass an order confiscating all the properties which are enlisted in the application or as determined by the Special Court. From the date of such order, all rights and title in respect to such confiscated property shall vest with the Central Government, free from all encumbrances. Further, a Fugitive Economic Offender may, at the discretion of the court, be disentitled to file or defend a civil claim. If such Fugitive Economic Offender is a promoter or a key managerial personnel or a majority shareholder of a company, such company may also be disentitled to file or defend a civil claim. (5) Non-conviction-based Asset Confiscation Under the Prevention of Money Laundering Act, 2002 (“PMLA”), confiscation of the assets of the offender can only be resorted post conviction which is not an expeditious remedy. Hence, to address this, the Bill adopts a non-conviction based asset confiscation (“NCBAC”) approach as envisaged in the United Nation’s Convention against Corruption (2003), which was ratified by India in 2011. The NCBAC approach is based on the principle that “crime does not pay” i.e. those who commit unlawful activity should not be allowed to profit from their crimes.

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