Article Review: Shivprasad Swaminathan's De-inventing the Wheel: Liquidated Damages, Penalties and the Indian Contract Act, 1872

Shivprasad Swaminathan's latest article in the Chinese Journal of Comparative Law (link-subscription required) De-inventing the Wheel: Liquidated Damages, Penalties and the Indian Contract Act, 1872, 6 Chinese Journal of Comparative Law 103-127 (2018) presents an interesting read and is an article which every Indian lawyer- practitioner, judge or academician- should read, Good articles on Contract Law from an Indian perspective are rare and the paper provides deep insights on the subject. 

Ask any lawyer about what are essentially required to be established in a court to be entitled for liquidated damages and he is likely to scratch his head or mislead you. If you file a claim in a court (or an arbitral tribunal) for liquidated damages and furnish some evidence, you can only hope to god on whether the court will award you the said amount.  So the claimant ends up furnishing the best evidence he has, "whether or not actual damage or loss is proved to have been caused".

The key takeaways of the article are listed out below:

• The article provides a much-required drafting history of Section 74
• It also discusses the objective of Section 74- to no more get into the LD-penalty dichotomy and how the dichotomy was introduced through the 1899 amendments. 
• The article notes how the supposedly "landmark" decisions on LD repeatedly brought the dichotomy into S. 74 when it was not warranted at all.
• "Reasonable" was a "trouser word": its determination was by establishing unreasonableness. 
• The article also analyses the relatively recent judgement Kailash Nath v DDA and how the Supreme Court tried to construe Section 74 to mitigate the uncertainty brought about by the dichotomy. 

The author argues that a "trichotomy" was introduced in Kailash Nath- liquidated damages, other liquidated amounts and penalty in place of the standard dichotomy (See, Part II of the article). This blawgger is not sure if RF Nariman, J did that in the case.  We'll quote the relevant portion of the judgement from which the author seeks to draw this inference:

"Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive as reasonable compensation such liquidated amount only if it is a genuine pre-estimate of damages fixed by both parties and found to be such by the Court. In other cases, where a sum is named in a contract as a liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount so stated. Similarly, in cases where the amount fixed is in the nature of penalty, only reasonable compensation can be awarded not exceeding the penalty so stated. In both cases, the liquidated amount or penalty is the upper limit beyond which the Court cannot grant reasonable compensation.

Reasonable compensation will be fixed on well known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act.

Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the Section.

The Section applies whether a person is a plaintiff or a defendant in a suit.

The sum spoken of may already be paid or be payable in future.

The expression "whether or not actual damage or loss is proved to have been caused thereby" means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded."

Kailash Nath nowhere uses the phrase "other liquidated amounts". It appears that "liquidated amounts" referred to above is qualified by "payable by way of damages". Nariman's decision is that if the above said liquidated amount payable by way of damages is found by the court to be a genuine pre-estimate of damages fixed by both parties, then the said amount is reasonable compensation but if it is not a genuine pre-estimate of damages fixed by both parties, it is a penalty for which only reasonable compensation could be awarded. In sum, there seems to be no trichotomy.

Nevertheless, this is just a minor issue with the paper that's a brilliant read. The author admirably concludes that the Act has deviated from the drafter's design, which originally could accommodate the test of legitimate interests of the promisee in assessing reasonableness (and enforcement of) the LD clause. The test is currently in vogue post-Cavendish Square. The author argues that the Section as originally drafted without the dichotomy could accommodate the legitimate interest test "[b]ut it was not to be". Now that Canvedish is the law in the common law world, it is time for us to exorcise the dichotomy and embark on reforming the law. 

Citation of the Practical Academic Blog in Journals

Readers are aware that we are doing a survey on the completion of ten years of the Practical Academic Blog. The responses so far to the survey are interesting. One of the questions asked was if the reader was aware that this blog has been cited in reputed dispute resolution journals world over and many of the responses expressed their ignorance about it. 

In this post, we provide links to some of the journal articles where the Practical Academic Blog has been cited. The list, for obvious reasons, excludes the papers of the authors of the blog.

• ICSID Review: Loukas A. Mistelis, Award as an Investment: The Value of an Arbitral Award or the Cost of Non-Enforcement, 28 ICSID Review 64-87, 81 (2013) (link- subscription required)
• ICSID Review: AP Karreman & K Dharmananda, Time to Reassess Remedies for Delays Breaching ‘Effective Means’, 30 ICSID Review 118-141 (2015) (link- subscription required)
• Pepperdine Dispute Resolution Law Journal:: Jory Canfield, Growing Pains and Coming-of-Age: The State of International Arbitration in India,14 Pepp. Disp. Resol. LJ 335-353, 353 (2014) (link-pdf)
• Singapore Law Review: N. Grover, Dilemma of the Proper Law of the Arbitration Agreement: An Approach towards Unification of Applicable Laws, 32 Sing. L. Rev 227 (2014) (link- subscription required)
• European Scientific Journal: Dmytro Galagan & Patricia Živković, If They Finance Your Claim, Will They Pay Me If I Win: Implications of Third Party Funding on Adverse Costs Awards in International Arbitration, European Scientific Journal (2015) (link-SSRN)

 This is apart from a Cambridge University Press publication: Gary F. Bell, The UNCITRAL Model Law and Asian Arbitration Laws: Implementation and Comparison (2018), p. 52 (link) and Indian journals such as the Indian Journal of Arbitration Law, etc. 

Practical Academic Blog Survey

Dear Readers,

The Practical Academic Blog is now more than ten years old. It is because of your support and encouragement that we have managed to keep writing all these years. 

At this juncture, we wish to know from you whether we were able to meet your expectations in term of content and quality. We would also like to make improvements in the blog so that it would continue to be of use and relevance for your legal research and other purposes. Kindly fill up the questionnaire you'd find in the below link, which should take not more than two minutes of your precious time:

https://goo.gl/forms/SkgUEtZqZrXytDCT2

Looking forward to hearing from you.

Are the Supreme Court and the High Courts not Complying with Section 11(8) of the Amended Arbitration Law?

Section 11(8) of the amended Arbitration and Conciliation Act, 1996 as it now exists in the statute book was inserted through the Arbitration and Conciliation (Amendment) Act, 2015. Sub-section 8 reads:

“(8) The Supreme Court or, as the case may be, the High Court or the person or institution designated by such Court, before appointing an arbitrator, shall seek a disclosure in writing from the prospective arbitrator in terms of sub-section (1) of section 12, and have due regard to—

(a) any qualifications required for the arbitrator by the agreement of the parties; and

(b) the contents of the disclosure and other considerations as are likely to secure the appointment of an independent and impartial arbitrator.” (emphasis supplied)

Section 11(8) provides that prior to appointing an arbitrator, the Supreme Court, the High Court or the designated institution should mandatorily seek a disclosure from the prospective arbitrator as mandated in Section 12(1) (disclosure per Schedule VI) and should have due regard to the qualifications of the arbitrators and importantly, the contents of the disclosure and other considerations as are likely to secure the appointment of an independent and impartial arbitrators.

It appears from a perusal of the decisions of the Supreme Court and the High Court that these are not being done post-2015. Take the case of National Collateral Management Services Ltd. v. Food Corporation of India, 2017(5) Arb LR 288 (Del.). The case was pertaining to reference to the CMD of one of the parties for resolution of disputes. The Delhi High Court held that since the CMD was an employee, he could not act as arbitrator owing to the bar in Section 12(5) r/w VII Schedule. Consequently, the High Court appointed an arbitrator with a statement that the arbitrator would decide his fees in consultation with the parties. The decision has nothing to state on whether Section 11(8) was complied or nor. Also, take the recent decision of the Supreme Court in Trans Asian Shipping Services (Pvt.) Ltd. v. Beacon Shipping Lines Ltd. MANU/SC/1014/2018, where the Supreme Court appointed the arbitrator and then directed the Registry to send a copy of the order to the arbitrator. 

With great respect, this procedure is in contravention of Section 11(8) of the 1996 Act as amended vide the 2015 Amendment Act. When the Parliament of India through the 2015 Amendments has laid down a procedure, it is for the High Courts and the Supreme Court to comply with the same in their letter and spirit. The judges of the Supreme Court and the High Court, even if they are acting in their judicial capacity, have to comply with the statute in full. The decision of the Supreme Court and the High Court noted above do not even disclose if the requirements in Section 11(8) were satisfied or not.

When a body is appointing an arbitrator, it is duty bound to ensure that the arbitrators appointed have the capability to decide a dispute and are independent and impartial as regards the dispute. Hence, such a power is endowed upon the Supreme Court and the High Court. The courts cannot shy away from such a duty.  

This blawgger has argued elsewhere:

"The question as to whether prior to appointing a person as arbitrator, consent from such person is taken by the Designate, was answered by six courts on merits. It appears that none of the courts obtain consent from the prospective arbitrator to be appointed in a particular dispute. It may be noted that the schemes made under Section 11(10) of the 1996 Act generally provide that the decision taken by the Designate to appoint an arbitrator shall be communicated to the arbitrator appointed pursuant to the request.This might lead to a few problems. 

One, it may lead to a conflict of interest situation involving the arbitrator and one of the parties. For instance, a person holding a substantial number of shares in a company may be appointed by the Designate as arbitrator in a dispute concerning the said company. Unless the Designate approaches a prospective arbitrator, it would not be possible for the arbitrator to disclose in writing such circumstances prior to appointment. In this regard, Section 12(1) of the Act mandates that when a person is approached in connection with his possible appointment as an arbitrator, he/she shall disclose in writing any circumstances likely to give rise to justifiable grounds as to his/ her independence or impartiality. Even if the arbitrator declines to proceed with the arbitration for that reason after the appointment is made by the Designate, the parties would be put in the same position as they were prior to the filing of the petition under Section 11, leading to delays of several months and, at times, several years (Srinivasan 2012: 27, 29).

Two, a person may make himself/herself available for being appointed as arbitrator. However, subsequently, at the time of appo intment by the Designate, the person might be unable or might not be ready to act as an arbitrator for reasons related to a particular dispute, or might not be ready to act as arbitrator in any dispute owing to illness or any other reason.

Hence, it would be prudent to seek consent prior to appointing a person as the arbitrator in a particular dispute." (See, Badrinath Srinivasan, Appointment of Arbitrators by the Designate under

the Arbitration and Conciliation Act: A Critique, vol xlix no 18, Economic & Political Weekly, p. 59-66- subscription required)

It would do well for the Supreme Court and the High Court to follow the below said procedure:

• Once the Court determines the prospective judge to be appointed depending on the requirements of the arbitration agreement and the nature of the dispute, the prospective candidate has to be informed by the court through the Registry.
• The Registry has to send a letter to the prospective candidate seeking the relevant declarations of independence, impartiality and availability.
• On receipt of the declarations, the High Court or the Supreme Court, as the case may be, should appoint the arbitrator.
• During this process, neither the Registry  nor the prospective arbitrator should interact with the parties or either party.

The Supreme Court and the High Courts should duly follow the law. If there is any difficulty in the above, the Registry could write to the Ministry expressing difficulties or problems with the law so that the same could be corrected. Already there is a Bill to amend the arbitration law pending in the Parliament. If the Ministry finds merit in the issue, it could very well amend the law. 

Specific Relief (Amendment) Act, 2018 Brought into Force from 1 October

We had done several posts on the Specific Relief (Amendment) Bill, 2018 and later Act.  See this post for a compilation of the past posts. On 19.09.2018, the Government of India has appointed 1 October 2018 as the date from when the new provisions would come into force. The Gazette Notification is available here.

Interesting times ahead. We'll keep readers posted on the developments. 

Change of Seat Should not be Easily Presumed on the Basis of Change of Venue

Recently, the Delhi High Court in the case of Ashiana Infrahomes Pvt. Ltd. v. Adani Power Ltd. had to decide on whether the parties agreed to transfer the seat.

The agreement provided:

“10. Dispute Resolution Any dispute or differences relating to or in connection with the MoA shall be referred to the sole Arbitrator Mr. Puneet Saran son of Prem Vallabh Saran r/o F 22 Indraprastha CGHS Plot 114, Patparganj New Delhi, whose decision shall be final and binding on the Parties. The proceedings of Arbitration shall be in Gurgaon in accordance with the provisions of the Arbitration & Conciliation Act 1996 as amended up-to date.”

Disputes arose and the matter had to be referred to arbitration by the chosen arbitrator. Ashiana Infohomes challenged the arbitrator on the ground that the arbitrator was a consultant and an employee of Adani. The Delhi High Court, correctly, decided the petition on merits in favour of Ashiana Infohomes. However, the reasoning as regards jurisdiction appears to be erroneous.

As is apparent, the arbitration clause states that the “proceedings of Arbitration shall be in Gurgaon”. The first question is whether this is a choice of seat or place? The parties did not use the term “seat” or “place”. Although this uncertainty did not play a part in the outcome of the case on the jurisdicitonal aspect, it is advised to use the term "seat" or "place" in making the choice. 

Coming back to the facts, it appears that Adani had approached the Additional District Court, Gurgaon (as it was then) and the court held that since the 2015 amendments, the parties had to approach the arbitral tribunal for interim relief when the tribunal was already in place.

Later, the arbitrator commenced his proceedings and in a decision to decide the modalities of how to proceed with the arbitration, he is said to have stated that the venue of arbitration would be a particular address in New Delhi till the parties agree on some other venue. Later, in another decision, the arbitrator declared that the venue of the arbitration would be mutually decided.  These decisions were consented to by the parties. About 40 hearings were held in New Delhi.  

In the petition before the Delhi High Court, the question was whether in view of the decisions of the arbitrator and the hearings conducted, whether parties had agreed to transfer the seat from Gurgaon to Delhi? The Delhi High Court held:

“20. In the facts of this case in my opinion, in view of the consent of the parties as recorded in the proceedings before the learned arbitrator dated 09.12.2014 and 19.12.2014 and the subsequent conduct of the parties i.e. that the proceedings that have all taken place in Delhi, the original agreement stating that the proceedings be held at Gurgaon have been given a go bye. In view of the agreement/conduct of the parties it is the courts in Delhi which would have jurisdiction. Delhi is now the seat of arbitration.”

On a perusal of the aforesaid Para, it appears that the court has decided that the parties had agreed to transfer the seat from Gurgaon to Delhi. With respect, this conclusion is wrong for the following reasons:

• Once the arbitration clause is interpreted to mean that Gurgaon was the seat, the parties should be deemed to be bound by it.
• The arbitrator did not state anything in his decisions regarding the change of seat. The decisions only refer to venue. This means that the parties and the arbitrator left the choice of seat in the agreement undisturbed.
• Adani approached the Addl. District Court, Gurgaon for interim relief. But the details of the case are not given in the judgement of the Delhi High Court. On some digging out, it appears that Adani has filed Arb Petition No. 50/2014 for interim relief. The Petition was disposed of on 20.10.2016 (see order). The following conclusions can be drawn from the order:
• Asiana did not raise any ground regarding the ADJ Gugaon not having jurisdiction.
• Asiana did not raise any contention that Delhi was the seat
• Most importantly, as on the date of the order of the ADJ Gurgaon (20.10.2016) several hearings were conducted before the arbitrator (as example there were two orders dt. 09.12.2014 and 19.12.2014 pursuant to hearings). Even then, Asiana did not raise jurisdiction at the end of the proceedings. It never did raise any arguments that the place of arbitration was transferred. Theoretically, nothings stopped Asiana from questioning jurisdiction even on the last day of the hearings before the ADJ that the seat was transferred.
• The High Court stated that Gurgaon court was not the appropriate court and therefore Section 42 did not apply. This is clearly wrong. Section 42 applied and this exception did not apply because:
• Even as on the date of the order of the ADJ, Gurgaon, there was no transfer of seat.
• If the transfer had taken place vide the decisions in 2014, nothing stopped Ashiana from moving a petition for dismissal on the ground of lack of jurisdiction sicne the parties had changed the seat.
• It is settled law that proceedings need not take place in the seat. In fact, there are several arbitrations were only some or at times none of the hearings take place in the seat.  The Delhi High Court had in fact quoted BALCO (which quoted Redfern & hunter) recognizing this aspects(See, Para 21 of the Delhi High Court’s decision). Despite this the Delhi High Court held that the seat was transferred.

As discussed above, the decision on jurisdiction is clearly wrong. While the decision was probably right on the eventual outcome that the named person could not act as arbitrator, the court has overlooked the ex post implications of this judgement. What this judgement does is to hold that if the arbitrator decides as a matter of procedure on a venue different from the seat and a substantial number of hearings are held in the venue, that would amount to a transfer of seat to the place of the venue. This is a dangerous conclusion and would result only in unsettling the distinction between seat and venue.  Transfer of seat cannot be so easily presumed merely on the basis of the discussions between the parties and the arbitrator in the hearings on the venue of arbitration. 

It is tempting to do justice to a party. But in a legal regime that follows the doctrine of precedents, doing justice by doing violence to the statute and settled principles will do more harm in the long run. Bhatia International was a clear example of such an outcome. 

"The power to arrest is one thing whereas the justification for the exercise of it is quite another" : A critical look in the wake of arrest and detention of persons with critical opinion of Government

The power of the police to arrest and the involvement of the executive in the functioning of the police force came under scrutiny one more time in the present environment of action against certain targeted persons allegedly to overwhelm political dissent. The 177^threport of the Law Commission of India, the third report of the National Police Commission, and the Indian judiciary ad nauseum has lamented the excesses by Indian police in the exercise of its power to arrest and detention.

In India, arrest is an action taken by the police, almost routinely with impunity, and often in utter disregard to the violation of the principles of the criminal procedure law thereby negating the rights of the person arrested. Arrest curtails multiple freedoms of the individual, particularly personal liberty and dignity assured also by the Indian Constitution.

The law on arrest and detention specify as to when the investigating officer can use the power to arrest a person. The text of the law but is replete with fluid lingoes. Sections 41 and 42 of the Criminal Procedure Code, 1973 contains expressions like reasonably suspected, reasonable complaint, and on receipt of credible information. These words give enough play for police officers and those who direct them to bend the norms of justice. When done in the context of silencing political dissent, it gains another dimension of adverse affect on democracy, which thrives on polyphony of opinions.

In ordinary circumstances that prevail in our country arrest of the suspect, detention and interview in search of evidence of a crime is the modus of police, unless the accused has economic or political sway. It is in this context that the apex court of India has on more than one occasion directed that arrest shall not be a matter of routine, (see Arnesh Kumar v. State of Bihar (2014) 8 SCC 273). Arrest by an investigation officer shall   be made only after due investigation and after reasonable satisfaction as to the genuineness of the allegation. Which means post arrest if a question is raised about the legitimacy of arrest, the investigating officer should have valid justification to support her action. The apex court has also underscored the proactive role of a magistrate when the accused is produced before her than making detentions 'business as usual' (see Joginder Kumar v. State of U.P (1994) 4 SCC 260). 

The callous manner of arrests in India is not a mere anecdotal argument. Data from the 2016 National Crime Records Bureau reveal non-essentiality of most of the arrests. From a total of 37,37,870 arrests recorded or offences under the Indian Penal Code, 32,71,262 charge sheets were filed. Of which only 7,94,616 reached conviction. This indicates the arrest and perhaps detention of nearly 79% was unwarranted to say the least. Read together with the fact that there is no independent and effective complaints redress mechanism against erring police officers escalates the gravity of the situation. Establishing the tortious liability of the state and of its officers is an insurmountable task for the ordinary citizen, given the judicial delays and multiple access constraints. 

In short, there is no disincentive for the police not to arrest and for the state to develop a policing system based on a policy that ensures scientific investigation of a case before arrest than resorting to arrest, detention, questioning and then finding evidence. Whereas the law is reverse, investigate, find evidence, arrest and then prove the same before judiciary. The potential to use police force according to the caprices of the political class is a good incentive to preserve the system as it is.   

Another dimension of arrest and detention is how even the judiciary frame the issue.  In Nandini Satpathy v. P.L Dani AIR 1978 SC 1025, the court projects the existence of a dichotomy between interests of society in having effective crime detection and the constitutional rights of the accused. This thought process helps to find justification for arrest and detention as a larger social need of crime detection. The securing of minimum right to the accused whereas is seen as a great balancing act at the benevolence of the judiciary. It is redundant and inadvisable to pitch these interests as rivals.  Contrarily both are the interests of the society at the same time. An efficient police force that does not require arrest and third degree modes as a default setting for crime investigation and is accountable to the people is the hallmark of a civilized nation. 

In the present scenario of arrest and attempted detention of activists, lawyers and academicians under the arguably intentionally ambiguous and questionable provisions of Unlawful Activities (Prevention) Act 1967, one pertinent question to be asked is whether the arrest was necessary at the first place. It is also important to examine whether the investigating officers have followed the procedure under the Act as well as the general directions on arrest given by the judiciary at various instances. If not, the arresting officers shall be made accountable for their action. There is nothing to celebrate in the Supreme Court order of reducing the rigour to house arrest, as it is also curtailment of liberty and dignity. What a citizen need is not the magnanimity of the Supreme Court but the justice due. An enquiry as to whether the arrests are legitimate, if not quash the same and make the officers pay the price is what justice demand. Few such actions against erring officers will go a long way in making the police independent of their assumed political masters. Such precedence will also help the police to dislodge itself from the overwhelming political pressure that today it has to shoulder.

The direct impact of arrest is dispossession of both liberty and dignity, which is a serious matter to be bartered away. Consequently the police officer's mantraon arrest as affirmed by the Indian judiciary is ‘the existence of the power to arrest is one thing whereas the justification for the exercise of it is quite another.’ 

Ghost Provisions: Who Will Exorcise Them Out?

Have a look at this post in the Law and Other Things blog on Ghost provisions. The post discusses ghost provisions in the recently proposed amendment to the Arbitration and Conciliation Act, 1996 and the recent amendment to the Specific Relief Act, 1963.

The post discusses the themes that have been recurrently discussed in this blog in the recent times. Happy Reading!