Cancellation of written instruments under Section 31 of Specific Relief Act-  whether an action in rem and hence not arbitrable

Cancellation of written instruments under Section 31 of Specific Relief Act- whether an action in rem and hence not arbitrable

Vikas Goel  Vikas Goel & Harshit Gupta, Law Intern


07/09/2020

  Introduction

 Almost a decade ago, the Apex Court held in the case of Booz Allen & Hamilton Inc. Vs. SBI Home Finance Ltd.​1, that generally and traditional all disputes relating to rights in personam are arbitrable whereas all disputes relating to rights in rem are to be adjudicated by the courts and public tribunals. Recently, in the case of Deccan Paper Mills Co. Ltd. v. Regency Mahavir Properties & Ors​2, the Apex Court, while deciding whether an action for cancellation of written instruments under Section 31 of Specific Relief Act (“SRA”), 1963 is arbitrable or not, re-visited its judgement in Booz Allen’s case in order to consider if a further exception can be carved out to the categories of non-arbitrable cases, laid down therein.

Facts of the Case

● Deccan Paper Mills Co. Ltd. “Deccan” owner of approximately 80,200 sq. meters of land bearing Survey Nos. 96B, 96C and 96D at village Mundhwa, District Pune,
decided to develop a portion of the said land i.e. 32,659 sq. meters and for the same Deccan entered into an agreement dated 22.07.2004 with M/s Ashray Premises Pvt. Ltd. “Ashray”. This agreement did not contain any arbitration clause. However, clause 2(m) in the agreement permitted assignment of the right of 1 (2011) 5 SCC 532.
2 Civil Appeal No 5147 of 2016 decided by a larger bench of Hon’ble Justice R F Nariman, Hon’ble Justice Navin Sinha and Hon’ble Justice Indira Banerjee, on 19.08.2020 the developer to any other person.
●In light of the aforesaid clause, Ashray entered into an agreement dated 20.05.2006 with Regency Mahavir Properties “Regency” by which Ashray assigned the execution of the previous agreement dated 22.07.2004 to Regency. This agreement contained an arbitration clause.
● Vide a deed of confirmation dated 13.07.2006, to be treated as part of the agreement dated 20.05.2006, the assignment by Ashray to Regency was reaffirmed.
●Deccan alleged that it was made to believe by one of the leading partners of Regency that the development of the said property shall be carried out as quickly as possible. Deccan was under a bonafide belief that Mr. Atul Chordia (ex-partner of Regency) would be responsible for the development of the said property. However, on enquiry on a later date due to delay in progress of construction, it came to learn that Mr. Chordia was no more responsible for development of the said property, since he had assigned the development rights way back in the year 2006.
● Deccan stated that the agreement of assignment and deed of confirmation were tainted with fraud and thus ab initio null and void and no more binding on them.
● In light of the aforesaid facts, Deccan prayed before the Ld. Civil Judge (Senior Division) Pune to declare all the agreements and deed obtained by fraud be
declared illegal, ab initio null and void and not binding on them. In the prayer clause, they also sought cancellation of agreements and the deed.
● An application dated 19.07.2010 filed under Section 8 of Arbitration and Conciliation Act, 1996 (“Act”) on behalf of Regency to refer the parties to arbitration by virtue of the arbitration clause in the agreement dated 20.05.2006. Plaintiff/ Deccan resisted the enforceability of the agreement on the grounds of it being null and void. After hearing both sides, the Ld. court at Pune referred the parties to arbitration.

 Writ Petition before the Hon’ble Bombay High Court (“BHC”)

In a writ petition filed by Deccan, the BHC vide judgment dated 18.03.2015 upheld the decision of the trial court and referred the parties to arbitration. In doing so, the bench referred to numerous Apex Court judgments, especially the decision in Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee​3 holding that N. Radhakrishnan​4 case was not correct in law and held that the allegations of fraud can be determined by arbitration where an arbitration agreement exists between the parties.

Proceedings before the Hon’ble Supreme Court of India (“SC”/“Apex Court”)

In its appeal before the SC, Deccan contended against the arbitrability of the dispute primarily on two grounds, firstly, disputes arising from the agreement allegedly executed on the basis of fraud are not arbitrable, secondly, as one of the prayers in the suit was for cancellation of three written instruments, which is a 3 (2014) 6 SCC 677 4 (2010) 1 SCC 72 proceeding under Section 31 of the SRA, 1963 and the same being a proceeding in rem, falling within one of the exception laid out in Booz Allen (supra), the dispute would not be arbitrable.
The Respondent, on the other hand, relying on the Apex Court’s judgment in the case of Rashid Raza v. Sadaf Akhtar​5 contended that “fraud exception” would apply only if it can be stated that the agreement itself was never executed, and not otherwise. In response to the issue of an action under Section 31 of the SRA, 1963, Respondent contended that court’s discretion under the said provision is for the benefit of the party interested in setting aside a written instruments,therefore, proceedings would be in personam. It was also contended by the Respondent that in light of the recent amendments to the Act, only thing necessary to be seen while deciding an application under Section 8 of the Act is existence of a valid arbitration agreement.

Decision of the Apex Court

Firstly¸ on the issue of arbitrability of dispute in face of allegations of fraud, the SC, followed its recent judgment Avitel Post Studioz Limited & Ors. v. HSBC PI Holding (Mauritius) Ltd.​6 and held that if an allegation between parties lies within Section 17 of the Indian Contract Act, or involves fraud in performance of contract, the subject matter would be arbitrable.

Secondly, in terms of Section 8 of the Act the SC made it clear that when an action is brought before the judicial authority to refer the parties to arbitration, such 5 (2019) 8 SCC 710 6 Civil Appeal No. 5145 and 5158 of 2016 decided on 19.08.2020.judicial authority shall do so unless prima facie, no arbitration agreement is found to exist.

Thirdly and most importantly, to determine whether the proceedings under Section 31 of the SRA, 1963 is one in rem or in personam, the SC set out to examine the correctness of the law laid down by a division bench of Hon’ble Delhi High Court in the case of Alien Developers Pvt. Ltd. Vs. M. Jamardhan Reddy​7, which held that the action under Section 31 of the SRA, 1963 is an action in rem and therefore not arbitrable. After detailed analysis of law, the Apex Court held that the judgement in the case of Alien Developers is not a good law and overruled the same. For concluding that action under Section 31 of the SRA is not an action in rem , SC examined the issue from various angles, as highlighted below:

● Apex court carried out in depth scrutiny of various provisions of the SRA, 1963 and different expressions used therein​8. SC noted that Section 31 (1) refers to “any person against whom a written instrument is void or voidable…….”. Thereafter, the SC cited with approval the judgment of full bench of Madras High Court reported as Muppudathi Pillai Vs. Krishnaswami Pillai​9, involving determination of scope of pari materia provisions of SRA 1877. In the said judgement, the Hon’ble Madras High Court had held that jurisdiction under Section 39 of the SRA 1877(which is the pari materia provision to Section 31 of SRA 1963) was protective or preventive one. The SC further held that a reading of the full bench judgment of Madras High Court would make it clear that expression “any person” does not include a third party but is restricted to a party 7 (2016) 1 ATL 194 (DB) 8 “Any person interested in the contract” in Section 27, “any person entitled to any legal character” used in Section 34 as against “any person” used in Section 31 of the SRA, 1963 9 AIR 1960 Mad 1 to the written instrument or any person who can bind such party. It was further held that reading of Section 31 SRA, 1963 shows that when a written instrument is adjudged void or voidable, the court may then order it to be delivered up to the plaintiff and cancelled in exactly the same way as a suit for rescission of a contract under Section 29 SRA, 1963. SC held that it is clear that action under Section 31(1) is strictly an action inter parties and this is an action in personam.
●The Apex Court further examined as to whether Section 31(2) makes any difference to the aforesaid determination in law. The SC disapproved the reasons given by the Hon’ble Delhi High Court in the matter of Alien Developers. SC held whether or not the written instrument is registered, makes no difference in order to hold that the proceeding in relation thereto will be proceeding in rem or in personam. SC relied on its earlier judgment in the case of Gopal Das Vs. Sri Thajuri​10 which was followed by a division bench of Madhya Pradesh High Court in case of Rekha Vs. Rantashree​11 for holding that a deed of conveyance or other document executed by any person is not an act nor record of an act of sovereign authority or of any official body or tribunal, or of any public officer, legislative, judicial or executive. Nor is it a public record kept in a state of any private document. Referring to the provisions of Section 74 of the Evidence Act defining the expression ‘public document’, the SC held that factum of registration of what is otherwise private document inter parties does not clothe the document with any higher legal status by virtue of its registration.
●Further, following its earlier judgment in the case Olympus Superstructures Vs. Meena Vijay Khetan​12, the SC held that the dispute or 10 AIR 1943 PC 83 11 (2006) 1 MP LJ 103 12 (1999) 5 SCC 651 differences which parties to an arbitration agreement agree to refer must consist of justiciable issue triable civilly. With the said finding, the court held that specific performance is justiciable issue triable civilly and expression “court” appearing throughout the SRA 1963 will have to be substituted by “arbitrator” or “arbitral tribunal”.
●The apex court also referred to the definition of expression “in rem” in the law dictionaries, as well to the meaning of the said expression in foreign jurisdiction besides taking cognizance of the fact that how proceeding “in rem” is understood in practice as compared to literal meaning of the said expression. After considering the same, the court came to the conclusion that Section 31 is with reference to specific persons and not with reference to all who may be concerned with the property underlying the instrument and hence a judgment delivered under Section 31 cannot bind all persons claiming an interest in the property inconsistent with the judgement, even though pronounced in their absence.
●Referring to the provisions of Section 32, 33, 34, and 35 read with Section 4​13 of the of the SRA 1963, the SC held that actions under these provisions are actions in personam and it would be most incongruous to say that every other provision of the SRA 1963, refers to actions in personam and Section 31 alone being out of step i.e. referring to in rem actions.
●Lastly the SC referred to the judgment in the case of Suhrid Singh Vs. Randhir Singh​14, wherein it was held that where an executant to a deed wants it 13 Section 4:- Specific relief can be granted only for the purpose of enforcing individual civil rights and not for the mere purpose of enforcing a penal law. 14 (2010) 12 SCC 112 to be annulled, he has to seek cancellation of the deed (under Section 31 of the SRA 1963) whereas if a non-executant seeks annulment of a deed, he has to
seek declaration that the deed is invalid (which can be done by filing of suit under Section 34 of the SRA, 1963). The SC held that it would be wholly incorrect to hold that cancellation of very same deed, if done under Section 31 would be an action in rem, however, if done under Section 34 of SRA would be an action in personam. On the basis of above discussion, the SC held that an action instituted under Section 31 SRA, 1963 is an action in personam and not an action in rem.

Conclusion

By virtue of this judgment, the Apex Court has put to rest most of the controversies surrounding arbitrability of the disputes seeking specific performance of contract. It has been clearly brought out that specific relief is granted only for the purpose of enforcing individual civil rights in light of Section 4 of the SRA, 1963 and hence all actions under the SRA are actions in personam. This determination of the apex court is in line with principle highlighted in Halsbury’s Laws of England to the effect that justiciable issues triable civilly are arbitrable and a fair test of this is whether difference can be compromised lawfully by way of accord and satisfaction. Accordingly, no exception was required to be carved out to the categories of non-arbitrable cases as mentioned in the case of Booz Allen.

DOES ALLEGATIONS OF FRAUD VITIATE ARBITRATION AGREEMENT

DOES ALLEGATIONS OF FRAUD VITIATE ARBITRATION AGREEMENT

Vikas Goel  Vikas Goel & Vivek Gupta


25/08/2020

Whether the allegations of fraud would vitiate the arbitration agreement, and what would be the measure of damages in case of contract entered into on the basis of fraud or misrepresentations, are the issues answered by the Honw’ble Supreme Court of India in its recent judgment in the case of Avitel Post Studioz Ltd. & Ors. Versus HSBC PI Holdings (Mauritius) Ltd[1].

 

Brief facts of the case

  • The HSBC PI Holdings (Mauritius) Ltd (“HSBC”) entered into a Share Subscription Agreement dated 21.04.2011 (“SSA”) and a Shareholder Agreement dated 6.05.2011 (“SHA”) with an Indian company namely Avitel Post Studioz Ltd. (“Avitel India”) for acquiring 7.8% of paid-up capital of Avitel India for a total consideration of USD 60 million. The SHA was executed for the purpose of defining the relationship between the parties after execution of the SSA. Both these agreements had identical dispute resolution clauses providing for settlement of disputes through arbitration to be conducted under the aegis of Singapore International Arbitration Centre (“SIAC”) in accordance with the International Arbitration Rules. It was specifically agreed by the parties that save and except the provisions of Section 9, Part 1 of Indian Arbitration and Conciliation Act, 1996 (Act”) shall not be applicable. Significantly, the basis of execution of the aforesaid agreements was the representations made by the Jain Family, who were the promoters of Avitel India, to HSBC that they were in advance stage of finalizing a contract with British Broadcasting Corporation (“BBC”) to convert the BBC’s film library from 2D to 3D. It was represented that the said contract was expected to generate a revenue of USD 300 million in the first phase and ultimately over USD 1 billion. It was also represented that the investment made by HSBC would be used to purchase equipment for Avitel Post Studioz FZ LLC (“Avitel Dubai”) to service the BBC contract. Avitel Dubai was 100% subsidiary of Avitel Holdings Ltd., Mauritius (“Avitel Mauritius”), which, in turn was 100% subsidiary of Avitel India (Avitel India, Avitel Mauritius, and Avitel Dubai are collectively referred to as the “Avitel Group”).
  • HSBC grew suspicious about the Avitel Group’s business of digitising films and Ernst & Young and KPMG, Dubai were engaged to inquire into business activities of the Avitel Group and return finding in that regard. Based on the preliminary findings of Ernst & Young and KPMG Dubai, HSBC discovered that the purported BBC contract was non-existent and was set up by the Avitel India to induce HSBC into investing the aforesaid money of USD 60 million in the shares of Avitel India. It was further discovered that though Avitel Dubai received payment of USD 60 million, however, about USD 51 million were siphoned off to companies in which the Jain Family i.e. promoters of Avitel India had a stake.
  • In the above circumstances, disputes arose and the matter was referred to SIAC, which initially appointed an Emergency Arbitrator in terms of an Application made by HSBC and subsequently constituted a tribunal of three arbitrators, in terms of the agreement.

 

Proceeding before the Arbitral Tribunal

  • The Emergency Arbitrator passed two Interim Awards dated 28.05.2012 and 29.05.2012 in the SSA and the SHA directing Avitel India and Avitel Dubai to refrain from disposing of or dealing with or diminishing the value of their assets up to USD 50 million. The Emergency Arbitrator further permitted HSBC to deliver copies of the Interim Awards to financial institutions in India and the UAE with which any of the said two Avitel companies held or may hold or be signatory to accounts with a request that the financial institutions freeze such accounts consistent with the Interim Awards. On 27.07.2012 the Emergency Arbitrator amended the aforesaid Interim Awards thereby giving further relief to HSBC by directing Avitel India and Avitel Dubai to cease and desist from prohibiting or inhibiting Ernst & Young and KPMG Dubai from conducting investigations into the financial affairs of Avitel Dubai and Avitel Mauritius.
  • A three member tribunal, constituted under the auspicious of SIAC, decided the disputes vide Formal Final Award in SSA dated 27.09.2014 holding that Avitel India made false and misleading representations to HSBC in order to induce HSBC to invest in Avitel India. The Tribunal held that Avitel Group were jointly and severally liable to HSBC in tort of deceit as well as for fraudulent misrepresentation under the Contract Act. The Tribunal awarded USD 60 million to HSBC towards damages along with interest @4.25% p.a. besides awarding legal and other costs in favour of HSBC. Arbitral Tribunal also directed for cancellation of shares of HSBC after full and final payment of awarded amount by Avitel Group to HSBC.
  • Proceedings initiated for challenging the award in India under Section 34 of the Act, 1996 were held to be not maintainable vide judgment of Bombay High Court dated 28.09.2015. Appeal under Section 37 of the Act was also dismissed on 05.05.2017 on the ground that no such proceedings was maintainable in India. HSBC moved the Bombay High Court on 15.04.2015 for enforcement of Foreign Final Award dated 27.09.2014 which proceeding are still pending. The judgment of the Supreme Court which is the subject matter of the present arbitration is not concerned with the Petition challenging the Award or enforcement thereof.

 

Proceedings under Section 9 of the Act in India before Hon’ble Bombay High Court (“BHC”)

  • On 30.07.2012, i.e. during pendency of the arbitral proceedings, HSBC filed a Petition under Section 9 of the Act before the BHC seeking a direction to the Avitel India to deposit security amount to the extent of HSBC’s claim of USD 60 Million. A Ld. Single Judge of BHC directed Avitel India vide order dated 22.01.2014 to deposit any shortfall in its account with the Corporation Bank so as to maintain a balance of USD 60 million during pendency of the arbitration proceedings.
  • In an intra court appeal, the Ld. Division Bench vide order dated 31.07.2014 took the view that measure of damages may not be the amount of loss ultimately suffered by HSBC but it can at best be the difference between the price paid by HSBC in acquiring the shares in Avitel India and the price HSBC would have received had it resold the said shares in the market. According, the Ld. Division Bench modified the order in appeal and directed that Avitel India would maintain USD 30 million, instead of USD 60 million, in its account during pendency of the arbitration proceedings. On the issue of arbitrability of the dispute due to allegations of fraud by HSBC, the Ld. Division Bench held that such allegations were primarily in the context of “fraud” and “Misrepresentation” as defined under Section 17 &18 of the Contract Act thus establishing a civil profile of the dispute. Ld. Division Bench thus held that the disputes were arbitrable. Both HSBC as well as Avitel India challenged the order of the Ld. Division Bench dated 31.07.2014 before the Hon’ble Supreme Court of India.

 

Decision of the Hon’ble Supreme Court of India

  • Allowing the appeal of HSBC, and dismissing the appeal of Avitel India, the Hon’ble Supreme Court directed that reduction of amount of USD 60 million to USD 30 million by the Ld. Division Bench was not justified. It was held that USD 60 million was rightly directed to be set aside by the Ld. Single Judge in the facts and circumstances of the case. For arriving at the aforesaid finding, the Hon’ble Supreme Court primarily dealt with the following two issues:
  • What is the substantive law in India qua arbitrability when allegation of fraud are raised by one of the parties to Arbitration Agreement?
  • What would be the quantum of damages that can be claimed in cases where contract is voidable due to fraud and misrepresentation?
  • For deciding the first issue, the Hon’ble Apex Court referred to almost all its earlier judgments on the issue of arbitrability of disputes in the face of allegations of fraud. It was noted that in Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd.[2] (para 27) it was held that the cases involving serious and specific allegation of fraud, fabrication of documents, forgery, impersonation, coercion, etc. and the cases involving prosecution for criminal offences would fall in the category of cases not suitable for ADR process. Similarly, it was noted that in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd.[3] (para 36), while listing the category of non-arbitrable cases, disputes relating to rights and liabilities giving rise to or arise out of criminal offences were held to be non-arbitrable. It was noted that in Radhakrishnan v. Maestro Engineers[4] (para 21), the apex court held that since the case related to allegations of fraud and serious malpractices on the part of the respondents, such a situation could only be settled in court through furtherance of detailed evidence by either parties and such a situation could not be properly gone into by the arbitrator. The apex court cited with approval the decision in the case Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee[5], where a Single Judge Bench of the apex court, while dealing with a petition for appointment of arbitrator, held that judgment in the case of N. Radhakrishnan v. Maestro Engineers was per incuriam and did not lay down the correct law. It was further held in Swiss Timing that only in cases where the court, on a meaning full reading of the contract, can readily conclude that the contract was void, it would be justified to decline reference to arbitrator. However, where the contract is only voidable, like in the case of Section 17 & 18 of the Contract Act, it is not possible to shut arbitration. The apex court also noted that in its earlier judgment in the case of A. Ayyasamy v. A. Paramasivam[6], it was held that only where serious question of fraud were involved that arbitration could be refused. The apex court further noted that in its recent judgment in the case of Rashid Raza v. Sadaf Akhtar[7], it was held that there was a distinction between serious allegations of forgery/fabrication in support of the plea of fraud as opposed to “simple allegations”. It was held in Rashid Raza that working tests were – (i) whether the plea permeate the entire contract and above all, the agreement of arbitration, rendering it void; (ii) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain. After noting the judgments as aforesaid, the Hon’ble Supreme Court held that “serious allegation of fraud” arise only if either of the two tests were satisfied and not otherwise. The court further held paragraph 27(vi) of Afcons (supra) and paragraph 36(i) of Booz Allen (supra) should now be read subject to a rider that the same set of facts may lead to civil and criminal proceedings and if it is clear that civil disputes involved question of fraud and misrepresentation etc. which can be subject matter of such proceedings under Section 17 of the Contract Act, and/or the tort of deceit, the mere fact that criminal proceedings can or have been instituted in respect of the same subject matter, would not lead to conclusion that a dispute ceases to be arbitrable.
  • The apex court further held that there can be a distinction between a contract obtained by a fraud or performance of contract being initiated by fraud. The second category of fraud which vitiates the performance of the contract would fall outside section 17 of the Contract Act and would be governed by tort of deceit, leading to a claim of damages and not of recession of contract itself. However, the court held that both kind of fraud are subsumed within the expression “fraud” when it comes to arbitrability of an agreement which contains an arbitration clause.
  • As regards the second issue regarding measure of damages for fraudulent misrepresentation by which a party to the contract is induced to enter into the contract, the court held that there is only one measure of damages in such cases namely the loss truly suffered by the parties affected who must be put back in the same place as if he had never entered into the transaction. In an action for deceit the price paid less valuation at the transaction date is simply a method of measuring such a loss. Referring to the finding in the Formal Final Award dated 27.09.2014, the court observed that it was clear that most of the representations made by Avitel Group and the Jain Family to HSBC, were false.
  • The Court held that in the case before it the measures for damages for fraudulent misrepresentation is not the difference between value of shares on the date of making the contract and the value HSBC would have realised if it had resold the share in the market, rather the measure for damages would be to put HSBC in the same position as if the contract had never been entered into, which is, the entitlement to recover the price paid for the shares and all consequential losses. Accordingly, the court held that the Division Bench’s finding as to measure of damages could not be acceded to.

 

Conclusion

This judgment reinforces the radical departure made in 1996 Act intending to strengthen the efficacy of arbitration. It was held that as long as the arbitration agreement is found to exists, mere allegations of fraud or initiation of criminal proceedings would not render the disputes to be non-arbitrable. It is only in those rare situations where the contract containing arbitration clause is found to be void that arbitration clause would also cease to exist. Inter-se allegation of “fraud” by one of the parties merely render the contract voidable as per Section 17 of the Contract Act and applying the principle of separability of arbitration clause /agreement from the underlying contract, parties cannot be permitted to avoid arbitration merely on the basis of such allegations of fraud. However, where serious allegations of fraud have implication in the public domain, satisfying the court that it will be just and in the interest of all the parties not to proceed with arbitration, court may relegate the parties to civil court and not to arbitration. However, such cases would be very few and in other cases, courts would not allow any party to arbitration to avoid arbitration merely by raising a bogey of the underlying contract being void.

 

 

[1] Civil Appeal No. 5245 of 2016, Civil Appeal No. 5158/2016 and Civil Appeal No. 9820/2016 decided on 19.08.2020. This appeal was against judgement dated 31.07.2014 passed by DB of BHC in appeal arising out of petition filed under Section 9 of the Act.

[2] (2010) 8 SCC 24

[3] (2011) 5 SCC 532

[4] (2010) 1 SCC 72

[5] (2014) 6 SCC 677

[6]  (2016) 10 SCC 386

[7] (2019) 8 SCC 710

AMENDMENTS MADE TO CPC BY THE COMMERCIAL COURTS ACT, 2015

AMENDMENTS MADE TO CPC BY THE COMMERCIAL COURTS ACT, 2015

Vikas Goel  Vikas Goel


04/07/2020

 

Intern

 

Introduction

 

The objective of Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 (the Principal Act) was speedy resolution of commercial disputes. The “Commercial disputes” have been defined with an inclusive definition and it covers almost all disputes arising out of the commercial activities[1]. The Act provides for a Schedule which amends certain provisions of CPC. These provisions are applicable to Commercial Disputes of Specified Value[2] and the Commercial Court or Commercial Court shall follow the amended provision. The Act has clarified that the provisions of the CPC as amended by the Act would have an overriding effect over any rules of the High Court, or the amendments to the CPC made by a State Government.

 

Pre-Institution Mediation and Settlement- The Act introduces Section 12A providing for mandatory pre-institution mediations in all cases, other than those cases which require any urgent interim relief. Such pre-institution mediation has to be conducted through Authority authorized by the Central Government. The process of pre-institution mediation has to be completed within a period of three months, extendable by two months with consent of the parties, from the date of application made by the Plaintiff. Time spent in pre-institution mediation shall not be computed for the purpose of limitation under the Limitation Act, 1963. If the parties to the commercial dispute arrive at a settlement, the same shall be reduced into writing and shall be signed by the parties to the dispute and the mediator. The Settlement arrived at under this provision shall have the same status and the effect as if it is an arbitral award on agreed terms under sub-section (4) of Section 30 of the Arbitration and Conciliation Act, 1996.

 

Overriding Effect[3]

 

Section 16 of the Act clearly states that this Act will have overriding effect on the provisions of Code of Civil Procedure, 1908 (hereinafter ‘Code’), and its amendments. It clearly mentions that in case of conflict between any rules of the Code, rules of jurisdictional High Courts or any state amendments made to the Code, the provisions of the Act, as it amends the Code, will prevail.

 

In a landmark case of Axis Bank Ltd. v. Mira Gehnani[4], the Bombay High Court held that amendments introduced to CPC by the Commercial Courts Act are only applicable to Commercial Disputes of a Specified Value and not Commercial Disputes not of a Specified Value such as the present suit[5].

 

Changes made to provisions of CPC

 

  1. Costs – The costs ordered by the court in relation to a suit are governed by Section 35 of CPC. The said section provided discretionary powers to the court while determining the costs. The Act has substituted the said section to provide a general rule for payment of costs by the unsuccessful party. The Court may deviate from the general rule after recording the reasons in writing. The order for costs would include fees and expenses of the witnesses, legal fees, and broadly, any fees involved in furtherance of the proceedings. The court has to also consider the conduct of parties, whether the party has succeeded partially if not wholly, whether frivolous claims or counterclaims were made, whether an offer for settlement was unreasonably rejected.
  2. Procedure for Summary Judgment –The Act introduces a system of “Summary Judgment” through a new Order XIII-A in the CPC. Summary judgment is given by the court without recording oral evidence in the following scenarios[6]:

 

(a) the plaintiff has no real prospect of succeeding on the claim; or
(b) the defendant has no real prospect of successfully defending the claim; or
(c) in the absence of any other compelling reason for recording of oral evidence.

 

An applicant may apply for summary judgment at any time after summons has been served on the defendant. However, no such application will be entertained after the court has framed the issues in respect of the suit. An application for summary judgment shall not be made in a suit if that is originally filed as a summary suit under Order XXXVII. The applicant may rely on documentary evidence in support of its application. The date for hearing a summary judgment of a commercial dispute must be fixed, after giving a notice period of thirty days to the respondent. The respondent has to file his reply within thirty days of the receipt of notice of application of summary judgment or notice of hearing, whichever is earlier.

 

  1. Pleadings in a commercial dispute –Order VI of CPC deals with pleadings. The form of pleadings in commercial dispute will be as per High Court Rules or Practice Directions provided for such disputes. A new Rule 15A has been inserted, which pertains to verification of pleadings in a commercial dispute, in a prescribed manner (Statement of Truth). In the absence of verification, the pleadings cannot be relied as evidence. Every pleading has to be verified by an affidavit signed by the party, or one of the parties to the proceedings or any person who is acquainted with the facts of the case and authorized by such parties. If the pleading is amended, the same has to be verified.
  2. Delay in filing written statement –The maximum period within which the written statement could be filed is 90 days under CPC. The Act has increased the time period to 120 days. Accordingly the Act has amended Order V of CPC dealing with issue of summons and Order VIII of CPC pertaining to filing of written statement by the defendant.

 

As per the provisions of CPC, if a party fails to present written statement, the court shall pronounce judgment or make an order in relation to the suit. The Act states that, the order made by the court cannot extend the time period of 120 days[7].

 

  1. Procedure for disclosure, discovery and inspection of documents before the Commercial Courts –Order XI of the CPC lays down the procedure for discovery and inspection of the facts of the suit through interrogatories. The Act has substituted this Order to include disclosure, along with discovery and inspection of documents.
    Under the new provisions, parties are required to file a list of all documents and the photocopies of all these documents at the stage of filing of plaint/written statement, specifying inter alia, in whose possession the documents are currently (whether the plaintiff or the respondent or any other person). They are mandated to include a declaration on oath stating that they are not in possession of any documents other than the photocopies of the documents they had already placed on record. The parties are not allowed to rely on any documents other than the ones mentioned in the list and whose photocopies had been filed, without leave of the Court. However, the Act has granted discretion to the Court to award exemplary costs against a party who willfully, unreasonably, wrongfully, or even negligently failed to disclose all documents pertaining to the suit in their possession.
  2. Electronic records –The evidentiary value of electronic records has already been recognized under the provisions of Indian Evidence Act, 1872 and Information Technology Act, 2000. The Act has incorporated the relevant provisions providing procedural rules in respect of the same under the new Order XI of the CPC.
  3. Written arguments –Order XVIII of the CPC deals with hearing of suit and examination of witnesses and consists of provisions pertaining to written arguments. As per the new provisions in this Order inserted by the Act, parties have been mandated to submit concise written arguments under distinct headings within four weeks of commencement of oral arguments. Revised written arguments may be filed within one week of the conclusion of arguments. Earlier, no such time restriction had been stipulated.
  4. Amendments in procedure related to Affidavits –The Act has inserted new Rules in Order XIX of the CPC, in addition to the existing procedure related to affidavits. The courts have been empowered to control the evidence, by being permitted to decide the issues which require evidence, and the manner in which such evidence is to be recorded. The Commercial Courts even have discretion to exclude evidence that would otherwise have been produced by the parties. They have been empowered to redact or reject any affidavits, which in their view does not constitute admissible evidence.
  5. Time period for pronouncing judgment –Rule 1 of Order XX of the CPC stipulates that judgment must be pronounced within a maximum time period of 60 days from the date of conclusion of hearings. The Act has provided a maximum time period of 90 days commencing from the date of conclusion of arguments, for pronouncing the judgment.
  6. Case Management hearing –An international practice of case management hearing has been introduced in India for the first time through a new Order inserted into the CPC- Order XV-A. This allows the Court to make a time line, and fix dates for the proceedings of the matter.

 

The first Case Management Hearing has to be held by the court within four weeks from the date of filing of affidavit of admission or denial of documents by all parties to the suit. Arguments have to be closed within six months of the first Case Management Hearing.

 

It provides that no adjournment for Case Management Hearing would be entertained for the sole reason of non-appearance of counsel. If such application had been made in advance, it would be accepted, upon payment of costs.

 

Non-compliance with Case Management Hearings shall be condoned by the Court only upon payment of costs, but it might also result in forfeiture of the party’s right to conduct the suit. In extreme cases of willful non-appearance, the Court has the discretion to dismiss the plaint.

 

  1. Disposal of a suit at first hearing –Order XV of CPC deals with disposal of suit at first hearing. The said Order has been omitted by the Act.

 

  1. Amendments at Glance:
S.No. Section/Order Amendment
1.      

Section 35 (Costs)

 

Substitution of new section for section 35.—For section 35 of the Code, the following section shall be substituted, namely:––

 

35. Costs.—

 

(1) In relation to any commercial dispute, the Court, notwithstanding anything contained in any other law for the time being in force or Rule, has the discretion to determine:

 

(a) whether costs are payable by one party to another;

 

(b) the quantum of those costs; and

 

(c) when they are to be paid.

 

Explanation

 

For the purpose of clause (a), the expression “costs” shall mean reasonable costs relating to—

 

(i) the fees and expenses of the witnesses incurred;

 

(ii) legal fees and expenses incurred;

 

(iii) any other expenses incurred in connection with the proceedings.

 

(2) If the Court decides to make an order for payment of costs, the general rule is that the unsuccessful party shall be ordered to pay the costs of the successful party: Provided that the Court may make an order deviating from the general rule for reasons to be recorded in writing.

 

Provided that the Court may make an order deviating from the general rule for reasons to be recorded in writing.

2.       Section 35A (Compensatory costs in respect of false or vexatious claims or defences) Sub-section 2 of Section 35A should not be applicable to commercial disputes of a specified value.
3.       Order V (Issue and Service of Summons)

For the second proviso, the following proviso shall be substituted, namely:––

 

“Provided further that where the defendant fails to file the written statement within the said period of thirty days, he shall be allowed to file the written statement on such other day, as may be specified by the Court, for reasons to be recorded in writing and on payment of such costs as the Court deems fit, but which shall not be later than one hundred twenty days from the date of service of summons and on expiry of one hundred twenty days from the date of service of summons, the defendant shall forfeit the right to file the written statement and the Court shall not allow the written statement to be taken on record.”

4.       Order VI (Pleading Generally)

Rule 3A. Forms of pleading in Commercial Courts––In a commercial dispute, where forms of pleadings have been prescribed under the High Court Rules or Practice Directions made for the purposes of such commercial disputes, pleadings shall be in such forms.”

 

15A. Verification of pleadings in a commercial dispute

 

(1) Notwithstanding anything contained in Rule 15, every pleading in a commercial dispute shall be verified by an affidavit in the manner and form prescribed in the Appendix to this Schedule.

 

(2) An affidavit under sub-rule (1) above shall be signed by the party or by one of the parties to the proceedings, or by any other person on behalf of such party or parties who is proved to the satisfaction of the Court to be acquainted with the facts of the case and who is duly authorised by such party or parties.

 

(3) Where a pleading is amended, the amendments must be verified in the form and manner referred to in sub-rule (1) unless the Court orders otherwise.

 

(4) Where a pleading is not verified in the manner provided under sub-rule (1), the party shall not be permitted to rely on such pleading as evidence or any of the matters set out therein.

 

(5) The Court may strike out a pleading which is not verified by a Statement of Truth, namely, the affidavit set out in the Appendix to this Schedule.”

5.       Order VII (Plaint)

Rule 2A. Where interest is sought in the suit

 

(1) Where the plaintiff seeks interest, the plaint shall contain a statement to that effect along with the details set out under sub-rules (2) and (3).

 

(2) Where the plaintiff seeks interest, the plaint shall state whether the plaintiff is seeking interest in relation to a commercial transaction within the meaning of section 34 of the Code of Civil Procedure, 1908 (5 of 1908) and, furthermore, if the plaintiff is doing so under the terms of a contract or under an Act, in which case the Act is to be specified in the plaint; or on some other basis and shall state the basis of that.

 

(3) Pleadings shall also state—

 

(a) the rate at which interest is claimed;

 

(b) the date from which it is claimed;

 

(c) the date to which it is calculated;

 

(d) the total amount of interest claimed to the date of calculation; and (e) the daily rate at which interest accrues after that date.”

6.       Order VIII (Written Statement, Set-off and Counter-claim

Proviso for Rule 1 shall be substituted, namely:-

 

“Provided that where the defendant fails to file the written statement within the said period of thirty days, he shall be allowed to file the written statement on such other day, as may be specified by the Court, for reasons to be recorded in writing and on payment of such costs as the Court deems fit, but which shall not be later than one hundred twenty days from the date of service of summons and on expiry of one hundred twenty days from the date of service of summons, the defendant shall forfeit the right to file the written statement and the Court shall not allow the written statement to be taken on record.”

 

3A. Denial by the defendant in suits before the Commercial Division of the High Court or the Commercial Court

 

(1) Denial shall be in the manner provided in sub-rules (2), (3), (4) and (5) of this Rule.

 

(2) The defendant in his written statement shall state which of the allegations in the particulars of plaint he denies, which allegations he is unable to admit or deny, but which he requires the plaintiff to prove, and which allegations he admits.

 

(3) Where the defendant denies an allegation of fact in a plaint, he must state his reasons for doing so and if he intends to put forward a different version of events from that given by the plaintiff, he must state his own version.

 

(4) If the defendant disputes the jurisdiction of the Court he must state the reasons for doing so, and if he is able, give his own statement as to which Court ought to have jurisdiction.

 

(5) If the defendant disputes the plaintiff’s valuation of the suit, he must state his reasons for doing so, and if he is able, give his own statement of the value of the suit.”

 

First Proviso to Rule 5 shall be inserted, namely:

 

“Provided further that every allegation of fact in the plaint, if not denied in the manner provided under Rule 3A of this Order, shall be taken to be admitted except as against a person under disability.”

 

Proviso to Rule 10 shall be inserted, namely:

 

Provided further that no Court shall make an order to extend the time provided under Rule 1 of this Order for filing of the written statement.

7.       Order XI, XIII-A, XV-A

Order XI is related to Disclosure, Discovery and Inspection of Documents In Suits Before The Commercial Division of a High Court or a Commercial Court

 

Order XIII-A is related to summary judgment.

 

Order XV-A is related to case management hearing.

8.       Order XVIII (Hearing of the suit and examination of witnesses)

In Rule 2 for sub-rules (3A), (3B), (3C), (3D), (3E) and (3F), the following shall be substituted, namely:––

 

“(3A) A party shall, within four weeks prior to commencing the oral arguments, submit concisely and under distinct headings written arguments in support of his case to the Court and such written arguments shall form part of the record.

 

(3B) The written arguments shall clearly indicate the provisions of the laws being cited in support of the arguments and the citations of judgments being relied upon by the party and include copies of such judgments being relied upon by the party.

 

(3C) A copy of such written arguments shall be furnished simultaneously to the opposite party.

 

(3D) The Court may, if it deems fit, after the conclusion of arguments, permit the parties to file revised written arguments within a period of not more than one week after the date of conclusion of arguments.

 

(3E) No adjournment shall be granted for the purpose of filing the written arguments unless the Court, for reasons to be recorded in writing, considers it necessary to grant such adjournment.

 

(3F) It shall be open for the Court to limit the time for oral submissions having regard to the nature and complexity of the matter.”

 

In Rule 4, after sub-rule (1), the following sub-rules shall be inserted, namely:––

 

‘‘(1A) The affidavits of evidence of all witnesses whose evidence is proposed to be led by a party shall be filed simultaneously by that party at the time directed in the first Case Management Hearing.

 

(1B) A party shall not lead additional evidence by the affidavit of any witness (including of a witness who has already filed an affidavit) unless sufficient cause is made out in an application for that purpose and an order, giving reasons, permitting such additional affidavit is passed by the Court.

 

(1C) A party shall however have the right to withdraw any of the affidavits so filed at any time prior to commencement of cross-examination of that witness, without any adverse inference being drawn based on such withdrawal: Provided that any other party shall be entitled to tender as evidence and rely upon any admission made in such withdrawn affidavit.”

9.       Order XIX (Affidavits)

After Rule 3, the following Rules shall be inserted, namely:––

 

4. Court may control evidence.

 

(1) The Court may, by directions, regulate the evidence as to issues on which it requires evidence and the manner in which such evidence may be placed before the Court.

 

(2) The Court may, in its discretion and for reasons to be recorded in writing, exclude evidence that would otherwise be produced by the parties.

 

5. Redacting or rejecting evidence.—A Court may, in its discretion, for reasons to be recorded in writing–– (i) redact or order the redaction of such portions of the affidavit of examination-in-chief as do not, in its view, constitute evidence; or (ii) return or reject an affidavit of examination-in-chief as not constituting admissible evidence.

 

6. Format and guidelines of affidavit of evidence.—An affidavit must comply with the form and requirements set forth below:—

 

(a) such affidavit should be confined to, and should follow the chronological sequence of, the dates and events that are relevant for proving any fact or any other matter dealt with;

 

(b) where the Court is of the view that an affidavit is a mere reproduction of the pleadings, or contains the legal grounds of any party’s case, the Court may, by order, strike out the affidavit or such parts of the affidavit, as it deems fit and proper;

 

(c) each paragraph of an affidavit should, as far as possible, be confined to a distinct portion of the subject;

 

(d) an affidavit shall state—

 

(i) which of the statements in it are made from the deponent’s own knowledge and which are matters of information or belief; and

 

(ii) the source for any matters of information or belief;

 

(e) an affidavit should—

 

(i) have the pages numbered consecutively as a separate document (or as one of several documents contained in a file);

 

(ii) be divided into numbered paragraphs;

 

(iii) have all numbers, including dates, expressed in figures; and

 

(iv) if any of the documents referred to in the body of the affidavit are annexed to the affidavit or any other pleadings, give the annexures and page numbers of such documents that are relied upon.”.

10.    Order XX (Judgment and Decree)

For Rule 1, the following Rule shall be substituted, namely:––

 

(1) The Commercial Court, Commercial Appellate Court, Commercial Division, or Commercial Appellate Division, as the case may be, shall, within ninety days of the conclusion of arguments, pronounce judgment and copies thereof shall be issued to all the parties to the dispute through electronic mail or otherwise.

[1] Section 2 (c) “commercial dispute” means a dispute arising out of––

 

  • ordinary transactions of merchants, bankers, financiers and traders such as those relating to mercantile documents, including enforcement and interpretation of such documents;
  • export or import of merchandise or services;
  • issues relating to admiralty and maritime law;
  • transactions relating to aircraft, aircraft engines, aircraft equipment and helicopters, including sales, leasing and financing of the same;
  • carriage of goods;
  • construction and infrastructure contracts, including tenders;
  • agreements relating to immovable property used exclusively in trade or commerce;
  • franchising agreements;
  • distribution and licensing agreements;
  • management and consultancy agreements;
  • joint venture agreements;
  • shareholders agreements;
  • subscription and investment agreements pertaining to the services industry including outsourcing services and financial services;
  • mercantile agency and mercantile usage;
  • partnership agreements;
  • technology development agreements;
  • intellectual property rights relating to registered and unregistered trademarks, copyright, patent, design, domain names, geographical indications and semiconductor integrated circuits;
  • agreements for sale of goods or provision of services;
  • exploitation of oil and gas reserves or other natural resources including electromagnetic spectrum;
  • insurance and re-insurance;
  • contracts of agency relating to any of the above; and
  • such other commercial disputes as may be notified by the Central Government.

 

Explanation.––A commercial dispute shall not cease to be a commercial dispute merely because— (a) it also involves action for recovery of immovable property or for realisation of monies out of immovable property given as security or involves any other relief pertaining to immovable property; (b) one of the contracting parties is the State or any of its agencies or instrumentalities, or a private body carrying out public functions;

 

[2] Section 2 (i) “Specified Value”, in relation to a commercial dispute, shall mean the value of the subject-matter in respect of a suit as determined in accordance with section 12 1 [which shall not be less than three lakh rupees] or such higher value, as may be notified by the Central Government.

 

[3] Section 16 – Amendments to the Code of Civil Procedure, 1908 in its application to commercial disputes.

 

(1) The provisions of the Code of Civil Procedure, 1908 (5 of 1908) shall, in their application to any suit in respect of a commercial dispute of a Specified Value, stand amended in the manner as specified in the Schedule.

 

(2) The Commercial Division and Commercial Court shall follow the provisions of the Code of Civil Procedure, 1908 (5 of 1908), as amended by this Act, in the trial of a suit in respect of a commercial dispute of a Specified Value.

 

(3) Where any provision of any Rule of the jurisdictional High Court or any amendment to the Code of Civil Procedure, 1908 (5 of 1908), by the State Government is in conflict with the provisions of the Code of Civil Procedure, 1908, as amended by this Act, the provisions of the Code of Civil Procedure as amended by this Act shall prevail.

 

 

[4] 2019 SCC OnLine Bom 358

[5] https://www.scconline.com/blog/post/2019/06/06/bom-hc-s-16-of-commercial-courts-act-to-be-interpreted-literally-amendments-brought-in-cpc-applicable-only-to-commercial-disputes-of-a-specified-value/

[6] Su-kam Power Systems Ltd. Vs. Kunwer Sachdev & Ors., reported as 264 (2019) DLT 326.

[7] SCG Contract (India) Pvt Ltd. Vs. K S Chamankar Infrastructure Pvt Ltd.& Ors. (2019) 12SCC 210

 

PROMISSORY ESTOPPEL HAS TO YIELD TO LARGER PUBLIC INTEREST

PROMISSORY ESTOPPEL HAS TO YIELD TO LARGER PUBLIC INTEREST

Vikas Goel  Vikas Goel


02/07/2020

 

INTRODUCTION

In a recent pronouncement[1], the Apex Court upheld amendment notifications issued by the Central Government (“Government” / “UOI”) limiting the extent of amount of benefit promised in the original notification. The genesis of the judgement is that doctrine of promissory estoppel cannot be invoked where invocation of the same against the Government is contrary to principal of equity or public interest.

 

FACTS OF THE CASE

In order to boost economic growth and employment opportunities in the district of Kutch (Gujarat), which was struck by a devastating earthquake on 26.01.2001, the Government issued a notification dated 31.07.2001[2] giving certain excise duty benefits to new industries new industrial units set up in the Kutch District prior to July 31, 2003 (which was subsequently extended to December 31, 2005). Such industrial units were entitled to refund of full duty paid by on finished goods, in cash/personal ledger account (“PLA”) for a period of 5 years from the date of commencement of commercial production.

 

Various amendments were made to original notification dated July 31, 2001 between September 2001 to September 2004 to clarify certain matters including extending cut -off date of for setting up new industrial units from 31.07.2003 to 31.12.2003. One of the amendments made with effect from 06.08.2003[3] provided that PLA payment could be made to discharge duty liabilities on the finished products only after exhausting the CENVAT credit balances.

 

Another amendment notification dated 27.03.2008[4] issued by the Government provided that the benefit of refund of excise duty would be granted with reference to value addition done by the industrial units, which was notionally fixed on 34% for the commodity manufactured. This notification also empowered the Commissioner to decide special rate in a situation where the actual value addition was more than the deemed value addition, as notionally fixed. Resultantly there was a reduction in the amount of refund of excise duty to which the industrial units setup pursuant to original notification dated July 31, 2001 were entitled. The industrial unit owners challenged amendment notification dated 27.03.2008 before the Hon’ble Gujarat High Court (“GHC”) contending that they had set up their industrial unit at district Kutch, as against Maharashtra by incurring additional substantial costs of approx. Rs.2200 PMT, only because of the incentive promised by the Government to refund excise duty paid in Kutch Area. Industrial unit owners (Petitioner before the GHC) challenged the notification dated 27.03.2008 on the ground that the said notification changed the entire basis of the incentive exemption and had the effect of substantially reducing the entitlement of refund from nearly 100% of the duty paid to only 34% of such duty amount. It was also contended that the amendment notification curtailing the promised incentive midway were in breach of the doctrine of principal estoppel.

 

During pendency of the writ before the GHC, Government issued another notification dated 10.06.2008[5] leading the petitioners to amend their writ petition for challenging even the said notification dated 10.02.2008. It appears that by way of yet another amendment notification dated 03.10.2008[6], the Government revised the deemed value addition at 75% in respect of the products manufactured by the eligible industries without giving them any option of applying for special rate.

 

Decision by GHC

GHC allowed the writ petitions vide judgement and order dated 10.03.2010 holding that the amendment notifications dated 27.03.2008 and 10.06.2008 were retrospective and not retroactive. It was further held that bar of promissory estopple would operate against the Government. Accordingly, the GHC set aside the said amendment notifications; with direction for refund of differential amount by the Government to such owners.

 

Decision by the Hon’ble Supreme Court of India (“SC”)

Union of India (“UOI”) challenged the decision of the GHC before the SC raising following grounds:

 

  • Notification dated 27.03.2008 was only clarificatory in nature and did not amount to withdrawing exemption benefit provided by Notification dated 31.07.2003.

 

  • Power to grant exemption from levy and collection of duty includes power to rescind, modify or withdraw such exemption, as per Section 5A of the Central Excise Act.

 

  • The provisions granting refund of excise duty were being abused by unscrupulous manufacturers who indulge in different type of tax evasion tactics.

 

  • Such rampant abuse being against the object and purpose of the original notification, the amendment notification were issued. As such there is no contravention of the doctrine of promissory estoppel.

 

  • Prevention of misuse of excise duty exemption was considered expedient in public interest and hence the Government modified the refund mechanism allowing refund only to the extent of duty payable on actual value addition made by the manufacturers undertaking manufacturing activities in these areas.

 

  • The GHC failed to appreciate that amendment notification was issued by the Government in public interest and in the interest of revenue.

 

  • Doctrine of promissory estopple cannot be invoked against exercise of powers under the statute/

 

  • The bar of promissory estopple is not applicable in fiscal matters.

 

On the other hand, the industrial unit owners supported the judgement passed by the GHC and contended that the amendment notification dated 23.03.2008 was violative of doctrine of promissory estoppel. The industrial unit owners made following submissions:

 

  • The amendment notification had the effect of reneging upon the promise made by the Government to grant incentive by way of refund of duty paid in cash for a period of 5 years starting from the date of commercial production.

 

  • High Court correctly applied the doctrine of promissory estoppel. The incentive under the original notification was not dependent upon the extent of value addition, which concept was introduced only by way of amendment notification.

 

  • The exemption was granted by way of refund of duty paid in cash or from Personal Ledger Account (“PLA”). It was contended that payment from PLA is not necessarily duty on value addition.

 

  • Amendment notifications dated 27.03.2008, 10.06.2008 and 03.10.2008 demonstrate that Government only jettisoned the concept of value addition fixed arbitrarily at 75%, without option of special rate, irrespective of the supposed valuation. There are cases where the input used for final product are subject to Nil input stage duty.

 

  • Mere misuse of exemption notification by some manufacturers cannot justify the withdrawal of incentive since there is an adequate mechanism with the department concerned to curb, deduct, as well as punish the offenders for any such misuse. The notification dated 31.07.2001 itself provided for recovery of refunds along with interest if such refund were wrongly claimed/granted.

 

After examining the matter, the Hon’ble Supreme Court of India set aside the order passed by the GHC and upheld the amendment notifications dated27.03.2008 and 10.06.2008. SC considered its earlier decisions on retrospectivity/ clarificatory/ applicability of promissory estoppel in the fiscal statute. The Hon’ble Court held that doctrine of promissory estoppel must yield when the equity so demands if it can be shown having regard to the facts and circumstances of the case that it would be inequitable to hold the Government or the public authority to its promise, assurance or representation. The Hon’ble Court further held that determination of applicability of doctrine of promissory estoppel against public authority/Government hinges upon balance of equity or public interest. In case there is a supervening public interest, the Government would be allowed to change its stand. The Court held that the amendment notification were only clarificatory in nature and are “to explain” the earlier notification, which did not take away any vested right conferred by the original notification and such a clarificatory amendment will have retrospective effect. The Apex Court was persuaded with the findings of the analysis carried out by the Excise Department showing some of the manufacturers indulging in various tax evasion tactics, to be a sufficient justification for the Government to issue the amendment notifications. Finding that the object of amendment notifications being prevention of tax evasion, SC held that the amendment notifications were issued in public interest and in the interest of Revenue and hence could not be said to be bad in law, arbitrary and/or hit by the doctrine of promissory estopple. SC, however, clarified that refund granted/paid prior to amendment notification shall not be reopened.

 

CONCLUSION

This judgement summarises the law with respect to application of doctrine of promissory estopple. It holds that the bar of promissory estopple would not apply if in the facts of the given case it is inequitable or is against the public interest. It further held that bar of promissory estopple would not apply against the Government so long as its impugned action rest on exercise of statutory powers. Undeniably, the enunciation of the SC in the present case is based on settled principle, however, question remains that can genuine and honest industrial units owners be made to suffer simply because a few entities had resorted to abuse of the exemption notification. The Apex Court did not deal with the contention of the industrial unit owners to the effect that in the original notification dated 31.07.2001 there was a mechanism in place to curb, detect and punish the defaulters/offenders and also for recover of refund wrongly claimed/allowed along with interest and in view of such provisions impugned amendments were not necessary.

 

 

 

[1] Union of India & Another versus M/s V.V.F Limited & Another  decided on 22.04.2020

Civil Appeal Nos. 2256-2263 OF 2020- In the article, only the facts pertaining to matters arising out of Kutch District are    considered. Supreme Court disposed of similar matters arising out of decision of Gujarat High Court, Sikkim High Court and Guwahati High Court.

[2] Central Excise Exemption Notification No. 39/2001-CE dated 31.07.2001.

[3] Notification No. 65/2003-CE dated 06.08.2003

[4] Notification No. 16/2008-CE dated 27.03.2008

[5] Notification No.33/2008 dated 10.06.2008

[6] Notification No. 51/2008 dated 03.10.2008

BANK OF BARODA VS. KOTAK MAHINDRA BANK LTD. – LIMITATION FOR EXECUTION OF FOREIGN DECREE

BANK OF BARODA VS. KOTAK MAHINDRA BANK LTD. – LIMITATION FOR EXECUTION OF FOREIGN DECREE

Vikas Goel  Vikas Goel & Yaman Kumar


06/06/2020

 

(Whether it raises more questions than it answers- An analysis.)

In a recent judgment[1] the Hon’ble Supreme Court delved into a significant question of limitation for filing an application for execution of a foreign decree of a reciprocating country in India.

 

Apposite facts of the case:

 

Vysya Bank, the predecessor of the respondent Kotak Mahindra Bank Ltd.(“respondent”/”KMBL”), issued a letter of credit for US $1,794,258 on behalf of its customer M/s. Aditya Steel Industries Limited in favour of M/s. Granada Worldwide Investment Company, London. The appellant Bank of Baroda (“appellant” / “BOB”) was the confirming bank to the said letter of credit. The Visa Bank issued instructions to the London branch of the appellant on 12.10.1992 to honour the letter of credit. Acting on this instruction the London branch of the appellant discounted the letter of credit for a sum of US $ 1,742,376.41 and payment of this amount was made to M/s Granada Worldwide Investment Company on 13.10.1992.

 

The appellant filed a suit against the Visa Bank for recovery of its dues on 19.04.1993 in London. This suit was decreed by the High Court of Justice, Queens Bench, Divisional Commercial Court of London on 20.02.1995 and a decree for US $1,267,909.26 along with interest thereon was passed in favour of the appellant bank and against Visa Bank. The decree was not challenged and became final.

 

On 05.08.2009, the appellant bank filed an execution petition in India, i.e. almost 14 years after the decree was passed by the London Court, for execution of the same in terms of Section 44A[2] read with Order 21 Rule 3 of the Code of Civil Procedure, 1908 ( “Code’) for recovery of Rs.16,43,88,187.86.

 

Fate of the execution petition before the courts below

 

On 20.07.2013 the Additional City Civil & Session Judge, Bangalore acceded to the main contention of the respondent regarding limitation and dismissed the execution petition as time barred holding that Article 136[3] of the Limitation Act, 1963 (“the Act”) applies and the execution petition should have been filed within 12 years of the decree being passed by the London Court. Aggrieved, the appellant bank approached the High Court, which vide judgment dated 13.11.2014 upheld the view of the trial court.

 

Rival submissions on behalf of the parties before Hon’ble Supreme Court of India (“SC”/“Apex Court”):

 

A. On behalf of the appellant, following points were urged before the SC:

  1. The Act does not prescribe any period of limitation for execution of a foreign decree passed in a reciprocating country.
  2. In such eventuality, the principles of delay and laches, as applicable to writ proceedings, may apply. Replying on a list of dates, it was submitted that the appellant was pursuing the matter and was trying its best to get the matter settled with Visa Bank and, therefore, there was no delay in filing the execution petition.
  3. Since no limitation is provided under the Act, the cause of action for filing an execution petition arises only when a petition is filed under Section 44A of the Code, which provides that a decree passed by a court in a reciprocating country should be treated as an Indian decree and, therefore, the limitation period of 12 years provided under Article 136 of the Act applies only from that date because that is the date when the cause of action for filing of execution petition arises when the foreign decree is treated to be an Indian decree.

 

B. Per contra, on behalf of the respondent following submissions were made:

  1. Law of limitation of England would apply in this case. The limitation period as per English Law is 6 years for execution of a decree, and hence the decree having been passed on 20.02.1995, no petition for execution of that decree could be filed after 20.02.2001.
  2. The alternative argument was that even if the Act were to apply, the limitation period for execution of a foreign decree would be determined as per Article 136 of the Act.
  3. Section 44A of the Code clearly provides that a decree passed in a reciprocating country should be treated as an Indian Decree and, therefore, the same must be enforced within 12 years from the date of passing of the decree as provided by Article 136 of the Act.

 

C. From the above, it can clearly be seen that not only both the courts below but even the parties were clearly of the view that if the Act was to apply, limitation for execution of foreign decree would be 12 years under Article 136. In such case, the only disagreement was with respect to the starting point of limitation, which as per the appellant was the day when the execution application was filed in India but as per the respondent, the starting point of limitation for execution of a foreign decree was the date when the foreign decree was passed. SC finally dismissed the appeal and held that the Application for execution was barred by limitation, albeit, for different reason.

 

Issues that arose for consideration before the Apex Court:

 

  1. Does Section 44A merely provide for the manner of execution of foreign decrees or does it also indicate the period of limitation for filing execution proceedings for the same?
  2. What is the period of limitation for executing a decree passed by a foreign court (from a reciprocating country) in India?
  3. From which date the period of limitation will run in relation to a foreign decree (passed in a reciprocating country) sought to be executed in India?

 

Findings of the Apex Court:

 

A. On issue no.1:

  1. At the outset, the SC emphasized the change in the legal position after Section 44A was inserted in the Code in the year 1937. Prior to Section 44A, a decree passed by any court in a foreign country could not be executed in India and only a suit could be filed on the basis of the judgment passed by a foreign court. Section 44A brought about a change in law in respect of reciprocating countries, which agreed to respect the judgments and decrees passed in each other’s courts.
  2. Expressing disagreement with the first contention of the appellant that no limitation is applicable, SC held that the present proceedings being execution proceedings are not at par with writ proceedings. The word ‘application’ used in Section 3 of the Act is wide enough to include an application filed for execution of a decree, including a foreign decree. Therefore, the principles of delay and laches, which may be applicable to writ proceedings, cannot be applied to civil proceedings and are not at all attracted in proceedings filed under the Code, which must be filed within the prescribed period of limitation.
  3. Turning down the second contention of the appellant the SC held that there is no concept of cause of action in so far as an execution petition is concerned. Cause of action is a concept relating to civil suits and not to execution petitions. In case of a decree, it becomes enforceable the day it is passed. Therefore, filing of an application under Section 44A will not create a fresh period for enforcing the decree. The clock of limitation cannot be kept in abeyance at the choice of the decree holder. SC disapproved the view taken by a Full Bench of the Madras High Court in the case of Sheik Ali vs. Sheik Mohamed[4] that limitation will start running on filing of an application under Section 44A.
  4. SC held that Section 44A is only an enabling provision, which enables the District Court to execute the decree as if the decree had been passed by an Indian Court and it does not deal with the period of limitation.

 

The Apex Court accordingly answered issue no.1 by holding that Section 44A only enables the District Court to execute a foreign decree and further provides that the District Court shall follow the same procedure as it follows while executing an Indian decree, but it does not lay down or indicate the period of limitation for filing such an execution petition.

 

B. On issue no. 2:

  1. Conscious of the effect of economic globalization leading to widespread international and cross-border transactions, SC delved upon a question that if the decree is to be executed in another jurisdiction, which law should apply? Whether the law of limitation as applicable in the cause country or forum country would apply? The expressions ‘cause country’ and ‘forum country’ would mean the country in which the decree was passed (i.e. England in this case) and the country in which the decree is sought to be executed (i.e. India in this case), respectively.
  2. If Article 136 of the Act is to apply then the period of limitation for filing application seeking execution of any foreign decree would be 12 years regardless of the limitation which may be prevalent in the country where the decree was passed i.e. cause country, which is 6 years in terms of Section 24 of the Limitation Act, 1980 of the United Kingdom.
  3. In recent years, almost all the common law countries have either brought a new legislation or by judicial decisions have now taken the view that the law of limitation cannot be termed as a purely procedural law[5].
  4. The view worldwide appears to be that the limitation law of the cause country should be applied even in the forum country. As India becomes a global player in the international business arena, it cannot be one of the few countries where the law of limitation is considered entirely procedural. In cases where the remedy stands extinguished in the cause country it virtually extinguishes the right of the decree holder to execute the decree and creates a corresponding right in the judgment debtor to challenge the execution of a decree. These are substantive rights and cannot be termed to be procedural.

 

The Apex Court accordingly answered issue no.2 by holding that the limitation period for executing a decree passed by a foreign court (from reciprocating country) in India will be the limitation prescribed in the reciprocating foreign country i.e. the cause country. SC held that the Act is a substantive law and not procedural law.

 

C. On issue no. 3:

 

  1. As far as Article 136 of the Act is concerned, the same only deals with decrees passed by Indian courts.
  2. The Apex Court arrived at this conclusion on the basis of the reasoning that the Act has been framed mainly keeping in view the suits, appeals and applications to be filed in Indian courts and wherever the need was felt to deal with something outside India, the Act specifically deals with that situation like Article 39 of the Act (dealing with dishonoured foreign bills) and Article 101 of the Act (dealing with suit upon a judgement including foreign judgement).
  3. When dealing with the applications for execution of decrees, the law makers could have easily said ‘including foreign decrees’ in Article 136. This having not been said, it appears that the intention of the legislature was that Article 136 would be confined to decrees of Indian Courts. Furthermore, Article 136 clearly states that the decree or order should be of a civil court. A civil court, as defined in India, may not be the same as in a foreign jurisdiction. The new Limitation Act was enacted in 1963 and presumably the law makers were aware of the provisions of Section 44A of the Code. When they kept silent on this aspect, the only inference that can be drawn is that Article 136 only deals with decrees passed by Indian Civil Courts.
  4. Section 44A of the Code in its sub-section (1) and (2) sets out the twin requirements of filing a certified copy of the decree and a certificate from the court in the cause country stating the extent, if any, to which the decree has been satisfied or adjusted. It is essential to comply with both the above requirements and no foreign decree can be executed unless both the requirements are met and the certified copy as well as the certificate are filed. However, that does not mean that nothing else has to be filed. The executing court cannot execute the decree unless the decree holder also provides various details of the judgment debtor i.e. his address etc. in India and the details of the property of the judgment debtor. These particulars will have to be provided by a written application filed in terms of clause (2) of Rule 11 of Order XXI of the Code.
  5. Therefore, a party filing a petition for execution of a foreign decree must also necessarily file a written application in terms of Order XXI Rule 11 clause (2). Without such an application it will be impossible for the court to execute the decree. Therefore, this application for executing a foreign decree will be an application not covered under any other article of the Act except Article 137[6] and the applicable limitation would be 3 years.
  6. Coming back to the question as to from which date the limitation starts, the Apex Court answered this question by holding that period of limitation would commence from the date of passing of the decree in the cause country. This conclusion was arrived at after analysing following 2 situations, which the court could think of:

 

    • The first situation is where the decree holder does not take any steps in the cause country for execution of the decree during the period of limitation prescribed in that country. In such a situation, he loses his right to execute the decree even in the cause country and it would be a travesty of justice if the person having lost his right to execute the decree in the cause country is permitted to execute the decree in a forum country. This would be against the principle that the law of limitation is not merely a procedural law. This would mean that a person who has lost his/her right or remedy to execute the foreign decree in the court where the decree was passed could take benefit of the provisions of the Indian law for extending the period of limitation. The limitation period in India is 12 years for executing a money decree whereas in England it is 6 years. There may be countries where the limitation for executing such a decree may be more than 12 years. The right of the litigant in the latter situation would not come to an end at 12 years and it would abide by the law of limitation of the cause country which passed the decree. Hence, limitation would start running from the date of decree was passed in the cause country and the period of limitation prescribed in the cause country would apply and not the one prevailing in the forum country.

 

    • The second situation is when a decree holder takes steps-in-aid to execute the decree in the cause country. The proceedings in execution in the cause country may go on for some time, and the decree may be executed/satisfied partly but not fully. The judgment debtor may not have sufficient property or funds in the cause country to satisfy the decree etc. In such eventuality what would be done? In such circumstances, the right to apply under Section 44A will accrue only after the execution proceedings in the cause country are finalized and the application under Section 44A of the CPC can be filed in India within 3 years of the finalization of the execution proceedings in the cause country, as prescribed by Article 137 of the Act. The decree holder must approach the Indian court along with the certified copy of the decree and the requisite certificates within this period of three years. It is also clarified that applying in the cause country for a certified copy of the decree or the certificate of part-satisfaction, if any, of the decree, as required by Section 44A will not tantamount to step-in-aid to execute the decree in the cause country.

 

The Apex Court accordingly answered issue no.3 by holding that the period of limitation would start running from the date the decree was passed by the foreign court of in a reciprocating country i.e. the cause country. However, if the decree holder first takes steps-in-aid to execute the decree in the cause country, and the decree is not fully satisfied, then he can file a petition for execution in India for recovery of the balance amount within a period of three years from the finalization of the execution proceedings in the cause country.

 

Conclusion:

 

Going by the rationale, this judgment essentially sets out two scenarios as discussed above, for the operation of limitation qua application for execution of a foreign decree of a reciprocating country, in India. Though the law laid down by the SC in this judgement is succinctly clear, and is the law of the land going forward, following aspects need to be considered and pondered over:

 

I             Whether the judgment aims at filling up the gap in the statute i.e. The Limitation Act, 1963

 

  1. Law Commission of India in its 193rd report published in the year 2005 proposed amendment in the law of limitation by way of The Limitation (Amendment) Act, 2005 and recommended insertion of a specific provision i.e. Article 136A to provide limitation for execution of foreign decrees. However, no such amendment was brought on the statute book by the Indian Legislature.
  2. In the judgement in reference, the Apex court held that the limitation period for executing a decree passed in cause country/ foreign country, in India will be the limitation prescribed in the cause country. Infact, the SC appeared to have endeavoured to overcome the gap i.e. absence of a provision in the Act prescribing the period of limitation for execution of a foreign decree. Although, the conclusion drawn by the SC, based on the limitation law prescribed in the reciprocating country, is widely recognized across the globe, however, in our view, this void should have been filled up or its cure should have come by way of amendment in the legislation.

 

2. In the absence of a specific mention as to whether this judgment would apply retrospectively or prospectively, what would be its effect on the maintainability of such execution petitions, seeking execution of a foreign decree, which though have been filed beyond the limitation period applicable in the cause country but within 12 years in terms of Article 136 of the Act in the forum country/India and are pending as on the date of this judgment?

 

  1. The judgment pronounced by Apex Court acknowledges the fact that Indian courts had consistently taken the view that the law of limitation was a procedural law.
  2. The judgment dated 04.10.12 passed by Hon’ble Delhi High Court in the matter of NNR Global Logistics Shanghai Co. Ltd. Vs. Aargus Global Logistics Pvt. Ltd.[7] is one such precedent where the Delhi High Court, following the consistent view, held the Law of Limitation was a procedural law. In fact, this judgment also cites extract of 193rd report of Law Commission observing as follows “Law Commission of India in its 193rd report on ‘Transnational Litigation -Conflict of Laws – Law of Limitation’ discussed how in the context of expansion of international trade it has become necessary to take notice of the fundamental changes in the law of limitation in all common law countries. While recommending that India should adopt the practice in civil law countries, it was pointed out that as of now the law of limitation was considered in India as part of the procedural law and not the substantive law”.
  3. The Apex court also concluded that as far as Article 136 of the Act is concerned, the same only deals with decrees passed by Indian courts. Hence, one can argue that since the SC has interpreted the applicability of an existing provision in the Act, therefore, it should apply even to the pending execution petition.
  4. In light of the above, will a judgment debtor be entitled to raise an objection in a pending execution petition that since Article 136 is not applicable to a foreign decree, therefore, the execution petition if filed beyond the period of limitation prescribed in the cause country, though filed within 12 years, be dismissed as being time barred?
  5. In our view this judgment may create a paradoxical situation. In case an executing court dismisses an execution petition on the ground of non-applicability of Article 136 of the Act, a question would arises i.e. which other article of the Act would then be applicable to such execution petition. Would it be correct to state, in light of this judgment, that it would be Article 137 of the Act which would be applicable? In our view, the answer in most of cases would be in the negative in as much as Article 137 of the Act, as held by Hon’ble Supreme Court, would operate only in the situation when decree holder comes to India only after taking steps for enforcement in the cause country and the foreign decree remained partly unsatisfied.
  6. Again, if the judgment is understood to have a prospective effect for the reason that it changes the classification of a law by laying down that the law of limitation would be no more procedural, wouldn’t this imply that the judgment acknowledges the legal position existing prior to its pronouncement to be correct and therefore, the finding that Article 136 of the Act would apply only to the domestic decree would lose much of its effect for the pending applications seeking enforcement of foreign decree.

 

3. Whether the ratio laid down in this judgment will have a bearing on the issue of limitation for filing application seeking enforcement of a Foreign Award?

 

  1. This question becomes all the more germane in light of a recent judgment dated 19.02.2020 passed by Hon’ble Delhi High Court in the matter of Cairn India Ltd. & Ors. Vs. Government of India[8] whereby the Hon’ble court has held that “the provisions of Article 136 of the Limitation Act would apply to a petition for enforcement of a foreign award”.
  2. Although there may be a counter argument to the above question that both these judgments i.e. the judgment passed by Hon’ble Supreme Court and the judgment passed by Hon’ble Delhi High Court operates in two different domains i.e. while the judgment passed by Hon’ble Supreme Court revolves around Section 44A of Code dealing with execution of foreign decree, the judgment passed by Hon’ble Delhi High Court, on the other hand, focuses on enforcement of foreign award under Arbitration & Conciliation Act, 1996. However, going by the rationale given by SC in the above judgment, how far it would be feasible to segregate the two spheres in so far as the applicability/non-applicability of Article 136 of the Act is concerned, is yet to be seen.

 

 

[1] Dated 17.03.2020 Civil Appeal No. 2175 of 2020

 

[2] Section 44A of the Code – Execution of decrees passed by the Courts in in the reciprocating territory.— (1) Where  a certified copy of a decree of any of the superior Courts of any reciprocating territory has been filed in a District Court, the decree may be executed in India as if it had been passed by  the District Court.

 

(2) Together with the certified  copy of the decree shall be filed a certificate  from such superior Court  stating the extent, if any, to which the decree has been satisfied or adjusted and such certificate shall, for the purposes of proceedings under this section, be conclusive proof of the extent of such satisfaction or adjustment.

 

(3)  The provisions of section 47 shall as from the filing of the certified copy of the decree apply to the proceedings of a District Court executing a decree under this section, and the District Court shall refuse execution of any such decree, if it is shown to the satisfaction of the Court that the decree falls within any of the exceptions specified in clauses (a) to (f) of section 13.

 

Explanation 1— “Reciprocating territory” means any country or territory outside India which the Central Government may, by  notification in the Official Gazette, declare to be a reciprocating territory for the purposes of this section; and “superior Courts”, with reference to any such territory, means such Courts as may be specified in the said notification.

 

Explanation 2.— “Decree” with reference to a superior Court means any decree or judgment of such Court under which a sum of money  is payable, not being a sum payable in respect of taxes or other charges of a like nature or in respect to a fine or other penalty, but shall in no case include an arbitration award, even if such an award is enforceable as a decree or judgment.

 

[3] Article 136 of the Act-

Description of suit Period of limitation Time from which period begins to run
136. For the execution of any decree (other than a decree granting a mandatory injunction) an order of any civil court. Twelve years When] the decree or order ecomes enforceable or where the decree or any subsequent order directs any payment of money or the delivery of any property to be made at a certain date or at recurring periods, when default in making the payment or delivery in respect of which execution is sought, takes place: Provided that an application for the enforcement or execution of a decree granting a perpetual injunction shall not be subject to any period of limitation.

 

 

[4] AIR 1967 Mad 45

[5] SC analysed the transition in the legal position as regards the classification of statute of limitation i.e. whether procedural or substantive. Referring to Dicey’s observation in ‘Conflict of Laws’ 6th Edition the court observed that the earlier view was that the law of limitation being a procedural law, the law of the forum country would govern the field. Indian courts have normally taken the view that the law of limitation is a procedural law. However, there is a change in view. The present view is entirely different and appears to be that law of limitation is not a procedural law especially when it leads to extinguishment of rights or remedies. This view is reflected in Dicey’s ‘Conflict of Laws’ 14th Edition as well as in Cheshire & North’s Private International Law 15th Edition.

[6] Article 137of the Act –

Description of suit Period of Limitation Time from which period begins to run
137. Any other application for which no period of limitation is provided elsewhere in this division. Three years When the right to apply accrues.

 

[7] MANU/DE/4897/2012; O.M.P. 61 of 2012 and O.M.P. 201 of 2001

[8] O.M.P. (EFA) (Comm.) 15/2016