Monday, 24 September 2012

CONSUMER PROTECTION - An Indian Perspective


THE CONSUMER PROTECTION ACT 1986
Indian law makers took 39 years to bring any legislation to protect the consumer.

WHO IS A CONSUMER?
  1. Any person who buys goods & services for a consideration.
  2. Any person who uses goods & services (other than the buyer himself) with the approval of the buyer. (Vide amendment in 1992)


With the approval of buyer?
It denotes that the user of the goods should be a rightful user.
The law construes users of the goods as consumers although they may not be buyers.

But a consumer does not include any person who buys goods for resale or for any commercial purpose

Prior to amendment
Western India State Motors vs Sobhag Mal Meena (1989) – Defective taxi case – meaning of consumer where goods purchased for resale or commercial purpose.

Synco Textiles Pvt Ltd. vs Greaves Cotton (1991) – Defective generator case – company not in the business of generation & sale of power – generators meant for production purpose  & not for commercial purpose – National commission revised the way it had interpreted commercial purpose – Act did not define commercial purpose – National commission took the dictionery meaning – commercial connoted ‘large scale’.


Amendment in 1992
Commercial purpose does not include use by the consumer of goods bought and used by him exclusively for the purpose of earning his livelihood by means of self employment 

Laxmi Engineering Works vs P S G Industrial Institute (1995) – Mr. Joshi’s small scale industry – machine purchased defective – meaning of livelihood interpreted by the Supreme Court – the meaning of the words ‘for the purpose of earning his livelihood’ is explained and clarified by ‘used by him’ and ‘self employment’.

Commercial Purpose
Important: But it is clear from a series of judgments that even the person who purchases goods for commercial purpose is also a consumer if the defects in the goods purchased are found during the warranty period.

Can a Company be treated as a person?
Karnataka Power Transmission vs Ashok Iron Works Pvt. Ltd (February, 2009) 
– Can company be treated as a person? Is electricity goods or service?

  • Under CPA, the definition of person "includes” a firm, a H.U.F, a Co-operative society and an association of persons. The word “include” means the list is illustrative and not exhaustive. The intent of the legislature has to be considered. Under the General Clauses Act, a company is also a person. The definition has to be interpreted widely. Accordingly, a company can also be a consumer entitled to file a complaint under the CPA.
  • Electricity may be goods for the purpose of Sales Tax but under the CPA it is defined to be a service.

Goods
Goods has the same meaning as assigned to it in the Sale of Goods Act 
(meant to be movable property).

Service
"Service" means service of any description which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, board or loading or both [housing construction] entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service".
A person is a consumer of services if he has hired or availed of the service….

Privity of Contract
Preist & Wife v Last (1903) - P asked L for a hot water bottle – Having being shown one by L he asked L if it would stand boiling water – L replied no, but it would stand hot water – P then bought for his wife – Fifth night of use bottle bursts & injures Mrs. P – turned out that the bottle burst because pure rubber formed a very small proportion of the material – P claims price & damages for wife’s pain & suffering from L – Issues – (a) Privity of contract: Mrs. P has no right? (b) Rights of a buyer who relies on the skill & judgment of the seller (as discussed in the Sale of Goods Act)
If this case was to have taken place in India? Discussion would be based on pre & post consumer protection era….

Remember: Indian courts are reluctant in invoking the law of torts. Also, damages awarded under this law are minimal. Thus, it makes a big difference whether the case goes to a consumer court or not!

WHO CAN FILE A COMPLAINT…
  • A Consumer, or
  • Any voluntary consumer association registered under the Companies Act, 1956 or under any other law for the time being in force, or
  • The Central Govt. or any State Government,
  • One or more consumers, where there are numerous consumers having the same interest.

 A Complaint on behalf of the public which consists of unidentifiable consumers cannot be filed under the Act.

The following can also file a complaint:

  • Beneficiary of the goods/services.
  • Legal representative of a deceased consumer.
  • Legal Heirs of the deceased consumer.
  • Husband of the consumer.
  • A relative of a consumer.
  • Insurance company.


CONSIDERATION
Consideration is regarded necessary for hiring or availing of services. The payment need not necessarily be immediate. It can be in installments.

 (For the services provided without charging anything in return, the person availing the services is not a consumer under the act).

Consideration may be:
  • Paid,
  • Promised,
  • Partly paid,
  • Partly promised,
  • Any system of deferred payment.


Contention: That a person who has been given free treatment by a government hospital, would not be a consumer. Argued that there was a consideration involved in this relationship. After all, it is people who pay taxes, which run the government establishments?

Supreme Court on taxes:
  • Taxes are imposed under statutory power without the taxpayer’s consent and the payment is enforced by law.
  • Tax is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of tax.
  • Tax is part of the common burden, the quantum of imposition upon the tax payer depends generally upon his capacity to pay.


Supreme Court noted that there are three categories of hospitals:
  • Where services are rendered free of charge to everybody availing the said services;
  • Where charges are required to be paid by everybody availing the service; and
  • Where charges are required to be paid by persons availing services but certain categories of persons who cannot afford to pay are rendered service free of charge.

Intention of the act:
  • ‘to provide for the protection of
  • ‘achieving or maintaining adequate protection for their population as consumers’
  • ‘encouraging high levels of ethical conduct for those engaged in the protection for their population of consumers’ 

Where charges are required to be paid by persons availing services but certain categories of persons who cannot afford to pay are rendered service free of charge.

Supreme court ruling: ‘Persons who are rendered free service under this category are beneficiaries of the service which is hired or availed of by the paying class.’

Who are not consumers?
  • A person who purchased goods for resale.
  • A person who purchased goods for commercial purpose.
  • A person who obtains services without consideration.
  • Tax-payers to municipality.
  • Applicants for jobs.
  • Persons who filed suits in courts.


Structure of Consumer Forums / Commissions and Their Jurisdictions

SUPREME COURT
(Final Appeal)

NATIONAL COMMISSION
Appellate Authority over State Commission Revisional Jurisdiction
Original Jurisdiction Over Rs.20,00,000

STATE COMMISSION
Appellate Authority for District Forum
Suo Moto Revision
Original Jurisdiction over Rs. 5,00,000 up to Rs. 20,00,000

DISTRICT FORUM
Original Jurisdiction up to Rs. 5,00,000

DEFECTS IN GOODS
Defect means any fault, imperfection or shortcoming in the quality, quantity, potency, purity or standard which is required to be maintained by or under any law in relation to any goods.

DEFICIENCY IN SERVICE
It means any fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of performance which is required to be maintained by or under any law, undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service.

COMPLAINT…
It is a statement made in writing to the National Commission, the State Commission or the District Forum by a person competent to file it, containing the allegations in detail, and with a view to obtaining relief provided under the Act.

NOTE
  • A consumer dispute can be filed within two years from the date on which the cause of action arises.
  •  There is no court fees to be paid to file a complaint in a Consumer Forum/ Commission.
  •  Further, a complainant/opposite party can present his case on his own without the help of a lawyer or employ any person other than a lawyer.


Finding of the District Forum
If, after the proceeding conducted under, the District Forum is satisfied that the goods complained against suffer from any of the defects specified in the complaint or that any of the allegations contained in the complaint about the services are proved, it shall issue an order to the opposite party directing him to do one or more of the following things, namely:--
(a) to remove the defect pointed out by the appropriate laboratory from the goods in question;
(b) to replace the goods with new goods of similar description which shall be free from any defect;
(c) to return to the complainant the price, or, as the case may be, the charges paid by the complainant;
(d) to pay such amount as may be awarded by it as compensation to the consumer for any loss or injury suffered by the consumer due to the negligence of the opposite party.
(e) to remove the defects or deficiencies in the services in question;
(f) to discontinue the unfair trade practice or the restrictive trade practice or not to repeat them;
(g) not to offer the hazardous goods for sale;
(h) to withdraw the hazardous goods from being offered for sale;
(i) to provide for adequate costs to parties.

Overlap with other Laws
The provisions of the Consumer Protection Act shall be in addition and not in derogation of the provisions of any law for the time being in force.

Section 6 of the Indian Post Office Act, 1898:
‘The government shall not incur any liability by reason of the loss, misdelivery or delay of, or damage to, any postal article in course of transmission by post, except in so far as such liability may in express terms be undertaken by the Central Government as hereinafter provided; and no officer of the Post Office shall incur any liability by reason of any such loss, misdelivery, delay or damage, unless he has caused the same fraudulently or by his wilful act or default.
When Speed post was introduced the Post Rules 1933 were amended: ‘in the event of loss of a Speed Post article or loss of contents or damage to the contents, compensation shall be double of Speed Post charges paid or Rs.1,000/- whichever is less’

Mrs. Helen Wallia v Cathay Pacific Airways Limited (2002)
Loss of baggage-airlines offers $20 for 32 kilos lost-passenger claims Rs.24,63,885 + Interest @18%
The Carriage by Air Act 1972: In the carriage of registered baggage and of cargo, the liability of the carrier is limited to $20 francs per kilogram, unless the passengers or consignor has made, at the time when the package was handed over to the carrier, a special declaration of interest in delivery at destination and has paid a supplementary sum if the case so requires.
The limits of liability specified in rule 22 shall not apply if it is proved that the damage resulted from an act or omission of the carrier, his servants or agents, done with intent to cause damage or recklessly and with knowledge that damage would probably result; provided that in the case of such act or omission of a servant or agent, it is also proved that he was acting within the scope of his employment.

UNFAIR TRADE PRACTICE
The provisions on Unfair Trade Practices were introduced in 1984, by amending the Monopolies and Restrictive Trade Practices Act.
Unfair trade practice means a trade practice which, for the purpose of promoting the sale, use or supply of any goods or for the provision of any service, adopts any unfair method or unfair or deceptive practice…..

SOME UNFAIR TRADE PRACTICES BY A TRADER
False statement, oral or written or by visible representation:
Re. quality & grade
Re. need of the goods
Re. Warranties & guarantees
Re. Price
Disparaging another person’s goods or services.*
Re. Characteristics, uses & benefits which are non existing.
Advertisement for sale at a bargain price without intending to do so.
Offer gifts or prizes without intending to do so.
Create an impression that something is offered free when it is covered by the amount charged in the transaction as a whole.*
Conduct of any contest, lottery, game of chance or skill, for the purpose of promoting, directly or indirectly, the sale, use or supply of any product or any business interest.*
Permits sale of goods not conforming to standards set by authority.
Permits hoarding of goods.

Holding of Contests & Schemes
HMM Limited vs DG(IR) MRTP Commission (1998) – Lucky purchaser of a bottle of Horlicks could find a coupon inside the bottle – coupon indicated prize – MRTP Commission held that this was an unfair trade practice as the system of getting the coupon  was nothing but a lottery – only a fraction of buyers could get the benefit – prizes many times costlier than the price of a bottle of Horlicks.
Supreme Court held that this was not a case of a lottery as there was no: ‘… draw of lots or that a price was charged for participation in the draw. The fact that some bottles of Horlicks contained a slip of paper which entitled the buyer to a prize is not a lottery in the ordinary sense of the word’

Godrej GE Appliances Ltd vs Whirlpool of India Limited (1992)– Scratch a gift scheme
Commission observed: ‘In this case also, there is no draw of lots, nor any price charged for participation in the scheme. Each participant got the value for his or her money and in addition, stood a chance for winning a prize.’
While some purchasers of Horlicks in the ‘Hidden Wealth Prize Offer’ did not get any prize, in the ‘Scratch a Gift Scheme’, every purchaser under the scheme would get gifts though of varied values.
The Whirlpool case was on an even sounder foundation than the Horlicks case
  
Create an impression that something is offered free when it is covered by the amount charged in the transaction as a whole.*

*Society of Catalysts V
Star Plus
Bharti Airtel Ltd

(The ‘Har-Seat-Hot-Seat’ contest on the 3rd Avatar of KBC, wherein Airtel received 58 million sms at Rs.2.40 per sms, amounting to Rs.13.92 crs, prizes given out amounted to Rs. 2 lakhs per episode i.e. Rs. 1.04 crs)
Fined Rs. 1 cr, being 14% of profits made over and above normal profit of Rs. 4.76 crs

Disparaging another person’s goods or services.*
  • Disparagement is not defined in the Act. Its dictionary meaning: ‘to dishonour by comparison with what is inferior, bring discredit or reproach upon; dishonour; lower in esteem; speak on or treat slightingly or vilify; undervalue; and depreciate’
  • Disparagement would occur only by comparison with some identifiable product.
  • A mere claim to superiority in the quality of one’s product by itself does not amount to disparaging products of……
  • Whether the representation complained of misleading the buyer….
  • Does a reasonable man, on reading the representation, form a belief different from what is the truth is?
  • It should be noted that ‘disparagement’ is not the only ground for an advertisement to be an unfair trade practice. The same advertisement could still be contested as an unfair trade practice on the grounds of misrepresenting quality.
  • Disparagement could be by way of comparison through words, gestures, gimmicks, pointing out directly to the inferiority of a product.
  • An advertisement could disparage other products, and yet, it would not be a case of disparagement so long as the disparaged product is not identifiable.
  •  Comparative advertisement & disparaging others’ goods is allowed as long as it is based on objective facts.


RESTRICTIVE TRADE PRACTICE
Any trade practice which requires a consumer to buy, hire or avail of any goods or, as the case may be, services as a condition precedent for buying, hiring or availing of other goods and services.

PRINCIPAL  & AGENT RELATIONSHIP
Indian Airlines V S. N Seth (1997)
Travel Agent - travel by air - confirmed tickets issued by authorised travel agent of Indian Airlines - no flight on the date indicated in the air ticket - liability of Indian airlines as principal- held liable.
State Commission awarded him compensation of Rs.10,000/-, Rs.1,210/- being price of the air ticket with interest @ 18% per annum being the refund of the price of the ticket and Rs.500/- as costs, National Commission added Rs.2,000 as cost. (Indian airlines had offered a letter of apology and 2 complementary tickets, which was refused by Seth. Seth had claimed Rs. 5 lacs in damages.)

DELAY IN DELIVERY OF POSSESSION OF APARTMENT
Kunj Behari Mehta V Ansal Properties & Industries Ltd (2000)
Can a builder after agreeing to deliver the possession within a stipulated time, raise a contention that as the price of the flat/property has gone up, it should not be directed to pay any compensation or to pay compensation at reduced rate for delay in delivering the possession of the property?
‘In the view of the commission, such contention of any builder is unjustified and unreasonable because after sale of the property all the benefits accrue to the purchaser and not to the vendor. In any case, if such contention is accepted, the builders/contractors would earn crores of rupees by delaying the delivery of the possession of the flat/property for months together for one reason or the other.’

Dyspepsia – imperfect or painful digestion - is a disease?
LIC V Smt. Chandra Kanta Lohande (2003)
The issue to be decided in this case is whether dyspepsia – imperfect or painful digestion - is a disease, which has to be mentioned in the proposal form of the LIC? Simple answer to the question is ‘NO’ as dyspepsia is not a disease in itself.

Further, in this matter, the main ground of repudiation is that the assured did not disclose the aforesaid disease he was suffering from. In support, it was stated that assured had taken medical leave. Western Coal Fields is a government owned public sector undertaking. In government departments and undertakings employees have the habit of exhausting all types of leave like casual leave, medical leave and earned leave. The first casualty is casual leave, which is exhausted first, then medical leave, which cannot be accumulated beyond a particular limit nor it can be encashed. Hence, they are liberally taken. But that should not be used as a ground for arriving at a conclusion that assured was suffering from some serious ailment, which required notice.

VALET PARKING
Hotel Hyaat Regency V Atul Virmani (2004)
The issue involved in this case is if the keys of the car given by the customer of a Five Star Hotel for parking to the uniformed valet of the hotel is stolen whether the Five Star Hotel is responsible for making good the loss to the consumer.
Car insured against third party claim but not for theft.
Rs. 900 charged for entry to discotheque.
Notice of disclaimer printed on docket in small letters.
“Beware giving car keys to the valet of this hotel does not ensure safety of your car, Management is not responsible for theft of the car”, board suggested by the Judge!



Monday, 10 September 2012

SALE OF GOODS


The sale of goods (governed by the Sale of Goods Act 1930) is the most common of all commercial contracts. 

Contract of Sale

Essentials of a Contract of Sale:
  • It is a contract.
  • Between two parties.
  • To transfer or agree to transfer.
  • The property in goods.
  • For a price, that is, money consideration.


Goods
GOODS form the subject of a contract of sale. They mean every kind of movable property other than actionable claims & money, and include stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.

Sale & Quality of Goods
In a sale of description, the buyer must get the described goods if he has not seen the goods and relies on the description alone.
Where there is a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description…….
Varley v Whipp (1900)(The case of the second hand reaping machine.)

In a sale of description, where the buyer has seen or examined the goods, the description would be modified to the extent of the apparent deviations, but not by latent and hidden defects.
Beale v Taylor (1967)(The case of the car that had been put together out of two cars)

Buyer Beware (Caveat Emptor)
There is no protection for the buyer in relation to the quality of goods except in the following situations:
  • Goods sold must be of merchantable quality. However, if the buyer has examined the goods, defects which such examination ought to have revealed would be exempted from the requirement of merchantable quality.
  • If the buyer relied on the skill and judgment of the seller, the good should be fit for the purpose described by the buyer.

Baldry v Marshall (1925) (The Bugatti car case)
Grant v Australian Knitting Mills Ltd. (1935) (Case of sulphites left behind in the woollen underwear garments causing severe case of dermatitis – case attracted both the clauses, relying on the skill & judgment of sellers & the goods not being of merchantable quality.)

Conditions & Warranties
Oscar Chess Ltd v Williams [1957]
(Mrs Williams purchased a second hand Morris car on the basis that it was a 1948 model. The registration document stated it was first registered in 1948. The following year her son used the car as a trade in for a brand new Hillman Minx which he was purchasing from Oscar Chess. The son stated the car was a 1948 model and on that basis the Oscar Chess offered £290 off the purchase price of the Hillman. Without this discount Williams would not have been able to go through with the purchase. 8 months later Oscar Chess ltd found out that the car was in fact a 1939 model and worth much less than thought. They brought an action for breach of contract arguing that the date of the vehicle was a fundamental term of the contract thus giving grounds to repudiate the contract and claim damages.)

Warranty in its ordinary English meaning denotes a binding promise.

Everyone knows what a man means when he says, ‘I guarantee it’, or ‘I warrant it’, or ‘I give you my word for it.’ He means the he binds himself.

Lawyers use it to denote a subsidiary term in a contract as distinct from a vital term which they call a ‘condition’.

Therefore, if used in this technical sphere, condition is a vital term and warranty is a subsidiary term.

Breach of Condition
It is the essential part or vital term of a contract whose breach creates the option for the buyer to terminate the contract.

Breach of Warranty
It is the subsidiary part of the contract. Its breach can only lead to a claim for damages but not to a repudiation of the contract.

Implied Conditions
  • Condition as to title
  • Condition in a sale by description the buyer must get the described goods.
  • Condition in a sale by sample, the bulk must correspond with the sample.
  • Conditions as to fitness & quality (in the following cases only; in other cases caveat emptor applies)
  1. Buyer makes known to the seller the particular purpose for which he requires the goods.
  2. Buyer relies on the skill & judgment of the seller (The seller’s business is to supply such goods whether he is the manufacturer or producer or not)

  • Condition as to merchantability (exception to the rule of caveat emptor)
  • Where goods are bought by description from a seller who deals in goods of that description (whether he is manufacturer or producer or not), there is an implied condition that the goods shall be of merchantable quality.

Merchantability means essentially that the goods must be fit for the ordinary purpose for which such goods are used.
  • Condition as to merchantability when applied to food products, the condition of fitness of merchantability requires that the goods should be wholesome, i.e. fit for the purpose of consumption.


Implied Conditions
  • Warranty as to quiet possession.
  • Warranty as to non-existence of encumbrances.
  • Warranty as to disclosure of dangerous nature of the goods to the innocent buyer.


Change of condition to warranty…..
Option of the buyer…..

When a condition is reduced to the status of a warranty, the effect is not the condition becomes a warranty, but that the condition remains a condition, it is only the remedy which changes.

Circumstances
Circumstances are such that goods cannot be returned ….
  • When the buyer has accepted the goods & intimates to the seller.
  • When goods have been delivered to the buyer & he does any act in relation to them which is inconsistent with the ownership of the seller.
  • In a sale or return, after the lapse of reasonable time, the buyer retains them for unreasonably long time without intimating, the seller that he has rejected them.


Sale & Transfer of Ownership
  • Goods must be ascertained and specific for the transfer of ownership to take place.
  • In the case of specific and ascertained goods, we should explore whether the contract provides in express or implied terms, on the passing of ownership. These terms should be applied.
  • In the case of specific and ascertained goods, if the contract does not provide in either express or implied terms on the passing of ownership, the ownership is transferred to the buyer when the contract is made.


Nemo Dat Quod Non Habet
No one can transfer a better title than he himself has.
Rowland v Divall (1923) (Sale of a stolen car – D bought a car – sold it to a motor dealer R – painted and sold by R – police took possession from the buyer as car was found to be stolen – R refunds price to buyer & sues D to recover price paid to D.)

Sale by Auction & transfer of Ownership
Unless the parties provide otherwise, a contract of sale in an auction is concluded on the fall of hammer.
Dennat v Skinner (1948) (Sale of cars by auction – D knocks down 4 cars to King – King does not pay, but offers cheque – D accepts based on a condition that ownership will not pass until cheques are encashed – King sells car to S – Cheque dishonoured – King arrested – pleads guilty & jailed – D now claims from S contending that the property had never passed to King.
To exercise right to retain possession & ‘seller’s lien’ possession of  goods, as agent or bailee for the buyer, is required.)

Goods not in a deliverable state
Ownership will pass only when the seller puts them in a deliverable state and informs the buyer about it.
Underwood Ltd V Burgh Castle Brick & Cement Syndicate (1922) ( U Ltd, owners of a condensing engine agreed to sell it free on rail in London to B - weighed thirty tons and was bolted to and embedded in concrete- before it could be delivered on rail, it had to be detached and dismantled - in loading the engine on a railway truck, the sellers accidentally damaged it, and the buyers refused to accept it . Seller claims goods have been sold.)
Buyers intention was to buy an article which would be a loose chattel (good) when the process of dismantling it were completed, and to convert it into a loose chattel (good), these processes had first to be performed.’

Sale or return transactions
The property passes when the person to whom goods have been given on ‘sale or return’  signifies his approval or acceptance to the seller or does any other act adopting the transaction.
Kirkham v Attenborough & Gill (1895-99) - K sends jewellery to Winter on Sale or return basis – Winter pawns jewellery to A & G  and dies – K wasn’t paid for it – K demands return of the same from A & G – A&G refuse to return unless money borrowed is paid back.

Unascertained Goods
No property in the goods is transferred to the buyer unless and until the goods are ascertained. This does not, however, mean that property would automatically pass once it is ascertained. It would depend on the intention of the parties as to when they want the property to pass.
Pignataro v Gilroy (1919) (G sold to P 140 bags of rice - Sale by sample – G would deliver 125 bags to P at a warehouse – 15 bags were to be collected by P from G’s place of business – G sends reciept for cheque received & delivery order for 125 bags – letter stating that 15 bags were ready for delivery – P neglected to collect bags – G sends two more letters – bags subsequently stolen – G took all care and was not negligent – Had ownership of 15 bags transferred?)

Unascertained Goods
‘Where on a sale of unascertained goods by description goods of that description and in a deliverable state are unconditionally appropriated to the contract by the seller, and the seller sends notice of that appropriation to the buyer, in the event of the buyer neglecting to reply to that notice promptly it must be inferred that he assents to the appropriation, and on the expiry of a reasonable time after receipt of the notice the property must be deemed to have passed.’
Wardar’s (Import & Export) Co Ltd v. W Norwood & Sons Ltd (1968)
Sellers had 1,500 cartons frozen kidneys of which they had sold 600. On morning of 14/10/1964, seller’s agent gave buyer’s carrier delivery note authorising him to collect 600 cartons. Carrier went to the cold store at 8am and found 600 cartons on the pavement. The cartons loaded onto lorry. Loading completed at noon. After morning tea break at 10am carrier noticed the cartons dripping. He switched on lorry refrigeration which became effective at about 3pm. When signing for the cartons at noon, carrier added a note “in soft condition”. When the cartons arrived in Glasgow next day, kidneys were unfit for human consumption. Buyers sued sellers for damages for breach of implied conditions -fitness for purpose and merchantable quality- and sellers sued buyers for the price. It was held that this was a sale of unascertained goods. Therefore property could not pass until goods were ascertained. This had taken place when the 600 cartons were taken out of cold store and placed on the pavement some time before 8am on 14/10.  Property in the goods and therefore the risk passed to the buyers either when the goods were placed on the pavement, or at the latest when the buyers agent called at 8am, presented his delivery docket and began loading. In either view, damage occurred subsequently and the buyers therefore bore the loss and had to pay the price.

Unpaid Seller
  • When the whole of the price has not been paid or tendered.
  • When a negotiable instrument or a bill of exchange has been received as conditional payment and the condition in which it was received has not been fulfilled by reason of the dishonour of the instrument or otherwise.
  • The seller remains as unpaid seller as long as any portion of the price, however small, remain unpaid. Where the whole of price has been tendered, and the seller refused to accept such a tender, seller ceases to be an unpaid seller. In such a case the seller loses all high right against the goods.


Rights of Unpaid Seller
The sale of Goods Act has expressly given two kinds of right to an unpaid seller of goods, namely :
Against the goods
  • When property in the goods has passed
  • Right of lien
  • Right of stoppage of goods in transit
  • Right of re-sale
  • When property in the goods has not passed
  • Right of withholding delivery.

Against the buyer personally
  • Right to use for price
  • Right to sue for damages
  • Right to sue for interest.

The unpaid seller’s right can be exercised by an agent of the seller to whom the bill of leading has been endorsed, or a consignor or an agent who has himself paid, or is directly responsible for the price.

Sunday, 9 September 2012

LAW RELATING TO CONTRACTS – PRACTICAL ISSUES


Soliciting tender is an invitation to offer.
Notice Inviting Tender (NIT) and the tender documents provide the manner in which the tender has to be submitted. The tender documents have to be completed in the specified manner. The tender also may have to be accompanied my Earnest Money Deposit (EMD).

The important question is whether the party inviting tender can reject a tender, if it does not meet the requirements?

M/s.BISMI ABDULLAH AND SONS V. THE REGIONAL MANAGER, FCI, TRIVANDRUM (1986)
(Case of non payment of security deposit – Clause in tender document ‘tenders not accompanied by the required amount of security deposit liable to be rejected’ – B’s tender accepted by FCI without security deposit - B does did not want to go ahead with the contract & contests that a valid contract was not formed – Held it was upto FCI to reject the tender, since they hadn’t a valid contract had come to be formed.)

Auctions
An auction is concluded with the auctioneer striking the hammer, bonding the last bidder & the auctioneer. Thus the striking of the hammer is an implied acceptance of the offer put up by the last bidder.

VERGHESE V DIVISIONAL FOREST OFFICER, TRICHUR (2003)
(Case of failure to remit balance bid amount  & failure to execute an agreement within 15 days from the date of intimation of confirmation orders – Verghese fails to remit as per bid conditions  despite extension of period – fails to execute agreement – but plucks the usufruct – DFO re-auctions – Verghese contests the right to re-auction – Argues that there is no concluded contract  as bid amount is not deposited & agreement is not executed– held, mere fact that plaintiff was reluctant to execute the agreement would not mean that there was no concluded contract, moreover, Verghese was the one who committed the breach.)

Contracts entered into with the Government of India
Article 299 of the Constitution of India imposes restrictions on how government contracts would be made. Article 299 of the constitution requires that contracts of the Govt. must be executed in the name of the President or Governor as the case may be.

It follows that if the contract between Govt. & another person is not in full compliance with Article 299 it would be no contract at all and could not be enforced either by the Govt. or by the other person as a contract.

In view of the mandatory terms of Article 299 no implied contract could be spelled out between the government and another person at the stage of bidding for Article 299 in effect rules out all implied contracts between Govt. and another person.

SARDAR SUCHA SINGH V.UNION OF INDIA (1986)
(Case of acceptance of tender by chief engineer eastern command vide letter of acceptance stating that S Singh’s tender has been accepted by him on behalf of the President of India and also stating  the requirement of a sum of Rs. 700 as additional security – S Singh contends (a) No contract was executed (b) Additional deposit meant that the acceptance was conditional – Held that (a) Section 175(3) of the Government of India Act, 1935 does not requires the execution of a formal document. (Two essential requirements enjoined by the said provision were that acceptance must be in writing and that it must be in the name of the Governor General.) (b) The letter requiring the deposit of further sum of Rs. 700 was after the tender was accepted and a contract came into existence.)

CHAIRMAN-CUM-MD, T.N., TEA PLANTATION CORPORATION LTD.V. M/s SRINIVASA TIMBERS (1998)
(Case of tender with conditions (a) Successful tenderer to pay sale value of timber minus EMD within 15 days of receipt of confirmation order (b) Execute the agreement within said period (c) the period of contract will be from the date of execution of the agreement – Corporation cancels the order after there is a delay in remittance of amount & execution of agreement in spite of extensions of time – Contention as to whether contract was formed – Held contract is not concluded. {When the requirement is in compliance of tender conditions subject to execution of a formal agreement, such a contract is not a concluded contract & cannot be executed or enforced})

The significance of ‘Letter of Intent’.
A letter of intent is customarily employed to reduce in writing a preliminary understanding of parties who intend to enter into contract, or who intend to take some other action.

WELLMAN HINDUSTAN LTD., Vs. NCR CORPORATION (1992)
(Case of letter of intent signed by the two corporations with a view to jointly establish a company in India with 60:40 share to manufacture, and market the product of NCR – Parties incorporate a company called NCR India Pvt. Ltd. – Land identified and purchased by Wellman – Govt. clearance was also obtained for the joint venture – NCR develops cold feet and wanted to ‘wriggle out  from the joint venture on the plea that they did not want to risk investing six million dollars in India’ – Contention was whether the letter of intent create a contract between the parties?)

M/S. PROGRESSIVE CONSTRUCTIONS LTD. Vs. BHARAT HYDRO POWER COPRORATION LTD.(1995)
(Case of following terms in a tender (a) Bid shall be accompanied by EMD (b) Acceptance of bid will be intimated to successful bidder through an award & the award shall conclude the contract (c) Award shall mean acceptance by MD BHPCL (d) Effective date of agreement shall mean date of the letter of intent/award – PCL bids for construction of dam – BHPCL issues a letter of intent for the construction of the dam & requires PCL to reach Calcutta for finalising & signing a formal contract – contract could not be signed as parties could not sort out the discrepancies – BHPCL cancelled the contract – Was the contract formed when the letter of intent was issued? – Held that a concluded contract was reached between the parties - formal contract had remained to be signed because there were minor discrepancies or variations in the terms which were being negotiated between the parties - finalisation of the details would not adversely effect the conclusion of the contract which had stood arrived at with the acceptance of tender and award/letter of intent issued by the respondent to the petitioner.)

The law as it stands, based on court rulings, is that a term of a letter of intent may of course negative the contractual intention but it would be open to the courts to hold the parties bound by the terms of the terms of such letters, especially:
  1. If the parties had acted on these terms for a long period of time or
  2. If they had expended considerable sums of money in reliance of them.


Place of formation of contract
A crucial issue in the formation of a contract is the place of formation of the contract.
Contracts are voluntary acts. Parties are free to set their terms. As a result, every business contract has stipulations on the applicable law and jurisdiction of the court.
Based on Civil Procedure Code, every suit shall be instituted in a Court where defendants reside or cause of action arises.
In suits arising out of contract, the cause of action arises within the meaning of Section 20(c) of the CPC out of any of the following place:
  • The place where the contract was made;
  • The place where the contract was to be performed or came to be performed;
  • The place wherein performance of the contract any money due thereunder expressly or impliedly has to be carried out. 

Jurisdiction of Courts
In cases where two or more courts can validly have jurisdictions, the parties are free to limit jurisdiction to one among them.

M/S. PROGRESSIVE CONSTRUCTIONS LTD. Vs. BHARAT HYDRO POWER COPRORATION LTD.(1995)
(BHPCL Ltd is in Calcutta – PCL’s registered office is in Hyderabad & Administrative office is in Noida – tender floated in Calcutta - Letter of intent issued from Calcutta - Negotiation took place in Calcutta -Dam to be built in Assam – Arbitration clause says venue of arbitration shall be Guwahati/Calcutta – further provides that if the dispute is referred to court, the jurisdiction will be the court within state of Assam – Held the court of jurisdiction will be Calcutta.)

MESSRS HANIL ERA TEXTILES LIMITED Vs. M/s. PURAMATIC FILTERS PVT.LTD.(2004)
(HETL is from Mumbai – Oder placed with PFL’s office in Mumbai – Advance paid in Mumbai – PFL’s HO is in Delhi –Materials dispatched from Delhi – Delivery of material at Patalganga – Clause in agreement states thus ‘Any legal proceedings arising out of the order shall be subject to the jurisdiction of the courts in Mumbai’ – When HETL did not pay the balance amount PFL filed a suit in Delhi – Case admitted – HETL Appeals – Held that part of the action arose in Delhi & part in Mumbai but there was a clear intention to confine the jurisdiction of the Courts in Bombay to the exclusion of all other Courts.)

Contracting with Government Bodies – Importance of Article 14 of the Constitution
The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India Prohibition of discrimination on grounds of religion, race, caste, sex or place of birth

M/S ERUSIAN EQUIPMENT AND CHEMICALS LTD. V. STATE OF W.B (1974)
(Party getting tender contracts from Govt. of West Bengal subsequently was not awarded the contract despite having made the best bid as the State Government had blacklisted the plaintiff as there was a case of violation of FERA pending against the party – state govt. argues that it could choose any person for entering into a contract – held that  the state govt. will give an opportunity to the petitioners to represent their case, and the authorities will hear the petitioners as to whether their name should be put on the blacklist or not – state government’s argument dismissed as the option of choosing any person does not lie with the state government.)

R.D.SHETTY V. INTERNATIONAL AIRPORT AUTHORITY OF INDIA (1979)
(Case as to whether an instrumentality of State-Authority calling for tenders of a job could accept a tender not conforming to conditions in notice – IAAI had stipulated in notice inviting tenders the condition for eligibility being ‘Registered 2nd Class Hotelier having at least 5 years experience’ – Tender accepted was of a person not fulfilling this condition – Contention is that if this was the case R D Shetty, who was not a ‘Registered 2nd Class Hotelier having at least 5 years experience’ could also have applied – held that IAAI could not discriminate.)

Impossibility & frustration of a contract.

TAYLOR Vs. CLADWELL(1863)
(Case of burning down of Music Hall – The destruction of the music hall was the fault of neither party, and rendered the performance of the contract by either party impossible - held that both parties were excused from their obligations under their contract.)

KRELL Vs. HENRY(1903)
(The defendant, CS Henry, agreed by contract on June 20, 1902, to rent a flat located at 56A Pall Mall from the plaintiff, Paul Krell, for the purpose of watching the coronation procession of Edward VII scheduled for June 26 and 27. The housekeeper of the premises informed Henry that he would have an excellent view of the procession from the room. The parties agreed on a price of £75, but nowhere in their written correspondence did either of them explicitly mention the coronation ceremony. Henry paid a deposit of £25 to Krell for the use of the flat, but when the procession did not take place on the days originally set (on the grounds of the King’s illness), Henry refused to pay the remaining £50. Krell brought suit against Henry to recover the remaining balance of £50, and Henry countersued to recover his deposit in the amount of £25. – Held that parties had not made any provision for the unexpected in their contract – if parties foresee but make no provisions their contract is frustrated.)

OCEAN TRAMP TANKERS CORPORATION V V/O SOVFRACHT (1964)
(Ship hired to transport iron from a port in black sea to Vishakhapatnam -  customary route was the Suez Canal – Govt. of Egypt nationalised the Canal – UK & France began to build up military forces in Cyprus – by the time ship neared the canal Egyptian anti aircraft guns were in action against hostile reconnaissance planes – Shipping company claimed frustration of contract – held there is no frustration - difference in time was 108 days from Genoa via the Suez and 138 days via the Cape - goods would not be adversely affected - the only trouble was it took longer – court firmly rejected, however, that frustration can only apply where the event is unforeseen or unexpected.)

Force Majeure: (a clause that lists the events which could cause impossibility)
A superior force, an event that no human foresight could anticipate or which if anticipated, is too strong to be considered, e.g. an industrial strike which leads to loss of profits. Circumstances must be abnormal and unforeseeable, so that the consequences could not have been avoided through the exercise of all due care.

STATE OF UTTAR PRADESH Vs. ALLIED CONSTRUCTIONS (2003)
(Under a contract entered into by and between the appellant and the respondent, the respondent undertook construction of bridge-cum-fall - While the work was in progress, the work area was flooded in the night of August 25 and 26, 1991 - The respondent-contractor herein filed a claim on account of loss sustained by him due to flooding of the work area - the matter was referred to an arbitrator - arbitrator gave an award for payment of a sum of Rs. 12,55,365/- together with interest at the rate of 18 per cent from 1.11.1991 till the date of the award and 6 per cent thereafter - the respondent filed the award for being made rule of the Court - appellant herein filed a petition, inter alia, on the ground that the arbitrator has misconducted the proceedings, inasmuch as the force majeure contained in Clause 47 disentitled the respondent from making any claim which was on account of unprecedented rain – having failed in lower courts State of UP petitioned the Supreme Court – Held that State of UP could not prove that flood which has caused loss was due to unprecedented rain & that it was an act of God.)

Compensation & Damages

FATEH CHAND Vs. BALKISHAN DASS (1963)
(BD sells his rights in land & building to FC – terms: 24,000 first installment – BD to give possession to FC – FC to get the sale deed down within next two months and pay balance of 87,500 – if registration was delayed contract deemed to be cancelled – FC to give back the possession, 24,000 paid to be forfeited & 25,000 to be paid as additional damages – Held: (a) The forfeiture of money if found reasonable will be allowed by court of law  (b) in present case as there was no loss sustained and the property had not depreciated in value, damages were disallowed.)

MAULA BUX Vs. UNION OF INDIA (1969)
(MB enters into a contract with the government of India to supply potatoes, poultry, eggs & fish at the Military HQ, UP Area – MB required to deposit 18,500 for due performance of the contract – contract provided that it could be rescinded & security deposit be forfeited in case of ‘neglect or delay to comply with any demand or requisition’ – MB made persistent delay in making regular & full supplies of the commodities agreed to be supplied – Government of India rescinded the contract & forfeited the money – Held that the loss has to be proved if it can be determined – if no attempt is made to prove loss, money cannot be forfeited.)

CONTRACT ACT - PART VII (REMEDIES FOR BREACH OF CONTRACT - DAMAGES - LIQUIDATED DAMAGES - PENALTY)


Agreements enforceable by law are contracts.
The Contract Law is mostly Commonsense
Points for discussion as based on The Indian Contract Act 1872

REMEDIES FOR BREACH OF CONTRACT

When a there is breach of contract, the injured party has one or more of the following remedies:
  • Rescission of contract
  • Suit for damages
  • Suit upon ‘quantum meruit’
  • Suit for specific performance of the contract
  • Suit for injunction

DAMAGES
….monetary compensation for the loss caused to the injured party.
Every action for damages raises two problems:
  1. Remoteness of damage
  2. Measure of damages


Remoteness of Damages
Hadley Vs Baxendale (1854)
A shaft in Hadley’s (P) mill broke rendering the mill inoperable. Hadley hired Baxendale (D) to transport the broken mill shaft to an engineer in Greenwich so that he could make a duplicate. Hadley told Baxendale that the shaft must be sent immediately and Baxendale promised to deliver it the next day. Baxendale did not know that the mill would be inoperable until the new shaft arrived. Baxendale was negligent and did not transport the shaft as promised, causing the mill to remain shut down for an additional five days. Hadley had paid 2 pounds four shillings to ship the shaft and sued for 300 pounds in damages due to lost profits and wages. The jury awarded Hadley 25 pounds and Baxendale appealed.
Held that:
  • An injured party may recover those damages reasonably considered to arise naturally from a breach of contract, or those damages within the reasonable contemplation of the parties at the time of contracting.
  • The court held that the usual rule was that the claimant is entitled to the amount he or she would have received if the breaching party had performed; i.e. the plaintiff is placed in the same position she would have been in had the breaching party performed. Under this rule, Hadley would have been entitled to recover lost profits from the five extra days the mill was inoperable, if such loss of profit was in the contemplation of the parties at the time of contracting.


Two Rules:
  1. General damages are for loss which arises naturally in the usual course of things from the breach itself.
  2. Special damages are for loss which arises on account of the unusual circumstances affecting the plaintiff.
  • They are not recoverable unless the special circumstances were brought to the knowledge of the defendant so that the possibility of the special loss was in the contemplation of the parties.


Measure of Damages
  • Damages are compensatory; not penal
  • In ordinary cases, damages for mental pain and suffering caused by the breach are not allowed.
  • Injured party has to take reasonable steps to see that his loss is kept to the minimum. (Duty to mitigate)

LIQUIDATED DAMAGES
Monetary compensation for a loss, detriment, or injury to a person or a person's rights or property, awarded by a court judgment or by a contract stipulation regarding breach of contract.

Generally, contracts that involve the exchange of money or the promise of performance have a liquidated damages stipulation.

The purpose of this stipulation is to establish a predetermined sum that must be paid if a party fails to perform as promised.

Damages can be liquidated in a contract only if :
  • the injury is either ‘uncertain’ or ‘difficult to quantify’;
  • the amount is reasonable and considers the actual or anticipated harm caused by the contract breach, the difficulty of proving the loss, and the difficulty of finding another, adequate remedy; and
  • the damages are structured to function as damages, not as a penalty.
If these criteria are not met, a liquidated damages clause will be void.

PENALTY
  • A penalty is a sum that is disproportionate to the actual harm. It serves as a punishment or as a deterrent against the breach of a contract. Penalties are granted when it is found that the stipulations of a contract have not been met. For example, a builder who does not meet his or her schedule may have to pay a penalty.
  • Liquidated damages, on the other hand, are an amount estimated to equal the extent of injury that may occur if the contract is breached. These damages are determined when a contract is drawn up, and serve as protection for both parties that have entered the contract, whether they are a buyer and a seller, an employer and an employee or other similar parties.