INTRODUCTION

An organization is a fake individual running for the satisfaction of a reason, however, on occasion, there are circumstances that could prompt its defeat and when an organization wraps up it is possibly removing the work of everybody related to it and is likewise influencing the economy of the country in a negative manner. Thusly, every conceivable step is taken to stay away from this from occurring yet when it couldn’t be stayed away from and indebtedness procedures of an organization are going to initiate, the exchanges made and the agreements went into by the organization preceding the initiation of such bankruptcy procedures are judged and the ones that are viewed as unsafe for the organization and individuals related with it or are violative of the interests of the debt holder or the lender are proclaimed to be void. The cycle is known as evasion of pre-insolvency procedures. The indebtedness and chapter 11 regulations have sorted out an approach to adjusting the privileges of both borrowers as well as lender. Lenders of the element reserving an option to guarantee the levy from the home of the debt holder can not maneuver the borrower toward auctioning off the resources like land, shares and different resources or going into an agreement that isn’t leaning toward the interests of the indebted person and is in any case violative of his privileges or interests.

UNCITRAL MODEL

The Uncitral model under section 2 of its regulative aide accommodates the evasion of specific exchanges with respect to an indebted person to guarantee the equivalent treatment of the multitude of lenders and insurance of the privileges of the borrowers in order to not get controlled by any of the leaders to go into an agreement for the exchange of any of the resources at a worth lower than that of its genuine worth. One more point of view on the equivalent is keeping away from bias with respect to the borrower, the debt holder could favour a lender over the others and could go into an agreement with him in regards to the exchange of a resource when they become mindful of the forthcoming bankruptcy procedures. Consequently, these exchanges that are placed preceding the initiation of the bankruptcy procedures are dropped or are considered to be incapable to guarantee the security of freedoms of each and every elaborate party. Various purviews have put together their indebtedness regulations with respect to the Uncitral model anyway there are qualifications that could be tracked down between the laws of various nations. The Indebtedness and Chapter 11 code, 2016 arrangements with the avoidable, otherwise called weak exchanges under sections 43 to 51. The kinds of exchanges that are avoidable under the IBC are:

• Preferential transactions
• Undervalued transactions
• Extortionate credit transactions.

The previously mentioned exchanges are to stay away from the debt holder during the significant period which is two years in the event of a connected party and one year in different conditions going before the bankruptcy beginning date according to section 46 of the IBC, 2016.

EVASION PROCEDURES

The Uncitral Model Regulation is intended to help States to outfit their bankruptcy regulations with a cutting-edge legitimate system to all the more really address cross-line indebtedness procedures concerning debt holders encountering extreme monetary misery or insolvency. The regulative aide is reliable of 4 sections on indebtedness regulation covering the goals, primary issues, components accessible for the goal of the debt holder’s monetary challenges, the beginning, the disintegration of the indebtedness procedures, evasion of procedures, cross-boundary bankruptcy regulations, other like arrangements that require consideration exhaustively. The regulative aide section 2 accommodates the privileges of a borrower, wherein it is expressed that where the debt holder is a characteristic individual, certain resources are for the most part prohibited from the bankruptcy domain to empower the debt holder to protect its own freedoms and those of its family and it is positive that the option to hold those barred resources be clarified in the indebtedness law.

CRITERIA

• Objective Rules: The emphasis is on the goal questions, for example, whether the exchange occurred inside the suspect period and whether the exchange proved any of various general qualities set out in the law.
• Emotional Rules: Emotional methodology is more case explicit, the inquiries that would emerge would resemble whether the expectation to conceal the resources from the loan bosses was there, and when did the borrower become indebted whether it was at the hour of the exchange or whether it was after the transaction.
• Mix Of The Two: The bankruptcy laws of greater parts of the states are more emotionally driven, but it is joined with a time span inside which the exchange probably happened. In India, for instance, the significant period is 2 years in the event of a connected party and 1 year if there should arise an occurrence of some other loan boss.

CONVENTIONAL COURSE OF BUSINESS

A differentiation is drawn between what might be considered as an everyday practice or normal exchange in a business and what is remarkable and ought to be stayed away from as a piece of avoidable exchange. An earlier lead of the debt holder could assume a part here alongside customs and ordinary practices as continued in the business. The states are allowed to take both of the standards as a base to accommodate the avoidable exchanges as referenced previously mentioned.

EVASION ACTIVITIES ALL OVER THE PLANET

As expressed over, the Uncitral model is just giving a manual for the states to form legitimate evasion activities, various purviews follow the different arrangements of staying away from power, and after ordering them comprehensively we can come to an end result that there are single set and twofold arrangement of staying away from powers, common regulation nations, for example, France and Spain are devotees of a single bunch of keeping away from powers, while customary regulation nations follow two-fold arrangement of staying away from powers, nations, for example, UK and USA, the twofold arrangement of keeping away from powers are underestimated exchanges and unlawful inclinations.

INDIAN PERSPECTIVE

The indebtedness and insolvency code is a moderately new regulation and is impacted by the precedent-based regulation nations with regard to evasion abilities. sections 43-51 arrangement with the evasion procedures wherein agreements on the move of resources or property could be the subject of aversion procedures. Aversion of exchanges and statements of agreements went into the gatherings as invalid and void could be of any agreement, in regards to the exchange of any property or resource. A land contract is no exemption, the instance of Jaypee Infratech Restricted Versus Pivot Bank Restricted is the ideal illustration of evasion of an exchange that depends on the move of an unflinching property.

In the very recent case, Jaiprakash Partners Restricted (JIL), which is the holding organization of Jaypee infratech restricted set up the previously mentioned auxiliary as a particular reason vehicle for the development of a freeway and went into a concurrence with the Yamuna Turnpike Modern Improvement Authority. For this reason, advances were taken from different banks altogether, selling the land and 51% shareholding of JIL. Later on, JIL was pronounced to be a non-performing resource by a portion of its loan specialists and NCLT passed a request under section 7 of the IBC, 2016 to start the indebtedness procedures after the appeal was recorded by IDBI bank with respect to something similar. The selected IRP documented an application in regards to the exchanges went into by the corporate borrower that has made a responsibility on the steady property possessed by the corporate debt holder and in that application such exchanges were professed to be special, underestimated, and fake. The application was tended to and permitted. An allure was documented by the lenders to save the NCLT orders. The issues in this way, looked at by the high court were as follows:

• Whether the exchanges went into by the account holder underestimated, special and fraudulent?
• Whether the respondents were monetary leaders given the way that the property was sold to them?

SECTION 43 COMPLIANCE

The NCLT saw that the land was sold to dupe the moneylenders. At the hour of entering the exchanges, the borrower was at that point confronting a monetary crunch and the lenders knew about the indebted person’s situation at the hour of going into the home loan contract. In this manner, the settling authority was of the view that the borrower was attempting to make a deceitful exchange during the sundown time frame and the sole target of the debt holder was to produce some money, consequently not falling inside the classification of customary course of business. The re-appraising expert then again, held that section 43(2) was not drawn in and the home loan was made in the common course of business. Likewise, the exchanges were not underestimated or particular and the arbitrating authority has no ability to make orders in regards to something similar. Taking everything into account, the peak court held that the debt holders had gone into a special exchange. The high court maintained the choice of NCLT and held that Section 43 hit the current case. The three overlay test is expected to be passed by an interpretation to turn into a particular exchange under this section, i.e,. Satisfying the prerequisites of sections 43(4) and 43(2), and shouldn’t fall under the special cases referenced in section 43(3). Subsection 2 section 43 discusses the exchanges in which the corporate debt holder will be considered to have been given an inclination.

SECTION 45 COMPLIANCE

One more kind of exchange that can be stayed away from is given under section 45 of the code is the underestimated exchange. In the aforementioned instance of Jaypee infratech, the IRP was of the view that the exchanges are special as well as underestimated, it was eventually held that the exchange was truth be told underestimated. An underestimated exchange is one in which the corporate debt holder has paid a sum lesser than the real worth of the resource. The referenced case is additionally an illustration of exchanges that could be kept away from on the ground that they are duping the loan bosses. section 49 of IBC manages the arrangement of swindling the loan boss. In the event that the corporate account holder has made an underestimated exchange deliberately, this arrangement would be drawn in.

IBC ACCOMMODATION

Finally, the IBC accommodates one more sort of avoidable exchange, which is exploitative credit exchange. section 50 discusses exploitative exchanges. Any exchange that is negative to the corporate account holder and is made when the indebted person was helpless is considered an exploitative exchange. There can be circumstances like the agreement was either endorsed by the borrower without pursuing or it was intentionally made to incline toward the loan boss as the account holder would sign the agreement being defenseless at that point.

CONCLUDING REMARK

We have laid out that specific exchanges are avoidable and consequently announced void assuming the topic of interest of either the indebted person or some other bank the firm is involved. The locales across the world have chosen various perspectives in regard to the regulations overseeing such procedures. Notwithstanding, the exchanges and agreements that went into are to be judged cautiously. The chance of them being made as a standard course of business exists. Land contracts particularly, the land is one of the most significant resources of any business that could turn into an obvious objective by the loan bosses who wish to hurt the indebted person by removing it at a lower cost simultaneously the borrower likewise could go into an exchange including land with hostility. In this way, the aversion procedures are to be painstakingly analyzed and afterward kept away from to save the interests of the multitude of involved parties.

REFERENCES

1. UNCITRAL Model Law on Cross-Border Insolvency available at https://uncitral.un.org/en/texts/insolvency/modellaw/cross-border_insolvency
2. https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/05-80722_ebook.pdf page 136 point 151
3. https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/05-80722_ebook.pdf page 138 point 158
4. https://staging.hcourt.gov.au/assets/publications/judgments/1948/012–Downs_Distributing_Co._Pty._Ltd._V._Associated_Blue_Star_Stores_Pty._Ltd._(In_Liquidation)–(1948)_76_CLR_463.html
5. https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/05-80722_ebook.pdf page 137 point 157
6. UNCITRAL legislative guide on insolvency law part 2 https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/05-80722_ebook.pdf page 167 point 20

This article is written by Saumya Tiwari, Student of Graphic Era University, Dehradun.

Introduction

A company is an artificial person that exists to serve a purpose, but some circumstances could cause it to fail. When a company fails, it could potentially eliminate jobs for everyone connected to it and have a detrimental effect on the nation’s economy.

Every effort is made to prevent this from happening, but when it couldn’t be helped and an organization is about to enter into insolvency proceedings, the transactions and agreements made by the organization prior to the start of those proceedings are assessed, and those that are found to be detrimental to the organization and those connected to it or that violate the interests of the debtor or the creditor are deemed null and void. Avoidance of pre-bankruptcy procedures is the name of the process.

The laws governing insolvency and bankruptcy have figured out how to strike a balance between the rights of the debtor and the creditor. The debtor cannot be forced to sell off assets like shares of stock, real estate, or other assets, or to sign a contract that goes against his rights or interests in any way by creditors of the entity with the authority to collect debts from the debtor’s estate. The activities taken and agreements made in this regard are avoidable and preventable in order to safeguard the interests of the debtors, and as a result, are referred to as avoidable transactions.

The protection of debtors’ assets, their maximization as a value, and the availability of credit in place of those assets continue to be the goals of avoidable transactions. Ultimately, improving the company’s financial situation and streamlining the resolution procedure will result in a fair allocation of the assets.

Prior to the start of the insolvency proceedings, the two parties may enter into contracts involving simple assets like shares, buildings, or land or more complex agreements like those involving a franchise, taking over construction projects, etc. Given its prominence and value as one of a company’s most precious assets, the land would be a target for any creditor who set out to pay off their debts to the debtor while ignoring other creditors. Land contracts between a creditor and a debtor should be avoided in addition to all other contracts.

The UNCITRAL model, in accordance with part 2 of its legislative guide, calls for the avoidance of specific transactions on the part of the debtor in order to guarantee the treatment of all creditors equally and protect the rights of the debtors and prevent them from being coerced by creditors into entering into a contract for the transfer of any asset at a value that is less than its true value.

Avoiding favoritism on the part of the debtor is another way to look at the situation. The debtor can prefer one creditor over another and get into an agreement with him on the transfer of an asset as soon as they learn that bankruptcy procedures will soon begin.

To ensure the preservation of the rights of all parties involved, these transactions that were made before the start of the insolvency procedures are canceled or declared to be ineffective. There are differences between the rules of different countries, even though different jurisdictions have based their insolvency laws on the UNCITRAL model.

Under sections 43 to 51 of the 2016 Insolvency and Bankruptcy Code, transactions that can be avoided, commonly known as vulnerable transactions, are addressed.

Under the IBC, the following transactions can be avoided:

1. Preferential Transaction
2. Undervalued Transaction
3. Extortionate Credit Transaction

According to section 46 of the 2016 IBC, the debtor must avoid the aforementioned transactions throughout the relevant period, which is two years in the case of a related party and one year in all other cases before the insolvency beginning date.

Model and Avoidance Procedures for UNCITRAL

The UNCITRAL Model Law is intended to help States give their insolvency laws a contemporary legal foundation so that they can deal with cross-border insolvency processes involving debtors who are in serious financial difficulty or insolvency more efficiently¹. The legislative guide is composed of four parts on insolvency legislation, covering the objectives, structural issues, mechanisms for resolving the debtor’s financial difficulties, the start, termination, and avoidance of proceedings, as well as other similar provisions that call for detailed consideration.

In the legislative guide’s part 2 on debtor rights, it is stated that it is preferable for the right to keep those excluded assets to be made clear in the insolvency law when a debtor is a natural person and that certain assets are typically excluded from the insolvency estate to allow the debtor to preserve its rights and those of its family².

Avoidance proceedings are likewise covered by recommendations 87 to 99 in the same section of the legislative handbook. The avoidance proceedings are based on a general principle of insolvency law that gives priority to the collective goal and overall maximization of the value of the assets and credit availability to facilitate equal treatment for all the creditors and the debtor’s rights rather than providing individual remedies to the creditors who could claim the assets by entering into a contract with the debtor before the commencement of the insolvency proceedings.

“Provisions dealing with avoidance powers are designed to support these collective goals, ensuring that creditors receive a fair allocation of an insolvent debtor’s assets consistent with established priorities and preserving the integrity of the insolvency estate,” reads a statement about this in the guide.

The UNCITRAL model also stipulates a few avoidance criteria. There are several factors, including the normal course of business, defenses, and both subjective and objective criteria. The state may choose any of the criteria as long as the overall goal—to strike a balance between the interests of the individual and the estate—remains the same.

Criteria

1. Objective Criteria: The focus is on measurable issues, such as whether the transaction occurred during the questionable time frame and whether it demonstrated any of the several broad legal requirements.
2. Subjective Criteria: The subjective approach is more case-specific, and the issues that might come up include whether there was a desire to conceal assets from creditors and when the debtor became insolvent—whether that occurred during or after the transaction.
3. Combination of the two: The majority of states’ insolvency laws are more subjective in nature, but they also provide a deadline by which the transaction must have been completed. For instance, in India, the applicable period is two years for a related party and one year for any other creditor.
4. Ordinary Course of Business: There is a distinction made between what might be seen as a routine or ordinary business transaction and what is extraordinary and ought to be avoided as part of an avoidable transaction. Along with conventions and standard business practices, the debtor’s prior actions may have an impact here.

The states are allowed to use either of the criteria as a starting point when deciding how to handle the aforementioned unnecessary transactions.

Avoidance tactics used worldwide

Different jurisdictions follow different sets of avoiding powers; by classifying them broadly, we can conclude that there are single sets and double sets of avoiding powers. Civil law countries like France and Spain are followers of a single set of avoiding powers, whereas common law countries follow a double set of avoiding powers. As previously stated, the UNCITRAL model is merely providing a guide to the states to formulate proper avoidance actions.

• American Viewpoint: A technique to invalidate perfectly legal transactions because they were made before the start of insolvency proceedings is the use of clawback actions or avoidance powers. The usual justification for invalidating such a deal is that the creditors who would be getting the firm’s assets but losing all control over them once the formal processes started would try to seize control of them beforehand by manipulation or other unethical ways. The transactions made before the bankruptcy proceedings, as was already indicated, are detrimental to the firm’s assets worthwhile also violating the rights of the debtor and other creditors. The goal of American bankruptcy law is to give creditors the most advantage possible.
• Automatic Stay: A fundamental tenet of the American insolvency regime is the automatic stay. When insolvency procedures begin, the rules of the automatic stay described in Section 362 of the bankruptcy code take effect. Any creditor would not be able to seize any assets or property from the debtor as a result of the stay. By allowing the creditors to pursue their recovery options, this approach benefits them. However, there are some exceptions to the automatic stay, and the court can change it if there is a good basis to do so. Creditors are protected by the automatic stay because it prevents the value of the debtor’s property from declining and guarantees that it is distributed fairly.
• Absolute Priority Rule: Another important tenet of the US insolvency process is the Absolute Priority Rule. This rule is based on fairness and equity because it requires that creditors who have investments be paid in priority to other creditors who have smaller investments. Because equity holders have the lowest priority, they will be paid last and secured creditors will be paid first. However, this rule can be circumvented by voting of senior members; if votes of senior members are obtained, payment of junior class or unsecured creditors can be possible.
• Avoidance action: The bankruptcy law in the US outlines several techniques that let debtors avoid the pre-bankruptcy transfer of assets. Due to the possibility of bias on the part of creditors, this affords debtors the right to raise the worth of their bankruptcy estate and prevent its decline before filing for bankruptcy.

• Australian Viewpoint: The clauses specified in the Bankruptcy Act, 1924-1946 deal with the transfer of property under Australian law at the time of bankruptcy. It is addressed in Section 95 of the Act, which states that if the debtor declares bankruptcy on a bankruptcy petition filed within six months, any transfer of property, payment, or obligation made in favor of any creditor or person acting in the creditor’s behalf and a creditor a preference, precedence, or other benefits over other creditors, shall be null and void. The Downs Distributing Co. Pty. Ltd. V. Associated Blue Star Stores Pty. Ltd. In the end, the court’s conclusion was influenced by the bankruptcy act’s Ltd provision.
• Indian Viewpoint: The common law nations influence the avoidance powers of the insolvency and bankruptcy code, which is a relatively young piece of legislation. Contracts for the transfer of assets or property may be the subject of avoidance procedures, which are covered under Sections 43 to 51.

Any contract involving the transfer of any asset or property may be avoided, and the parties may declare any contracts they have entered into to be null and void. Land contracts are no exception; the Jaypee Infratech Limited v. Axis Bank Limited case is the ideal illustration of how to prevent a transaction based on the transfer of real property.

In this instance, the holding company of Jaypee Infratech Limited, Jaiprakash Associates Limited (JIL), established the aforementioned subsidiary as a special purpose vehicle for the construction of an expressway and entered into a contract with the Yamuna Expressway Industrial Development Authority. Loans were obtained for this purpose from several banks jointly, and the land and 51 percent of JIL’s stock were mortgaged.

Later, when an IDBI bank petition was filed about it, some of JIL’s lenders declared it to be a non-performing asset, and the NCLT issued an order under section 7 of the IBC, 2016 to start the insolvency procedures. The corporate debtor engaged in transactions that resulted in an obligation on its immovable property, and those transactions were alleged to have been preferential, undervalued, and fraudulent in the application submitted by the designated IRP.

The request was reviewed and approved. The creditors filed an appeal to invalidate the NCLT orders.

The issues, therefore, faced by the supreme court were as follows:

1. Whether the transactions entered into by the debtor undervalued, preferential and fraudulent?

2. Whether the respondents were financial creditors given the fact that the property was mortgaged to them?

The land was mortgaged, according to the NCLT, to mislead the lenders. The debtor was already in financial trouble at the time the transactions were made, and the creditors were aware of the debtor’s predicament at the time the mortgage contract was signed. Because the debtor’s only goal was to make money, the adjudicating authority believed that the debtor was attempting to conduct a fraudulent transaction during the twilight period and did not meet the definition of an ordinary course of business.

The appellate authority, on the other hand, determined that the mortgage was made in the normal course of business and therefore section 43(2) was not invoked. Additionally, the transactions were not preferential nor undervalued, and the adjudicating authority cannot issue any directives in this regard.

The apex court determined that the debtors had engaged in a preferential transaction in terms of preference. The supreme court upheld NCLT’s ruling and declared that section 43³ applied to the current situation. A translation must pass the three-fold criteria to qualify as a preferential transaction under this clause, i.e. observing Sections 43(4) and 43(2) criteria, and not violating any of the Section 43 exceptions (3).

The transactions in which the corporate debtor shall be judged to have been granted a preference are discussed in subsection 2 section 43. The clause expressly mentions a corporate debtor transferring property or an interest in that property to a creditor in exchange for payment of financial or operational debt. The clause intends to invalidate any transactions involving the transfer of property in which a corporate debtor granted precedence. hence include transactions relating to land within its purview.

The Goodwill Theaters v. Sunteck Realty, in which it was questioned whether the developer who had been granted development rights by the landowner should be classified as an operational creditor, adopted a different strategy and determined that because the transfer of development rights did not amount to the supply of goods or services, the developer would not be classified as an operational creditor.

The aforementioned transactions specified in subsection 3 will not be regarded as preferential transactions if the transfer is carried out in the ordinary course of business and is establishing a security interest in the property.

Undervalued transactions are another sort of transaction that can be prevented thanks to section 45 of the code. The IRP believed that the transactions in the aforementioned matter of Jaypee Infratech were not only preferential but also undervalued; nonetheless, it was finally decided that the transaction was undervalued. A deal is considered undervalued if the corporate debtor pays less than the asset’s true value.

The aforementioned situation is another illustration of a transaction that may be avoided because it is cheating the creditors. The IBC’s Section 49 addresses the prohibition against deceiving the creditor. This clause would apply if the corporate debtor had purposefully entered into a transaction at a discount.

Last but not least, the IBC allows for exorbitant credit transactions, another category of unnecessary transactions. In Section 50, extortionate transactions are discussed. A transaction is deemed exorbitant if it is unfavorable to the corporate debtor and is made at a time when the debtor is at its most vulnerable. It’s possible that the contract was either blindly signed by the debtor without reading it or that it was purposefully drafted in the creditor’s favor so that the debtor would sign it while at a vulnerable moment.

Conclusion

We have determined that some transactions are avoidable and, as a result, ruled void if there is a conflict between the interests of the debtor and any other creditors, including the firm. Regarding the laws governing such proceedings, diverse perspectives have been adopted by jurisdictions around the world. However, it is important to make very thorough judgments about the deals and agreements made.

They might be produced as part of routine company operations. Land contracts, in particular, the land being one of the most important assets of any business could become an easy target by the creditors who desire to injure the debtor by taking it away at a reduced price, at the same time the debtor could also engage in a land transaction with ill will. To protect the interests of all parties involved, the avoidance procedures must therefore be thoroughly assessed and finally dismissed.

---

References

1. UNCITRAL Model on Cross-Border Insolvency (1997) available at https://uncitral.un.org/en/texts/insolvency/modellaw/cross-border_insolvency
2. UNCITRAL Legislative Guide on Insolvency Law Part 2 https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/05-80722_ebook.pdf Page 167 Point 20.
3. (1) Where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section 44.

This article is written by Bhagyashri Neware, LLM student from Maharashtra National Law University, Aurangabad.

This article has been written by Yash Dodani, a second-year at NALSAR University of Law. He has tried to set a distinction between ‘Offer’ and ‘Invitation to offer’.

Introduction

Contract is an area where the parties bargain with each other on terms and conditions and then have an obligation to work according to the conditions in the contract. It’s a private law where the role of the judiciary is very limited, not a law like Criminal law or taxation, where the role of State is very high. But still, the role of the state is there, as always will be in any law.

There was a confusion with regards to what is an offer and what exactly is ‘invitation to offer. And as always, the judiciary is called the interpreter of the law for some very important reason and that reason is to clarify the things as and when required. To this also the courts have given a very beautiful difference through many case laws on this front. Let me first get through the individual meaning of these terms and then set a distinction.

Offer/ Proposal

Offer or as it is said proposal has been defined in section 2[a] of the Indian Contract Act¹ as under:

“When one person signifies to another his willingness to do or abstain from doing something with a view to obtaining the assent of the other to such an act or abstinence, he is said to make a proposal”.

It means that when a person says something to another that he would do something or not do something, with a view to get an assent from the other person, he is said to make an offer to the other person. For instance, A, a party says to another person X that “I would buy your cycle for a sum of 6000 rupees”. If after negotiation, both the parties agree on the sale and the price, this would become an agreement and I made an offer by saying the above line quoted.

When an offer is accepted, it becomes an agreement. In an agreement, there is an intention to create legal obligations generally. But this is not always true [see Balfour v Balfour ²] due to the nature of the relationship between the parties. If the nature of the relationship between the parties is such that the agreement would not be intended anywhere to be legally binding, that it will not be legally asked to complete. However, this position is not followed in the Indian Context. If there is an agreement which is not unlawful or illegal, the agreement will be enforced even if there was no intention to create a legal obligation. [See CWT v/s Abdul Hussain Mulla Muhammad Ali ³]

There are other conditions of an offer and in what cases the offer can become an agreement like knowledge of offer and other such things but I will not go into the details of these things in this article. It will focus more on the distinction between an ‘offer’ and ‘invitation to offer’.

General and Specific Offers

Offer can be ‘general’ or ‘specific’. In an earlier judgment, the English courts have said that the offer can not be ‘general’ [See Weeks v/s Tybald ⁴ ]. But after a century or so, the courts said that the offer can be in ‘general’. In Carlill v/s Carbolic Smoke Ball Co ⁵, the court recognized that ‘an offer can be made to world at large as well. Whereas ‘specific offer’ means that an offer which is made to a specific person(s). There can be more than one specific person involved in a contract.

Invitation to Offer

When it comes to ‘Invitation to offer’, it is not necessary that parties do have an intention to enter into an agreement. It’s upon them whether to enter or not into an agreement. It can be said as a pre-negotiation stage before an actual offer. The best example to explain it in the shop. The goods displayed in a shop might not be on a sale, but as they are on display, it doesn’t mean that they are up for sale. The shopkeeper invites the customer to offer that good for sale. It completely depends on the shopkeeper that if they are willing to sell it or not. They are not bound to sell the product at the given price tag. It’s because they have the power to reject the sale, and it is called as ‘invitation to offer’. The buyer will select the best invitation and try to further negotiate on it. In a market condition, an invitation is made by the seller and offer is made by the buyer, if the seller accepts the offer, it becomes an agreement. Intention to enter into a legal obligation is nowhere seen in an invitation, but intention generally matters in an offer.

Finally, when it comes to the difference between, it is very important to discuss the very important case law named Carlill v/s Carbolic Smoke Ball Co. A company made an advertisement in a leading newspaper that it has made a product, the consumption of which will keep away disease such as a cold. If someone after consumption of it as prescribed, will attract those disease, will get a Compensation of 100 Euros. It has also said that to show that confidence, it also deposited the said amount in a bank account. The product was purchased by the plaintiff. After consumption in the said prescribed manner, he suffered from cold and filed a suit for recovery. The company contended that it was an invitation to offer and not offer. They also contended that it was a puff advertisement. But the courts rejected the contention saying that the advertisement is not an invitation to offer but an offer itself because they have deposited the amount in a bank, they do have intention here and hence the offer was accepted when the buyer consumed the product in the said manner. The plaintiff was allowed to get the compensation of 100 Euros.

Conclusion

Thus, it is essential to understand the difference between an ‘offer’ and ‘invitation to offer’. ‘Invitation to offer’ is a step before making an ‘offer’. ‘Invitation to offer’ is given by one party, then on reaction to the invitation, the another party makes an ‘offer’, then it is upon the previous party to either accept or reject it. The person inviting an offer is not bound by any condition which he has specified at the invitation stage.

References

1. The Indian Contract Act, 1872 [Act 9 of 2873]
2. (1919) 2 KB 571
3. (1988) AIR 1417
4. 74 ER 982.
5. [1892]

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ABSTRACT

The article is written by Naman Jain pursuing BBA-LLB from Bennett University, Greater Noida. This article endeavours to demystify the key concepts of force majeure and the repercussions of Covid-19 on contractual obligations. This article insights into the legal permissibility of this clause in the current scenario and highlights the elements to be considered before the invocation or while defending a force majeure claim.

“LAW AND ORDER ARE THE MEDICINE OF THE BODY POLITIC AND WHEN THE BODY POLITIC GETS SICK, MEDICINE MUST BE ADMINISTERED”
~ DR. B.R. AMBEDKAR

INTRODUCTION

The continuous spread of COVID-19 has forced the country into a conspicuous uncertainty. Global disruptions are evident in the business and commercial sector. A significant population of the world has been put under lockdown. Due to this, operations carried by various businesses have been hindered and fulfilment of contractual obligations has been greatly impacted. The disruptions in the supply chain will lead to delay, interruption, or even cancellation of many contracts. As businesses are making plans to address this international emergency, this article provides guidance to inform strategic decision making in accordance with the contractual relationships. To escape from the contractual penalties arising due to missing project deadlines, non-payment, etc as a result of the pandemic, parties to contracts are bringing word like “Force Majeure” in use.

WHAT IS ‘FORCE MAJEURE’ ?

The French phrase means a “superior force”, is a law U/S 32 and 56 of Indian Contract Act, 1872. Black Law Dictionary defines it as “In the law of insurance, superior or irresistible force. Such clause is common in construction contracts to protect the parties in the event that a part of the contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by the exercise of due care”. It is a provision that protects a party in contractual agreement from liability for its failure to function the contractual obligations. It is an expressed provision in contract law which describes an extraordinary event involving circumstances beyond human control as an act of god or a superior force. Further, this clause frees both the parties from a contractual liability when some specified or uncertain events beyond human control obstruct the carrying of obligations under the contract.

As mentioned in the clause, this exhaustive list contains events like wars, riots, fire, flood natural calamities, lockouts, famines, and govt. action affecting any party to function or perform the pre-decided obligations under the contract cause its frustration or impossibility. The clause provides relaxations to perform the contractual obligations, but it does not entirely excuse a party from a contract. Moreover, it suspends the contract for the duration of that superior force. However, if this superior force continues to dominate for more than a specified period, the clause gives the power to both the parties to terminate the contract without any financial effects on either party.

Force Majeure principle is ruled by chapter 3 of the Indian Contract Act dealing with the contingent Contract. S. 32 of the act defines this Supreme power whereas S.56 is a rule of positive law which mentions about frustration. ‘Impossible’ or ‘Frustration’ is only confined to something which is beyond the control of both the parties and not to the literal impossibility to perform i.e. strikes or commercial hardships as held in the case of Satyabrata Ghose V. Mugneeram Bangur.

The Supreme Court in the case of Naihati Jute Mills Ltd. v. Hyaliram Jagannath held that “A contract is not frustrated merely because the circumstances in which it was made are altered. The Courts have no general power to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events.” The capacity to invoke the clause depends on the nature of the contract as well as the wordings of the contract. Therefore, with respect to the pandemic situations, implications of the above provisions would be dealt by the adjudicatory bodies on case to case basis.

FORCE MAJEURE AND COVID-19

The Ministry of Finance has clarified the doubt stating that disruption in supply and production chains due to the spread of coronavirus has to be considered as a case of natural calamity and Force Majeure clause may be invoked wherever appropriate according to the circumstance and nature of the contract. Many of the contracts are such in India that do not says explicitly to invoke the benefits of Force Majeure clause. Whether a contract on the account of Covid-19 has the capability to invoke the benefits of this clause is a fact-specific determination that totally depends on the nature of the obligations involved and the specific terms of the contracts. If in case the contract formed by the party does not involve ingredients of Force Majeure, then the party can claim under the “Doctrine of Frustration” U/s 56 of the Indian Contract Act, 1872. This doctrine makes the party excusable if the whole contract becomes impossible to perform. ‘Frustration’ and ‘impossible’ are often used interchangeably.

Force Majeure is an element of a contract being strict in nature while the doctrine of frustration is a common law concept.

In the light of the current situation, the lockdown has been imposed in India restricting the performance of some contracts. As the lockdown is imposed by the Govt. and is construed as an order of the Govt. Therefore, the party having the obligations to perform can issue a notice saying that such an event has occurred i.e. lockdown which is beyond its control and therefore, the provisions of Majeure clause can be triggered giving relaxation to the party by suspending the party till the supreme force i.e. lockdown gets over.
Further, the contracts made before lockdown between 2 parties involving advance payment and non-performed obligations which is impossible to execute at this time of lockdown in the purview of S. 56 of Indian Contract Act become void and the party who had paid advanced can claim for a refund as the one who received the payment in advance is bound to pay back the amount.

KEY ASPECTS WHILE INVOKING/DEFENDING FORCE MAJEURE

• Keeping a track of the events that would be in accordance with the ingredients of the clause based on the contractual understanding of the parties and the nature of the contract. The list of the above events can be exhaustive or non-exhaustive in nature.
• Actions that have to be taken to invoke the Force Majeure clause should be informed prior, with an issuance of notice to the opposite party.
• Repercussions of the Force Majeure events, mitigation strategies, relaxations to be provided in performance and issues dealing with suspension or delay of standard quality performance should be analysed thoroughly.
• Mindfulness of businesses in knowing that economic hardships i.e. higher cost of performing the obligations under a contract will not be a strong ground to assert Force Majeure clause or Frustration principle as a defence.

In the English case of Tsakiroglou & Co. Ltd. v. Noble Thorl GmbH, the facts comprise of a ship that needs to perform sale of coconuts by transporting it from one place to another. The contract was made but later at execution, it was found that the canal to be used on the customary route was closed. Despite knowing the fact, it was held that the above contract of sale of coconut cannot be considered impossible to perform and hence there was a way for the ship to travel from another passage being 3 times longer than the usual one. Economic hardship that was faced by the ship hence, failed to become a ground for frustration to contract. Therefore, the party failed to get the defence under this principle. The above view of the law was also stated in ‘Chitty on Contracts’, 31st edition. Further, the view of not to trigger Force Majeure clause unless an alternative way is available was evident in ‘Treitel on Frustration and Force Majeure’.

Moreover, legal advisors should be contacted by the parties to have a clear view of the sector they are involved in and the specific events and provisions being invoked to avoid any ambiguity later. Some cases where negligence or malfeasance of a party is seen, those are intended to get the benefit of the above clause. Understanding of the loopholes in law enforcing Force Majeure provisions with the guidance of legal practitioners would help in serving the justice better minimising the misuse of such benefit providing provisions of the law.

OTHER FACTORS AFFECTING FORCE MAJEURE CLAUSE

It would be important to note that the burden to proof of special circumstances, the events under the list of Force Majeure or Frustration principle and the mitigation assurance to be provided is on the party asserting Force Majeure defence. The liability is on the asserting party to prove the existence of Force Majeure conditions. Such clauses are construed strictly by Courts. Force Majeure clause is expressly provided and not implied under the Indian Law. Expressly means that courts will apply usual principles of contractual interpretation as per the scope of the clause to make decisions regarding the protection to be provided to the parties of the contract.

Parties can also attempt to invoke other contractual clauses. For instance, Material adverse Change (MAC) clause, price adjustment clauses, limitation and exclusion clauses to limit or minimise the burden of non-performance. Moreover, the companies can also consider the ramification of non-performance clauses to clarify the liquidity of damages and the amount of compensation for non-performance of contract which is pre-determined and agreed between the parties before making a contract.

REMEDIES

Remedies to the clause depends on the nature of contracts. For instance, some contracts may provide immediate cancellation, or some may put the contract on hold. Some may give leniency in time or in standard quality of performance. In the verdict of Alopi Parshad & Sons Ltd. v. Union of India, it was ruled out that the Indian Contract act does not enable a party to a contract to disregard their expressed statements made earlier and to claim compensation for the non-performance of a contractual obligation which was made at rates different from stipulated rates, on an indeterminate plea of equity. Irrespective of any sudden price hikes or market inflation or deflation, the party to a contract does not itself get rid of the bargain they have made and is liable to perform the obligation until proven in the Court that the above performance is ‘impossible’ or ‘impracticable’.

MITIGATING THE CURRENT CIRCUMSTANCES

With COVID-19 effects all over the globe, Life Insurance companies also have the right to invoke Force Majeure clause and escape the liability of paying the claims to the clients.

TURNING POINT

Insurance companies being private or public, have stated that they will not invoke this clause in cases of COVID-19 related death claims and will process them as fast as possible. This step was taken to assure the premium payers, that the Life Insurance industry is taking every possible measure to mitigate the disruptions and the suffering being caused, due to the lockdown. Further, the company will be providing the clients with maximum digital support to honour COVID-19 death claims in accordance with the “social distancing” rules. A grace period of 30 days is bring provided by the company to pay their premiums. Relaxations in settlements of policy is being given due care and attention to keep the policyholders at ease. All the other special charges are exempted except the fund management charge. Options like partial withdrawal and switching of accounts will be restricted during the settlement period. Other insurance companies will be providing maximum support to cover the loss arising due to special unsure circumstances in the various businesses. Policyholders are falling largely on ‘Force Majeure’ and ‘Act of God clause’.

AROUND THE WORLD

COVID-19 virus arising from the Virus ology labs of China has already made the country to work on the problems arising due to non-performance of Contracts. China Council for The Promotion of International Trade (CCPIT) has already provided thousands of Force Majeure certificates to businesses, relaxing the difficulties in performing the specified obligations of their respective contracts. It is right to conclude that the invocation of the Force Majeure clause has been successful in China. If the clause is a failure to some of the businesses, then those companies can go for the provisions governing non-performance of contract due to impossibility or impracticability also known as ‘Frustration’ to contract as mentioned in the Uniform Commercial Code (UCC) of China.

In India, Department of Expenditure, Procurement Policy Division, Ministry of Finance discharged an Office Memorandum on February 19, 2020, with regard to the Government’s ‘Manual for Procurement of Goods, 2017, which sets out the direction for procurement by the government. Further, it states that COVID-19 could be brought under Force Majeure clause based on ‘Natural calamity’ providing that ‘due procedure’ has to be followed.

CONCLUSION

COVID-19 is having an unforeseeable impact on businesses and the companies. It has restricted the parties to perform their contractual obligations, leading to a decline in the economy. As discussed in detail, Force Majeure is an express provision and invoking it for the purpose of invocation or as a defence, depends on the nature of a contract, impossibility to perform, alternativity to perform and various other circumstances that are different in different cases and would be assessed by the Courts on a case by case basis. Contracting parties must go through the language of the contract so formed by them and the various provisions regarding them. This would help in determining the plausibility of their success. Presently, massive challenges are being faced by the society. The hope for everyone is that the wrecks of COVID-19 will go by swiftly.

REFERENCES

• https://www.bloombergquint.com/opinion/coronavirus-key-legal-issues-for-india-inc-with-covid-19
• https://www.wsgr.com/en/insights/covid-19-and-force-majeure-clauses.html
• https://amlegals.com/covid-19-force-majeure/
• https://www.mondaq.com/india/litigation-contracts-and-force-majeure/918092/time-it-or-time-out–force-majeure
• https://www.business-standard.com/article/companies/life-insurers-will-not-invoke-force-majeure-clause-for-covid-19-claims-120040601452_1.html
• https://www.lexology.com/library/detail.aspx?g=d63bbf8d-64ec-4595-ab87-633934115ab0

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This article is written by Hitesh Vachhani, 4th year Law Student at GLS Law College Ahmedabad. This article focuses on the advancement of technology that has raised a question regarding the online contracts and how the Judiciary and the Legislature has responded to the same.

INTRODUCTION

The advancement of technology has changed the lifestyle of the people. Technology has no geographical limitations and thus there’s quick and wide dissemination of information than before. It has also changed the manner which the businesses are conducted. Internet is being used for electronic commerce, social networking, dispute resolution, sending emails and writing blogs. Today, electronic commerce is the most significant features of the Internet.

Electronic commerce includes all the type of activities by a person or a firm such as buying and selling of products and services like using computers or any electronic platform via the use of internet. And online contracts form a part of electronic commerce. Thus conducting business over the internet demands agreement between the parties. Online Contracts or Cyber Contracts or E-Contracts or Digital Contracts is a shift from the traditional mode of face to face contract and the parties can contract without meeting each other.

Traditionally, in a contract, one of the parties to the contract makes an offer and the other accepts the offer and thus there is a meeting of two minds and the contract is said to have been entered into between the parties. In online contracts, the parties can agree to the terms of the contract via the internet i.e., via exchange of emails or other possible suited mediums. But in both, traditionally or in online contracts, the essential requirements of the contracts have to be fulfilled for the contract to be valid and made enforceable in the courts of law.

ESSENTIAL REQUIREMENTS FOR ONLINE CONTRACTS

The following requirements have to be fulfilled for the contracts to be held valid under the Indian Contract Act, 1872:

• Offer
• Acceptance
• Intention to create legal relationship
• Lawful Object
• Lawful Consideration
• Parties must be capable to enter into contracts
• Free Consent
• Possibility of Performance

DEVELOPMENT OF THE CONCEPT OF ONLINE CONTRACTS

The Indian Contract Act, 1872 which is a colonial-era law defines a contract as an agreement enforceable by law. Traditionally the Indian Contract Act would only apply to the agreements entered into between the parties face to face. But as early as in 1996, the Hon’ble Supreme Court in Bhagwandas Goverdhandas Khedia v. Girdharilal Parshottamdas & Co.¹ was posed with a question that whether the contract entered into between the parties orally over a telephonic conversation was a valid contract capable of being enforced in a court of law. The SC by a majority of 2:1 (the majority being J. Shah and J. Wanchoo) held that the draftsmen of the Indian Contract Act, 1872 could not have envisaged the use of the telephone because it was not invented and therefore the words of the provision should be confined to communication by post. Thus, the contract was not a valid contract and could not be enforced. But the minority opinion of Hidayatullah J. is what opened the doors for online contracts.

According to J. Hidayatullah, the law should have been interpreted in the present-day context. He observed:
“The law under consideration was framed at a time when telephone, wireless, Telstar, Early bird were not contemplated. If the time has marched and the inventions have made it easy to communicate instantaneously over long distance and language of our law does not fit the new condition it can be modified to reject the old principles”.

It is true that the draftsman of the contract law could not have contemplated scientific inventions. Further, it is also important that the provisions of the law are interpreted in a progressive manner. The statues must be construed to continuously update the wordings in accordance with the changes in the social condition, science and technology.

LAWS THAT GOVERN THE ONLINE CONTRACTS

There are various laws that govern the online contracts such as the Indian Contract Act, 1872, the Indian Evidence Act, 1872, the Information Technology Act, 2000 and the Indian Stamps Act, 1899.

It is important to note that the requirements of the online contracts are similar to that of physical contracts under the Indian Contract Act, 1872 i.e., there should be a lawful object, lawful consideration, the parties must be competent enough to contract, there must be free consent and there must be an intention to create a legal relationship. Thus, even for the online contracts the provisions of the Indian Contract Act, 1872 have to fulfilled for it to be made enforceable in the courts of law.

However, the doubts as to the evidentiary value of the online contracts may arise. To settle the doubts raised qua the evidentiary value of the online contracts there are certain provisions in the Indian Evidence Act, 1872 which govern the same. They are as follows:

• Section 85 A: This section presumes the existence of the electronic agreement after the agreement is concluded by affixing the electronic signature of the parties.
  
• Section 85 B: This section allows the court to presume that the record in question is not put to any kind alteration. It also allows the court to presume that the electronic signature has been affixed with the intention of signing and approving the electronic record. This section also provides that the section should not be misread so as to create any presumption relating to the integrity or authenticity of the electronic record or digital signature in question.
  
• Section 88 A: This section allows the court to presume the existence of the electronic messages and also specifies that the court shall not make any presumptions as to the person by whom that message was sent. The Court may presume that an electronic message, forwarded by the originator through an electronic mail server to the addressee to whom the message purports to be addressed corresponds with the message as fed into his computer for transmission.
  
• Section 90 A: According to this section where the electronic documents are proved to be five years old are and are produced from the proper custody, the court may presume that the electronic signature so affixed on the document was affixed by him or any other person authorized by him so as to validate the existence of the contract.
  
• Section 65 B: According to this section any information contained in an electronic record which is printed on a paper or stored/recorded/copied on optical/magnetic media produced by a computer shall be deemed to be a document and is admissible as evidence in any proceeding without further proof of the original, provided certain conditions mentioned in sub-section 2 of section 65 B are fulfilled.

The Information Technology Act, 2000 recognizes the basic features of the contract such as communication, acceptance and revocations which may be expressed in electronic form or by means of an electronic record. Signature of the parties to the contract is essential but is not required under the Indian Contract Act as it recognizes the existence of the oral contracts as well. The principal function of signing a document is to confirm the identity of the contracting parties and to give consents to the contractual terms and to refuse repudiation, i.e. when a person appends his signature, he cannot subsequently refuse that he was not a contracting party. Therefore, the IT Act makes provision to authenticate the electronic records. Section 3 of the Information Technology Act, 2000 provides that any subscriber can authenticate the electronic record by affixing the electronic signature. Section 3 A of the Information Technology Act, 2000 defines electronic signatures and makes this electronic authentication technique reliable.

In particular, the IT Act 2000 excludes the following documents from electronic transactions:

• Negotiable Instruments
• Power of Attorney
• Trust Deed
• Will
• Sale Deed or Conveyance deed with respect to the immovable property of any documents relating to any interest in an immovable property.

Section 10A of the Information Technology Act, 2000 hints at the validity of e-mail contracts. It reads as follows: “Where in a contract formation, the communication of proposals, the acceptance of proposals, the revocation of proposals and acceptances, as the case may be, are expressed in electronic form or by means of an electronic record, such contract shall not be deemed to be unenforceable solely on the ground that such electronic form or means was used for that purpose.”

In the present era the formation of contracts via emails are increasing and to ensure that the online contracts are not faced to with any legal implications this provision was inserted into the Information Technology Act, 2000.

JUDICIAL RECOGNITION OF ONLINE CONTRACTS

In Trimex International Fze Limited v. Vendata Aluminium Limited², The petitioner had applied to the Hon’ble Supreme Court under section 11(6) of the Arbitration and Conciliation Act, 1996 for the constitution of the arbitral tribunal. The respondents objected to the same on the grounds that there was no contract between the parties and therefore there could not be any arbitration agreement between the parties. It was the contention of the respondent that the acceptance over the e-mails could not give rise to the contract and there was always an intention that a formal contract would be signed in future.

In Rickmers Verwaltung GNBH v. Indian Oil Corporation Limited³, The Supreme Court clearly contemplated that possibility of exchange of correspondence between the parties would amount to contract between parties. Thus relying on the above decision of the three-judge bench the court held that “Unconditional acceptance of contract concluded orally or in writing [or by e-mail].. mere absence of a signed formal contract, would not affect either unconditional acceptance of contract or implementation thereof.” Thus, the e-mails which convey the clear intention of the contracting parties can be treated as a binding contract.

In Ambalal Sarabhai Enterprise Limited v. KS Infraspace LLP Limited, The Hon’ble Supreme Court had decided the validity of agreements entered into by the parties using a combination of communications over WhatsApp and emails. The court stated that: “The e-mails and WhatsApp messages will have to be read and understood cumulatively to decipher whether there was a concluded contract or not. The use of the word ‘final draft’ in the e-mail… cannot be determinative (of offer or acceptance) by itself”. Therefore the courts have accepted and provided that the agreements can be executed electronically, so long as they meet the minimum requirements of the Contract Act and the IT Act.

The foreign courts have also given a more liberal construction. There are judgments which read that unless an inference can be drawn from the facts that the parties intended to be bound only when a formal agreement had been executed, the validity of the agreement would not be affected by its lack of formality.

CONCLUSION

The advancement of technology will bring more and more challenges and thus it is important that the laws are updated and upgraded from time to time to keep up with the evolving technology. The judiciary is still administering the online contracts and it still remains a developing subject as there are not many judicial decisions on this point.

However, the fact, that many Indian courts recognize the extensive inclination to e-commerce and reliance on the internet cannot be denied. The prevailing legal judicial and legislative intent appears to be that any legally valid acts would maintain their validity even if performed online or electronically provided that such contract satisfies all the essentials of a valid contract.

REFERENCES

• 1966 AIR 543 ¹
• 2010 (1) SCALE 574²
• AIR 1999 SC 504³

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