Tag: #indiancontractact

S.no	Contents
1.	Introduction
2.	Definition of Section 74 of the Indian Contract Act
3.	Time Aspects and Other Dispositions
4.	Importance of Penalties
5.	Jurisdiction of Section 74 of the Act
6.	Analysis of Section 74 of the Act
7.	Principal of Mitigation
8.	Conclusion

Introduction

Since the passage of the colonial Indian Contract Act of 1872 (ICA)¹, much has changed or developed in the manner that commerce is done. Due to the act’s age, there are a few flaws that need to be reviewed and fixed to ensure efficient corporate operations. Unliquidated losses, which apply where a contract lacks a section addressing liquidated damages, are discussed in Section 74 discusses liquidated damages.

This clause deals with liquidated damages, however, the act doesn’t define them, and the courts have frequently issued contradictory rulings in various circumstances. These decisions are frequently viewed incorrectly or differently. This study aims to clear up any ambiguity about significant liquidated damages rulings. It is far more difficult to assert the liquidated damages since you have to demonstrate the extent of the losses the harmed party produced.

There are very few contracts where the damages in the event of a breach cannot be determined. In these kinds of circumstances, it might be challenging to assert liquidated damages that equal the actual harm. The ‘genuine prior estimate of losses’ provision, which the party who breaches the contract attempts to exploit, is given weight by the courts in determining whether liquidated damages are appropriate or not. Additionally, there is no distinction between a penalty and liquidated damages under Indian contract law because the awarded compensation cannot exceed the contract’s maximum value.

Definition of Section 74 of the Indian Contract Act

“The complaining party is entitled to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named, or the case may be, the penalty stipulated for when a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty,”² according to the law.

Exception of Section 74

Any person who signs a bail bond, recognizance, or another similar document, or who offers a bond by law, a directive from the [Central Government] or a 3[State Government] for the accomplishment of a public duty or act in which the public is interested, is liable to pay the full sum specified therein if the condition of the document is broken.

Illustrations

1. In exchange for failing to pay B Rs. 500 on a specific day, A has agreed to pay B Rs. 1,000. On that day, A fails to pay B the sum of Rs. 500. A must pay B the amount of money the court finds appropriate, up to a maximum of Rs. 1,000.
   
2. A signs a recognizance obligating him to appear in court on a particular day in exchange for a fine of Rs. 500. His recognizance is lost. He is responsible for paying the entire fine.
   
3. A and B have an agreement that if A works as a surgeon in Calcutta, he would pay B Rs. 5,000. A is a surgeon who works in Calcutta. B is entitled to compensation that the Court deems appropriate, up to a maximum of Rs. 5,000.

Time Aspects and Other Dispositions

Time is a crucial component of this specific Section 74 of the ICA 1872. The Indian Contract Act of 1872 has significant repercussions that follow a delay, making it difficult for the party in default to immediately breach the contract. The important aspect of these actions is their profound philosophy. The contractual provision of a penalty is meaningless in the absence of any loss. 

The idea of taking advantage of rewards coming from a violation of a contract is mentioned in the Indian Contract of 1872. The bare act states that “When the vendor sells to the defaulting vendee is not eligible to receive the benefits of the later contract if the price is higher than the market price on the day of delivery.” This is accurate even if the vendor received the advantages of a different contract that was desirable to him in return for the loss of the contract that the defaulting vendee had breached.

Importance of Penalties

The essence of a penalty is the payment of the agreed-upon monetary recompense to the party who was wronged. The fundamental idea behind compensation is that the aggrieved party should regain its prior position before the contract’s performance. The landmark case Tata Iron & Steel Co Ltd v. Ramanlal Kandoi³ established this rule, stating that it is important to be aware of the events that caused the plaintiff’s loss of income. The innocent person needs to comprehend the damages.

A comprehensive analysis of the types of fines and damages is necessary. The mere use of terms like “loss” or “damages” does not make the defaulting party liable. A sequence of events must occur for the loss brought on by the contract’s breach to be fairly assessed. Section 74 of the Indian Contract Act abolishes the rather convoluted differences established under English Common Law between provisions allowing for the payment of liquidated damages and clauses in the form of penalties.

Jurisdiction of Section 74 of the Act

Bal Kishan Das v. Fateh Chand⁴, the Court explained the application of Section 74 by dividing situations involving damages into two categories:

1. First, whether the sum to be paid in the event of contract violation has been predetermined and 
2. Any further penalty clauses that may be included in the contract.

Analysis of Section 74 of the Act

When considering the application of Section 74 in Fateh Chand v. Bal Kishan Das⁵, The Court stated that it handles issues involving damages, which are divided into two categories. when the compensation due in the case of a contract violation is predetermined. Where penalties in the form of extra provisions may be included in the contract.

The Supreme Court noted that the expression is meant to embrace several sorts of contracts in Maula Bux v. Union of India⁶, It might not be practicable for the court to determine compensation in cases of contract breaches. If the sum agreed upon by the parties is a real pre-estimate and not a penalty, then it may be used in some circumstances as the benchmark for appropriate compensation.

The party seeking compensation must establish the loss incurred in cases when a monetary loss may be identified. In these situations, the courts must consider whether the amount sought is reasonable. The courts will do this while using the Section 73 principles. The magnitude of the damage incurred by a party must thus be shown in every instance. The obligation to establish the level of loss was waived in some instances, however, where the harm was difficult or impossible to demonstrate.

In Indian Oil Corporation vs. Messrs Lloyds Steel Industries Ltd⁷, the Delhi Court ruled that IOC was unable to receive liquidated damages since it had not experienced any losses as a result of the contractor’s construction and commissioning delays at the terminal in Jodhpur.

The court determined that the pipeline arrived at the Jodhpur port significantly later than the construction project’s completion date and that the terminal could not have been used for commercial purposes without the pipeline.

According to the Supreme Court’s decision in Oil & Natural Gas Corporation Ltd vs Saw Pipes Ltd⁸, when evaluating whether the party seeking damages is entitled to them, the conditions of the contract must be taken into account. unless it is determined that such an estimate of losses or compensation is excessive or acceptable, allowing for liquidated damages in the case of a contract violation.

The person who was harmed by a breach of contract may now obtain a decree without having to show that he experienced loss or damage thanks to Section 74. Even if no real loss is demonstrated to have been experienced as a result of the contract violation, the court is nonetheless permitted to award appropriate damages in such a situation.

If the damages are a true pre-estimate by the parties as the standard for fair damages, the court may nevertheless award them even if they are not a punishment or are reasonable. The court may find it challenging to determine the appropriate damages in some contracts.

Principal of Mitigation

According to the idea of mitigation, the complaint must make a concerted effort to accomplish considerably more in the typical court of commerce. The efforts he takes to remove himself in the case of a contract breach shouldn’t be measured on a high-tech scale. The complainant doesn’t need to endanger his assets, his reputation, or that of his business to reduce the damages that the defendant will be compelled to cover. In M Lachia Setty & Sons Ltd. v. Coffee Board Bangalore⁹, the Supreme Court decided that the mitigation principle should be the only consideration made while calculating damages rather than granting any rights to a party that violated the contract. In this case, it was determined that the complainant was required to do all reasonable efforts to limit the loss and that he was barred from pursuing claims for avoidable losses if he failed to do so.

According to the decision in Esso Petroleum Co. Ltd. v. Mardon¹⁰, the court has the jurisdiction to treat a prediction made concerning the subject of a contract at the pre-negotiation stage as more than just an expression of opinion and as a continuing guarantee. This is because the prognosis was provided to sway the other party into signing a contract. The person who produced the prediction may be held accountable for a breach of warranty if the estimate is subsequently found to have been prepared with complete negligence.

 In Murlidhar Chiranjilal v. Harishchandra Dwarkadas¹¹, according to the Supreme Court, there are two criteria used to determine damages when a contract for the sale of commodities is broken. The first step is to place the party that can prove the other party did not provide what they were promised in a position financially equivalent to what would have happened if the contract had been completed. The plaintiff is also not entitled to any damages resulting from failure to take reasonable efforts to mitigate the loss resulting from the breach.

Conclusion

Thus, it follows that the requirement that the loss sustained be shown violates the entire reason why liquidated damages provisions are included in contracts. The Act’s Section 74 emphasizes the need for fair pay. If the contract’s compensation was offered as a penalty, The consideration would be altered, and the party would only be eligible for damages reimbursement. However, if the compensation provided in the contract is a true pre-estimate of loss, which the party recognized at the time of contracting, there is no doubt as to how to prove such loss. In actuality, it is the opposing party’s responsibility to provide evidence that no loss is anticipated to result from such a breach.

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Endnotes:

1. Indian Contract Act 1872
2. Section 74 of the Indian Contract Act 1872
3. Tata Iron & Steel Co Ltd v. Ramanlal Kandoi, (1971) 2 Cal. Rep. 493, 528
4. Bal Kishan Das v. Fateh Chand, AIR 1963 SC 1405
5. Fateh Chand v. Bal Kishan Das, AIR 1963 SC 1405
6. Maula Bux v. Union of India, (1969) 2 SCC 554
7. Indian Oil Corporation vs. Messrs Lloyds Steel Industries Ltd, 2007 (144) DLT 659)
8. Oil & Natural Gas Corporation Ltd vs Saw Pipes Ltd, (2003) 5 SCC 705
9. M Lachia Setty & Sons Ltd. v. Coffee Board Bangalore, (1981) SCR (1) 884
10. Esso Petroleum Co. Ltd. v. Mardon, [1976] QB 801
11. Murlidhar Chiranjilal v. Harishchandra Dwarkadas, 1962 SCR (1) 653

This article is authored by Animesh Nagvanshi, a student at ICFAI University, Dehradun.

Case Number

158 Ind Cas 554

Equivalent Citation

(1935) 37 BOMLR 461

Bench

The Bombay High Court

Decided On

12.03.1935

Relevant Act / Section

• The Indian Contract Act, 1872
• The Insurance Act, 1938

Brief Facts and Procedural History

Introduction

This legal case centres around a minor named Madanlal Sonulal, who initiated legal proceedings against The Great American Insurance Co. Ltd. for failing to fulfil a contractual promise. The agreement was made between the minor’s guardian and the insurance company and was deemed valid. Madanlal was the only surviving son of a joint Hindu family that operated a business in Devalgaum. The family had taken out a fire insurance policy with the defendant company to cover their cotton bales. However, when the cotton bales were destroyed in a fire, the plaintiff sued the defendant company for the recovery of their loss. The defendant company, which was incorporated in New York, USA, was conducting business in Bombay, India. To represent him in the case, Madanlal was aided by his next friend, Goverdhandas Mohanlal, who was the husband of the plaintiff’s sister and with whom the plaintiff was living.

The case raises several legal issues, including the enforceability of contracts entered into by minors, the obligations of an insurance company under a fire insurance policy, and the jurisdiction of foreign companies operating in India. The court had to determine whether the contract was binding on the minor, whether the insurance company had fulfilled its obligations, and whether the court had jurisdiction to hear the case. The case has significant implications for Indian contract law, particularly in relation to minors and the obligations of insurance companies. Ultimately, the court’s ruling would have a profound impact on the rights of Indian citizens in similar legal disputes.

Facts

This is an appeal case regarding a point of law arising from Mr Justice Kania’s decision. The plaintiff, Madanlal Sonulal, is represented by Goverdhandas Mohanlal, his next friend, and has filed a lawsuit against The Great American Insurance Co., Ltd. This company is based in New York, USA, but operates in Bombay at Apollo Street within the Fort of Bombay. According to the lawsuit, the plaintiff is the only surviving coparcener of a joint Hindu family that carries on a joint family business in Devalgaum under the name Surajmal Sonulal. The plaintiff lives with his sister’s husband, Goverdhandas Mohanlal, who oversees the firm’s operations. The plaintiff had effected an insurance policy against fire with the defendant company on certain cotton bales Nevertheless, at the precise moment when the ultimate insurance was granted to the plaintiff’s company, the bales were set on fire, prompting the plaintiff to file a lawsuit seeking compensation for the resulting loss through the insurance policy. The defence raised in the written statement is that there was collusion between the agent of the defendant company and the persons who affected the insurance and that the insurance was affected after the fire. The defendants did not plead that the plaintiff was a minor and that the insurance policy was void. However, during the proceedings, the defendant’s counsel drew the attention of the learned Judge to the fact that the plaintiff was a minor and invited the Court to raise an issue as to whether the contract was void on the ground of a minority of the plaintiff. The learned Judge raised such an issue, but at the trial, he came to the conclusion that it was not necessary to answer the issue since the minority had not been pleaded.

The defendants have appealed the judgment of the learned Judge. They have not challenged the findings of fact. However, they contend that the insurance policy is void because the plaintiff is a minor, relying on the well-known decision of the Privy Council in Mohori Bibee v. Dhurmodas Ghose^[1]. The Privy Council held that any contract by a minor is wholly void under the Indian Contract Act since the Act requires that parties to a contract should be persons competent to contract, and if one of the parties is a minor, he is not competent to contract, and therefore, no contract results.

The learned Judge had found that the contract was valid and negatived the case of fraud and collusion set up by the defendant company, and gave judgment for the plaintiff. The only answer raised by the defendants is that the insurance is void because the plaintiff is a minor. This contention is alarming since it means that the property of minors cannot be insured 

In numerous joint family enterprises, minors inherit ownership rights, and typically an adult member of the family manages the business under the minor’s name. However, if this family member is unable to secure insurance on behalf of the minor, it can create a highly precarious situation. Nonetheless, the evidence indicates that the agreement was actually established by Goverdhandas, who acted as a representative through his agent Trimbaksha. In other words, the minor who entered into the contract did so through the agent Trimbaksha, who was serving as the minor’s guardian. The Court need not delve into the principles of the previous cases since the answer to the defendants’ contention is a simple one. The contract was made by the guardian of the minor, and not by the minor himself. Thus, the insurance policy is not void.

Before this case, in Mohori Bibee and Ors. Vs. Dharmodas Gosh (1903), the Privy Council had held that a contract by a minor is void-ab-initio. Yet, the Privy Council ruled in Sri Kakulam Subrahmanyam Vs. Kurra Subba Rao (1948)^[2] that an agreement made by a guardian on behalf of a minor for their advantage is considered legally binding. In Suraj Narain Dube v. Sukhu Aheer and Anr (1928)^[3], the Allahabad High Court held that the old consideration by the minor is not valid consideration for a fresh contract. In the case of Kunwarlal Daryavsingh vs Surajmal Makhanlal And Ors. (1963)^[4], the Madhya Pradesh High Court held that a minor is liable to pay rent for the property given to him on rent due to necessities for living and continuing study.

The case of General American Insurance Co v/s Madanlal Sonulal^[5] thus stands in line with the legal precedents established by the above cases, where the validity of a contract made on behalf of a minor or involving a minor was challenged and resolved.

Issues Of The Case

• Validity of the insurance made by the minor: An important matter to be addressed in this case pertains to the validity of the insurance policy made by the minor. As the minor is not legally competent to enter into a contract, the enforceability of the policy is uncertain. Thus, the court must decide whether the policy is binding or whether it should be rendered void on account of the minor’s legal incapacity.
• Liability of the insurance company to pay losses under the policy: A second matter for the court to consider is whether the insurance company is responsible for covering the losses under the policy. In the event that the policy is deemed valid, the court must then decide whether the insurance company is legally required to fulfil the terms and conditions outlined in the contract. In making this determination, the court may need to evaluate various factors such as the nature of the loss, the degree of damage incurred, as well as any provisions or restrictions included in the policy.

The case of Madanlal Sonulal v. The Great American Insurance Co. Ltd. dealt with several legal issues, including:

1. Whether a policy of insurance is void if entered into on behalf of a minor by an adult member of their family.
2. Whether the defendant could raise the defence that the contract was void on the ground of the minority of the plaintiff, citing the well-known decision of the Privy Council in Mohori Bibee v. Dhurmodas Ghose.
3. Whether the contract was actually made by the minor’s guardian acting through an agent, or whether it was made directly by an adult member of the minor’s family.
4. Whether the defendant could use technical defences to policies, especially in cases involving minors and joint family businesses.
5. Whether the law strikes an appropriate balance between protecting the rights of minors and ensuring the smooth functioning of businesses and transactions involving minors.

Decision Of The Court

In the case at hand, Defendant had raised a claim in their written statement that there was collusion between Plaintiff and the agent of Defendant’s company. According to Defendant, the insurance came into effect after the occurrence of the fire, and therefore, they were not liable for the damages. The Plaintiff’s minority was not pleaded, and as a result, the learned judge concluded that since the issue of the minority was not raised, it was not necessary to address it. The judge further held that the insurance was valid and ruled in favour of the Plaintiff in the case of collusion and fraud.

However, Defendant appealed this decision on the grounds that Plaintiff was a minor at the time the insurance was taken out, and therefore, the insurance should be considered void ab initio. The court analyzed the circumstances surrounding the insurance policy and found that it had been entered into by Goverdhandas on behalf of the minor through the agent Trimbaksha with Puranmal on behalf of the Defendant’s company. The court further noted that Puranmal had knowledge of the Plaintiff’s minority, which made the Defendant’s company aware of the Plaintiff’s status as a minor.

The court then considered whether Goverdhandas could be considered a guardian within the meaning of the relevant Act. The Act defines a guardian as a person who has the care of the person of a minor or of their property, or both. In this case, the insurance was made for the benefit of the minor and their property, and Goverdhandas had acted on behalf of the minor in entering into the insurance agreement. Therefore, the court held that the insurance was valid and dismissed the Defendant’s appeal with costs.

In light of the court’s decision, the parties agreed that the insurance company would pay Rs. 7000 to the Plaintiff. This decision reflects the court’s careful consideration of the legal issues at play, including the definition of a guardian under the relevant Act and the circumstances surrounding the insurance policy in question.

Conclusion

The case of Madanlal Sonulal v. The Great American Insurance Co. Ltd. serves as a reminder of the importance of understanding the legal implications of contracts entered into on behalf of minors and the role of guardians in such transactions. In this case, the defendant raised the defence that the contract was void on the grounds of the plaintiff’s minority, citing the decision of the Privy Council in Mohori Bibee v. Dhurmodas Ghose (1903).

However, the court ultimately ruled that the contract was not made by the minor but by Goverdhandas, acting through his agent Trimbaksha. Thus, it was the person acting as the guardian for the minor who entered into the contract through the agent. This ruling underscores the importance of understanding who the contracting parties are and whether the person entering into the contract has the legal authority to do so on behalf of the minor.

Furthermore, this case highlights the need for insurance companies to carefully consider technical defences to policies, especially in cases involving minors and joint family businesses. Insurance companies must be diligent in their review of the policy and ensure that the person who enters into the contract on behalf of the minor has the legal authority to do so.

In conclusion, while the law seeks to protect minors from entering into contracts that may be detrimental to their interests, it is essential to balance the need to protect their rights with the smooth functioning of businesses and transactions involving minors. It is important to take into account the role of guardians in such transactions and to ensure that all parties understand the legal implications of the contract before entering into it. Overall, this case serves as a valuable reminder to all parties involved in contractual relationships to be aware of the legal implications of their actions and to seek legal advice where necessary.

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Endnotes:

1. Mohori Bibee v. Dhurmodas Ghose, (1903) 30 Cal. 539 (India).
2. Sri Kakulam Subrahmanyam v. Kurra Subba Rao, AIR 1948 Mad 207 (India).
3. Suraj Narain Dube v. Sukhu Aheer and Anr, AIR 1929 All 210 (India).
4. Kunwarlal Daryavsingh v. Surajmal Makhanlal and Ors., AIR 1964 SC 193 (India).
5. Madanlal Sonulal v. The Great American Insurance Co. Ltd., AIR 1962 SC 439 (India).

This case is analysed by Sohini Chakraborty, a first-year law student at RGNUL Patiala.

RELATED POST: When Age Matters: Examining the Implications of Minors Entering into Contracts

S.no	Contents
1.	Introduction
2.	What is an E-Contract?
3.	Legal Validity of E-Contracts
4.	Essentials
5.	Validity of E-Contracts under the Indian Evidence Act
6.	Roles of Parties in an E-Contract
7.	Kinds of E-Contracts
8.	Challenges Associated with E-Contracts
9.	Present Dilemmas
10.	Conclusion

Introduction

As we enter the era of digitization, technology has become the backbone of almost everything, from our means of communication to attendance tracking in offices is now seamlessly integrated with technology. It’s no secret that in this day and age, technology is the driving force behind the advancements we see around us. As more companies continue to expand and agreements become increasingly complex, it’s only natural that the contracts themselves should become digitized as well.

Here in India, the rise of online transactions has led to a surge in the use of electronic contracts. These cutting-edge agreements are created and executed through electronic communication and digital signatures, bypassing the need for physical documents or signatures. With this new level of convenience and efficiency, we can now close deals with ease, without having to deal with tedious paperwork or signatures.

What is an E-Contract?

The Indian Contract Act, of 1872^[1], defines a contract as an agreement that is enforceable under the law. Section 2(h) of the Act states that for an agreement to be considered a contract, it must meet certain legal requirements. Interestingly, electronic contracts, also known as E-Contracts, adhere to the essence of Section 2(h) while changing the mode of contract formation. In simple terms, E-Contracts are digital agreements that are created, negotiated, and executed without the need for physical paperwork. The parties involved communicate through electronic means, such as the internet or telephonic media, allowing for a meeting of the minds to take place.

E-Contracts save time and are a step ahead of traditional pen-and-paper contracts as they are entirely paperless and created through digital mediums. Through the use of electronic means, such as the internet or telephonic media, the parties involved in E-Contracts are able to communicate effectively, leading to a meeting of the minds. This not only streamlines the negotiation process but also reduces the need for physical meetings, saving time and resources. Unlike traditional pen-and-paper contracts, E-Contracts are created through digital mediums and are completely paperless, making them environmentally friendly and cost-effective. They are a step forward from traditional contracts, as they are efficient, secure, and authentic.

Legal Validity of E-Contracts

Section 10A of the Information Technology (IT) Act, 2008^[2] is a significant provision in the Indian legal framework that acknowledges the legitimacy and enforceability of electronic contracts. The IT Act was amended to include this section as a response to the increasing use of digital contracts in commercial dealings.

The introduction of Section 10A of the IT Act clarifies that electronic contracts cannot be considered invalid merely because they exist in electronic format. These contracts hold the same legal value and enforceability as traditional paper contracts. This means that parties entering into an electronic contract have the same legal rights and duties as those in a contract executed on paper. The Act not only recognizes the legality of electronic contracts but also sets out certain conditions for their validity. These conditions include making the contract accessible for future reference and using a reliable and secure electronic signature or authentication method. Additionally, it clarifies that any law which requires a contract to be in a particular form or written shall be deemed satisfied if the contract is in electronic form and meets the requirements specified under Section 10A.

Essentials

1. There must be a proposal – one party must offer to enter into a contract.
2. There must be acceptance – the other party must agree to the proposal.
3. Legal consideration must be there – there must be something of value exchanged between the parties.
4. Parties must be able to contract – they must have the legal capacity to enter into a contract.
5. Free consent by the parties – the parties must enter into the contract freely and voluntarily without any coercion or undue influence.
6. Lawful objective – the purpose of the contract must not be illegal or against public policy.

It is essential for an e-contract to fulfil these criteria in order to be valid and enforceable under the law. Therefore, if all the necessary elements of a contract are present in an electronic agreement, it cannot be invalidated solely on the basis of its digital form, making E-Contracts legally binding and valid. It is crucial to establish the legal validity of an E-Contract to ensure that legal action can be taken in case of any violation of the agreement.

Validity of E-Contracts under the Indian Evidence Act

According to Section 65B^[3], any information contained in an electronic record that is either printed on paper, stored, recorded, or copied in an optical or magnetic media produced by a computer, can be deemed to be a document. However, this is subject to certain conditions, including that the electronic record is produced in court in compliance with the provisions of the Indian Evidence Act, and that it is accompanied by a certificate identifying the electronic record containing the statement of the person who had control over the creation of the record.

In essence, Section 65B ensures that electronic records are given the same evidentiary value as physical documents. This provision is particularly significant in the context of electronic contracts, as it reinforces their legal validity and provides parties with a means of proving the existence and terms of an electronic contract in court.

Roles of Parties in an E-Contract

An e-contract usually involves two parties: the originator and the addressee. The originator is responsible for initiating, sending, or creating the electronic message, while the addressee is the intended recipient of the message. The originator could be an individual, a business, or any other organization that initiates electronic communication. They can send an e-contract proposal to the addressee through various electronic channels such as email, messaging platforms, or an online contract management system.

The addressee, on the other hand, may also be an individual, a business, or any other entity that receives the proposal from the originator. Once the addressee receives the proposal, they may choose to accept, reject, or make a counterproposal based on the terms and conditions of the e-contract and the negotiation process between the parties.

Kinds of E-Contracts

The main types of contracts are:

• Shrink Wrap contracts – Contracts that are agreed upon by the end user by opening the product packaging.
• Click Wrap contracts – Agreements that are agreed upon by the end user by clicking on an “I agree” or similar button on a website or software.
• Browser Wrap contracts – Contracts that are agreed upon by the end user by using a particular website or software.

In addition to these, there are also other types of contracts, such as:

• Electronic Data Interchange – It is the type of e-contract that is used in the business-to-business (B2B) context for the automated exchange of business documents.
• E-Mail contracts – Agreements that are formed through the exchange of e-mails between the parties.

Comparing Traditional and E-Contracts

Within the legal domain, it is imperative to recognize the fundamental disparity between conventional contracts and electronic contracts. The former entails a tangible signature and is produced on paper, whereas the latter involves the utilization of digital signatures and is created digitally. In addition, the formation of conventional contracts demands the presence of the involved parties in a physical setting, culminating in elevated transaction costs and protracted processes. Conversely, electronic contracts obviate the need for physical presence, resulting in diminished transaction costs and enhanced expediency.

Challenges Associated with E-Contracts

• AUTHENTICITY AND SECURITY

E-contracts pose various challenges in their formation and enforcement, including concerns about the authenticity and security of electronic documents. Although the use of electronic signatures and digital certificates can ensure authenticity and security, there is always a risk of fraud, hacking, and unauthorized access to electronic documents. As technology advances and individuals become more knowledgeable about it, there is a risk of malicious use that can compromise the privacy of the public. Parties to e-contracts must take adequate measures to protect their electronic documents from such risks, including but not limited to using secure communication channels, employing encryption techniques, and regularly updating their security protocols.

• ENFORCEABILITY

The enforceability of electronic contracts in India hinges on their adherence to the requirements set forth in the Contract Act. Under the Contract Act, parties to a contract must possess the contractual capacity and the agreement must not violate any laws or public policies. Moreover, the contract terms must be lucid and explicit, and the contract must have consideration.

In India, there have been several instances where the enforceability of e-contracts has been challenged in courts of law. One such example is the Trimex International FZE Limited v. Vedanta Aluminum Limited (2010)^[4] case, in which the court upheld the enforceability of an electronic contract, despite the absence of a physical signature. The court declared that the usage of digital signatures and the presence of a valid offer and acceptance satisfied the prerequisites laid out in the Contract Act.

• JURISDICTION

One of the most significant challenges in the realm of electronic contracts pertains to jurisdiction and choice of law. Electronic contracts are frequently established across different jurisdictions, with the involved parties potentially operating under distinct legal systems. Therefore, the clauses regarding jurisdiction and choice of law must be meticulously crafted to ensure that the parties agree on the applicable law and forum for dispute resolution. Failure to properly address these clauses could result in one party being subjected to laws with which they are unfamiliar, potentially leading to non-compliance and undesirable legal ramifications. As such, it is imperative for parties involved in electronic contracts to engage in thoughtful deliberation regarding jurisdiction and choice of law clauses to minimize potential conflicts and disputes.

Present Dilemmas

• AUTOMATED CONTRACTS IN E-COMMERCE

The proliferation of artificial intelligence and machine learning in e-commerce has led to the formation of contracts through automated systems, raising pertinent legal questions regarding their enforceability. The primary concern revolves around whether contracts formed without any human intervention are legally binding and enforceable. With the increasing use of automated systems, it is essential to evaluate the validity of these types of contracts and determine if they adhere to the requirements set forth by contract law. The development of these automated systems has also prompted the need for a clear legal framework to ensure that parties involved in such contracts are adequately protected. Thus, there is a pressing need for legal guidelines and regulations to facilitate the formation, validity, and enforcement of contracts through automated systems.

• ONLINE DISPUTE RESOLUTION

One of the challenges in the enforcement of e-contracts is the possibility of disputes arising between the parties involved. In order to address this issue, there is a need for a mechanism for online dispute resolution, similar to the physical systems that exist for resolving disputes. With the increasing use of technology in e-commerce, the use of online dispute resolution can provide a cost-effective and timely solution to resolve disputes in the same medium in which the contract was formed. This would not only save time and money for the parties involved but also promote trust and confidence in the use of e-contracts.

• DATA PRIVACY

E-contracts often entail the collection and processing of personal data, which can potentially be accessed by individuals with sufficient technological expertise. It is essential that the use of such data complies with applicable data protection laws, including the General Data Protection Regulation (GDPR)^[5] in the European Union and the Personal Data Protection Bill in India, to safeguard the privacy and security of individuals. Adherence to such laws can help ensure that personal data is processed lawfully and transparently, and that appropriate measures are taken to protect against unauthorized access, theft, or misuse of personal data.

• FORCE MAJEURE

It is imperative to update the force majeure clause in e-contracts to account for unforeseeable events that could impede contract performance. Traditionally, force majeure provisions applied to uncontrollable events, such as natural disasters, wars, or labour strikes that were unforeseeable at the time of contract formation. However, given the increasing reliance on technology in conducting business, it is vital to include potential disruptions caused by cyber-attacks, technology failures, or similar events. Thus, it is necessary to include provisions in the force majeure clause that explicitly describe the effect of such events on contract performance, to ensure that e-contracts remain valid and enforceable in these scenarios.

Conclusion

In the contemporary era, the prevalence of e-contracts has become ubiquitous, making it arduous to avoid or anticipate their eventual dominance over traditional contracts. The digital age has witnessed the widespread adoption of e-contracts as a customary mode of contracting. The legal framework governing the formation and enforcement of e-contracts is underpinned by legal principles and statutory provisions. Provided that they satisfy legal requisites, e-contracts are enforceable to the same degree as paper-based contracts. However, the realm of e-contracts poses distinctive challenges, including concerns related to the legitimacy and security of electronic documents, as well as issues related to jurisdiction and choice of law. To ensure the enforceability and validity of e-contracts, parties must implement appropriate measures to mitigate these challenges. Although e-contracts offer notable advantages in terms of expediency and efficiency, parties must remain vigilant to address unconventional challenges. Given that technological progress is inevitable, it is vital for parties to e-contract to be cognizant of these challenges and take appropriate steps to address them.

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Endnotes:

1. The Indian Contract Act, 1872, Act No. 9 of 1875
2. The Information Technology (Amendment) Act, 2008, Act No. 10, Acts of Parliament, 2009 (India).
3. The Indian Evidence Act, 1872, Act No. of 1872
4. Trimex International Fze Limited v. Vedanta Aluminium Limited, 2010 (1) S.C.C. 574 (India)
5. General Data Protection Regulation (GDPR), https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016R0679

This article is authored by Sohini Chakraborty, a first-year law student at RGNUL Patiala.

Read more about E-Contracts:

• Laws Governing Online Contracts, http://lexpeeps.in/laws-governing-online-contracts/
• Validity and Challenges of E-Contracts, http://lexpeeps.in/validity-and-challenges-of-e-contracts/
• Evidentiary Value of E-Contracts, http://lexpeeps.in/evidentiary-value-of-e-contracts/

S.no	Contents
1.	INTRODUCTION
2.	WHO IS A MINOR?
3.	CAN MINORS ENTER INTO A CONTRACT?
4.	CONTRACTS OF BENEFICIAL NATURE
5.	BENEFICIARY TO A CONTRACT
6.	RESTITUTION
7.	NO ESTOPPEL AGAINST MINOR
8.	RATIFICATION BY A MINOR
9.	VOIDABLE AT THE OPTION OF A MINOR
10.	CONCLUSION

INTRODUCTION

The capacity to contract is a crucial aspect of contract law, which refers to the ability of a person to enter into a legally binding agreement. In other words, it is the legal competence or power of an individual or entity to enter into a contract that creates enforceable rights and obligations between the parties involved.

To be bound by a contract, the parties must have the legal capacity to agree. This means that they must have the mental capacity and legal status required to form a legally binding contract. The law recognizes that certain individuals or entities may not have the necessary capacity to enter into a contract, and therefore, any agreement they make may not be legally binding.

For example, minors, individuals with mental incapacities, and individuals under the influence of drugs or alcohol may not have the legal capacity to enter into a contract. In such cases, any contract they enter into may be deemed void or unenforceable. Similarly, corporations and other legal entities must also have the capacity to contract. This means that they must have the legal authority and power to enter into a contract, as well as the necessary authorization from their board of directors or shareholders.

Overall, the capacity to contract is a fundamental element of contract law, as it ensures that contracts are entered into freely and voluntarily by parties who have the legal competence and power to be bound by them.

WHO IS A MINOR?

According to Section 3^[1] of the Indian Majority Act, of 1875, an individual is considered to have achieved the age of majority once they turn 18 years old, with the exception of two scenarios

• If a guardian has been appointed for a minor’s person or property under the Guardians and Wards Act, of 1890, then the minor will remain a minor until they complete the age of 21 years.
• If a Court of Wards has assumed the superintendence of a minor’s property, then the minor will also remain a minor until they complete the age of 21 years, even if they have already turned 18 years old.

Under the act, minors enjoy a privileged position whereby they can bind others to contracts, but cannot themselves be held accountable for any breaches. This means that a minor cannot be held personally responsible for any wrongdoing they may commit.

CAN MINORS ENTER INTO A CONTRACT?

According to Section 11^[2] of the Indian Contract Act, of 1872, it is explicitly prohibited for a minor to enter into a contract. This prohibition means that any contract entered into by a minor, regardless of whether the other party was aware of their age, will be considered void-ab-initio, or invalid from the outset. This means that even if a minor is just one day away from turning 18, they will still be considered a minor in the eyes of the law, and any contracts they enter into will be deemed void.

Let’s take an example to understand the legal concept of minors and contracts;

In this case, Mr D, a minor, mortgaged his house for Rs.20,000 to a moneylender, who paid him only Rs.8,000. Subsequently, Mr D filed a lawsuit to set aside the mortgage agreement.

The court held that as per Section 11 of the act, a minor is not capable of entering into a contract, and any contract entered into by a minor is void. Therefore, the mortgage agreement between Mr D and the moneylender was void-ab-initio, as Mr D was a minor at the time of the agreement. The court further held that since the contract was void, Mr D was not liable to repay the moneylender any amount of the mortgage. The court allowed Mr D’s request to set aside the mortgage agreement, and the moneylender was not entitled to claim any rights on the property mortgaged by Mr D.

It is a well-established legal principle that minors are generally unable to enter into contracts, given their lack of legal capacity. However, there are two notable exceptions to this rule;

CONTRACTS FOR NECESSARIES

These are goods and services that are necessary for the minor’s support and maintenance. In such cases, a minor can enter into a contract for necessities, and the contract will be binding on the minor to the extent that it is reasonable and necessary.

CONTRACTS OF BENEFICIAL NATURE

 This type of contract is entered into for the benefit of the minor and is therefore binding on the minor. Examples of such contracts may include contracts for education or to advance the minor’s business interests. It is important to note that in both cases, the contracts must be entered into for the benefit of the minor in order to be legally enforceable. These exceptions to the general rule regarding minors and contracts serve to protect the best interests of minors and ensure that they can enter into necessary and beneficial agreements. The principle that a minor cannot enter into a legally binding contract has been firmly established in various landmark cases. One such notable case is Mahori Bibi v/s Dharmodas Ghose^[3], where the court held that a minor’s contract is void ab initio and unenforceable, even if the minor has misrepresented their age or misled the other party into believing that they were of age. The case has been widely cited and has played a pivotal role in shaping contract law in India, reaffirming the principle that minors cannot be held liable for obligations under a contract and can seek to have the contract set aside if necessary.

BENEFICIARY TO A CONTRACT

It is recognized that a minor can serve as a promisee or beneficiary in a contract and that a contract that is advantageous to a minor can be enforced by them. Notably, there are no limitations on a minor serving as a beneficiary, such as in the role of a payee or promisee within a contract. In light of these considerations, it follows that a minor possesses the ability to purchase real property and may initiate legal action to recover possession of the property after tendering payment for its purchase.

RESTITUTION

Where a minor has received benefits under a contract, he is bound to make restitution or return the benefits received. For instance, if a minor enters into a contract to purchase a car and has paid some amount of money, the seller is required to return the money to the minor and take back the car. If a promissory note is executed in favour of a minor, they have the right to enforce it accordingly.

Furthermore, a minor who has extended a loan to someone and experiences a refusal by the borrower to repay the loan based on the voided agreement has the entitlement to reclaim the loaned funds. In a legal context, these principles are crucial for contracts in which minors are involved. It is important to note that this legal principle regarding the capacity of minors in contracts has been demonstrated in various legal cases. For instance, the case of General American Insurance Co v/s Madanlal Sonulal^[4] illustrates how a minor was able to recover insurance funds after a loss, despite the fact that the goods in question had been insured on behalf of the minor. Such cases serve to affirm the legal rights and entitlements of minors in contractual matters.

NO ESTOPPEL AGAINST MINOR

The legal principle of estoppel is intended to stop a person from arguing something or asserting a right that refutes what they formerly said or agreed to by law. However, it is important to note that this principle does not apply to minors in the context of contractual agreements. Specifically, an infant or minor is not estopped from setting up the defence of incompetence due to minority. This is because the law of contract is designed to protect minors from incurring contractual liability, given their limited legal capacity. As such, the defence of estoppel cannot be used against minors in contractual matters.

In situations where a minor misrepresents their age and induces another party to enter into a contract with them, the minor cannot be held liable for the resulting contract. Specifically, no estoppel can be asserted against a minor in such cases. This means that the minor cannot be prevented from pleading their infancy as a defence in order to avoid the contractual obligation.

This is because the law recognizes the limited legal capacity of minors and aims to protect them from the consequences of their contractual agreements. As such, a minor cannot be held responsible for a contract that they entered into while still legally considered a minor, regardless of any misrepresentation that may have occurred. Ultimately, the principle of no estoppel against a minor serves to safeguard the rights and interests of minors in contractual dealings.

According to the ruling in Vaikuntarama Pillai v. Athimoolom Chettiar (1915 Madras H.C.)^[5], “There is a clear statutory provision that minor being incompetent to contract is incapable of incurring any liability for any debt, the law of estoppel cannot overrule this provision to make him liable.” This statement emphasizes that minors are not legally responsible for debts incurred through contracts and that the doctrine of estoppel cannot be used to make a minor liable for a contractual debt. The ruling underscores the importance of protecting minors in contractual matters and ensuring that they are not unfairly subjected to legal liabilities.

RATIFICATION BY A MINOR

Ratification refers to the act of confirming or validating a contract that was entered into while the person was a minor, after they have attained the age of majority. Once a minor attains majority, he or she has the option to either affirm or disaffirm the contract. If the minor chooses to affirm or ratify the contract, then the contract becomes binding and enforceable. By doing so, the minor becomes bound by the terms of the contract and can be held liable for any breach of the contract. It is essential to note that once a contract has been ratified, the right to disaffirm the contract is lost and cannot be exercised again. Ratification can be expressed or implied, and it can be done through words or actions. For example, if a minor purchases a car and continues to use it after attaining the age of majority, then it can be considered an implied ratification of the contract.

VOIDABLE AT THE OPTION OF A MINOR

In cases where a minor enters into a contract that is not for necessaries or of a beneficial nature, the contract is considered voidable at the option of the minor. This means that the minor has the option to either ratify the contract or repudiate it. If the minor chooses to repudiate the contract, then he or she is not bound by the terms of the contract and is not liable for any breach of the contract.

This provision is based on the understanding that minors are not legally competent to enter into binding contracts. Therefore, if a minor is to be held responsible for a contract, it must be a contract that is for necessaries or of a beneficial nature, or one that has been ratified after the minor has attained the age of majority. If a minor decides to repudiate a contract, he or she must do so before attaining the age of majority. Once the minor attains the age of majority, he or she can no longer repudiate the contract. If the minor does not repudiate the contract before attaining the age of majority, then the contract will be considered valid and enforceable.

It is important to note that if the minor ratifies the contract after attaining the age of majority, then the contract becomes binding on the minor, and he or she can be held liable for any breach of the contract. Therefore, it is essential for minors to carefully consider the consequences of their actions when entering into contracts, and to seek legal advice if necessary.

CONCLUSION

It is crucial to recognize that strict rules must be applied to contracts made by minors. It is often questioned why a minor who is one day away from attaining majority and has committed a breach in the contract should get away with it. However, it is important to understand that the law exists to provide a reliable framework to protect individuals’ rights when they have been infringed. Minors are considered to lack the capacity to make informed decisions as they are not yet fully accustomed to the complexities of the real world. Therefore, it is essential to ensure that minors are provided with adequate protection until they reach the age of majority. By adhering to these strict rules, we can create a consistent legal system that protects everyone’s interests, including minors who may be vulnerable in contractual relationships.

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Endnotes:

1. The Majority Act, 1875, Act No. 9 of 1875
2. The Indian Contract Act, 1872, Act No. 9 of 1875
3. Mahori Bibi v/s Dharmodas Ghose, UKPC 12, (1903) LR 30 IA 114 (India).
4. General American Insurance Co v/s Madanlal Sonulal, (1935) 37 BOMLR 461, 158 Ind Cas 554 (India).
5. Vaikuntarama Pillai v. Athimoolom Chettiar, (1914) 26 MLJ 612 (India).

This article is authored by Sohini Chakraborty, a first-year law student at RGNUL Patiala.

In India, startups are still relatively new. They are attempting to survive and, occasionally, succeed in the local environment. However, because of its intricate and constantly evolving corporate policies, the legal issues faced by start-ups are particularly distinctive. Let’s investigate and analyze the complexity of many aspects that have an immediate influence on start-ups in India.

BUSINESS STRUCTURE

Many start-ups struggle to identify the best business structure for their venture because it differs from industry to industry and one business structure that works well for one may not work well for another in terms of risk, the number of participants, profit distribution, liability, taxation, annual meetings, and registration, among other factors.

SOLE PROPRIETORSHIP

It has an easier taxation structure based on the revenue made by the proprietor; It is not taxed as a distinct legal entity; It is the appropriate business structure for individuals who wish to have complete control over their business and enjoy all the earnings alone. Instead, the business owners include their tax filings in their tax forms; The responsibility of a sole proprietor is infinite since the business’s assets are not considered to be private or personal if the proprietor is unable to pay the debts of the company; Its ability to raise cash for businesses is extremely constrained.¹

PARTNERSHIP FIRM

When multiple persons are involved in the business, it is appropriate; One of the most straightforward business structures, it is controlled by the Indian Contract Act of 1972 and the Partnership Act of 1932; Its taxation resembles that of a proprietorship firm quite a bit; several partners split the profit; Conflicts between the ideas of the different partners might be one of many problems.²

LIMITED LIABILITY PARTNERSHIP (‘LLP’)

When a business is unstable or dangerous, it works best; The Limited Liability Partnership Act of 2008 governs it; Because the liability is restricted, the business and personal assets are seen as distinct, and the personal assets cannot be depleted to pay off the obligations; There is no maximum number of members in an LLP, however, there must be at least two members; Its formation costs are considerably higher than those of a sole proprietorship business; The tax authorities treat limited liability partnerships (LLP) as a separate legal entity from its owners and require that they register with the Income Tax Department for taxation purposes. This makes LLP more advantageous than private limited companies because it is simpler to establish, manage, and register than a private limited company.³

PRIVATE LIMITED COMPANY

When there is a chance for corporate growth and equity investors, it is most appropriate; The 2013 Companies Act governs it; A privately held firm for small businesses is known as a private limited company; A Private Limited Company’s members’ liability is only as great as the number of shares they each own; Private Limited Company’s shares cannot be exchanged publicly; Compared to an LLP company, starting a private limited company has higher startup costs; It is crucial to be aware that the tax authorities view it as a separate legal entity from its shareholders and that it is legally required to register with the Income Tax Department for taxation purposes; it is appropriate for an entrepreneur who needs outside funding and is working toward a high level of turnover.⁴

REGISTRATION AND LICENSES

Obtaining all necessary paperwork and permissions before starting a business is essential for success. The absence of a license with the company will result in pricey legal actions and settlements. Firm licenses are different from business registration in that the latter is the paperwork required for a business to operate, whereas the former is required for listing a business with the registrar.

Another sort of registration that is required is the Startup India Registration, provided that the company satisfies the criteria established by the Department of Industrial Policy and Promotion of India (DIPP). Additional registrations like MSME, GST, Udyog Aadhar, import-export codes, etc. may be required depending on the type and size of the company.

Startups should be aware that, in addition to the aforementioned, they can require extra permits to set up and run a business depending on state regulations.⁵

PROPERTY LAWS

The distribution of property for the use of offices, warehouses, service centers, manufacturing plants, etc. is a key problem for startups in India. Since local state laws governing the commercial use of real estate or land vary from state to state and fall under the jurisdiction of the government, startups should be aware of them. For instance, the local municipal government may create a rule prohibiting the use of any property or land for industrial or commercial purposes in a residential area.

Typically, the municipal zoning authority divides a community into eight divisions. Residential, commercial, industrial, public, and semi-public, public utilities, open spaces/parks/playgrounds, transportation and communication, and agricultural use are all permitted in these parts. For carrying out commercial work, the zoning authorities may choose to specify the height, position, and map of the building.

Startups must conduct the necessary due diligence for any local municipal zoning laws or reservations and obtain the necessary permissions or licenses from such authorities if they intend to operate from a property, whether it be for an office, warehouse, service center, manufacturing units, etc. These requirements vary from state to state.

CONTRACT MANAGEMENT

Startups should practice strong contract discipline to control expenses, provide the maximum value, and reduce business risk; otherwise, they face expensive lawsuits.

Some of the most important contracts that a business typically needs include employment agreements, non-disclosure agreements, services agreements, lease agreements, rent agreements, and leave licenses, among others.

Startups should avoid using traditional and time-consuming methods for contract drafting; instead, they should write their contracts in a clear, concise, and simple manner without the use of legal maxims or challenging legal terms, making them easier to understand for the average person or anyone without a background in law.⁶

DATA PROTECTION & PRIVACY

Startups and other online retailers track and make use of user data, including search history. Startups should ideally avoid requesting permissions that aren’t required for the proper operation of their website or app or gaining access to user’s private information without their approval.

Startups ought to treat user privacy highly, which can only be done by developing privacy policies that are succinct, clear, summarised, and available in the user’s local/native language. Before logging in to any app, users will be able to easily read and understand the privacy policies, terms, and conditions.

A user agreement stating the startup won’t disclose or utilize their personal information is also required. This will help the company get the respect and confidence of the general population. What categories of personal information are collected by the website and how they will be shared or sold to third parties must be specified by the company in the privacy policy agreement.⁷

ADDITIONAL RESOURCES RELATED TO THE STARTUP INDIA PROGRAM

Identifying Startup The ability of an entrepreneur to exceed the competition in the market is essential, but doing so necessitates first comprehending the competition and creating an ominous business plan. When a company registers, it will become aware of all the other companies operating in the same industry, which will help it develop a development plan.

• Networking
  The business approach of “networking” pulls all the strings necessary to draw in investors, seize opportunities, increase customer awareness, and establish a strong brand identity.
  
• Investors 
  Investors are also your company’s stock speculators. A startup that has registered will have the opportunity to introduce itself to a large group of investors and give them the chance to develop some level of trust in your company.
  
• Mentor
  You can discover hope within yourself with the help of a mentor. A startup that has registered might look for the best mentor who has already been through all the difficult times that it will now face surviving.
  
• Accelerator
  After your business makes it through the start-up phase, accelerators offer financial support for building it up.
  
• Government Office
  A large number of government agencies have enrolled with the platform so that the startup can easily reach them.
  
• Accessibility for Startup
  A registered startup will have access to several online tools and be able to use resources on the Startup India platform without any hassles.
  
• The knowledge base
  All the information needed for a company, including important words, stakeholders, legal requirements, statistical data, business analysis, and more, is available online.

• Associated services
  This entails contacting every associated service provider, such as banks, law offices, and cloud computing services, and utilizing the best services offered by leading service providers.

• Templates 
  It is possible to obtain templates for practically every function, including legal, human resources, and customer service, which could make it simpler to complete tasks with the least amount of people and money.

• Startup Programs and Events
  Being constantly engaged and aware of your position in the company are now requirements. Consequently, the following program for startups is hosted by the government and various private entities: 

• Online Programs
  Learning never ends, thus an entrepreneur can always refresh his knowledge to stay consistent by enrolling in one of the many online courses offered on the website Innovative Challenges. Possibility to take part in various tasks that aid in identity formation, as well as interactions with mentors and incubators.

CONCLUSION

In conclusion, the Startup India Movement seeks to make lucid entrepreneurial ambitions and ideas a reality, which aids in the country’s overall development not just by creating more jobs or high-quality products but also by creating a standard for the global industrial development sector.

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References:

1. ALEXANDRA TWIN, Sole Proprietorship, Investopedia (July 26, 2022) Available at: https://www.investopedia.com/terms/s/soleproprietorship.asp
2. Arvind Manohar, India’s Startups And Legal Roller Coaster, Legal Service India(Last Visited: 16 September, 2022) Available at: https://www.legalserviceindia.com/legal/article-9182-india-s-startups-and-legal-roller-coaster.html
3. ibid
4. Indeed Editorial Team, What Is A Private Limited Company? A Complete Guide,indeed(Last visited: 16 September, 2022) Available at: https://in.indeed.com/career-advice/career-development/what-is-private-limited-company
5. Supra Note 2
6. Bennett Conlin,The Fundamentals of Contract Management,BusinessNewsDaily(Last Visited: 16 September, 2022) Available at: https://www.businessnewsdaily.com/4813-contract-management.html
7. The Editor, Data Protection and Privacy: 12 Ways to Protect User Data, Cloudian( Last Visited: 16 September, 2022) Available at: https://cloudian.com/guides/data-protection/data-protection-and-privacy-7-ways-to-protect-user-data/#:~:text=Data%20protection%20is%20a%20set,handles%2C%20or%20stores%20sensitive%20data.

This article has been written by Jay Kumar Gupta. He is currently a second-year BBA LL.B.(Hons.) student at the School of Law, Narsee Monjee Institute of Management Studies, Bangalore.

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.

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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.

INTRODUCTION

A transfer is an act of transferring something from one person to another. Any physical or virtual entity possessed by a person or group of people is considered property. A property asset can be transferred from one person to another through transferring rights, interests, ownership, or possession. Either or all of the ingredients can be satisfied. It can happen in two ways: by the parties’ acts and by law.

Section 5 of the Transfer of Property Act of 1882 defines the term “transfer of property.” It describes an activity in which a live person transfers property to one or so more people, or to himself or to one or so more living people, in the present or future. A living person is defined as a corporation, an association, or a group of individuals, whether or not they are incorporated.

Some important concepts in this act are as follows:

1. Immovable property involves land, benefits resulting from the land, and goods linked to the land, according to the General Clauses Act of 1897. Immovable property can be defined as including all property that is not standing wood, growing crops, or grass in the context of property transfer.
2. Mortgage debt was omitted from actionable claims following the amendment of 1900. Wallis C.J. held in Peruma animal vs. Peruma Naicker that mortgage debts might be transferred as actionable claims before 1900, but that they were excluded from the actionable claims because the legislature meant that the mortgage debt is transferred in the mortgagee’s interest through an instrument that is registered.
3. Instrument: The instrument is defined as a non-testamentary instrument according to the 1882 Transfer of Property Act. It serves as proof of a property transfer between living parties. An instrument is a formal legal document, according to the legal terminology.
4. Attested: A formal document signed by someone acting as a witness is referred to as attested. The executors are the persons who are in charge of transferring the property. In 1926, the amendment legislation was passed, stating that two or more witnesses must sign the document in the presence of the executant, not necessarily at the same time, and they must not be parties to the transfer.
5. Registered: According to the 1882 Transfer of Property Act, “registered” refers to any property that is registered in a jurisdiction where the Act is in effect. Various registration procedures must be followed.
   a. The property’s description should be stated.
   b. Avoid being a victim of fraud.
   c. A competent person should present the deeds.
   d. The property must be listed in the very jurisdiction as the registered office.
6. Actionable claims: A claim to any debt, except a debt acquired by a mortgage of immovable property or pledge o or hypothecation of movable property, or to any equitable interests in movables, not in the claimant’s possession, either actual or constructive possession, which the civil courts recognize as providing grounds for relief, whether such debt or advantageous interest is existent, accusing, or conditional.
7. Notice: The term “notice” refers to being aware of a fact. The individual is well-versed in a variety of scenarios. The Transfer of Property Act of 1882 settled 2 kinds of notices.
   
   Other important concepts are actual or implied notice means the one who is aware of a specific truth and constructive notice means that reality is discovered as a result of circumstances.
   
8. Transfer of property must be done by a competent person: For a legitimate transfer, the person transferring the property must be of sound mind, not intoxicated, a major, or not a person prohibited by law from entering into a contract of transfer of property with another person.
9. The transfer must be made in the following format: Property transfers do not have to be in writing, but if there is a specific property to transfer, it should be in writing:
   a) Over a hundred rupees was spent on the sale of the transportable property.
   b) The sale of intangibles must be done in writing.
   c) All mortgages with a value of more than a hundred rupees must be transferred in writing.
   d) A documented transference of actionable claims is required.
   e) Immovable property is given as a gift.
   f) A lease of more than one year on immovable property.

OSTENSIBLE OWNER

The provision is founded on the idea of proportionality. No one can confer a higher right on a property than what he owns, and alium transferee potest quam ipsa habet and nemo plus juris, which means that no one may transfer a right or title larger than what he owns. The ostensible owner’s transfer emphasizes the notion of holding out.

To make use of this section, you must meet specific qualifications, according to the law for its application. They are as follows:

1. The most important need is that the individual transferring the property is the ostensible owner.
2. The property owner’s permission should be given either implicitly or explicitly.
3. The transfer ought to be in exchange for something.
4. The transferee must exercise reasonable caution in determining the transferor’s authority to complete the transaction and whether he acted in good faith.
5. The idea of ostensible owner transfer is founded on the doctrine of estoppel, which states that when a genuine owner of property makes someone appear to be the owner to third parties and they engage on that representation, he cannot retract his representation.
6. This clause and its rules apply only to immovable property but not to movables.

However, the ostensible owner is really not the true owner, but he can pretend to be the real owner in such transactions. By the purposeful neglect or acquiescence of the genuine owner of the land, he has obtained that right, rendering him an ostensible owner. A guy who has been away for a number of years has donated his property to a close cousin to utilize for agricultural purposes and whatever else he sees suitable.

In this situation, the ostensible owner is a family member, and if he transfers the property to a third party during that time, the true owner cannot claim his property and claim that the person was not permitted to transfer it. Another scenario is when the property is in the wife’s name but the husband used to handle the finances and other aspects of the property. If the husband sells the property as a result, the wife will be unable to reclaim it.

In Ram Coomar v. MacQueen, the privy council declared that when it comes to transfers by apparent owners, somewhere along that lines that it is a principle of natural equity that where one man allows another to hold himself out as the owner of an estate and a third person buys it for value from the obvious owner believing that he is the real owner, the third person shall not be allowed to recover on a secrete title until he can overthrow that of notice, or something that adds up to constructive that ought to have put him on an inquiry, which, if put on trial, would have led to a discover.

ESSENTIALS

There are essentials that need to be meant to be an ostensible owner of any property. Like the term itself, the word ‘ostensible’ denotes ‘seeming’ or ‘apparent’. An ostensible owner is a person who poses as the one who owns that immovable property but is not the true owner.

1. A person must be the property’s ostensible owner.
2. That person must be such an owner with the genuine owner’s express or implied approval.
3. The one who is transferring must buy the property for consideration from the ostensible owner.
4. The transferee must take reasonable care before accepting the transfer to ensure that the transferor has the authority to make the transition; in other words, it should be done in good faith.

Reasonable care can be defined as the level of care that a reasonable and average person would take. It is his responsibility to check the transferor’s title.

As in the case of Nageshar Prasad v. Raja Pateshri, where the name of the proprietor was incorrectly recorded in the revenue records. The name was written was that of someone else, and the rightful owner had already complained about the mistake. The individual whose name was on the revenue records later sold it to a third party, who took possession of the property without making required investigations, and the rightful owner later objected. The third party is obligated to provide all available documents that may provide more information on the property’s title, which may include police registers, municipal registers, and other documents.

Also, there is a safety net in place for the true owner. As in the case of Mathura v. Ambika, in which the actual owner had disposed of the property to another person and had it registered prior to the ostensible owner’s transfer could even be registered, it was held that the real owner’s transfer would be valid because he has a greater title to the property than the ostensible owner, and that the rights of a third party who had purchased the property from the ostensible owner will not be protected under this section.

Only if the foregoing necessary conditions for the section’s applicability are met does the true owner lose his rights in the property here under the section.

There are steps to register an ostensible owner. Firstly, the documentation pertaining to the property must be examined to see if the transferor’s name appears as the owner.

Second, if the individual whose name appears on the records for the property in issue intends to buy it or not. Thirdly, look into “who has ownership of the site property and who is using it.” If the individual is the owner of the property according to the records and documents in the case at hand, the chances of it being a property of an ostensible owner or him being an ostensible owner are slim. However, “enjoying the property” doesn’t merely mean “being in possession of the property,” but also “selling rights,” “right to enjoy the benefits of the said property,” “right to lease out the stated property and receive compensation,” and “right to enjoy the benefits of the said property,” among other things. In this scenario, the term “enjoyment” has now been given a larger meaning.

Finally, the reason for it being given the ostensible ownership element, i.e. why the true owner has not bought it in his own name.

The transfer must be made without considering some factors:

1. The ostensible owner’s transaction is always for consideration. There should be some sort of exchange. Gratuitous transfers are not covered in this section.
2. When there is a transfer by an ostensible owner, care must be taken. He is unable to give the property away as a gift. As stated in the Indian Contract Act of 1872, consideration is a required component of every contract, and an ostensible owner’s property can only be transferred via contract. In addition, section 4 of the act states that anything that’s not expressly specified in this act must be determined from the basic definitions set forth in the Indian Contract Act of 1872.

THE BURDEN OF PROOF

The transferee bears the burden of proof in demonstrating that the transferor was the ostensible owner and also had permission to sell the property.

He must also demonstrate that he behaved in good conscience and took all reasonable precautions while obtaining possession of the property. It’s because he needs to show that he wasn’t at fault when he took the property and that the burden of proof should be shifted to the rightful owner. To shift his burden of proof, he can show that the transferor did not permit the transferee to know the true facts and went to great lengths to conceal them.

CONCLUSION

The Act’s Section 41 has done a good job of safeguarding the interests of the said innocent third party. However, this section may appear to be prejudiced in favor of the third party, this is only the case if the genuine owner is at fault. No one else can simply claim that he now owns the property and can no longer be evicted. The third party must exercise extreme caution when purchasing the property, and these criteria have been imposed by law to prevent the apparent owner and the third party from abusing this section. In a way, this also protects the genuine owner’s interests.

This article is written by Tingjin Marak, a BA/LLB student at Ajeenkya DY Patil University Pune.

INTRODUCTION

Section 10 of the Indian Contract Act prescribes the essentials for the formation of a valid contract which includes free consent of the parties, competency of the parties, lawful consideration, lawful object and ultimately entering into agreements that are not expressly declared void by the Act.

After the abovementioned ingredients of a valid contract are fulfilled and the object of the contract is served, it is said that the contract is discharged. There are four distinct ways by which the contract may be discharged which are as
follows:

1. Discharge by Performance
2. Discharge by Impossibility
3. Discharge by Agreement
4. Discharge by Breach

The article in hand seeks to uncover the details for the discharge of a contract by the breach and elucidates the required remedies.

MEANING OF BREACH

Breach of a contract is said to occur when either of the party to the contract renounces his liability or contractual obligations under the terms and conditions of the contract or makes the total or partial performance of the contract impossible due to his own act/ failure. The breach of a contract can be of two types:

1. Anticipatory Breach
2. Present Breach

ANTICIPATORY BREACH

Section 39 of the Indian Contract Act deals with the doctrine of anticipatory breach. The anticipatory breach is basically said to occur when the promisor rejects to perform the contract by announcing his intention of not fulfilling the contract prior to the actual date of the performance of the contract or disables himself from the performance of the contract in part or in its entirety.

• Features:

Anticipatory breach absolves the innocent party from the obligation to further perform the contract and brings an end to the obligations of the original contract.

Anticipatory breach further entitles the aggrieved party to either sue the defaulting party immediately for the breach of the contract or wait till the time when the act was supposed to be done. The above principle was famously laid down in the landmark case of Hochester v De La Tour¹.

Further, anticipatory breach of a contingent contract i.e. performance of contracts on happening of any conditional event also gives a scope of action for damages.

If the defaulting party announces his intention of default and the aggrieved party decides to wait until the actual date of performance of contract so as to sue the promisor, then the contract is deemed to be alive, subject to the obligations of the contract, thereby implying that repudiation of the contract by the promisor has not been accepted by the promisee. In order to ascertain what constitutes repudiation, the entire conduct and the words of the party have to be objectively assessed on the anvil of refusal or abandonment to performance of the contract. The breach must strike the root of the contract. Silence of the aggrieved party does not lead to acceptance of repudiation.

Such condition of unaccepted repudiation enables the defaulting party either to complete the contract, thereby binding the promisee to accept the same, or else to take advantage of any supervening situation i.e. discharge by means other than repudiation. And if so happens that due to the supervening situation performance of the contract becomes impossible, then the defaulting party is absolved from his contractual obligations and stipulations.²

The date for assessment of the general damages in cases of anticipatory breach shall be the date on which the repudiation took place. If the aggrieved party does not accept the anticipatory breach of the contract, then the damages will be assessed from the date of the actual performance of the contract. In the meantime, the promise shall take all the reasonable steps to mitigate the losses to the minimum.³

It is to be noted that there lies a remedy of damages for the losses suffered due to non-performance of the contract even if the contract has been acquiesced by the promisee thereon (usually in the cases of anticipatory breach wherein the promisor is later allowed by the promisee to fulfill the contract).

Further, as per the mandate of Section 64 Indian Contract Act, the aggrieved party, on bringing an action for damages, shall be bound to restore the benefits or advantages that he might have received under the terms of the contract.

PRESENT BREACH

Present breach is said to occur when the defaulting party breaches the contract on the actual date of the performance of the subject matter of the contract. The aggrieved party, in such cases, shall be entitled to sue the defaulting party for the breach of the contract in a competent court of law and extract the requisite monetary damages.

DAMAGES FOR BREACH

Damages refer to the monetary compensation that is claimed by the injured or aggrieved party for the breach of contract. The burden of proof of the breach of contract lies upon the plaintiff. The action for damages is mainly assessed on the twin criterion of “remoteness of damages” and “measure of damages”.

The fundamental principle behind awarding damages is to place the plaintiff in the same position in which he would have been if the contract had been fulfilled or if the breach had not occurred. The damages are hence compensatory in nature and not penal. Motive and manner of a breach are not taken into account in order to ascertain the compensation.

1. Remoteness of Damages:
It was in the landmark case of Hadley v. Baxendale, that the first acceptable criteria for assessing the quantum of damages were evolved. As per it, only such damages should be considered for the purpose of computing compensation as may be fairly or reasonably be considered as arising from the natural or the usual course of actions or such as may be reasonably in contemplation of both parties while entering into a contract. The given case laid down two distinct rules for the purpose of computing damages.

• General Damages: These damages are awarded in such cases of a breach that may arise naturally due to the usual course of things.
• Special Damages: These arise on account of unusual or special circumstances on the part of the plaintiff and in order to recover these damages, the special circumstances should be brought to the notice of the defendant. The knowledge of special circumstances should be within the contemplation of both parties.

Provisions in Indian Contract Act:
Section 73 of the Indian Contract Act deals with monetary compensation or damages to be awarded in cases of breach of contract. The underlying principle behind the concept of damages is that the party breaching the contract must compensate the aggrieved party in respect of the direct, reasonable consequences, flowing from the breach of contract.

Section 73 of the Act underscores the twin principle laid down in the case of Hadley v Baxendale, i.e. losses that arise in the natural course of things and the losses that are within the contemplation of the parties thereto. Any such losses sustained due to remote or indirect causes shall not fall within the scope of the claim for compensation under Section 73.

It is to be noted that Section 73 casts a duty to mitigate the losses which might accrue due to the breach of the contract. The aggrieved party is expected to undertake reasonable efforts to avoid the losses and keep them to the minimum. Any unreasonable conduct on the part of the plaintiff that leads to an aggravation of the losses shall disentitle him from such aggravated losses.⁴

In the case of Madras Railway Co. v Govind Rao⁵, the court held that extent of liability in ordinary cases is what may have been foreseen by the spectrum of a reasonable man.

2. The measure of Damages:

A. Pecuniary Losses
After the determination of the general or special nature of damages, comes the next step of monetary evaluation of damages. As far as the mantra for calculating or measuring damages is concerned, the difference between the contract price and the market price forms the base for the award of damages (usually in sales transactions). For the loss of profits that may accrue upon resale, the court held that such loss was a special loss that was not recoverable unless it was communicated to the other party.⁶

The court may award nominal damages so as to recognize the rights of the plaintiff even if he suffered no losses. Besides this, the pre-contractual expenditure may also be recovered as damages if it was within the contemplation of the parties.

B. Non Pecuniary Losses
Initially the Victorian and the Indian courts were hesitant in awarding damages for non-pecuniary losses, but however slowly and gradually, it became a cult practice for the courts to award such damages. In the case of Farley v Skinner⁷, the House of Lords pointed out there was no such absolute reason as to why the non-pecuniary damages shall not be awarded. The Indian courts too made a popular practice to award damages for non-pecuniary losses such as distress and mental trauma.

Section 74
Section 74 stipulates that if the number of liquidated damages to be paid in case of breach is stated in the contract, then the aggrieved party is entitled to such compensation even if the actual loss or damage is proved or not. The party claiming compensation shall not be entitled to receive any greater amount than such stated in the contract. The compensation so awarded by the court shall be a reasonable one. In Maula Bux v Union of India⁸, SC affirmed the words of Section 74 by stating that the section dispenses the proof of actual loss or damage. However, the presence of loss or legal injury remains necessary so as to claim the monetary damages.

Section 75
Section 75 further reinstates the mandate of Sections 39, 73, and 74 by elucidating that the aggrieved party who rightfully rescinds the contract is entitled to compensation that is sustained due to the non-fulfillment of the contract.

CONCLUSION

The Indian Contract Act systematically lays down the detailed provisions for addressing the ensuing nuances of monetary compensation out of the contractual relationship. Section 39, 73, 74, and 75 provide the in-hand remedy to address the aspect of anticipatory breach, remoteness of damage, and measure of compensation.

Citations:

1. Court of Queen’s Bench, (1853) 2 Ellis and Blackburn 678
2. Avery v Bowden (1855)
3. Heyman v Darwins Ltd 1942 AC 356, 361
4. Derbishire v Warran 1963 1 WLR 1067
5. ILR 1898 21 Mad 172
6. Karandas H Thacker v Saran Engg Co Ltd AIR 1965 SC 1981
7. 2001 4 UKHL 49 HL
8. 1969 2 SCC 554

This article is written by Riya Ganguly, 2 nd year BBA LLB student at Bharati Vidyapeeth New Law College, Pune.

Abstract

Gambling, in the current time, is mushrooming at an enormous speed, thereby posing a grave threat to the stakeholders involved due to its inherent vulnerability. The vociferous and the reverberating calls for its legalization newer assume more significance given the nebulous state of gambling laws in the country. Although the legalization would bring with itself a gush of entailing benefits, the profound and the pressing issues at hand pertaining to legalization are required to be given a thorough perusal including the pricking need to overhaul enforcement mechanism rather than venturing into the question of how and when to legalize the gambling given the legal and socioeconomic intricacy of India.

Introduction

It would be apposite, to begin with, the scrutinization of the term “gambling”. Gambling is a game that involves chances of winning or losing money or possessions of bet. Cambridge dictionary defines betting as the habit of risking money and placing a wager on the outcome of sports events. Gambling is a genus while betting is a species and both function on the coefficient of unpredictability especially those of the sporting events. The modern world thrives on the perpetuities of monetary gains and gambling serves as a handy way to satiate those materialistic needs.

This article seeks to systematically articulate the advantages and disadvantages that ensued due to the legalization of gambling, thereby concluding with some apposite and congruous solutions.

Background

India and gambling have had a substantiative co-relationship since ancient times, with the Rig Veda believing to have documented its first description. Since then, gambling has been a popular choice in India among the masses when it came to quick monetary gains in the course of satisfaction with worldly needs. Initially, gambling was encouraged in colonial India due to its economic benefits, but soon, it was illegalized due to its ensuing negative consequences such as bankruptcy, criminal delinquency, etc.

Thus, the Public Gambling Act of India was passed in 1867¹ to regulate and restrict gambling practices, thereby, illegalizing gambling albeit without sufficient punitive sanctions. The Act sought to restrict most forms of gambling including sports gambling (lotteries, casinos, festive gambling, etc were allowed and regulated in a few states) that was wagering in nature involving pure chance (eg: using the roll of dice or marble to determine the outcome) baring the few games that involved “skill” and not pure chance such as horse racing; online games of skill such as rummy, poker, fantasy games, etc. In K.R. Lakshmanan v. State of Tamil Nadu², the Apex court held that “The test of the legality of gambling vis-à-vis nature of sports is dependent upon the dominance of the element of skill/chance with regard to a recognized sport.”

With the advent of the constitution, Subjects of betting and gambling were kept in the State list as entry no. 34. The States have been given the liberty to delve into their own legislation on betting and gambling, having the freedom to regulate and deregulate it. While some states such as Sikkim (which has legalized betting in the online form), Kerala (conducts State-run lotteries), Goa³ (which has legalized casinos), etc have framed their own betting laws, others continue to govern themselves via the Central legislation of 1867. In a nutshell, both online and offline sports betting baring the games involving “skill” are currently illegal in India.

In recent times, gambling has unfettered its wings, mushrooming at an enormous speed with no signs of ebbing down in near future, more so due to the advent of advanced technology, penetration, and access to the internet in even the remotest corner of the world. India, too remained at the forefront to exploit this vice opportunity, with the 2016 ICC and the 2013 IPL betting scandals that involved thousands of crores of Rupees, giving testimony to this booming trend. It was in light of such massive illegal betting markets and the large-scale flouting of the law by the masses that the Supreme Court of India, in 2016, mandated the Law Commission of India (LCI)⁴ to examine a logical way to deal with India’s illegal gambling.

The LCI mentioned in its report that– “since it is not possible to prevent these activities completely, effectively regulating them remains the only viable option” Also, a Private Member Bill was introduced by Mr. Shashi Tharoor in 2018 in this regard, which articulated the legalization of sports betting in India under strict surveillance as it would curb the illegalized betting ecosystem in India which was under the monopolistic ambit of underworld mafias. It would curb the black money market, along with the generation of massive revenues for the government which could then be utilized for funding the sports infrastructure and betterment of athletes. Some of the potential restrictions that the bill sought to introduce were barring the minors from participating and limiting the highest betting fees one can bid. The bill impeccably envisioned the regulation mechanism by introducing a 7 member committee that would be responsible for formulating the rules and regulations monitoring sports online gaming. The bill also sought to criminalize the activities of sports fraud and match-fixing to the extent of 5 years of imprisonment and hefty fines which in turn would espouse deterrence. The bill also focused on maintaining the integrity of sports and preventing any event such as manipulations or match-fixing as those current pressing issues were not dealt with by the present legal framework.

Advantages of legalizing gambling

Gambling is one of the forms that has been an inherent phenomenon in Indian society and curbing it entirely won’t be certainly possible, more so because of the willful and brazen flouting of the legal norms by masses. Hence, giving it a legal sanctity would be a desirable approach in the discourse of its regulation and fund generation thereby espousing public consent and adherence rather than remaining oblivious to its incongruous existence. Far from this realization has been the seemingly illogical approach of the legislative setup which has still kept it within the cloak of illegality. This has been further reinforced by the Indian Judiciary by keeping horse race (on the basis of predicting the winnability) under the gamut of ‘games of skill’ but not the other games involving technicality and intricacy of similar nature such as cricket or hockey.

The most popular form of gambling has been in the sporting activities involving bets, which has evolved itself as a clandestine ecosystem possessing a huge network of people and enormous amounts of money. The Drastic modernization in the sports ecosystem coupled with the digital boom has led to sweeping revolutionary changes across the spectrum. This in turn accentuated the gambling culture creating a mammoth web of individuals and finances involved in this subculture. The first step in the legalization process would involve systematic identification and acknowledgment of these prevailing entities. Next would come regulation, owing to the fact that an exorbitant amount of Rs 300,000 Crores of black money is used annually for betting and the sector involves an enormous cash flow worth 60 billion dollars which is 3.5% of India’s GDP. It will lead to transparency as the source of cash flow could be traced and tracked thereby keeping a tight check on the black money market. Licensing of the brokers would further keep a check on them by curbing the black money laundering in illegal betting which is often used to fund terrorism and related nefarious activities¹. Involving in such illegal activities could lead to the cancellation of their licenses which in turn would serve as a deterrence to them. The legalization of sports betting would also ensure the protection of the subtle interests of minors, uneducated, poor fellows with a limited income and lack of bargaining power, and the elderly with shrinking life savings, who are often cheated by brokers. They remain at disadvantage due to unregulated and unenforceable market agreements lacking legal recourse owing to the wagering nature of the contract where the interests of the weaker party lacking bargaining power is jeopardized.

Currently, the earnings under betting are not reported as a source of taxable income under the Income Tax Act, 1961, thus, creating an avenue for black money. Legalizing the same would make the disclosure of such income mandatory (paving the way for effective surveillance and regulation) along with the generation of revenue receipts for the government to the tune of a minimum of Rs 12000 crores per annum⁵. It would also check on the tax evasions by brokers and bettors. The fund generated could be used for revamping sports infrastructure and related welfare schemes of the country along with peddling the development of the tribal and conventional sports that have been grossly neglected owing to their unpopularity and lack of resources.

Legalization would also serve as the panacea for ever-rising unemployment in the country by providing jobs ranging from the post of officers (required to monitor betting transaction) to a new catena of brokers who would specialize in sports betting along with a majority of unskilled workers employed in the implementation of menial economic activity in the betting industry. India, having the required knowledge, expertise and population could also evolve itself into a niche avenue for cyber betting like Denmark, the USA, etc, thus bringing with itself valuable foreign exchange which in turn would fuel the economic prosperity of the country.

Further, policing of the current gambling laws which illegalize it becomes a major problem due to the sheer numbers of “law-breakers” and exhaust colossal time of the law keepers which could be efficiently used for other productive work. Even effective policing results in large numbers of people gaining criminal records, with all of the consequential social problems. (employment problems, social and family stigma due to criminal record, etc). Hence, legalization would serve to meet the above ends. One other argument often posed in favor of legalization/regulation is that gambling adversely affects only a minority (less than 1% of the population due to problem gambling). So depriving the majority of a harmless leisure activity when it could add to a mix of other advantages is not worth it

Disadvantages of legalizing gambling

It is argued that the job of the government is to lead the people and not to simply follow popular views, especially if there are “public interest” reasons for pursuing unpopular routes. The concept and practice of gambling have historically been frowned upon in the Indian context. The moral issues constrain the government from peruse the idea of legalization as this has been a forbidden virtue in the Indian sub context given its entailing disadvantages. Giving it a legal sanctity would go against this entrenched ideal of morality.

Legalization would entail massive social costs as various studies have revealed that adolescents engaging in such activities possess a higher rate in school and academic failure accompanied by a history of family conflict triggered by the loss of household income, erratic sexual activity, severe financial difficulties such as large debts, poverty, and even bankruptcy; conflict and breakdown in relationships and a variety of psychological illnesses including anxiety and depression and psychiatric disorders, thus, paving way for baleful tendencies to commit suicide arising out of the ensuing depression.

State-sanctioned gambling would disproportionately burden the socially and economically backward people who expend a greater portion of their income into such wagering contracts, thus, exposing them to the channels of destituteness and crimes such as fraud and embezzlement, to address the mounting financial demands of their gambling. It will also push them into the scourging avenues of alcohol and drug addiction thereby instigating a vicious cycle of economic losses. Apart from the above menaces, gambling would also seriously impact the integrity and the true sportsmanship spirit of the sports due to the money factor and instances of match-fixing.

A logical argument against gambling follows that if gambling were to be legalized, it follows that more people would gamble (due to its enticing nature), and subsequently, more would become problem gamblers who face the adverse effects of gambling. Studies corroborate the above fact showing that increased availability of and easy accessibility to 2 gambling increased the participation in gambling and also the consequent prevalence of problematic gambling that entails massive social costs. Studies show that in India, although the prevalence of gambling was low, the proportion of people who had developed problem gambling among those who did gamble was considerably higher as compared to other countries. The final argument against legalization is that, even if it were to be considered a good idea, in theory, the time for such a major policy change in India is not right, because India did not possess the infrastructure to conceive, implement, monitor, or regulate such a huge change.

Suggestions

Certain suggestions could be considered in the light of the given circumstances. First, because of India’s inherent diversity, changes should be piloted in one or few states instead of going for pan India legislations so as to evaluate the post and pre-policy changes along with avoiding the deleterious and incongruous effects. Second, sufficient research needs to be undertaken so as to generate the local and relevant empirical pieces of evidence vis a vis the Indian sub context instead of relying on foreign pieces of evidence. Third, the question of government or private ownership of gambling monopoly needs to be delved upon. Fourth, the safeguard mechanism for the stakeholders needs to be put in place along with relevant and requisite standardized norms for regulation.

Conclusion

Keeping gambling under the scope of criminal legislation in spite of its nonviolent nature has been a source of contention amidst the scholars who view this as a step to give legitimacy to State paternalism. Section 30 of the Indian Contracts Act 1872 renders such betting (wagering) agreements voidable and takes off the recourse of legal enforceability, thus, exemplifying its vulnerability to financial exploitation and illegitimate transactions. Now in recent times, with a drastic surge in online gambling, the IT Act, falls short to curb people from engrossing in illegitimate offshore gambling websites where there is the absence of the protective blanket of national laws.

Thus, the archaic legislation of 1867 and the present laws being incompetent, abruptly fail to regulate the ongoing inconsistencies pertaining to betting. Further, nonchalance concerning the present penal provisions and the recklessness of the stakeholders exacerbate the administrative incapacities and ineffective framework of government. Against this backdrop, the vociferous and the reverberating calls for newer legislations assume more significance given the nebulous state of gambling laws in the country.

Given the pros and cons of the current issue at hand, there is no unambiguous evidence to support the status quo. Although the legalization would bring with it a gush of entailing benefits, the profound and the pressing issues at hand pertaining to legalization are required to be given a thorough perusal including the pricking need to overhaul enforcement mechanism rather than venturing into the question of how and when to legalize the gambling.

References

1. The Public Gambling Act, 1867. http:// www.sangrurpolice.in
2. 1996 AIR 1153, https://indiankanoon.org/doc/1248365/
3. https://www.scams.info/online-casino/india/#laws
4. Law Commission of India. Legal framework: Gambling and sports betting including in cricket in India. Report number 276. New Delhi: Law Commission of India, 2018.
5. http://timesofindia.indiatimes.com/business/india-business/Goa-casinos-contribute-Rs-135cr-revenue-in-2012-13/articleshow/19524670.cms

Written by Riya Ganguly student at Bharati Vidyapeeth New Law College, Pune.