Covid-19 and Force Majeure: Part III

A recurring issue during the Covid-19 crisis has been the alleged impossibility of performance of contractual obligations and its consequence on invocation of bank guarantees and negotiation of letters of credit. Does the frustration of the underlying contract entitle a party to seek an injunction against the invocation/encashment of a bank guarantee or a letter of credit? In this post, I discuss the law on this issue along with recent orders of the High Courts of Bombay and Delhi where the current lockdown was cited to seek an injunction against invocation/encashment of a bank guarantee or a letter of credit.

The Supreme Court has time and again held that a bank guarantee or a letter of credit constitutes an independent contract and any dispute concerning the underlying contract is irrelevant to the invocation/encashment of a bank guarantee or a letter of credit. The Court in Industrial Finance Corporation of India Ltd. v. Cannanore Spinning and Weaving Mills Ltd. has held that the frustration of the underlying contract does not have any bearing on the contract of guarantee. The Court has applied this principle to bank guarantees as well. In Gujarat Maritime Board v. L&T Infrastructure Projects Ltd., the respondent sought an injunction against the invocation of a bank guarantee on the ground that it had become impossible to perform the underlying contract. The Court rejected this contention and reiterated that an “injunction against the invocation of an absolute and an unconditional bank guarantee cannot be granted except in situations of egregious fraud or irretrievable injury”. The Court also endorsed its ruling in Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co., where it was noted that the same principles are applicable to encashment of a letter of credit.

The independent nature of a bank guarantee or a letter of credit does not imply that frustration can never constitute a ground for seeking an injunction. It only implies that frustration of the underlying contract is irrelevant. In the event that the contract of guarantee or the letter of credit itself is shown to be frustrated, it would entitle, or indeed, compel, the bank to refuse payment under the contract of guarantee or letter of credit, as it would be impossible or illegal (as the case may be) to do so. So, for instance, where the payment mechanism of the bank is crippled, or where a legislation is enacted prohibiting payment to entities based in a given sovereign State, the bank may be excused for failing to honour its obligations under the contract of guarantee or letter of credit.

Now, let us examine the orders on frustration/force majeure passed during the current lockdown.

In Standard Retail Pvt. Ltd. v. G.S. Global Corp & Ors., the petitioner sought an injunction against the encashment of letters of credit on the ground that the performance of the underlying contract had been frustrated due to the lockdown. The Bombay High Court rightly rejected this plea at the ad-interim stage, holding that the letters of credit constituted an independent transaction with the bank and the disputes arising out of the underlying contract had no bearing on this issue. (In two earlier posts, I have discussed the detailed facts of the case and certain other aspects of the Court’s reasoning.)

The Delhi High Court’s decision in Halliburton Offshore Services Inc. v. Vedanta Limited is in marked contrast to the Order in Standard Retail Pvt. Ltd. In Vedanta Limited, the petitioner had entered into a contract with the respondent for completion of certain drilling work by 31st March 2020. The respondent was entitled to invoke bank guarantees furnished by the petitioner through ICICI Bank in the event that the petitioner failed to complete the work in accordance with the contract. The petitioner filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 and contended that but for the lockdown, it would have completed the work by 31st March 2020, and sought an injunction against the respondent from invoking the bank guarantees.

The Court upheld the petitioner’s plea at the ad-interim stage, finding that: (i) prima facie the lockdown constitutes a force majeure event; (ii) the petitioner had established that it was only due to the lockdown that it could not complete the work by the contractual deadline of 31st March 2020; (iii) ‘special equities’ constitutes a ground distinct from irretrievable injury for grant of injunction against invocation of a bank guarantee; (iv) the petitioner had proved that special equities existed in this case for grant of an injunction; and (v) the petitioner would suffer irretrievable injury if the injunction is not granted, even if the petitioner succeeds in the arbitration proceedings and recovers the amount from the respondent. There can be no quarrel with the Court’s reasoning that the lockdown constitutes a force majeure event, since it is an event beyond the petitioner’s control which precluded the petitioner from completing the drilling work (See Dhanrajamal Gobindram v. Shamji Kalidas & Co and Esjay International Pvt. Ltd. v. Union of India for the definition of force majeure). However, it is submitted that this does not justify the grant of ad-interim injunction against the invocation of bank guarantees.

First, as discussed above, a bank guarantee is an independent contract and a dispute as to the alleged impossibility of performance of the underlying contract is irrelevant to the invocation of a bank guarantee. Second, I have argued in the previous post that ‘special equities’ does not constitute a distinct exception to the invocation of a bank guarantee; instead, it has been referred to by courts synonymously with irretrievable injury. Third, the Delhi High Court’s finding that the petitioner will suffer irretrievable injury if the injunction is not granted is contrary to the well-settled definition of irretrievable injury. Contrary to what the Court held, the contours of irretrievable injury are not elastic. In Svenska Handelsbanken v. Indian Charge Chrome, U.P. State Sugar Corpn. v. Sumac International Ltd. and Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co. (all of which were cited before the Delhi High Court), the Supreme Court has held that irretrievable injury must be of the kind in Itek Corpn. v. First National Bank of Boston, i.e. which would make it impossible for the guarantor to reimburse itself. No such impossibility of recovery was highlighted before the Delhi High Court. On the contrary, the respondent emphasized on the fact that the petitioner could very well recover the guarantee amount from the respondent if it succeeded in the arbitration proceedings. In such circumstances, a finding of irretrievable injustice cannot be justified.

The Delhi High Court has passed two other orders temporarily restraining Indian Oil Corporation Limited (“IOCL’) from invoking and encashing bank guarantees. These orders were passed by the Court in exercise of its writ jurisdiction under Article 226 of the Constitution, as the petitioner had been unable to move the National Company Law Tribunal (‘NCLT’) during the lockdown to have its plea of injunction heard. One cannot take exception to the grant of these temporary injunctions, since the basis for these injunctions is the impairment of the petitioner’s constitutional right of access to justice and have the matter heard on its merits.

Is ‘Special Equities’ a Distinct Exception to Invocation of Bank Guarantees?

The law on invocation of bank guarantees is well-settled. The Supreme Court has consistently held that the beneficiary of a bank guarantee is entitled to invoke it (in accordance with its terms) irrespective of any dispute between the beneficiary and the party at whose behest the guarantee is given. For, a bank guarantee is an independent contract, and grant of injunction by courts against invocation of bank guarantees would irreparably damage commercial transactions. The Court has also held in a plethora of judgments that there are only two exceptional circumstances in which an injunction may be granted against invocation of a bank guarantee: (i) fraud of an egregious nature which vitiates the entire underlying contract; and (ii) where the invocation of guarantee would cause irretrievable injury to the party at whose behest the guarantee is given. The Court has referred to ‘special equities’ synonymously with the second exception. However, two recent judgments of the Supreme Court – Andhra Pradesh Pollution Control Board v. CCL Products (India) Ltd. and Standard Chartered Bank v. Heavy Engineering Corporation Ltd. – have seemingly added special equities as a distinct category of exception. Relying on Standard Charter Bank, the Delhi High Court in Halliburton Offshore Services Inc. v. Vedanta Limited has held that special equities does constitute a distinct ground for grant of injunction against invocation of bank guarantees. In this post, I argue that this is incorrect, and the observations in CCL Products and Standard Chartered Bank must be construed in the context of the development of law on this issue and the precedent relied upon in these decisions.

The first instance when special equities was craved out as an exception to the bank’s obligation to honour a guarantee was in the Calcutta High Court’s decision in Texmaco Ltd. v. State Bank of India. Sabsyasachi Mukharji, J. (as he then was) referred to judgments on English law where fraud had been held to be an exception to invocation of a bank guarantee and added special equities as an additional ground. Texmaco Ltd. was subsequently endorsed by a Division Bench of the Supreme Court in U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. (which also involved Sabyasachi Mukharji, J.). In U.P. Cooperative Federation Ltd., the Court expressly held that there are only two situations in which courts can interfere with the invocation of a bank guarantee – fraud and ‘special equities in the form of preventing irretrievable injustice’. The Court explained that the phrase ‘special equities’ used in Texmacomay be a situation where the injunction was sought for to prevent injustice which was irretrievable”. While this may suggest that the Court referred to irretrievable injustice only as one of the instances of special equities, the Court’s unequivocal finding that there exist only two exceptions to the invocation of bank guarantee dispels the notion that ‘special equities’ and ‘irretrievable injustice’ are distinct exceptions (fraud being the other one). This reading of U.P. Cooperative Federation Ltd. is confirmed by subsequent Supreme Court judgments, discussed below.

Two decisions of the Supreme Court in General Electric Technical Services Company Inc. v. Punj Sons (P) Ltd. and Svenska Handelsbanken v. Indian Charge Chrome approved the two exceptions to invocation of bank guarantee laid down in U.P. Cooperative Federation Ltd., i.e. fraud and ‘special equities in the form of preventing irretrievable injustice’. According to Svenska Handelsbanken, ‘special equities in the form of irretrievable injustice’ meant nothing more than irretrievable injustice and special equities did not constitute an independent exception. This is evident from the following excerpts:

“72. Again in [General Electric Technical Services Company Inc.] Shetty, J. referred to the observations of Mukharji, J. [in U.P. Cooperative Federation Ltd.] that there should be prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Mere irretrievable injustice without prima facie case of established fraud is of no consequence in restraining the encashment of bank guarantee.”

“88. …In law relating to bank guarantees, a party seeking injunction from encashing of bank guarantee by the suppliers has to show prima facie case of established fraud and an irretrievable injury. Irretrievable injury is of the nature as noticed in the case of Itek Corpn.

The Supreme Court in Hindustan Steel Workers Construction Ltd. v. Tarapore & Co. yet again clarified that special equities is not a distinct exception to the invocation of bank guarantees. The Court held that the ratio of U.P. Cooperative Federation Ltd. was that fraud and irretrievable injustice are the only two exceptions to invocation of bank guarantees and reiterated this position of law. Subsequently, in U.P. State Sugar Corpn. v. Sumac International Ltd., Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd., Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co., Vinitech Eletrconics Pvt. Ltd. v. HCL Infosystems Ltd., Gujarat Maritime Board v. L&T Infrastructure Projects Ltd. and several other judgments, the Supreme Court categorically recognized only these two exceptions to the invocation of a bank guarantee. In fact, in BSES Ltd. v. Fenner India Ltd., the Court refused to import other exceptions from English law and Singapore law. In view of this overwhelming precedent, a learned Single Judge of the Bombay High Court in Felguera Gruas India Pvt. Ltd. v. Tuticorin Coal Terminal Pvt. Ltd. rejected the contention that special equities constitutes a third exception to the invocation of bank guarantees (the Division Bench in appeal noted the findings of the learned Single Judge on this issue but did not comment on them).

Now, let us examine the decisions in CCL Products and Standard Chartered Bank. In neither of these decisions was the Court called upon to consider the scope of exceptions to the invocation of bank guarantees or as to whether special equities and irretrievable injustice constitute distinct exceptions to invocation of a bank guarantee. The Court simply took note of its previous decisions in Ansal Engineering Projects Ltd. v. Tehri Hydro Development Corporation Ltd., State Bank of India v. Mula Sahakari Sakhar Karkhana Ltd. and Hindustan Construction Co. Ltd. v. State of Bihar and held that the exceptions to invocation of a bank guarantee are fraud, irretrievable injustice and special equities. However, none of these decisions hold that special equities and irretrievable injustice are separate exceptions. The additional judgments – in Himadri Chemicals Industries Ltd. and Gujarat Maritime Board – relied upon in Standard Chartered Bank also do not support this proposition. On the contrary, all the decisions referred to in CCL Products and Standard Chartered Bank had categorically held that there are only two exceptions to invocation of a bank guarantee – fraud and irretrievable injustice.

In this background, it is submitted that the observations in CCL Products and Standard Chartered Bank cannot be construed to mean that the Court has laid down special equities as a distinct exception to the invocation of a bank guarantee and altered the position of law which had been reiterated in innumerable previous judgments for more than two decades. Indeed, the Court in CCL Products and Standard Chartered Bank was bound by decisions of larger bench strength, rendered in General Electric Tehnical Services Company Inc., Svenska Handelsbanken, Ansal Engineering Projects Ltd., and Dwarikesh Sugar Industries Ltd., which have all held that there are only two exceptions to the invocation of a bank guarantee and referred to special equities synonymously with irretrievable injustice. It is well-settled that observations of courts in a judgments cannot be read like a statute or out of context. Therefore, the Delhi High Court’s reliance on Standard Chartered Bank to hold that special equities is a distinct category of exception is misplaced and ignores the long line of precedent on this issue.

Even from a normative perspective, construing special equities as being independent of irretrievable injustice would have far-reaching consequences. The Supreme Court has time and again emphasized on the importance of banks honouring their commitments under bank guarantees and therefore, the two exceptions of fraud and irretrievable injury have consciously been construed extremely narrowly. Fraud must be such that it vitiates the very foundation of the guarantee and irretrievable injustice must be of the kind which would make it impossible for the guarantor to reimburse herself. A third exception on the ground of special equities will needlessly expand this further. Disputes arising out of the underlying contract will increasingly influence the performance of the contract of guarantee, diminishing the independent nature of the latter. The fluid nature of the phrase ‘special equities’ may lead to injunctions being granted more frequently against invocation of bank guarantees. This will have an insidious effect on the efficacy of bank guarantees.

Covid-19 and Force Majeure: Part II

In the previous post, I had discussed the force majeure clause in Standard Retail Pvt. Ltd. v. G.S. Global Corp & Ors. and argued that Section 56 is non-derogable to the extent that it leads to frustration of contract on the ground of a supervening illegality; and a force majeure clause compelling performance despite the supervening illegality is void. In this post, I discuss the strength of this argument in light of the existing precedent on this issue.

Two decisions of the Supreme Court – Satyabrata Ghose v. Mugneeram Bangur & Co. and Energy Watchdog v. CERC – have been cited for the proposition that a force majeure clause in a contract entirely excludes the applicability of Section 56. This is incorrect. In Satyabrata Ghose, the Court held that if the parties expressly undertake to perform the contract irrespective of a force majeure event, Section 32 would apply and the contract is not frustrated upon the occurrence of such an event. However, the Court did not express an opinion as to whether this would extend to a supervening illegality as well. In fact, the excerpt from the House of Lords’ decision in Matthey v. Curling relied upon by the Court for this proposition referred only to a supervening impossibility, and not a supervening illegality. In Energy Watchdog, the Court relied upon Satyabrata Ghose to hold that when a contract contains a force majeure clause, Section 56 has no application. However, as in Satyabrata Ghose, the Court in Energy Watchdog did not expressly comment on whether a force majeure clause would be valid even when it requires performance despite the occurrence of a supervening illegality.

This issue arose for the Delhi High Court’s consideration in a recent decision in NTPC Limited v. Voith Hydro Joint Venture. In this case, the Court held that parties had the right to agree that even if the performance of the contract was rendered impossible on account of a force majeure event, one party would compensate the other for non-performance. The Court then went on to hold that a binding decision of a statutory authority (which constitutes ‘law’ and therefore amounts to a supervening illegality) which led to the abandonment of a hydro power project would not automatically frustrate the contract; NTPC was required to invoke the force majeure clause in according with its terms in order to be excused for non-performance. Thus, the Court upheld Voith’s claim for damages for breach of contract by NTPC despite finding that performance had become illegal in light of the decision of the statutory authority. It is submitted that this aspect of the Court’s ruling is incorrect. On the one hand, the Court held that the non-performance was due to a supervening illegality, and not on account of any fault on the part of NTPC. On the other hand, the Court granted damages to Voith for breach of contract by NTPC. This ruling is plainly self-contradictory and cannot be good law. Once the Court held that the project had to be abandoned as a result of a supervening illegality, it would automatically frustrate the contract under Section 56. Once the contract is frustrated, the necessary consequence under Section 65 of the Contract Act must follow.

English law endorses the position that parties cannot agree upon performance of a contract notwithstanding a supervening illegality (See Chitty on Contracts, 30th Edn., Para 23-058). The seminal judgment on this issue was rendered by the House of Lords in Ertel Bieber & Co v. Rio Tinto Co Ltd, [1918] A.C. 260. There, Rio Tinto Co. Ltd. (an English entity) and Ertel Bieber & Co. (a German entity) entered into a contract for supply of cupreous ore by Rio Tinto to Ertel Bieber. Before the contract could be performed, World War I broke out and according to English law, the existence of a state of war between England and Germany would abrogate (and not merely suspend) the contract. However, the contract contained a force majeure clause which provided for the suspension of the obligation to supply the goods during the existence of a state of war. In this background, the issue before the House of Lords was whether the force majeure clause could exclude the application of English law on abrogation of contract upon the existence of a state of war. The House of Lords held that the continued existence of a contractual relationship with alien enemies was prohibited by law and this prohibition dissolved, and not merely suspended, the contractual relationship. In such circumstances, a private contract could not provide for mere suspension of the contract. If the contract is illegal and void on account of a supervening illegality, a force majeure clause cannot save its legality.

That said, the Supreme Court in Satyabrata Ghose has cautioned against relying on English judgments on the doctrine of frustration de hors the statutory provision. However, the dictum in Ertel Bieber is aligned with the provisions of the Contract Act. Neither Section 32 nor Section 56 provides any guidance on whether parties can contract out of Section 56. Therefore, the issue has to be determined keeping in mind the overall scheme of the Contract Act. While the Act recognises freedom of parties to agree upon the terms of their contractual relationship, this is subject to norms of public policy. This is best evidenced in Section 23 of the Act, which, broadly stated, proscribes parties from contracting to do acts which are illegal. The supervening-illegality ground for frustration in Section 56 is another application of the principle contained in Section 23. The difference between the two provisions is in their temporal application – under Section 23, the illegality which renders the agreement unenforceable prevailed at the time of execution of the agreement, whereas under Section 56, the performance of the contract becomes unlawful after it has been executed. Therefore, the overriding nature of public policy over freedom of contract is recognised under English law as well as under Indian law. For this reason, the law laid down in Ertel Bieber must be applied in the Indian context as well. As the House of Lords held in Ertel Bieber, if a contract becomes illegal and void, a force majeure clause in the contract cannot eliminate its illegality. Therefore, the doctrine of frustration on the ground of supervening illegality must apply irrespective of the presence (or scope) of a force majeure clause in the contract and to that extent, Section 56 must be construed to be non-derogable.

This limited non-derogable nature of Section 56 assumes particular importance in the current scenario, where there is a legal prohibition on most commercial activity. This legal prohibition, which can ultimately be traced to the Disaster Management Act, 2005 or The Epidemic Diseases Act, 1897, constitutes a supervening illegality. The supervening illegality was absent in Standard Retail as distribution of steel has been designated as an essential service and there exists no restriction on its movement. Now, let us assume that the contract is for supply of a non-essential item and it contains a force majeure clause as in Standard Retail, entitling only the seller to terminate the contract or delay performance upon the occurrence of an event beyond the parties’ control. In such circumstances, if the notifications issued under the Disaster Management Act, 2005 or The Epidemic Diseases Act, 1897 altogether prevent the buyer from performing its obligations under the contract, the buyer is entitled to rely on Section 56 and contend that the contract is frustrated. The force majeure clause is void to the extent that it impliedly compels the buyer to perform the contract despite the occurrence of a supervening illegality. The situation would be no different if the compulsion to perform the contract was express in nature.

Covid-19 and Force Majeure: Part I

There has been much discussion about the impact of Covid-19 on parties’ contractual obligations and the consequence of their failure to perform their obligations. Under Indian law, it is well-settled that there are two possible ways of determining the outcome in such a situation: either as per Section 32 or Section 56 of the Indian Contract Act, 1872. Section 32 is applicable where the contract itself contains a clause envisaging such a scenario (i.e. a ‘force majeure’ clause). In the absence of a force majeure clause, Section 56, which codifies the doctrine of frustration, would be applicable. Applying Section 32 or Section 56, as the case may be, may or may not excuse a party’s non-performance of its contractual obligations and each dispute has to be adjudicated on its own facts. In a series of posts on Covid-19 and force majeure, I will take various fact situations, mostly from recent orders of courts, and examine the outcome that ought to be reached in such scenarios. In this post, I look at the scenario in the Bombay High Court’s recent decision in Standard Retail Pvt. Ltd. v. G.S. Global Corp & Ors.

In Standard Retail, the Respondent No. 1 was to supply steel from South Korea to the Petitioners in Mumbai. The contracts contained a force majeure clause which entitled only the Respondent No. 1 to terminate the contracts or delay performance upon the occurrence of a force majeure event. Respondent No. 1 despatched the steel from South Korea. The Petitioners contended that the contracts were frustrated due to the pandemic and filed petitions under Section 9 of the Arbitration and Conciliation Act, 1996 seeking to restrain the bank from negotiating/encashing the Letters of Credit. The Court rejected the Petitioners’ request for ad-interim injunction inter alia on the grounds that: a) distribution of steel had been declared as an essential service and there was no restriction on its movement during the lockdown period; and b) the force majeure clause in the contracts entitled only the Respondent No. 1 to terminate the contracts, and not the Petitioners. In the first two posts, I will discuss these two aspects of the Court’s reasoning (the Court gave other reasons as well, which will be discussed in subsequent posts).

Preliminarily, it must be noted that the starting point for discussion is Section 32 of the Contract Act, and not Section 56, since the contracts in Standard Retail contained a force majeure clause. This is the clear mandate of the Supreme Court’s decisions in Satyabrata Ghose v. Mugneeram Bangur & Co. and Energy Watchdog v. CERC. Now, the force majeure clause only envisaged events beyond the control of Respondent No. 1 which affected its capability to supply the goods to the Petitioners. It entitled only the Respondent No. 1 to terminate the contracts or delay performance. This is reflective of parties’ intention to cast an absolute obligation on the Petitioners to perform their obligations under the contracts. Nonetheless, it is submitted that in certain situations, viz. one of supervening illegality, a force majeure clause imposing an absolute obligation on any party irrespective of the supervening illegality is void to that extent, as a supervening illegality necessarily and automatically frustrates the contract under Section 56 of the Contract Act.

There are two kinds of events which may frustrate a contract under Section 56: i) where the performance of the contract becomes impossible (i.e. where there is a ‘supervening impossibility’); or b) where the performance of the contract becomes unlawful (i.e. a ‘supervening illegality’). The rationale behind the doctrine of frustration is that it would be unjust to hold a party to its bargain despite there being a radical change in circumstances (see Lord Simon’s dictum in National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675). This rationale would be applicable irrespective of whether the change is on account of supervening impossibility or supervening illegality.

However, in case of a supervening illegality, there is an additional justification for excusing a party’s non-performance, i.e. compelling the party to perform the contract would compel it to violate the law. Naturally, such a course cannot be permitted. Viewed from another perspective, if the supervening illegality was in existence at the time of execution of the agreement, the agreement would be unenforceable for being void under Section 23 of the Contract Act. (On the other hand, in case of a supervening impossibility, if the impossibility was in existence at the time of execution of the agreement, it is assumed that parties undertook the risk of performing the agreement despite the impossibility, and the agreement would be enforceable.) Therefore, in case of supervening illegality, the rationale behind frustration of contract transcends into the realm of public policy. For this reason, while parties can be permitted to undertake to perform the contract notwithstanding a supervening impossibility, the same cannot extend to supervening illegality. To that extent, Section 56 must be construed as mandatory and non-derogable in nature.

In the next post, I will examine the efficacy of this argument in light of the decisions in Satyabrata Ghose and Energy Watchdog, the Delhi High Court’s judgment in NTPC Limited v. Voith Hydro Joint Venture, and the position under English law. I will then discuss the difference that this approach may make in cases such as Standard Retail.

Registration of decrees: Determining the existence of ‘pre-existing right’

The Indian Registration Act, 1908 (“Registration Act”) mandates the registration of any non-testamentary instrument which inter alia creates any right, title, or interest in any immoveable property which is valued at more than one hundred rupees (Section 17(1)(b)) and any non-testamentary instrument which acknowledges the receipt or consideration on account of the creation of such right, title or interest (Section 17(1)(c)). Section 17(2)(vi) of the Registration Act exempts “any decree or order of a Court” from the requirement of registration under Section 17(1)(b) and Section 17(1)(c). The sole statutory exception to Section 17(2)(vi) is a compromise decree where the immoveable property forming a part of the decree was not the subject-matter of the suit. In other words, such a decree is the only form of decree which is not exempted from the requirement of registration under Section 17(1)(b) and Section 17(1)(c). (This exception was inserted in Section 17(2)(vi) with effect from 1st April 1930 and it legislatively overruled the Privy Council’s decision in Rani Hemanta Kumari Debi v. Midnapur Zemindari Co. Ltd.)

However, the Supreme Court in Bhoop Singh v. Ram Singh Major was conscious of the fact that Section 17(2)(vi), if interpreted literally, would allow parties to avoid the payment of registration charges and stamp duty by filing collusive suits and securing the transfer of immoveable property through a decree passed in a collusive suit. Therefore, the Court read into Section 17(2)(vi) a condition that the order or decree of the Court must not create a new right, title or interest in immoveable property for it to qualify for the exemption from registration under Section 17(2)(vi). It is only a decree or order of a court declaring a pre-existing right that will be exempted from the requirement of registration. This test was made applicable to compromise decrees and other decrees alike (except, of course, the statutory exception to Section 17(2)(vi), which was left untouched).

Two recent decisions of the Supreme Court, both authored by Ashok Bhushan J., throw light upon the Court’s approach to determining whether the decree merely declared a pre-existing right or created a new right in an immoveable property. At the same time, they cast a doubt on the continued applicability of the Bhoop Singh test. It is important to examine their facts in some detail.

In Mohammade Yusuf v. Rajkumar, the defendants in a suit relied upon a compromise decree passed in their favour in an earlier suit to establish their title over the land in dispute in the latter suit. The defendants argued that they had pre-existing title in the land on account of adverse possession and the compromise decree did not create title in their favour. The High Court held that adverse possession could not constitute the basis of title, and therefore, the defendants did not have title at the time the compromise decree was passed. Thus, the High Court ruled that the compromise decree created a new right in the land in favour of the defendants and required registration as per the dictum in Bhoop Singh. The Supreme Court reversed the High Court’s ruling and relying on Ravinder Kaur Grewal v. Manjit Kaur, it held that adverse possession could vest the title with the defendants. Without going into the issue of whether, on facts, the defendants’ claim of adverse possession (and consequently, the pre-existing title) was established, the Court held that the compromise decree was not collusive in nature and did not require registration under Section 17(2)(vi).

Next, in Gurcharan Singh v. Angrez Kaur, the appellants had filed a suit against one Bhajan Singh seeking declaration of title in respect of land owned by Bhajan Singh and relied on a registered will and a family settlement executed between the parties for this purpose. Bhajan Singh admitted both the documents in his written statement and the suit was decreed in favour of the appellants. In a suit subsequently filed by Bhajan Singh’s daughters against the appellants, one of the issues was whether the earlier decree was required to be registered. The Supreme Court simply relied on Bhajan Singh’s admissions to conclude that the appellants had pre-existing title in respect of the land. Consequently, the decree did not require registration.

The correct application of Bhoop Singh required the Supreme Court in Mohammade Yusuf and Gurcharan Singh to carry out a factual assessment of whether the party relying on the earlier decree had a pre-existing right in its favour. The Court failed to carry out this analysis in both the cases. In Mohammade Yusuf, upon ruling that adverse possession could, in law, constitute the basis of title, the Court simply assumed that the defendants had acquired title based on adverse possession and as a result, they had a pre-existing right. The lower courts had not arrived at any such finding on this issue at all. In Gurcharan Singh, the Court concluded the existence of pre-existing title from Bhajan Singh’s written statement, where he had admitted the will and the family settlement. However, as per the mandate of Bhoop Singh, the Court was required to carry out an independent examination of whether a family settlement was executed. Simply relying on the pleadings of parties in the earlier suit would defeat the principle laid down in Bhoop Singh. Bhoop Singh imposed the test of a pre-existing right to ensure that parties do not abuse the exception under Section 17(2)(vi) and use it as a tool for transferring immoveable property without payment of registration charges and stamp duty. If courts uphold a pre-existing right merely on the basis of pleadings in the suit, it would encourage parties to deploy a scheme where one party would assert the existence of the pre-existing right, even where such a right does not exist, and the other party would admit it. This would negate the principle and spirit of the dictum in Bhoop Singh.

Is there a justification for the Supreme Court’s approach in Mohammade Yusuf and Gurcharan Singh and its half-hearted application of the Bhoop Singh principle? It is arguably the Court’s subtle disapproval of the principle itself. In Mohammade Yusuf, the Court cited its decision in Som Dev v. Rati Ram, which had “held that all decree and orders of the Court do not require registration” except decrees which fell within the ambit of the statutory exception to Section 17(2)(vi). Citing Som Dev, the Court concluded that since the compromise decree in this case was outside the statutory exception to Section 17(2)(vi), the decree was not required to be registered. Mohammade Yusuf was subsequently relied upon in Gurcharan Singh, including for its reading of Som Dev.The Court in Gurcharan Singh concluded that the immoveable property in the decree formed a part of the subject-matter of the suit and was therefore, expressly covered by the phrase ‘any decree or order of a court’ in Section 17(2)(vi). Pertinently, the Court then held that “[w]hen legislature has specifically excluded applicability of Clause (b) and (c) with regard to any decree or order of a Court, applicability of Section 17(1)(b) cannot be imported in Section 17(2)(vi) by any indirect method.” This ‘indirect method’ can only be construed as a reference to the ‘pre-existing right’ test of Bhoop Singh.

Viewed in this background, it is evident that the Supreme Court’s perfunctory assessment of whether a pre-existing right existed in the facts of Mohammade Yusuf and Gurcharan Singh was, to use the Court’s own phrase, an ‘indirect method’ for diluting the Bhoop Singh principle. But, if the Court did not agree with Bhoop Singh, why did it not refer the issue of its correctness to a larger bench? The answer lies in some of its previous decisions. In K. Raghunandan v. Ali Hussain Sabir, the Court rejected the proposition that Som Dev (relied upon in Mohammade Yusuf and Gurcharan Kaur) was inconsistent with Bhoop Singh. Subsequently, in Phool Patti v. Ram Singh (I), the Court noted that there was some inconsistency between K. Raghunandan and Bhoop Singh, and that Bhoop Singh had been incorrectly decided as the terms of Section 17(2)(vi) do not permit the Court to read in the test of pre-existing right. Thus, the Court referred the issue of interpretation of Section 17(2)(vi) to a larger bench. However, the larger bench concluded that there was no inconsistency between K. Raghunandan and Bhoop Singh and refused to look at the interpretation of Section 17(2)(vi), thereby practically endorsing Bhoop Singh. Therefore, despite the ostensible disapproval of Bhoop Singh, the Courtin Mohammade Yusuf and Gurcharan Kaur did not expressly discard the test laid down in that judgment and distinguished it on facts. Bhoop Singh continues to be good law and the test of pre-existing right continues to subsist to determine whether a decree or an order of a Court is required to be registered under Section 17(1)(b) and 17(1)(c).

Are Exclusion of Liability Clauses in a Contract of Bailment Valid?

Chapter IX of the Indian Contract Act, 1872 (“Act”) deals with bailment. Section 151 of the Act imposes an obligation on the bailee in all bailment contracts (whether gratuitous or for reward) to “take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value as the goods bailed”. Section 152 absolves the bailee of any liability for loss or damage to the goods bailed if she has taken the requisite care as per Section 151, provided there is no special contract to the contrary.

A vexed issue which fell for consideration before several High Courts is whether the bailee can contract out of its obligations under Section 151, and there has been no unanimity in the judgments rendered on this issue. The most elaborate and lucid analysis of the issue is contained in a more-than-a-century old judgment of Sankaran Nair, J. in Mahamad Ravuther v. British India Steam Navigation Co. Ltd. where he had held that a bailee cannot contract out of its obligation under Section 151. However, he was in the minority on this aspect of the matter. Recently, the Supreme Court in Taj Mahal Hotel v. United Insurance Co. Ltd. has endorsed Nair, J.’s dissenting opinion. (The Gujarat High Court in its 1983 decision in Mahendrakumar Chanulal v. Central Bank of India had considered the entire law on this issue and followed Nair, J.’s approach. But this decision went unnoticed by the Supreme Court).

In Taj Mahal Hotel, the Court was called upon to decide upon the liability of a five-star hotel for the theft of a car parked in its premises through valet parking. The parking tag issued to the car owner stipulated that the car was being parked at the owner’s own risk and responsibility and the hotel would not be responsible for any loss, theft or damage to the car (“Exclusion of Liability Clause”). The Supreme Court inter alia held that: a) the hotel would be liable if a contract of bailment is found to subsist between the hotel and car owner; b) once a contract of bailment is found to subsist, prima facie the hotel would be liable for the theft of the car unless it can prove that it had taken the requisite care under Section 151 of the Act; and c) the bailee cannot contract out of its obligations under Section 151 and 152 of the Act, and therefore, the Exclusion of Liability Clause is invalid. In this post, I discuss as to whether the Court was justified in following Nair, J.’s opinion and the implications of Taj Mahal Hotel on exclusion of liability clauses in bailment contracts.

The Court in Taj Mahal Hotel (as did Nair, J. in Mahamad Ravuther) provided two broad bases to declare the Exclusion of Liability Clause as invalid. First, the express terms of Section 152 do not allow a bailee to exclude its liability altogether. Section 152 only permits the bailee to undertake additional liability, i.e. for loss or damage caused to the goods despite the bailee having fulfilled its duty of care as per Section 151. Second, allowing the hotel to exclude its liability for negligence by way of a contract would render the obligation under Section 151 illusory and redundant, and leave the consumers (i.e. car owners availing valet parking facility) without any remedy. In other words, this was a public policy ground (the Court does not use this phrase) which the Court relied upon to hold the Exclusion of Liability Clause as invalid.

Assessing the correctness of the Court’s reasoning would require us to look into the scheme of the Act. The Act codifies the law of contract in India. Section 1 of the Act saves inter alia the ‘incident of any contract’ which is not inconsistent with the provisions of the Act. Put simply, those aspects of a contract which are contrary to the provisions of the Act are not valid. This interpretation of Section 1 is buttressed by the fact that various provisions of the Act are expressly made applicable only in the absence of a contract to the contrary between the parties. These include Sections 43, 131, 137, 146, 163, 165, 170, 171, 174, 202, 219, 221, 230; of these, Sections 163, 165, 170, 171, 174 are in the chapter on Bailment. This overall scheme of the Act was a crucial reason behind Nair J. concluding that a bailee could not contract out of its obligation under Sections 151 and 152. Post Mahamad Ravuther, the Bombay High Court in K.R. Chitguppi v. Vinayak Kashinath Khadilkar (in the context of Section 133) and the Gujarat High Court in Mahendrakumar Chanulal v. Central Bank of India (in the context of Sections 151 and 152) have held that except for those provisions of the Act which expressly allow parties to derogate from it, all other provisions of the Act are mandatory. There cannot be any quarrel with this line of reasoning when viewed from the perspective of interpretation of statutes. This interpretation is also supported by the latin maxim expressio unius est exclusio alterius, i.e. the express mention of one is the exclusion of another (applied, for instance, in Ethiopian Airlines v. Ganesh Narain Saboo).

The argument made in support of parties’ right to contract out of their obligations under Sections 151 and 152 is two-fold: first, parties’ inherent right to agree upon the terms of their contract:

  1. First, parties have an inherent right to agree upon the terms of their contract. This formed the basis of the Bombay High Court’s decisions in Lakhaji Dolla & Co. v. Borugo Mahadeo Rajanna and Parsram Parumal Dabrai v. Air India Limited and the Punjab & Haryana High Court’s decision in S. Summan Singh v. National City Bank of New York. None these decisions, however, discussed the aspect of freedom of contract in detail and simply proceeded on the assumption that the Contract Act does not preclude parties from agreeing upon the terms of a private contract. They failed to consider that such a right cannot be absolute, for all private law rights are circumscribed by public policy limitations. Surely, it cannot be said that parties can contract out of the provisions of Section 19 of the Act, which renders agreements for which consent is obtained by fraud, coercion or misrepresentation voidable. In such circumstances, how does one determine the extent to which parties can contract out of the provisions Contract Act? The answer is provided by the Act itself, and which is precisely what has been emphasized by Nair, J. in Mahamad Ravuther and in other subsequent decisions mentioned above.
  2. Second, some courts have held that Section 152 itself allows a bailee to contract out of its obligations under Section 151 (see for eg., Fut Chong v. Maung Po Cho). However, the phraseology of Section 152 would make it clear that this argument has no merit. Section 152 reads: “The bailee, in the absence of any special contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken the amount of care of it described in section 151”. Section 152 supplements Section 151 and clarifies that so long as the bailee takes the degree of care prescribed in Section 151, it is not responsible for any loss or damage caused to the goods. This exoneration of liability is made subject to a contract to the contrary between the bailor and the bailee. Thus, a special contract can only increase the liability of the bailee, and not exonerate it altogether from liability despite its failure to take the requisite care under Section 151.

In view of the above, in my submission, the Court in Taj Mahal Hotel was justified in following the approach of Nair, J. in Mahamad Ravuther.

An interesting issue that arises is whether Taj Mahal Hotel would preclude bailees in all contracts of bailment from contracting out of their obligation under Sections 151 of the Act? The Court in Taj Mahal Hotel restricted the applicability of its findings to the liability of hotels as bailees for vehicles handed over to them for valet parking. It expressly refused to comment on whether the majority opinion in Mahamad Ravuther ought to be followed in other kinds of contracts.

Nonetheless, it is unlikely that a court will follow the majority opinion in Mahamad Ravuther over Taj Mahal Hotel. First, one of the fundamental reasons for the Court’s decision in Taj Mahal Hotel, i.e. that Section 152 does not allow a bailee to contract out of its obligation under Section 151 would extend to all contracts of bailment. It is not contingent on the nature of the bailment contract. Second, the fact that allowing the hotel to contract out of Section 151 would render the provision redundant and illusory would also be the case in other kinds of contracts of bailment. It may be argued that a gratuitous bailee ought to be allowed to contractually exclude all liability for loss or damage to the goods bailed. But it is well-settled that the Contract Act, unlike English common law, imposes the same obligations in a gratuitous bailment and a bailment for reward. Allowing only a gratuitous bailee to exclude liability by way of contract would be contrary to this aspect of the Act.

BGS SGS SOMA JV v. NHPC Ltd. and the Internationalization of Domestic Arbitration

The significance of ‘seat’ and ‘venue’ of arbitration has been a much-debated issue under Indian law and in the past decade, the Supreme Court has had multiple occasions to propound the significance of these two concepts. Much of the discussion has been in the context of international commercial arbitrations. The most recent in this line of decisions is the decision in BGS SGS SOMA JV v. NHPC Ltd., where the issue arose in the context of a domestic arbitration. A three-Judge Bench of the Supreme Court conducted an exhaustive analysis of the precedent and the legislative mandate on this issue and held, inter alia, that a choice of seat of arbitration confers exclusive jurisdiction on courts at the seat of arbitration in relation to arbitral proceedings under Part I of the Arbitration and Conciliation Act, 1996 (“1996 Act”).

There cannot be much quarrel about this proposition of law in the context of an international commercial arbitration where parties have a choice between multiple national legal regimes/supranational rules of arbitration. The fallacy of NHPC lies in the fact that it has borrowed this proposition from international commercial arbitrations and applied it to domestic (or non-international commercial) arbitrations governed by Part I of the 1996 Act.

Definition of ‘court’ under the 1996 Act the ruling in BALCO

The 1996 Act contains an express definition of ‘court’ in Section 2(1)(e), which would exercise jurisdiction in respect of an arbitral proceeding. According to Section 2(1)(e) (as it stood prior to the 2015 amendment), the court having jurisdiction in relation to arbitration proceedings is the principal civil court of original jurisdiction in a district (and includes a High Court in exercise of its ordinary original civil jurisdiction) which would have jurisdiction over the subject-matter of arbitration if the same had been the subject-matter of a suit. In other words, it relegates us to the bases of jurisdiction under the Code of Civil Procedure. The 2015 amendment to the 1996 Act prescribes that in international commercial arbitrations, it is only the High Court (hearing appeals from the pre-amendment S.2(1)(e) court) which will have jurisdiction in relation to arbitral proceedings.

Till the decision in Bharat Aluminium Co. v. Kaiser Technical Services (“BALCO”), the 1996 Act was interpreted not to have any link between the designation of seat and the competent court which would have jurisdiction in relation to arbitral proceedings. It was the Supreme Court in BALCO which laid down (in paragraph 96, which has been the subject of much discussion in NHPC) that two classes of courts will have jurisdiction: a) courts having jurisdiction as per the Code of Civil Procedure (“CPC courts”); b) the court at the seat of arbitration. The language of paragraph 96 leaves no doubt that it is both these categories of courts which will have jurisdiction.  

The decisions in Indus Mobile and NHPC

Despite the clear language of paragraph 96, a two-Judge Bench of the Supreme Court in Indus Mobile Distribution Pvt. Ltd. v. Datawind Innovations Pvt. Ltd. (2017) 7 SCC 678 held that choice of Mumbai as the seat of arbitration was equivalent to the choice of exclusive jurisdiction of courts in Mumbai and the jurisdiction of CPC courts in such instances is ousted. However, in Indus Mobile, the contract between the parties also contained a separate clause which conferred exclusive jurisdiction on Mumbai courts. Relying on this clause, the Delhi High Court in Antrix Corporation Ltd. v. Devas Multimedia Pvt. Ltd. 2018 SCC Online Del 9338 held that the ratio of Indus Mobile must be limited to cases where an exclusive jurisdiction clause existed in the contract, else the ruling in Indus Mobile would be contrary to paragraph 96 of BALCO.

NHPC (incidentally authored by the same Judge as Indus Mobile) has emphatically reinforced the ruling (and the error) in Indus Mobile and overruled Antrix Corporation. The Court in NHPC held that mere designation of seat of arbitration amounts to a choice of exclusive jurisdiction of the court at the seat of arbitration. This finding is plainly contrary to paragraph 96 of BALCO. Paragraph 96 of BALCO contains a clear stipulation and an illustration according to which the CPC Courts and the court at the seat of arbitration would have jurisdiction in a Part I arbitration. In such circumstances, how did NHPC overcome the hurdle of paragraph 96 of BALCO, which was rendered by a five-Judge Bench? NHPC found that paragraph 96 was contrary to the rest of the discussion in BALCO where choice of seat was held to constitute a choice of exclusive supervisory jurisdiction of courts at the seat of arbitration. NHPC also drew support from the decisions following BALCO where this principle – the equivalence of choice of seat with choice of exclusive supervisory jurisdiction – was upheld.

The fallacy of NHPC

It is submitted that NHPC’s reading of BALCO, specifically paragraph 96, is plainly incorrect. The fundamental flaw in NHPC, which leads the Court to incorrectly construe the ratio of BALCO, is its failure to recognize the distinction between an international commercial arbitration and a domestic arbitration. It is, therefore, necessary to examine this distinction.

In international commercial arbitration, there is no quarrel with the proposition that a choice of seat amounts to conferral of exclusive jurisdiction on courts at the seat of arbitration insofar as the supervisory role over arbitration proceedings is concerned. Thus, for matters such as constitution of the arbitral tribunal and setting aside an arbitral award, courts at the seat of arbitration have exclusive jurisdiction. It is important to note that the choice of a seat in the context of an international commercial arbitration is significant because the choice is between two or more distinct national legal regimes, with different arbitration laws and different municipal court systems. Since international commercial arbitration has to be rooted in a national legal regime and ought to derive its legitimacy from a municipal law (this is contested by French scholars, but that debate is outside the scope of this post), the choice of seat of arbitration by the parties is seen as a choice of the curial law of arbitration and the municipal court regime which would have supervisory jurisdiction over arbitration proceedings. Choice of seat also means that the award must comply with the public policy of the seat of arbitration, lest it run the risk of being set aside.

The seat of arbitration does not have the same level of significance in a domestic arbitration, where no party is from outside India. The legitimacy of the arbitral process is derived from the existing municipal law on the subject, i.e. the 1996 Act. It is only the Indian courts which will have supervisory jurisdiction over arbitral proceedings. The choice of substantive law also remains unaffected. Therefore, the choice of seat of arbitration has little bearing on the applicable laws or the municipal court regime which has the power to adjudicate upon challenges to an award. Indeed, the 1996 Act does not indicate any material consequence of seat of arbitration in the context of a domestic award. Indeed, till the decision in BALCO, Section 2(1)(e) was construed to mean that only the CPC courts have supervisory jurisdiction over arbitral proceedings. It is only after the Supreme Court’s interpretation of Section 2(1)(e) in BALCO that courts at the seat of arbitration were held to have jurisdiction over arbitral proceedings. Paragraph 96 of BALCO makes it unequivocally clear that the jurisdiction of courts at the seat of arbitration is concurrent, and not exclusive, in nature; parties have the choice to approach courts at the seat of arbitration or the CPC courts. In view of the distinction between an international commercial arbitration and a domestic arbitration discussed above, NHPC’s reliance on the significance of seat in international commercial arbitration to negate the rule of concurrent jurisdiction of CPC courts and courts at the seat of arbitration laid down in paragraph 96 of BALCO is incorrect.