Enforceability of Shareholders Agreements: In Relation to Articles of the Company

Enforceability of private arrangements entered into by shareholders often become a bone of contention in corporate disputes. Following is an attempted analysis of the judicial trend in that regard in this country. While referring to the judgments, it is important to look into the factual matrix of the cases, as the reasoning would vary depending upon the nature of the company (private or public) and the status of the agreements (whether or not incorporated in the Article). Rhodes scholar and subsequently Vinerian scholar designate V. Niranjan did a brilliant and elaborate analysis of this issue in the Indian Corporate Law Blog (http://indiacorplaw.blogspot.in/2010/09/rangaraj-madhusoodhanan-conflict-and.html). I've reproduced the article below with some minor alterations and additions.

1. Introduction

Contracts among shareholders of a company are termed as “shareholders agreements” (SHA). Usually, the company is also a party to these agreements (but this may not always be the case) which confer rights and impose obligations over and above those provided by company law. The agreements provide for matters such as restrictions on transfer of shares (right of first refusal, right of first offer), forced transfers of shares (tag-along rights, drag-along rights), nomination of directors for representation on boards, quorum requirements and veto or supermajority rights available to certain shareholders at board level or shareholder level. Hence, broadly, Shareholders Agreements provide stipulations either for transferability of shares (restriction, forced transfer, etc) or they provide conditions which govern the administration of the company.

2. Judicial Trend on Enforceability of Shareholders Agreements.

2.1. Shareholders Agreements dealing with Transferability of Shares.

As mentioned earlier, Shareholders Agreements may either contain provisions on transferability of shares or deal with aspects of corporate governance (voting rights, quorum, etc). However, most of the judgments delivered by the courts in India are on situations wherein SHAs have dealt with transferability of shares under Section 111A of the Indian Companies Act.

2.1.1. Stage 1: Non Enforcement due to absence of provisions in Articles.

Initially, the Indian courts did not favour complete freedom of contract in the case of shareholders agreements. Courts either refused to recognize clauses in shareholders agreements or, even when consistent with company legislation, enforced such clauses only if they were incorporated in the articles of association.

(Niranjan's analysis extracted from his post in the Indian Corporate Law Blog link to which is mentioned above)
"The landmark judgment in this regard is V.B. Rangaraj v. V.B. Gopalakrishnan, AIR 1992 SC 453, [1992] 73 Comp. Cas. 201, often cited in the context of shareholders’ agreements. The defendant in that case was a private limited company, and in time, its sole shareholder came to be a family that consisted of two branches. The principals of each branch orally agreed in 1951 that the proportion of shareholding of their respective branches would not change, and provided, for this purpose, that any member of a branch who wished to sell his shares must first offer the shares to his own branch. After referring to the decision of the Supreme Court in Kalinga Tubes, common law decisions and scholarly opinion, Sawant J. held that shares are “freely transferable” and that “a private agreement that imposes … restrictions not stipulated in the articles of association…” is “not binding either on the shareholders or on the company. Hence, in this judgment, the Apex Court refused to enforce shareholders agreement which provided for restriction in transferability, as it had not been stipulated in the Articles. The statutory ground of the decision was S 82 which provides that shares in a company constitute movable property “transferable in the manner provided by the articles of association”.

The Rangaraj rule was reiterated in Mafatlal.

(Niranjan's analysis extracted from his post in the Indian Corporate Law Blog link to which is mentioned above)

Ø  "Mafatlal Industries Ltd. v. Gujarat Gas Co. Ltd., [1999] 97 Comp. Cas. 301 (Gujarat High Court)

In 1999, an eminent judge of the Gujarat High Court heard Mafatlal, where the defendant was a public limited company. The plaintiff had sold 3.87 % of the equity in that company to an FII with a pre-emption right, who later disposed of a part of those, shares in the open market. The plaintiff relied on the right of pre-emption to invalidate the subsequent sale by the FII, and argued, interestingly, that “free transferability of shares refers to absence of restrictions which may be imposed by third parties, but it cannot exclude the right of a shareholder to impose restrictions on himself in the matter of transfer of shares to another person.” This argument was rejected by M.B. Shah J., who pointed out that the “ratio in the case of V.B. Rangaraj will apply with much greater force to the case of a public company”."

2.1.2. Stage 2: Enforcement despite absence of provisions in Articles.

Subsequently, the courts moved on from taking the Rangaraj rule as a blanket provision on enforcement of shareholders agreement, to applying it on given factual scenarios. The judgments which distinguished Rangaraj are the following:

(Niranjan's analysis extracted from his post in the Indian Corporate Law Blog link to which is mentioned above)

Ø  "M.S. Madhusoodhanan and Anr. v. Kerala Kaumudi (P) Ltd. and Ors. 2004) 9 SCC 204

In 2002, the Supreme Court decided Madhusoodhanan. The case arose out of a complex family dispute in Kerala, and specifically out of a karar (agreement) that provided in Clause 2 that “there would be no change in the existing share structure” (among the family) of a private company. Clause 2 also provided that the shares of two members would pass to Madhusoodhanan in a certain percentage on their death. Ruma Pal J. distinguished Rangaraj and Kalinga Tubes on the basis that this restriction was not on a share as a class, but on specific, identified shares between specific, identified members, to which the company need not be a party. Whether the decision is consistent in its entirety with Rangaraj is a matter of disagreement, especially as to the clause that there would be no change in the existing share structure – a provision similar to the requirement in Rangaraj that the shareholding pattern of the two branches would remain constant. Therefore, even if the company is not a party to the shareholders agreement, that by itself does not prevent the shareholders, inter se, from enforcing their agreement in relation to the transfer of shareholding.

However, it is clear that it is not authority for the general proposition that a private arrangement is legal under existing Indian law, but at best for the proposition that a transaction between identified members imposing a restriction on identified shares is legal.

Ø  This brings us to the two Bombay High Court decisions. In Western Maharashtra Development Corpn. Ltd. v. Bajaj Auto Limited, [2010] 154 Comp. Cas. 593 Chandrachud J. noted that the karar in Madhusoodhanan had dealt with specific, identified shares between identified members, followed Rangaraj, and declared that a right of pre-emption is contrary to s. 111A. That has now been overruled in Messer Holdings [2004] 121 Comp. Cas. 335.  In Messer, Khanwilkar J. makes three points – first, that the legislative history of s. 111A shows that the intention of the legislature was to fetter the actions of the Board of Directors, not individual shareholders; secondly, that Madhusoodhanan is authority for the general proposition that “consensual arrangements between particular shareholders relating to their specific shares do not impose restriction on the transferability of shares”; and thirdly, that “freely transferable” in s. 111A only means that “both seller and purchaser must agree to the terms of the sale”. It was further held that this need not be embodied in the articles of association.

In paragraph 55, Khanwilkar J. held as follows:

…“freely transferable” in Section 111A does not mean that the shareholder cannot enter into consensual arrangement/agreement with the third party (proposed transferee) in relation to his specific shares If the company wants to even prohibit that right of the shareholders, may have to provide for an express condition in the Articles of Association or in the Act and Rules, as the case may be, in that behalf.

The rule in Rangaraj was that a restriction on the transfer of shares is “unenforceable unless contained” in the Articles of Association. If Messer Holdings is good law, the rule is that a restriction on the transfer of shares is “enforceable unless barred” by the Articles."

It is important to note that Messer is at present in appeal before the Apex Court.

2.2. Shareholders Agreements dealing with issues of Corporate Governance.

These agreements have acquired popularity in the Indian context only over the last two decades or so. Therefore, courts have not been presented with sufficient opportunities to decide upon the enforceability of their provisions. Where courts have indeed ruled on such agreements, it has often been in relation to agreements merely stipulating transferability of shares and not on issues of governance. However, there have been three judgments of the Delhi High Court which have dealt with the issue of enforceability of agreements in relation to issues other than transferability.

Ø  Spectrum Technologies USA v. Spectrum Power Generation Company. 2000(56)DRJ405

In this case the Respondent Company contended that they would not be bound by the Promoters Agreement as they were not a party to it. The Delhi High Court refused to entertain the plea because the company had passed a board resolution to implement it in the Articles and taken such steps which were required of the Agreement, hence expressing their intent to abide by its terms. The provisions of the Agreement were also not inconsistent with the Articles or memorandum although the provisions of the promoters’ agreement were never incorporated in the Articles.

Para 22.

“We are unable to agree with the submission advanced on behalf of SPGL that adoption and revocation of the said promoters’ agreement by SPGL are irrelevant to the issue on hand. As regards the three decisions referred to above, in none of these decisions the company had agreed to amend its Articles of Association to bring them in conformity with the promoters’ agreement and, Therefore, they being distinguishable are inapplicable to the facts of the present case. “

Ø  Modi Rubber Ltd. v. Guardian International Corp. 2007(2)ARBLR133(Delhi)

In this case the Petitioner and Respondent entered into a shareholders’ agreement to collaborate and promote a joint venture company for the production and marketing of float glass. Subsequently the financial status of the petitioner company drastically deteriorated and it was declared to be a ‘sick company’ by the BIFR. As a result, the respondent proposed to set up a wholly owned subsidiary, without the consent of the petitioner, in breach of clause 14 of the Shareholders Agreement. The Respondent argued that since the said clause was not incorporated in the Articles of the joint venture company, they were not to abide by it. The Delhi High Court negating the argument ruled in favour of the petitioners and prevented the respondent from proceeding towards setting up of the said subsidiary. However, it seems from the order, that the Shareholders Agreement was enforced despite not being incorporated in the Articles because the said clause was merely a non compete clause and had nothing to do with the administration of the company. In fact, Sr. Arun Jaitley, senior counsel for the appellant, sought enforceability of the agreement on the aforementioned ground.

Para 61.

“Mr. Arun jaitley, learned senior counsel for the petitioner, has urged that clause 14 of the SHA did not relate to a matter effecting the affairs of the joint venture.”

Para 68.

“The instant case is certainly not concerned with any restriction or stipulation relating to management of the affairs of GGL, the joint venture. The agreement between the parties relates to an agreement not to enter into such business which is the same as or similar to the business of GGL, the company that is the joint venture. There is a fundamental difference between such an agreement as against an agreement relating to restriction on transfer of share holding or functioning as directors of a company which would be governed by the Companies Act and the Articles of Association of the company.”

Hence, According to the judgment, the demarcation of shareholders agreement on the basis of what they ought to achieve is irrelevant and whether they deal strictly with transferability or governance, they must not be in conflict with the Articles.

Ø  Premier Hockey Development v. Indian Hockey Federation 2011(2)ARBLR492(Delhi)

The Shareholders Agreement required a minimum quorum requirement which was not met. The petitioner contended that such requirement was invalid since the said provision was not incorporated in the Articles. Reliance was placed on the Rangaraj judgment by the petitioners. The court negating the contention held in favour of the Respondents while distinguishing Rangaraj on the following grounds:

a. The petitioner company, unlike in Rangaraj, was a party to the agreement.

Para 36.

“Pertinently, the position in the case in hand is materially different from that before the Supreme Court in Rangaraj (supra). The Petitioner company is a party to the Subscription and Shareholders Agreement dated 31.12.2004.”

b. the petitioners could not show any clause in the SHA which were in conflict with the articles.

Para 39.

“In the present case as well, there is no Article pointed out by the Petitioner, in the Articles of Association of the Petitioner company, which conflicts with Articles 10.3.2 and 10.3.3 of the Subscription and Shareholders Agreement.”

However, as mentioned earlier, the relevance of the above judgments may be limited to the extent that it is only a High Court decision and the extensiveness of the principle cannot be taken for granted unless the Supreme Court echoes that view.

3. Analysis of the judgements.

An analysis of the above judgements on the issue of shareholders agreement seem to be that they shall be enforced, even if not incorporated in the Articles, provided they are not in conflict with it.

As regards enforceability against the company:

a. they shall be enforced if the company is a party to it.

b. they shall not be enforced if the company isn’t a party (Rangaraj hasn’t been overruled), provided the company hadn’t expressed its willingness to amend its articles to implement it in its Articles (such as passed a Board Resolution). This follows from the Spectrum ruling.

As regards enforceability against the parties:

they shall be enforced even if the company isn’t a party to it or even if it is not incorporated in the Articles, provided they are not in conflict with the Articles or any statutory provision. (Modi Rubber, Messers Holdings).

The Present Position in light of the Vodafone Verdict:

The Supreme Court’s judgment in Vodafone (2012) is of enormous importance to a number of branches of Indian law. The relevant para in context of shareholders agreement is reproduced below:

SHAREHOLDERS' AGREEMENT

154. shareholders' Agreement ( for short SHA) is essentially a contract between some or all other shareholders in a company, the purpose of which is to confer rights and impose obligations over and above those provided by the Company Law. SHA is a private contract between the shareholders compared to Articles of Association of the Company, which is a public document. Being a private document it binds parties thereof and not the other remaining Advantage of SHA is that it gives greater flexibility, unlike Articles of Association. It also makes provisions for resolution of any dispute between the shareholders and also how the future capital contributions have to be made. Provisions of the SHA may also go contrary to the provisions of the Articles of Association, in that event, naturally provisions of the Articles of Association would govern and not the provisions made in the SHA.

155. The nature of SHA was considered by a two Judges Bench of this Court in V.B. Rangaraj v. V.B. Gopalakrishnan and Ors. MANU/SC/0076/1992 : (1992) 1 SCC 160. In that case, an agreement was entered into between shareholders of a private company wherein a restriction was imposed on a living member of the company to transfer his shares only to a member of his own branch of the family, such restrictions were, however, not envisaged or provided for within the Articles of Association. This Court has taken the view that provisions of the Shareholders' Agreement imposing restrictions even when consistent with Company legislation, are to be authorized only when they are incorporated in the Articles of Association, a view we do not subscribe.

Conclusion:

To guarantee enforcement, while it is not necessary that the provisions of the shareholders agreement are to be incorporated in the Articles, it is certainly to be ensured that such provisions are not in conflict with the Articles.

Section 26 of the Specific Relief Act, 1963: Rectification of an Instrument and Undue Influence

Section 26 of the Specific Relief Act, 1963 (“Act”) provides the means to rectify a contract or any other instrument which, by mutual mistake or fraud, does not express the real intention of the parties. However, when an agreement provides for the entire subject matter and does not show any sort of ambiguity, applicability of this section will not arise.[1]

On 12^th March, 2013, Supreme Court (“Court”), in Joseph John Peter Sandym (“Appellant”) v. Veronica Thomas Rajkumar & Anr (“Respondent”), had to decide a question concerning the applicability of Section 26 of the Act. In this case, deceased father executed two registered settlement deeds thereby transferring two houses in favour of the appellant and the respondent (“they are siblings”). On an allegation by the appellant that wrong houses have been provided to them, contesting parties executed an “unregistered deed” for exchanging the houses. Since respondent did not give effect to this unregistered deed, appellant filed a suit before the trial court. During the pendency of the suit, father of the contesting parties executed a rectification deed by which allotment of houses to the parties was changed. Following this, decision of the trial court, which was decreed in favour of the appellant, was overruled by the High Court. Against this, appellant filed an appeal before the Supreme Court.

Supreme Court, while determining the scope of Section 26 of the Act, held that it does not have a “general application”, and can be attracted only in a limited number of cases.

“The relief of rectification can be claimed where it   is   through   fraud   or   a   mutual   mistake   of   the  parties   that   real   intention   of   the   parties   is   not   expressed   in  relation to an instrument”[2]

Admissibility of an “unregistered instrument”

While deciding the outcome of the case, court also dealt with the question of admissibility of an unregistered instrument. In doing so, court referred to the case of State of Bihar & Ors. v. Radha Krishna Singh & Ors., AIR 1983 SC 684, wherein it was held that:

“Admissibility of a document is one thing and its probative value quite another - these two aspects cannot be combined. A document may be admissible and yet may not carry any  conviction and weight of its probative value may be nil.”[3]

Onus of “Proof”

In this case, Court was also of the view that onus of proving the validity of an instrument is on the one (“plaintiff”) who produces it, and not on the other party (“defendant”).[4] As far as fiduciary relationship is concerned, the   burden   of   proving   the   absence   of   fraud, misrepresentation   or   undue   influence   is   upon   the   person   in   the dominating position.[5]

Undue Influence

Court also dealt with the issue of undue influence in this case. While doing so, court referred to Afsar Shaikh & Anr v. Soleman Bibi & Ors, AIR 1976 SC 163 wherein the it had laid down the conditions before which one can allege the presence of undue influence.

“..if   a   person   seeking   to   avoid   a  transaction on the ground of undue influence  proves-

(a)   that   the   party   who   had   obtained   the  benefit was, at the material time, in a position to dominate the will of the other conferring  the benefit, and

(b) that the transaction is unconscionable,

the burden shifts on the party benefiting by  the   transaction   to   show   that   it   was   not induced by undue influence. If either of these two conditions is not established the burden will not shift

With regard to undue influence, court, in case of Afsar Shaikh, referred to a judgment of Privy Council wherein it was held that if the transaction appears to be unconscionable, then the burden is on the person exercising dominating will to disprove the existence of undue influence.[6] Burden, in this situation, can be understood as the burden to provide the absence of undue influence. However, the first thing to be considered is the relation of the parties and not the unconscionable transaction.

Outcome of the case

After considering the above positions in relation to Section 26 of the Specific Relief Act, undue influence and onus of proof, Court, in Joseph John Peter Sandym v. Veronica Thomas Rajkumar & Anr, held that there was a presence of undue influence, In support of this, court confirmed the findings of the high court that at the time when exchange deed between the parties was executed, respondent was not married and was dependent on the appellant for sustenance. 

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[1] Subhadra & Ors. v. Thankam,  AIR 2010 SC 3031

[2] Also see State of Karnataka & Anr. v. K. K. Mohandas & etc, AIR 2007 SC 2917

[3] Also see  Madan Mohan Singh &  Ors v. Rajni Kant & Anr, AIR 2010 SC 2933, H.Siddiqui (dead) by Lrs. v. A.Ramalingam AIR 2011 SC 1492; Laxmibai (dead) thr. Lrs. & Anr v. Bhagwantbuva (dead) thr Lrs. & Ors, JT 2013(2) SC 362

[4] See Thiruvengada   Pillai   v.   Navaneethammal   &   Anr,  AIR  2008   SC   1541; K. Laxmanan v. Thekkayil Padmini & Ors., AIR 2009 SC 951

[5] Krishna   Mohan   Kul  v. Pratima Maity & Ors.  AIR 2003 SC 4351

[6] Raghunath Prasad v. Sarju  Prasad,  (AIR 1924 PC 60)

Sexual Harassment Bill, 2010: A Woman to be held liable for filing a false or malicious complaint

On February 26, 2013, Rajya Sabha passed The Protection of Women Against Sexual Harassment at Work Place Bill, 2010 (“Bill”). The Bill was passed by Lok Sabha in September last year. The long title of the Bill reads as:

“to provide protection against sexual harassment of women at workplace and for the prevention and redressal of complaints of sexual harassment and for matters connected therewith or incidental thereto.”

Interestingly, section 14 of the Bill makes a woman or a person, as the case may be, liable for filing of a false/malicious complaint or false/misleading document. Bill does not define the term “document”, and hence, assistance can be taken from General Clauses Act, 1897.[1]

Before an action can be taken under this clause, the internal committee or local committee should arrive at a conclusion that there has actually been a false/malicious complaint or false/misleading evidence. Section 4 of the Bill obliges an employer of a work place to constitute an “internal complaints committee”, which will have a woman as its presiding officer. In a situation when constitution of an internal committee a workplace is not feasible (“on account of less than ten persons being employed at such workplace or where the complaint is against the employer himself”), a “Local Complaints Committee” shall be constituted by the District Officer. Local Committee will also have a woman as its chairperson. Apart from the chairperson or presiding officer, as the case may be, these committees have substantial number of women as their members. In fact, presence of women in such committees is necessary for ensuring a fair deal for complainant.

Some have argued that inclusion of such a provision in the bill would discourage women from filing complaints. At the same time, some have argued that inclusion of it will prevent misuse of the bill. However, any conclusion in this regard can only be made once the act comes into use.

Bill also makes it clear that a mere inability to substantiate a complaint or provide adequate proof need not attract action against the complainant under Section 14. Once committee gives a verdict against the complainant, an action can be taken in accordance with the provisions of applicable service rules. In the absence of a service rule, Bill only provides “in such manner as may be prescribed”. Section 2(k) defines “prescribed” as “prescribed by rules made under this Act”.

An appeal can be made against the recommendations of the committee(s) under Section 14 to the court or tribunal in accordance with the provisions of the service rules applicable to the said person. In the absence of service rules, the person aggrieved may prefer an appeal in such manner as may be prescribed. However, an appeal shall be preferred within a period of thirty days of the recommendations.

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[1] Section 3, General Clauses Act, 1897 (“Document" shall include any matter written, expressed or described upon any substance by  means of letters, figures or marks, or by more than one of those means which is intended to be  used, or which may be used, for the purpose or recording that matter.”)

Retrospective Application of an amended Procedural Law: Right of Action v. Right of Forum

Unless otherwise mentioned in the text of a statute, usually it has a prospective application. The main purpose behind such a principle is to avoid multiplicity of proceedings and litigation for the decided matters. However, this principle of prospective application is not applicable where a provision is of procedural nature. Such a prospective application is applicably only to the substantive part of a statute.

One such issue had come before the Supreme Court (“Court”) in the case of Ramesh Kumar Soni v. State of Madhya Pradesh wherein Court held that enactment of a procedural provision usually has a retrospective application. This is because of the fact that a person has a “vested right of action” but not a “vested right of forum”. In this case, following the passage of Code of Criminal Procedure (Madhya Pradesh Amendment) Act, 1973, offences under Section 467, 468 and 471 of Indian Penal Code, 1860, were made triable by the Court of Sessions instead of a Magistrate of First Class. Subsequently, a reference was made to the M.P. High Court for clarifying the applicability of this amendment. By its order, Full Bench of the High Court held that all cases pending before the Court of Judicial Magistrate First before the amendment remained unaffected and were triable by the Judicial Magistrate First Class.

At a time when investigation was pending in his case, appellant, relying on this decision of Full Bench of the High Court, filed an application before the Judicial Magistrate for remission of his case ("his case was transferred to the Court of Sessions"). The same was rejected by the Judicial Magistrate and was consequently affirmed by the High Court. In appeal, Supreme Court held that a case must be deemed to be instituted only when the Court competent to take cognizance of the offence alleged therein does so. In this situation, no charge-sheet was filed before the court, and hence, no case was pending before the judicial magistrate when amendment came into effect. However, Supreme Court did not concur with the Full Bench  of High Court in relation to the prospective application of the Amendment Act.

As far as the question of retrospective application of amendment Act was concerned, Court referred to its decision in the case of Hitendra Vishnu Thakur and Ors. etc v. State of Maharashtra and Ors. (1994) 4 SCC 602, wherein it summed up the legal position with regard to the procedural law being retrospective in its operation and the right of a litigant to claim that he be tried by a particular Court. Following were the principles laid down by the court:

(i) A statute which affects substantive rights is presumed to be prospective in operation unless  made retrospective, either expressly or by necessary intendment, whereas a statute which merely affects procedure, unless such a construction is textually impossible, is presumed to be  retrospective in its application, should not be given an extended meaning and should be strictly  confined to its clearly defined limits. 

(ii) Law relating to forum and limitation is procedural in nature, whereas law relating to right of action and right of appeal even though remedial is substantive in nature. 

(iii) Every litigant has a vested right in substantive law but no such right exists in procedural law. 

(iv) A procedural statute should not generally speaking be applied retrospectively where the result would be to create new disabilities or obligations or to impose new duties in respect of transactions already accomplished. 

(v) A statute which not only changes the procedure but also creates new rights and liabilities shall be construed to be prospective in operation, unless otherwise provided, either expressly or by necessary implication.”

However, for the cases decided by a court before change in the law, the same shall not become illegal merely because an amendment has changed the forum of trial. If allowed, it will lead to multiplicity of litigation [See: Baburam v. C.C. Jacob and Ors. (1999) 3 SCC 362]. Hence, Court referred to its decision in the case of Nani Gopal Mitra v. State of Bihar AIR 1970 SC 1636 whereby it held that

“amendments relating to procedure operated retrospectively subject to the exception that whatever be the procedure which was correctly adopted and proceedings concluded under the old law the same cannot be reopened for the purpose of applying the new procedure”

Apart from the applicability of an act, court also referred to the prospective application of a precedent, a doctrine invoked by this court for the first time in I.C. Golak Nath and Ors. v. State of Punjab and Ors. AIR 1967 SC 1643. By this principle, all actions taken contrary to the declaration of law, prior to the date of the declaration are validated (“in larger public interest”).

In conclusion, it can be said that though a person can move to new forum by virtue of change in law, he cannot do so if the case has already been decided. Otherwise, there will appear a problem every time a change in law is carried out. That would certainly not be in public interest.

"Written" Agreement Requirement under Indian Arbitration and Conciliation Act

Though an oral agreement is valid under under Indian Contract Act, 1872, Section 7(3) of the Arbitration and conciliation Act, 1996 (“Act”) makes it mandatory for the parties to execute the arbitration agreement in writing. Section 7(4) of the Act stipulates the conditions which are to be fulfilled before an agreement can be considered as written:

Section 7(4): An arbitration agreement is in writing if it is contained in-

a)      a document signed by the parties;

b)      an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or

c)      an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other

Clause (a)

As long as there is an existence of a signed document, not much difficulty arises. If there is a document, and has been signed by the parties; there is no need to go further. In the case of Ghanshyam Sharma v. South City Projects, Calcutta High Court held that “if there is an arbitration agreement contained in a document signed by the parties, the requirement of Section 7(4) is complete and one need not progress to clauses (b) and (c) thereof”. Hence, as far as Section 7(4)(a) is concerned, it is more a matter of evidence than interpretation, i.e., if there is an existence of a signed arbitration agreement, the same merely has to be produced before the judicial authority.

As far as the term “document” is concerned, the definition of the same has not been provided in the Act. However, General Clauses Act, 1897 provides that

“document shall include any matter written, expressed or described upon any substance by means of letters, figures or marks, or by more than one of those means which is intended to be used, or which may be used, for the purpose or recording that matter.”

Though it is an established principle that a special act overrides a general act, reference to General Clauses Act may be made (“with precaution”) since Arbitration and Conciliation Act does not provide for the definition of “document”. However, the same would have to be done with precaution.

Clause (b)

With technology becoming more advanced, usage of new modes of communication for business transactions is predictable. Section 7(4)(b) of the Act provides that an arbitration agreement is in writing if it is contained in “exchange” of letters, telex, telex and other means of communication provided that they provide a “record” of the “agreement”.

In Great Offshore Limited v. Iranian Offshore Engineering, (2008) 14 SCC 240, while considering the validity of a document received by “fax machine,” court was of the opinion that

“Section 7(4)(b) states that an agreement is in writing if it is contained in “an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement”. This section covers agreements that are sent via facsimile (fax) as they are “other means of telecommunication”. “Fax” is defined as “a machine that scans documents electronically and transmits a photographic image of the contents to a receiving machine by telephone line” or “a document received by such a machine. This definition clearly provides that a fax falls under “other means of telecommunication”. Thus, faxed agreements are acceptable under Section 7 of the Act.”

Hence, any means of communication which can provide a record of the agreement would be good enough to come under the ambit of this clause. Also, the term “other means of communication” makes it possible for a new technology (“presently, which is not in existence”) to be included under this clause in future.

As far as the term “record” is concerned, Calcutta High Court, in P.T. Tirtamas Comexindo vs Delta International Limited held that term “record” means the record of bilateral consent of the parties. If there is a unilateral consent, the requirements of Section 7(4)(b) cannot said to have been fulfilled. Indeed, without presence of consent, it would not be proper to hold an arbitration agreement valid.

Clause (c)

Last, but not the least, is clause (c) which provides that an arbitration agreement is in writing if it is contained in “an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other” [See: DDA v Jain Rolling Mills (Delhi High Court)]. The language of this clause is not difficult to interpret. However, there is one point which ought to be remembered. Statement of claim and defence is not restricted to the submission in an arbitration proceeding, but to any suit. In S.N. Prasad v. Monnet Finance Ltd. and Ors., Supreme Court held that.

“the words, 'statements of claim and defence' occurring in Section 7(4)(c) of the Act, are not restricted to the statement of claim and defence filed before the arbitrator. If there is an assertion of existence of an arbitration agreement in any suit, petition or application filed before any court, and if there is no denial thereof in the defence/counter/written statement thereto filed by the other party to such suit, petition or application, then it can be said that there is an "exchange of statements of claim and defence" for the purposes of Section 7(4)(c) of the Act”

The points discussed in this post are only a few general points which one can consider while interpreting “written” agreement requirement.

Mediation and Marriage Disputes: Supreme Court ruling in K. Srinivas Rao v. D.A. Deepa

With modes of alternative dispute resolution (“ADR”) emerging as a popular mechanism, their influence on marriage disputes is inevitable. Further, given the delicate nature of marriage disputes and their abysmal consequences for the couple and their families, litigation only makes the dispute worse. This is evident from the manner in which parties keep on accusing each other in a litigating dispute. In litigation, instead of resolving the dispute in an amicable manner, it rather becomes a matter of winning and losing the game. These matrial disputes, usually arising from trivial problems, can be settled amicably at an early stage.  It is at this early stage that the usage of alternative dispute mechanisms becomes important.

In the recent case of K Srinivas Rao v. D.A. Deepa, Supreme Court considered the importance of mediation as a means for settling a marriage dispute amicably. The case that, by special leave, came before the Court was related to a dispute whereby husband had sought divorce on the ground of mental cruelty. While granting divorce, Justice Ranjana Prakash Desai referred to the case of Samar Ghosh v. Jaya Ghosh, in which Supreme Court had laid down some guiding principles for determining mental cruelty. In the instant case of K Srinivas Rao, wife filed criminal cases against the husband and his family members (including a case under Section 498-A). She also made an allegation that the mother of the husband asked her to sleep with the father of the husband. After discovering the presence of mental cruelty, court also opined that the marriage had broken down irretrievably.  

What for Mediation?

Considering the importance of mediation in matrimonial disputes, Court noted that 10 to 15% of the matrimonial disputes get resolved by various mediation centres. Since the cause of the misunderstanding in a matrimonial dispute is usually trivial at first, the same, in the opinion of the court, can be sorted out by a mediator before it takes the shape of a furious legal battle. Following observation was made by the bench:

“We, therefore, feel that at the earliest stage i.e. when the dispute is taken up by the Family Court or by the court of first instance for hearing, it must be referred to mediation centres. Matrimonial disputes particularly those relating to custody of child, maintenance, etc. are preeminently fit for mediation. Section 9 of the Family Courts Act  enjoins upon the Family Court to make efforts to  settle the matrimonial disputes and in these efforts,  Family Courts are assisted by Counsellors. Even if the Counsellors fail in their efforts, the Family Courts  should direct the parties to mediation centres, where trained mediators are appointed to mediate between the parties. Being trained in the skill of mediation, they produce good results”

At the same time, court also observed that there can, very often, be situations when one of the parties files a case under Section 498A of IPC. Since offence under Section 498A is non-compoundable, it is usually not possible to circumscribe it by means of a settlement (“A successful mediation results into a settlement”). In fact, Supreme Court, in Ramgopal & Anr. v. State of Madhya Pradesh & Anr.[ (2010) 13 SCC 540], had requested the Law Commission and the Government of India to  examine whether offence punishable under Section 498-A of the IPC could be made compoundable.

As an interim solution to this problem, the court can approve the result of mediation (“even in the presence of a case under Section 498A of IPC”) by using its inherent powers. If a dispute can be solved amicably and marriage can be saved, there is no point in dragging up the issue in a litigation. In B.S. Joshi & Ors. v. State of Haryana & Anr.[ AIR 2003 SC 1386],  Court had held that

“...complaint involving offence under Section 498-A of the IPC can be quashed by the High Court in exercise of its powers under Section 482 of the Code if the parties settle their dispute.”

In the instant case, court made the following final observation:

“In terms of Section 9 of the Family Courts Act, the Family Courts shall make all efforts to settle the matrimonial disputes through mediation. Even if the Counsellors submit a failure report, the Family Courts shall, with the consent of the parties, refer the matter to the mediation centre

The criminal courts dealing with the complaint under Section 498-A of the IPC should, at any stage and particularly, before they take up the complaint for hearing, refer the parties to mediation centre if they feel that there exist elements of settlement and both the parties are willing..” (Emphasis supplied)

While first observation is appearing to be of mandatory character, the latter appears of a recommendatory character.

This is yet another case which shows how alternative dispute mechanisms are important. However, success of mediation in matrimonial disputes largely depends on the co-operation between the parties. From my own experience at a family mediation centre, I have seen the decision of the parties getting influenced by their relatives, parents. In such a situation, the possibility of them coming to an amicable solution reduces. Nonetheless, there is no harm in making parties resort to such a mechanism (at least 10-15% cases are settled by it)!

Laws Governing "Private Security Agencies" in India and Suo Moto Petition

In a recent development, Supreme Court has decided to initiate a suo moto petition questioning the working of “private security agencies” in India. In the light of this petition, following issues have been framed by the court –

1. What is the legal regulatory framework under which the private security agencies operate?

2. What are the parameters/norms that are considered for issue of firearm/weapon licences to private security personnel?

3. What are the guidelines, if any, governing the use of such firearms/weapons, by private security personnel; if not, whether it is necessary to frame definite parameters on the subject? 

4. What are the rights and duties of private security agencies under the law, particularly, vis-a-vis the criminal law of the land?

Petition was initiated following the demise of Liquor Baron Ponty Chanda in a firing mishap. The said firing saw involvement of some of the private security guards. The reason for which an individual employs private security is the protection. If this purpose turns out to be the reason of death, then consequences can be grave. Police cannot provide protection to everyone personally, and hence, some have resorted to the middle path by employing private security guards. These private security guards are usually provided by the Private Security Agencies (“PSA”). According to 2010 records of National Crime Records Bureau, the number of police personnel per lakh population is 133 with Mizoram placed on the top of the ladder (1065). On the other hand, Bihar, with 64 policemen per lakh population has been placed at the bottom. Report can be accessed here – Download

“The ‘Actual’ strength of Civil Police, including District Armed Police in the country during 2011 stood at 12,81,317 against the ‘Sanctioned’ strength of 16,60,953” – 2011 Statistics, National Crime Records Bureau

Above data of National Crime Records Bureau does show a reason why some individuals prefer private security, but lacuna still remains over the functioning of PSA.

In India, PSA are governed by The Private Security Agencies (Regulation) Act, 2005 (“Act”). Section 3 of the Act leaves to the state the power to appoint Controlling Authority for regulating PSA. Section 10 of the Act provides that no PSA shall employ a person unless he is a citizen of India, completed 18 years of age, satisfies his antecedents, trained etc. The Section also provides for a preference (“may give”) to be given to the persons already served in a force such as Army, Navy, and Air Force etc. Section 25 of the Act leaves it to the respective state government to enact rules for carrying out the provisions of the Act. Unfortunately, the Act does not answer the questions framed by the Supreme Court in this petition. It has rather left to the respective state governments to make rules, if there be any. In pursuance of the Act Delhi Government, in 2009, passed the rules governing PSA. Similarly, Haryana in 2009, Tamil Nadu in 2008, Odhisa in 2009, Maharashtra in 2007 etc.  Interestingly, in 1981, Maharashtra seemed to have enacted a law “Maharashtra Private Security Guards (Regulation of Employment and Welfare) Act” for the welfare of Private Security Guards employed in factories and establishment.

Unfortunately, none of the rules or act mentioned above provides a sufficient answer to the questions raised by the Supreme Court. In light of another lacuna of the Act, a petition was filed by Security Association of Goa in 2008 pertaining to employment issues. Because of these reasons, Supreme Court has rightly initiated the petition.

PSA provides service to an individual and comes under the ambit of service sector. Over a period of time, this sector has been able to provide employment a large of number of people. Hence, a proper legal framework is also necessary given the number of people employed in the sector. As far as employment conditions are concerned, those who work in this sector need to be put under a proper rules and conditions. The outcome of this suo moto petition can expected to be a milestone in the area related to PSA, both for the security of an individual and also that of the person working an as employee in this sector. 

Death Penalty - Uncertain Procedure and Life of an Individual

“The judgment does not, with respect, indicate the material that led this Court to conclude what aroused the intense and extreme indignation of the community. Except the nature of the crime, it is not clear on what basis it concluded that the criminal was a menace to society and “shall continue to be so and he cannot be reformed” ( Supreme Court in “Sangeet & Ors. v. State of Haryana” )

Given the grave nature of certain crimes, imposition of Death Penalty has, for a long time, come out to be a proper way of their valid redressal. But, what constitutes this grave nature that will make a crime qualify to be a “rarest of the rare crime”? This has rather been a matter of dispute.

Recent decision of the apex court in the case of Sangeet & Ors v. State of Haryana (decided on Nov. 20, 2012) has once again thrown light on the debate surrounding the issue of death penalty. In this case, an entire family but one was brutally murdered. Considering the nature of crime to be heinous, appellants were sentenced to death by the trail court which, on appeal, was confirmed by the Punjab & Haryana High Court. While discussing the issue, Supreme Court referred to the two landmark judgments Jagmohan Singh v. State of U.P. (1973) 1 SCC 20, decided in accordance with former CrPC Code (1898), and Bachan Singh v. State of Punjab (1980) 2 SCC 684, decided in accordance with the fresh CrPC Code (1973). A number of other cases were also discussed in the judgment.

Change in the nature of Sentencing w.r.t “Death Penalty”- Since 1974, when a fresh CrPC (1973) came into force, the nature of sentencing in cases, where maximum punishment is death penalty, has significantly changed. In earlier code, death penalty appears to be the rule and life sentence an exception (as also other sentences).[1] Contrary to this, under the fresh code, death penalty appears to be exception and life imprisonment a rule.[2]

Ultimately, considering the uncertainty in the procedure governing death penalty in this case, appeal was allowed by the Supreme Court and death sentences were converted into life imprisonment.


"The Constitution Bench made it absolutely clear that the suggestions given by learned counsel were only indicators and not an attempt to make an exhaustive enumeration of the circumstances either pertaining to the crime or the criminal. The Constitution Bench hoped and held that in view of the “broad illustrative guide-lines” laid down, the Courts “will discharge the onerous function with evermore scrupulous care and humane concern, directed along the highroad of legislative policy outlined in Section 354(3) [of the Cr.P.C.] viz. that for persons convicted of murder, life imprisonment is the rule and death sentence an exception." - para 28 

Earlier this year, I came across an article titled “A case against the death penalty”, published on Frontline, which thoroughly examined the issue of death penalty and inconsistencies therein. If one compares this article with the judgment in Sangeet case, the debatable issues are principally the same. Article highlighted a group of retired judges who came in rescue of those wrongly convicted with death sentences. Unfortunately, two of the convicts, who were wrongly convicted, were already executed in 1996 and 1997. According to the retired judges, this “constituted the gravest known miscarriages of justice in the history of crime and punishment in independent India.”

Article 21 of the Constitution of India, 1950, provides to every person a life and personal liberty. This right of life and personal liberty can only be taken away by a procedure established by law. In the light of Maneka Gandhi v. Union of India, it has now become clear that this procedure cannot be “arbitrary, unfair, oppressive or unreasonable”. In India, Code of Criminal Procedure, 1973, empowers the judges to provide a death penalty, and for doing so, reasons are to be noted. But what are the criteria for providing these reasons? Seeing the absence of any such proper mechanism, Supreme Court, in the case of Bachan Singh (supra), came up with certain principles. Unfortunately, these principles have not been followed uniformly. In Bachan Singh (supra), court was of the opinion that due weightage should be given to both the crime and the criminal, instead of crime alone. It was also held that death penalty should be given only in rarest of rare crime. Further, Section 235 of CrPC empowers the judge for giving a judgment once the arguments are heard. Of Course, discretion should be left to the judge deciding a particular case. But, should the life of a person be made subject only to this discretion? Should not there be certain basic principles to be followed with certainty? In the absence of such a certainty, life of a person will depend merely on the what a judge thinks of. There can be a situation when one judge may provide a death sentence, but other judge, on the same facts and circumstances, may not. Whether it should be crime and criminal, or the criminal alone, is a matter which needs thorough deliberation. Reverting back, do all these circumstances leave the procedure under Article 21 of the Constitution  as reasonable? In my opinion, the substantive part of the procedure under Article 21 needs more clarity as far as the death penalty is concerned. In the absence of such a clarity, the life of an individual, though an accused, will be at stake. It is true that certain crime are so grave that death penalty may be warranted for it. Nonetheless, procedure of providing death penalty should have some certainty

From the judgment of the Court in Sangeet Case, and also other cases mentioned therein, it is clear that  in awarding death sentence, there has not been a consistency in the principles followed. Much discretion is provided to the judge in determining what constitutes rarest of rare crime. This uncertainty in the decisions is also because of the change in the judges serving the apex and other courts. It is high that that, if not abolition, then a uniformity should appear in such grave convictions.

contact - abhinav.s@nujs.edu

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[1]See Code of Criminal Procedure, 1898, Section 367(5)

[2] See Code of Criminal Procedure, 1973, Section 354(3)