VHVK E Newsletter February 2022
Feb 2022
Volume VI Issue 1
VHVK Law Bulletin
We are pleased to bring you this first issue of VHVK Law Bulletin for 2022. With this, we enter the sixth year in providing you with bi-monthly legal updates on important developments, with focus on business law. We appreciate your ongoing support and welcome any feedback you have on our e-newsletter. The current issue features the following:
- Criminal prosecution is maintainable for dishonour of multiple cheques issued for a single transaction (Supreme Court)
- Ban on online gambling – developments in Karnataka and Tamil Nadu
- Interference with customer’s contractual rights impermissible in considering Insolvency Resolution Plans (Supreme Court)
- Draft law for mandatory mediation published for stakeholder consultation (Government of India)
- Importance of “entire contract” and parties’ intention stressed to determine if timely performance of contract is essential (Supreme Court)
- Confidentiality and non-compete agreements operate in limited sphere (High Court of Karnataka)
Multiple cheques issued for single transaction can lead to successive prosecutions
When a payer issues several cheques on different occasions to discharge the liability arising from a single transaction, dishonour of the different cheques can give rise to multiple/successive prosecutions under the Negotiable Instruments Act, 1881. Delivering the verdict in Gimpex Pvt Ltd v Manoj Goel,1 the Supreme Court set aside the order of the Madras High Court quashing the second prosecution.
Gimpex, the appellant in the Supreme Court, had balance due from Aanchal Cement Ltd for services it had provided. The original set of cheques issued by Aanchal were dishonoured and they were the subject of a criminal prosecution brought by Gimpex. The parties then concluded a settlement which was documented and Aanchal issued a new set of cheques to Gimpex for implementing the settlement.
The second set of cheques were also dishonoured. With this, Gimpex brought a second prosecution against Aanchal and its directors under the Negotiable Instruments Act, 1881 (section 138). Alongside, Aanchal also challenged the settlement in a separate action. Accepting Aanchal’s plea that two criminal prosecutions could not be maintained with regard to liability under a single transaction, the Madras High Court quashed the second prosecution.
Allowing the appeal filed by Gimpex, the Supreme Court restored the second prosecution. The court held that the liability for the two sets of cheques were distinctive and they subsisted at the time they were presented for payment. The reasoning is consistent with the legislative intent to promote integrity in issuing cheques and it can instill greater caution among businesspersons in distributing cheques.
Online gambling and its ban – the story unfolding in Karnataka, Tamil Nadu
Recent efforts by the state governments of Karnataka and Tamil Nadu to prohibit online gambling with financial stakes are developing in significant ways. The Madras High Court quashed the ban, terming it too wide and sweeping, and a similar challenge to the Karnataka legislation is pending in the state High Court.
In August 2021, the Madras High Court in Junglee Games P Ltd v Tamil Nadu2 struck down the prohibition on online gambling through amendments to the Tamil Nadu Gaming Act, 1930. The ban covered games such as rummy and poker including those involving application of skill. Stiff penalties included up to two-year jail term. Referring to the legislation’s failure to distinguish between games involving skill and those that are entirely speculative, Madras High Court quashed the ban terming it arbitrary, excessive and disproportionate. Tamil Nadu government responded to the judgment, almost immediately, that new legislation will be introduced soon to take care of the concerns noted by the court and to streamline the ban on online gambling.3
Similar legislation to ban online gambling are also enacted in the other southern states and are pending challenge in the respective High Courts.
No interference with customers’ contractual rights in insolvency resolution proceedings
A customer of a corporate debtor in insolvency can rightfully terminate the debtor’s services as contract terms. This ruling by the Supreme Court in Tata Consultancy Services v Vishal Jain4 sets the limits of intervention in contracts under the Insolvency & Bankruptcy Code, 2016 (IBC).
Tata Consultancy Services (TCS) had entered into a Facilities Agreement with the corporate debtor, S K Wheels P Ltd. Experiencing problems with S K Wheels’ work, TCS terminated its services as provided in the agreement. The termination was made after several complaints about quality had been made to S K Wheels and there was no resolution of the issues. S K Wheels, which was financially stressed, entered insolvency resolution under IBC. Allowing an application from the Insolvency Resolution Professional, National Company Law Tribunal (NCLT) ruled against TCS’ termination of its contract with S K Wheels. NCLT held the termination was prompted by S K Wheels’ insolvency proceedings and exercised its residual jurisdiction (IBC section 60) to void the termination.
Noting the factual context of termination by TCS – namely, as a result of quality problems, rather than insolvency, the Supreme Court reversed NCLT’s ruling. In affirming TCS’ termination of contract, the Supreme Court also warned against judicial interference with parties’ contractual rights against corporate debtors, unconnected with the insolvency proceedings. The ruling sets an important boundary on NCLT’s residual powers in dealing with insolvency resolution plans.
Proposal published for mediation law with mandatory pre-litigation talks
In November 2021, government of India published draft legislation for mediation to promote Alternative Dispute Resolution (ADR). The Mediation Bill, 2021 requires mediation as a precondition before parties initiate litigation in courts, usually based on the adversarial principle.
The Mediation Bill framework and its major features are summarized below.
- Parties in dispute must first resort to mediation and can initiate litigation only if mediation fails. This requirement is subject to limited exceptions (e.g. element of criminality, violation of law).
- Mediation must be completed within 90 days and further extension is possible to a maximum of another 90 days, subject to parties’ consent.
- Streamlined procedure is included for appointment of mediators and the creation of supportive institutions are proposed – namely, Mediation Council of India and recognized Mediation Service Providers.
- Courts have jurisdiction to grant appropriate interim relief, either before mediation commences or during pendency.
- Online mediation proceedings are recognized and permitted, subject to conditions.
- A novel, and potentially powerful, device proposed is “community mediation” for any disputes likely to affect peace, harmony and tranquility amongst the residents or families of any area or locality.
The new mediation bill marks a significant departure from the conventional adversarial litigation in courts that has been followed in India since the advent of British colonial rule. Interestingly, the government presents the mediation bill as promoting convergence with international trends and recognition of the inefficiency of adversarial litigation. This fails to consider that mediation, in fact, resonates with the older Indian method in dispute resolution – non-adversarial, participatory, settlement-oriented. The planned legislation can strengthen the older method and promote widespread use of mediation as an alternative to technical, dilatory, expensive and time-consuming litigation in courts.
Timely performance of contracts, “entire contract” and parties’ intentions
In Welspun Specialty Solutions Ltd v ONGC,5 the Supreme Court reiterated the longstanding position that the importance of timely performance would depend on the entire contract as well as parties’ intention apparent from their conduct. Written affirmation that time is of the essence of the contract, by itself, is inadequate. With this reasoning, the court voided the application of liquidated damages by ONGC to a supplier.
ONGC’s contract for purchase of steel pipes stipulated timely performance as essential. But other clauses in the contract enabled extension of delivery dates for the products. The supplier, Welspun Specialty, also demonstrated that ONGC raised no serious issues about delays in delivery that occurred over an extended period of time. On these facts, the Supreme Court upheld the arbitrator’s conclusion that ONGC could not charge liquidated damages from the supplier.
The approach adopted by the arbitrator and the Supreme Court is consistent with the Indian Contract Act, 1872. Per section 55, criticality of timely performance is dependent on parties’ intention. Also, a party claiming compensation for delay must demonstrate loss suffered on due to delay. By these standards, ONGC applying liquidated damages on the supplier would be unlawful.
Limits of confidentiality and non-compete agreements subject to strict definition
In holding former employees and executives to confidentiality clauses and restrictions on solicitation and competition, the judicial approach has generally been cautious. This was recently underlined by the High Court of Karnataka in Kenrise Media P Ltd v Ashish Mishra.6
New-genre enterprises derive significant business value from their knowledge base, market intelligence and customer data. In Kenrise v Mishra, a co-founder of a subscription-based online platform left and started a new business. Kenrise attempted to curtail the co-founder’s new venture, a competing platform. The method was two-fold. One was to restrict use of information related to Kenrise, which it claimed was confidential and the other was enforcing the non-compete clause in the co-founder’s agreement with the company. The Karnataka High Court rejected both the contentions, on the following basis.
- No confidentiality was demonstrated by Kenrise with regard to the information about its patrons, authors and subscription base. The information was publicly available on its website.
- For the non-compete restriction, the High Court followed the standard the Supreme Court formulated in Percept D’Mark P Ltd v Zaheer Khan7 and the recognition that non-compete clauses often amount contracts in restraint of trade, which are prohibited under the Indian Contract Act, 1872 (section 27). In Percept D’Mark, the Supreme Court ruled that non-compete clauses would be valid only in a very narrow sphere and limited it to situations where goodwill is sold along with a business. In such situations, sellers of business cannot, subsequently, attempt to wrongfully make use of the goodwill that had already been sold by them.
Confidentiality, non-solicit and non-compete provisions have become standard in most employment contracts for senior positions. This is particularly so in the nascent digital economy aka the Knowledge-Based Economy. Kenrise Media v Mishra is a reminder that the validity of such provisions is open to successful challenge in courts.
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VHVK Law Bulletin is issued for information purposes only and does not constitute legal advice. For more information on any of the material covered here and/or their implications for your situation, please obtain competent legal advice.