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Articles of Association (AOA) under Company Law

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This article is written by Aditi Vinzanekar, and Debapriya Biswas. This article explores the meaning and importance of the Articles of Association in corporate governance while also detailing the procedures and legal provisions relating to it.

It has been published by Rachit Garg.

Table of Contents

Introduction

The Articles of Association (hereinafter also referred to as AOA) of a company is one of the most essential documents of a company. It prescribes the rules, regulations and by-laws according to which the internal matters of the company are conducted. In simpler terms, it specifies the conduct of the business of a company and is a document of paramount significance for a company.

An AOA is often compared to a rulebook of a company since it regulates the internal management of a company while also giving powers and obligations to its officers and employees. This includes regulations for several details of the company and its workings, such as rights of the shareholders, qualifications of directors, binding effect of contracts, etc. Moreover, the Articles of Association even establishes contracts between, firstly, members of the company, and secondly, members and the company.

However, it must be noted that while the AOA establishes the regulations of the company, it is still subordinate to the Memorandum of Association (hereinafter also referred to as MOA). MOA acts as a constitutional document of the company that supersedes all other documents within the company. If the AOA exceeds the scope laid down in the provisions of the MOA, then it would be considered ultra vires, as laid down by the Calcutta High Court in the landmark judgement of Shyam Chand v. Calcutta Stock Exchange (1945). Thus, in the event of a conflict between the two, the provisions laid down in the Memorandum of Association would prevail. Further, in case of any uncertainty of such provision in the MOA, it shall be read along with the AOA for a more harmonious interpretation and understanding.

What is Article of Association (AOA) 

Under the Companies Act of 2013, Section 2(5) covers the definition of Articles of Association. According to the aforesaid Section, AOA or ‘Articles’ contain all the rules and regulations framed by the Directors of the company to govern the internal management and governance, which can also be altered from time to time. In a nutshell, as mentioned earlier, it is a rulebook that regulates the inner workings of the company while binding the company to its workers and vice versa.

Difference between Memorandum of Association (MOA) and Articles of Association (AOA)

The major differences between the Memorandum of Association (MOA) and the AOA are given below:

S.NoBasis of DifferentiationMemorandum of Association (MOA)Articles of Association (AOA)
1On the basis of ContentLays down the fundamental principles upon which the company is incorporated.Lays down the provisions for internal regulations of the company, including the rights and obligations of its members.
2ObjectiveActs as an informative document for the benefit and clarity of the public, the creditors, and the shareholders.Acts as a rulebook that regulates the relationship between the company and its members, as well as amongst the members themselves.
3Functions Establishes the scope beyond which the company’s conduct becomes void.Establishes the rules, regulations and by-laws based on which the company conducts its workings.
4Jurisdiction Lays down the scope or the parameters within which the AOA is to function.Prescribes rules and other details within the parameters set by the MOA.
5AlterationMOA has a very rigid procedure for alteration and can only be altered in specific circumstances. Permission of the Central Government is also required in certain cases.Can be altered in an easier manner than MOA, by passing a special resolution.
6Position or statusThe MOA cannot be in contravention of the Companies Act. It is only a subsidiary of the Companies Act.AOA cannot include provisions contrary to the MOA. It is subsidiary to both the Companies Act and the MOA.
7Ratification when breached Any conduct or actions beyond the scope of the MOA will be considered ultra vires and cannot be ratified even by the shareholders.Any conduct or actions beyond the provisions of the AOA can be ratified by the shareholders as long as such conduct/action is not in contravention of the MOA.

Objective of Articles of Association (AOA)

While the Memorandum of Association contains the fundamental elements based upon which the company is incorporated, the Articles of Association acts as a complementary document to the Memorandum that fulfils the following objectives: 

  • To act as a governing document that regulates the internal affairs and operations of the company with the rules and regulations framed in its articles;
  • To provide clarity in regards to the procedures and rules that the company must follow, which should also be accessible by the shareholders of the company;
  • To regulate the relationship between the company and its members (shareholders, directors, employees, etc.) along with the relationship among the members;
  • To clarify the legal rights and obligations of the different classes of shareholders as well as the directors and other members;
  • To cover any additional matters that the Company considers necessary for its governance and management.

In simple terms, the Articles of Association play a vital role in the workings of the company by ensuring that the internal affairs of the company are being conducted lawfully. It further ensures that the aforesaid affairs of the company align with the interests and objectives of the business of the company.

Forms of Article of Association (AOA)

As per the Companies Act of 2013, AOA of different types of companies need to be framed in specific, prescribed forms as given under  Section 5(6) of the aforesaid Act. It is prescribed for companies such as companies limited by shares, companies limited by guarantee having a share capital, companies limited by guarantee not having a share capital, etc. As per Section 5(7), such companies may adopt the model articles in these forms.

The exception to this lies under Section 5 (9), which states that companies that have registered before the commencement of the Companies Act, 2013 shall not need to follow these forms. However, if they amend their AOA anew, then these provisions shall be applicable. Meanwhile, Section 5 (8) clarifies that if the companies follow the models given under the forms to the dot, without any modifications, then such AOA will be treated the same as any other registered Articles of the Company.

Schedule I of the Companies Act, 2013 contains the model Articles under the forms in Tables F, G, H, I and J. The required Companies, as mentioned earlier, are obligated to register the Articles of Association using these forms:

Tables in Schedule IDetails of the Forms
Table FForm for the Articles of Association for a company limited by shares (as per Section 2 (22) of the Companies Act, 2013)
Table GForm for the Articles of Association for a company limited by guarantee and having a share capital (as per Section 2 (21) of the Companies Act 2013)
Table HForm for the Articles of Association for a company limited by guarantee and not having a share capital
Table IForm for the Articles of Association for an unlimited company and having share capital [as per Section 2 (92) of the Companies Act 2013]
Table JForm for the Articles of Association for an unlimited company and not having a share capital

Nature of Articles of Association (AOA)

As mentioned earlier, the Articles of Association is the rulebook of the company that acts as the bedrock upon which all the internal affairs of the company are conducted. The internal management and governance depend completely on the AOA. However, while it is an essential document for the company, the Memorandum of Association still supersedes its authority as a sort of ‘Constitution’ of the Company.

Compliance of Articles of Association (AOA) with the law

In addition to the Memorandum of Association, which the Articles of Association cannot contravene or go outside the jurisdiction of, there are also other laws that the provisions in the Articles of Association must not be against:

  • The Constitution of India;
  • The Public Policy;
  • The laws of the land; and
  • The Companies Act.

For better understanding, let us explore some relevant case laws. In the case of Hutton v. The Scarborough Cliff Hotel Company Ltd (1865), a resolution dealing with the issue of new shares with preferential dividends was passed in the general meeting of shareholders of the company, resulting in the alteration of the Articles of Association. However, the Memorandum of Association of the company provided no such power of alteration in the aforesaid matter; thus, making the altered clause void and inoperative. The High Court of Chancery held that the purview of alteration of the Articles, either expressly or impliedly, depends directly on what is stated in the Memorandum.

Meanwhile, in the case of Hari Chandana Joga Deva v. Hindustan Co-Operative Insurance Society Ltd. (1923), the Defendant company had issued insurance to the Plaintiff, promising the payment of the prescribed amount on the specified date. However, the Defendant company altered their AOA on a later date, because of which the fund the insurance was based on, changed. The premise of the fund changed into a special one,  which was declared insolvent by the time the date of the payment approached. The Calcutta High Court held the case in the favour of the plaintiff, stating that the alteration was clearly breaching the provisions of the contract by suddenly changing the type of fund the payment had to be given without consulting the other party. Thus, the altered clause was declared to be inoperative and void. The Defendant company was further ordered to compensate Plaintiff for the breach of contract.

Formalities of Articles of Association

There are some formalities to be adhered to in regard to the Articles of Association. These formalities include how the AOA should be framed, which is by dividing the provisions into respective paragraphs. These paragraphs then shall be numbered properly and consecutively. Furthermore, the Articles of Association should be printed and provided to every member or subscriber of the Memorandum of Association as well. 

Articles of Association must be signed

Rule 13 of the  Companies (Incorporation) Rules, 2014 prescribes both the MOA and the AOA of a company to be signed in a specific manner. Furthermore, it is to be signed by each signatory or member of the Memorandum, in the presence of one or more witnesses, explained as below:

  • Both the MOA and AOA of a company, as mentioned above, are required to be signed by all the subscribers of the MOA and required to have their personal details mentioned. These details include their name, occupation, address, etc. The singing must be done in the presence of one or more attesting witnesses, who must then sign as well and add their own personal details as required.
  • In case of a subscriber being illiterate, the subscriber’s thumb impression can be taken instead of their signature. Any person authorised/appointed shall be present during such procedure to authenticate and witness the ‘signing’ and the addition of the subscriber’s details. Furthermore, this authorised person should also help the illiterate subscriber in reading or understanding the AOA wherever required.
  • Where a subscriber is a body corporate, the memorandum and articles must be signed by any director of the said body corporate who is duly authorised to do so by the mutual consent or resolution of the board of directors of that corporation.
  • In case the subscriber is a Limited Liability Partnership (LLP), then the partner of the Partnership firm shall be authorised to sign, given that all the other partners of the LLP agree.

Registration of Article of Association (AOA)

Once the above-mentioned conditions are fulfilled, the Articles of Association shall be registered alongside the Memorandum of Association. Without the filing to the Registrar of Companies, the Article of Association nor the company itself will gain any legitimacy. Thus, to avoid such a scenario, the Articles of Association along with the Memorandum is registered while filing for the incorporation of the company as per the provision of Section 7 of the Companies Act. In case of any amendment or alteration, as per Clause (2) of Section 14, a printed version of the altered Articles along with the Tribunal order of approval (in case of any conversion in the class of the company), shall be filed for registration to the Registrar within fifteen days of the alteration and its approval.  

Contents of Articles of Association (AOA)

Contract drafting

As the rulebook of the company, the Articles of Association is framed as a legally binding document that has the necessary rules and by-laws on matters prescribed. Section 5 (2) of the Act briefly mentions such matters, some of which include the content as given below:

  • The extent to which ‘Table A’ of the Companies Act is applicable
  • Management decisions
  • Clause relating to adoption of preliminary contracts
  • The different classes of shareholders
  • The rights and duties of different classes of shareholders 
  • Appointment of Directors 
  • The powers and rights of Directors 
  • Borrowing powers of Directors
  • The procedure of issuing share certificates and share warrants
  • The voting of the Directors and Chairman
  • The Dividend policy of the company
  • The creation of reserves
  • Confidentiality of the trade secrets and trade know-how of the company and penalty over their unauthorised disclosure
  • The intellectual property valuations of the company
  • The alteration of share capital
  • Issue and transfer of shares
  • Transmission clause relating to the transfer of title of share by insolvency, succession, death, etc.
  • Forfeiture and surrender of shares 
  • The procedure for board meetings and for special resolutions that can be passed
  • Arbitration clause in case of disputes 
  • Accounts and audits of a company 
  • Clause relating to the common seal of the company
  • The winding up procedure of a company, including the conditions required and the period of notice given to the members of the company 

These are some of the details that are usually included in the Articles of Association. The company can also give other additional information, which may include the restrictions given in the Memorandum of Association, specifically its objects clause. 

Provisions for Entrenchment

In the contents of the Articles of Association given above, certain contents or provisions are made as such to be harder to change, amend or alter, making them ‘entrenched’ in nature. The literal definition of the word ‘entrench’ can be defined as a firm belief, attitude or habit that is quite difficult or hard to change. In simpler terms, entrenchment clauses can be referred to as clauses or provisions of AOA that are very hard to bring changes to or amend.

Section 5(3) of the Companies Act, 2013 explicitly talks about entrenchment clauses in AOA, stating that certain provisions in the Articles of Association cannot be altered or amended by simply passing a special resolution but also require additional procedures, which would be covered later in the article. Section 5(4) further mentions that such entrenchment clauses can be introduced in the AOA only during:

  1. The incorporation;
  2. By bringing an amendment later to the provisions of the AOA through:
  • An agreement between all the members in case it is a private company.
  • Special resolution if it is a public company.  

Notice to Registrar 

Section 5(5) of the Act further provides for the requirement of giving notice to the Registrar of Company if any Articles in the Articles of Association contain the entrenchment provision, let it be framed even before the registration of the Articles or added later by amendment or alteration. This is done so as to avoid unnecessarily hard alteration laws for the provisions where such an elaborate process is not particularly needed.

Scope of Articles of Association (AOA)

While the Articles of Association play a vital role in the running of the company, it is still bound by the Memorandum of Association, which acts as the ‘supreme law’ within the company. Due to this, the Articles of Association cannot exceed or be in contravention of the scope of the Memorandum.

Beyond that, the Articles of Association act as a legally binding document that not only clarifies the power and rights of the members and directors but also sets the obligations that can be accessed and have to be agreed upon by all the future members who are to join. Every contract the company has with its future hires, members or even legal representatives is based upon the clauses of these Articles.

It acts as the base legal system of the company, highlighting the duties and rights of the company towards its members and vice versa. The company can also add rules as per their own requirements but even those need to be signed and approved by every shareholder prior to its enactment. 

The alteration of Articles of Association, while possible, is quite a lengthy and tedious procedure since the process needs to be approved by all the shareholders and Directors of the company as well as be filed to the Registrar of the Companies, who is appointed by the Ministry of Corporate Affairs. 

All this is done to avoid any arbitrary or mischievous clauses that can lead to the company exploiting its members unfairly.

Importance of Articles of Association (AOA)

Both Articles of Association and Memorandum of Association are considered the most important statutory documents of a company. In the case of the Articles of Association, any new company would find it to be of utmost importance; even more so than a Memorandum in some cases since the Articles dictate the internal governance of a company. 

Since many countries have a necessary requirement for both documents, they hold immeasurable power in the context of the legitimacy of a company and its foundation. In addition to that, it also acts as a vital document for shareholders who read and follow it for their due diligence before investing in the company through stocks and shares or to learn more about their rights and obligations in the company.

The Articles of Association also act as a good first step in regulating plans to achieve the company objectives mentioned in the Memorandum of Association. Beyond that, it can also be used to learn more about the internal workings of a company and what it stands for.

Moreover, in many countries, the Articles of Association are also needed while setting up an official bank account for the company or while taking loans from the bank in the name of the company, which is an artificial personality.

Alteration of Articles of Association (AOA)

Section 14 of the Companies Act, 2013, states the power of a company to alter its AOA, given that such alteration is within the bounds of the MOA and is passed by the prescribed procedure of passing a special resolution. This is one of the essential powers of a company since its effect can turn:

  • A private company into a public company

A company can be converted from a private company to a public one by altering its clauses. This alteration is done in the form of omitting or removing the three clauses mentioned under Section 2 (68) which states the characteristics of a private company. Once such alteration is made, a copy of the resolution and the altered AOA shall be filed with the Registrar within 15 days of passing such a resolution for alteration.

Other changes

In addition to the obvious change of the shares of the company also being available to the public, as per Section 14 (1) of the Companies Act, any restrictions on the previously private company, such as the limit on the number of members of the company to two hundred and the limit in numbers of directors to two, shall be removed after its conversion to a public company.

The newly converted public company, as per Section 149, would now need to have three directors at minimum for such conversion as well as have more than the two hundred limit of members. Furthermore, the company shall update every copy of the Articles of Association, physical or online, to include the newly updated clauses as per Section 15 of the Act.

  • A public company into a private company

For a public company to be converted to a private one, passing a mere special resolution is not enough. The approval of the Tribunal is needed for such alteration and conversion. In addition to that, a copy of the special resolution needs to be filed with the Registrar within 30 days of passing the resolution. Once the altered AOA is approved by the Tribunal, the new, altered Articles of Association and the order of approval of the Tribunal shall also be filed with the Registrar within 15 days of such order being passed.

Other changes 

In addition to the above, in case of such newly converted private companies, the Articles of Association must contain the three restrictions mentioned in the aforesaid section, which include the restriction on the right of members to transfer shares, restriction on the number of employees or members of the company to two hundred and the restriction of invitation to the public for the subscription of its securities. 

Due to such restrictions, the special resolution to be passed by the shareholders becomes even more crucial along with the approval of the Tribunal. If either one of them is not acquired, such conversion will not go through. In certain cases, if the public company is acquired or has shares held by the Government, then such conversion may also require the approval of the Central Government.

Procedure for Alteration of Articles of Association (AOA) 

As mentioned earlier, Section 14 of the Companies Act, 2013 states the requirements for the alteration of Articles of Association, which may include addition, deletion, substitution or modification of the clauses in the aforesaid document. 

To alter the Articles, there are four types of procedures that the company can follow: 

  • As per the steps prescribed in the Articles of Association: If the company has provided special steps to be followed for alteration in the Articles of Association itself, then they shall be followed.
  • As per the procedure of special resolution: This step of alteration includes the passing of a resolution of at least 75% of the votes in favour of the alterations in the general meeting of shareholders, as per Section 114(2) of the Companies Act, 2013.
  • As per the votes of the Board of Directors: The Directors also have the power to alter the Articles of Association as per the clauses given in the AOA. However, such alteration needs to be ratified by the shareholders in the next general meeting or else the alteration will lose its legitimacy.
  • As per the Order of the Tribunal: The Articles of Association can also be altered by the National Company Law Tribunal (NCLT), given that the alteration is either subtraction or declaration of a clause as void due to any contravention with the Memorandum of Associations of the company or any legislation of the country. The main power of alteration is mostly only in the hands of the shareholders and Directors of the company and the Tribunal can only do so if there are any contraventions of the clauses with law or if the alteration is necessary for the functioning of the company or to protect the interests of the shareholders from unfair exploitation. Even in case of any mistake in the Articles of Association, be it clerical or otherwise, it can only be rectified by the shareholders.

Before the initiation of any procedure of alteration in the Articles of Association, a notice of at least 7 days is required to be given for the Board meeting of Directors as per Section 173 of the Companies Act.

Once the Board meeting of the Directors is held and recommendations for alterations as well as approval are granted, the notice is issued for the general meeting in accordance with Section 101 of the said Act, which may extend to however much is mentioned in the clauses in the Articles of Association itself.

Filing alteration for registration

After the general meeting of the shareholders is held a special resolution is passed for the approval of the alteration. If the resolution fails to reach the required amount of 75%, then the alteration will not proceed any further. But if it does pass successfully, then the company has to file form MGT-14 with the Registrar of Companies (ROC) within 30 days of passing of such resolution with the required documents, consisting of certified copies of passing of the special resolution as per Section 117, a copy of the notice of the general meeting as well as a printed copy of the new and altered AOA.

The printed version of altered Articles of Association must also be provided to every shareholder of the company once it is approved by the Registrar of Companies.

Limitations on power to alter Articles of Association (AOA)

  • As mentioned earlier, the alteration made to the Articles of Association shall not be in contravention of the Memorandum of Association or the Companies Act, given that the AOA is subordinate to both of them.
  • The alteration made to the Articles cannot have a retrospective effect. In simpler terms, the alteration made in the Articles of Association changing any of the rules shall not be applicable to the time or situation before its alteration to avoid unfair treatment or arbitrary actions.
  • The alteration cannot be in contravention with the order, alterations or suggestions of the Tribunal, as per Section 242 of the Act. If the Tribunal decrees for certain actions or rules, The Articles of Association cannot have any provisions acting against such order or decree.
  • The alteration made shall not be in contravention of morality, public policy or any of the laws of the State. In addition to that, such alteration to the AOA should be made for the benefit of the company and not to solely fraud or suppress the minority shareholder. 
  • In the case of the conversion of a public company to a private one, no such alteration can be made until consent from the Tribunal is obtained.
  • The alteration in the AOA should not be used by the company to breach any contract or escape from the liability of a pre-existing contract.

Binding effect of Memorandum of Association (MOA) and Articles of Association (AOA)

Once the Memorandum and the Articles of Association of a company are registered with the Registrar, both documents legally bind the company with its members. This binding effect is almost akin to a contract since it has much less force than a statute. This effect is explained in further detail as follows:

Binding the company to its members

The first binding effect both the MOA and the AOA have is between the company and its members. The members have the obligation to act and conduct their corporate affairs within the scope of the MOA and the AOA. Meanwhile, the members can restrict the company from doing any actions in contravention of either the MOA or the AOA as an injunction. The members can also enforce their own rights mentioned within the Articles of Association, such as the right to their declared dividends and shares in the company.

However, only a member or a shareholder of the company can restrict the company by enforcing the clauses under the AOA. As seen in the case of Wood v. Odessa Waterworks Co. (1889), The AOA of the Defendant company stated the Directors can declare the payment of the dividends to its members and shareholders, with the official approval of the company at a general meeting. However, a resolution was passed that permitted the payment of dividends through debenture bonds instead of cash. The Court held that the term ‘payment’ referred to the payment in cash and thus, such resolution was held void. In simple terms, the Directors were restricted from executing the resolution since it went against the provisions of the AOA.

Members bound to the company

As mentioned earlier, the first binding effect is always between the company and its members. It is like a contractual relationship with both parties having their rights and obligations mentioned in the provisions of the AOA. Each member or shareholder of the company shall abide by the provisions of the MOA and the AOA. This includes when any member has any amount payable to the company, which shall be considered a debt due. 

In the case of Borland’s Trustee v. Steel Bros. & Co. Ltd. (1901), the AOA stated that in case any member of the company went bankrupt, their share would be sold at the price decided by the Directors of the company. Thus, when the member Borland declared bankruptcy, Borland’s Trustee (the plaintiff, in this case) asked to sell Borland’s shares at their original value. The trustee further contended that since he was not a member, he was not restricted by the AOA. 

It was, however, held that while the trustee may not be bound by the AOA, the shares that were bought were bound by its provisions. In simpler terms, the sale of the shares was to follow as per the provisions given under the Articles.

Binding between members

The second binding effect that the Articles of Association have is on the members of the company with each other. Such powers or rights can only be applied by and against a member of the company. However, it is often noticed that the Courts tend to extend the scope of such binding effect even to the individual members who are not exactly members of the company.

As seen in Rayfield v Hands (1960), the plaintiff was a shareholder of a company. The AOA of the company stated that if any shareholder wanted to transfer their shares, the Directors of the company would have to buy such shares at a reasonable and fair value. Following this provision, the plaintiff informed the Directors, who refused to pay for his shares and argued that it was not within their obligations.

However, the judgement was given in favour of the plaintiff as the High Court stated that the plaintiff was not required to join the company as a member to bring a suit against it. The Directors were ordered to buy the shares of the plaintiff at a fair rate.

No binding in relation to outsiders

Any third party or individual not connected to the company shall not be bound by the AOA or the MOA of the company. Neither the company nor its members are bound to such third parties within the scope of the Memorandum and the Articles. As seen in the case of Browne v. La Trinidad (1887), the AOA of the company contained a clause that implied the plaintiff may be a Director that should not be removable. However, he was still removed later and proceeded to sue the company for the contravention of the Articles. 

It was held by the House of Lords that since the plaintiff was an outsider to the company, he could not restrict the company since he would not have any rights to enforce as a member. In simple terms, an outsider to the company cannot take undue advantage of the AOA to restrict or enforce any claims against the company.

Doctrine of constructive notice

According to Section 399 of the Act, after the registration of the MOA and the AOA of any company with the Registrar, it becomes a public document that can be easily accessible by any member of the public at a prescribed fee for accession. Once such a request is made to any company, as per Section 17 read with Rule 34 of Company (Incorporation) Rules, 2014, the company has the obligation to send that individual a copy of its MOA, AOA and all the other agreements mentioned under Section 117(1) of the Act. However, if the prescribed fee is not paid with such a request, the company has no obligation to send anything.

Thus, since both the MOA and the AOA become public documents, they are easily accessible to all the members of the company as well as anyone outside the company. In such a case, the doctrine of Constructive notice states that the company shall deem the party dealing or contracting with the company to have read such public documents or, at least, be aware of its provisions. This knowledge is important since the AOA can directly affect the contractual obligation of the company. 

The individuals or third parties dealing with the company can request to access the MOA and the AOA just as any other member of the public. If the company fails to provide copies of the aforesaid documents, then every defaulting ‘officer’ of the company who fails to do so may be liable to a fine of Rs. 1000 for each day of default until it is resolved. Or it can be extended to one lakh rupees, given whichever is less.

In the end, it is the duty of every person planning to interact or contract with the company to inspect these aforementioned documents which are easily accessible to the general public. Their knowledge of the workings of the company and its objectives would be assumed since the conducting of such due diligence is their responsibility. 

Whether the individual has actually read the document would not matter since it would be assumed still that they are familiar at least with the relevant provisions in the Memorandum and the Articles of Association of the company. In this context, the MOA and the AOA act as a ‘constructive notice’ to the public and interested parties for the workings of the company.

As seen in the case of Kotla Venkataswamy v. Chinta Ramamurthy (1934), the Article of the Association of the company of the Defendant stated that if any property of the company is mortgaged, then such mortgage deed would require the signatures of the Company’s Secretary, Managing Director and the Working Director. Without all three signatures, the deed would not be held valid. 

In the present case, the plaintiff had filed the suit to enforce her tenancy rights but it was later found that the mortgage deed only had the signatures of the working Director and Company Secretary. Without the signature of the Managing Director, the deed was accepted by the plaintiff. The Madras High Court held the mortgage deed invalid, stating that the plaintiff should have practised due diligence and had knowledge of the provisions of the AOA of the company, which is publicly available.

Doctrine of indoor management

The Doctrine of Indoor Management was first laid down in the case of Royal British Bank v. Turquand (1856), due to which it is also commonly referred to as the ‘Turquand Rule.’

In this case, the Articles of Association of the Appellant company permitted the Directors of the company to borrow bonds by passing a resolution in the general meeting. However, the Directors had given a bond without the passing of such a resolution, resulting in the present suit. The issue that arose was whether the company would be still liable for such a bond or would the transfer be invalid due to the conduct going against the AOA of the company. The (then) Chief Justice, Sir John Jervis held the company liable, stating that the individual receiving the bond was entitled to assume that the prescribed procedure in the AOA was followed and the bond was given in good faith.

This judgement was held quite ahead of its times and was not fully accepted or incorporated into the common law until the case of Mahony v. East Holyford Mining Co. (1875)

The House of Lords, in the present case, endorsed the Turquand case and explored the concept of indoor management, which is quite opposite to the the doctrine of constructive notice. Simply put, while the Doctrine of Constructive Notice protects the company from the actions of an outside party, the Doctrine of Indoor Management protects the third parties not connected to the company from the company. It is so since the Constructive Notice is solely restricted to matters outside of the company, which has an external position and does not regard the internal mechanism of the company.

Meanwhile, the Doctrine of Indoor Management protects the third party from any default in the inner workings or mechanisms of the company that any outsiders would not be aware of despite practising proper due diligence. If the contract between the company and any third party is consistent with the public documents of the company, then it shall not be prejudiced due to any irregularities arising on the part of the inner workings or ‘indoor’ operations of the company.

From the common law, this doctrine has also been adopted into Indian Law, as seen in the cases of Official Liquidator, Manabe & Co. Pvt. Ltd. v. Commissioner of Police (1967) and M. Rajendra Naidu v. Sterling Holiday Resorts (India) Ltd. (2008), where it was held that while the individuals or third parties lending to the company should be familiar with the MOA and the AOA of the aforesaid company, they should not be expected to know every single inner working of the company. In simpler terms, third parties dealing with the Companies are not obligated to be acquainted either each and every internal action and proceedings occurring in the company.

Exceptions to the Doctrine of Indoor Management

Where the outsider is aware of the irregularity

While third parties are not expected to be aware of the internal workings or actions of a company, if the knowledge of such irregularity is with the party, then they shall not have the protection of the Doctrine of Indoor Management. In simpler terms, if the third party gets to know about the irregularity in the internal procedure, even in an implied manner through their observation of lack of proper process or authority followed, then it is their duty to not go through with the transaction. If the third party still decides to go with the transaction, they would not be protected under the scope of this doctrine.

As seen in the case of Howard v. Patent Ivory Co. (1888), the AOA of the Defendant company allowed the Directors of the company to borrow up to one thousand pounds and not beyond that. To exceed that amount, they need to pass a resolution in the general meeting, which was not followed through by the Directors before they borrowed 3500 pounds in exchange for debentures from the plaintiff, who was one of the Directors present on the Board.

The present suit came to be when the company refused to pay back such an amount and the judgement was held in the favour of the company, stating that the debentures would only be paid up to the amount of 1000 pounds since the plaintiff had full knowledge of the irregularity of internal procedure as a Director.

Lack of knowledge of the AOA

As mentioned earlier, this Doctrine cannot protect anyone who has not acquainted themselves with the AOA and the MOA of the company despite both being available in public records. As seen in Rama Corporation v. Proved Tin & General Investment Co. (1952), the plaintiff Corporation did not acquaint themselves with the Articles of Association of the Defendant company while doing a transaction with them.

Negligence

The Doctrine of Indoor Management does not protect third parties who have not practised proper due diligence. In simpler terms, if the irregularity could have been noticed with proper due diligence or observation on the side of the third parties, then this doctrine does not protect such parties as a consequence of their blatant negligence.

As seen in the case of Al Underwood v. Bank of Liverpool (1924), the officer of the Defendant company had taken actions which were not within their scope of duties. However, the plaintiff did not ensure if the officer contracting with them as the representative of the company was duly authorised, resulting in negligence on their end due to which they were not protected under this doctrine.

Forgery 

Any illegal transactions or transactions involving forgery are not protected under this doctrine. In simpler terms, if there is any forgery that results in a fraudulent transaction where the company had no idea or will would not be protected by the Doctrine of Indoor Management.

As seen in the Ruben v. Great Fingall Consolidated (1906) case, the secretary of the Defendant company had forged the signatures of the Directors on a certificate to issue shares of the company. It was held that since the Directors had no hand or idea of such forgery, they could not be held liable for the fraudulent transaction happening due to it. Furthermore, the forged share certificate was held to be void and hence, would not invoke the Doctrine of Indoor Management. The unauthorised use of the company seal can also be included within the scope of this exception along with the cases of Oppression.

This exception of the doctrine also includes situations where a third agency was involved in the transaction, as seen in Varkey Souriar v. Keraleeya Banking Co. Ltd. (1956) case, where agents of the company had acted on their own without the authorisation of the Defendant company.

Relevant cases 

Eley v. Positive Government Security Life Assurance Co Ltd (1876)

In this case, the Articles of Association of the Defendant company provided that the Petitioner would be hired as the company’s legal representative for his lifetime. However, despite such a clause, the company dismissed him after some while, resulting in the Petitioner suing the company for damages for the breach of contract based on the provisions of the Articles of Association. The Court held that the Petitioner did not have any right of action since the Articles do not bind the company with any third party or outsider; thus, not constituting such a contract between the Defendant and the Petitioner.

Sidebottom v. Kershaw, Leese & Co Ltd (1920)

In the present case, the Defendant company had altered the provision in its Article of Association to authorise its Directors to order any shareholder of the company to transfer their shares at a reasonable value to the person nominated by the Board of Directors. The shareholders sued the company for arbitrariness. However, the Court held the alteration in the Articles of Association valid, stating that such a clause was made to benefit the company with a bonafide intention. In simpler terms, even if the interests of a few individuals were to be affected, the alteration in AOA shall stand valid if it helps in the development of the company. However, since the alteration caused the benefit of the company as a whole, it was not void.

Southern Foundries (1926) Ltd v. Shirlaw, (1939)

In the present case, the Articles of Association of the Appellant company provided that the Managing Director of the company had to be a Director, and any early ceasement would result in the inability to function as a Director. The Respondent was a Director of the company for three years, with a contract period of ten years. However, he was removed from the directorship once the company was taken over by another parent company. Grieved by such removal, the case was brought in front of the Court which held that such alteration had enabled the company to commit such a breach of contract and thus, the company was liable to pay damages for such breach to the Respondent due to his early dismissal before the term of his contract was over.

Economy Hotels India Services Pvt Ltd v. Registrar of Companies (2020)

In this case, the Appellant Company had filed a petition to the NCLAT, stating that the special resolution passed had a few typographical errors due to which the NCLT had rejected its application confirming the amendment for reduction of share capital. The Court observed that the resolution passed under Section 66 was not only unanimous in its voting but also had only one typographical error in the extract of the Minutes of the Meeting characterising the ‘special resolution’ as ‘unanimous ordinary resolution’. However, since the resolution was also registered to the Registrar, all the required conditions were met and the resolution was sound despite such clerical errors. Thus, the appeal was allowed.

S.P. Velumani v. Magnum Spinning Mills India Pvt. Ltd (2020)

In the above-mentioned case, the Appellant had filed a case in the Tribunal against the Respondent company, contending that the company had made several fraudulent transactions that were bogus and allocated the funds in a misappropriate manner. The Tribunal, however, dismissed the case, stating that the conduct showcased did not fall within the purview of Oppression and mismanagement. The case was then appealed to the NCLAT, where the Appellate Tribunal upheld the decision made by NCLT since the decision to write off bad debt was a power conferred to the Directors of the Respondent company by the Articles of Association of the company and was not in contravention of any law. 

Brillio Technologies Pvt. Ltd v. Registrar Of Companies (2021)

In the above-mentioned case, the Directors of the Appellant company had resolved to reduce the share capital selectively, by reducing a portion of the equity share capital from non-promoter shareholders with considerable consideration to compensate for it. This decision was then approved by a special resolution passed under Section 66 (1) and Section 114, where the consensus was unanimous; thus, making the Appellant company a wholly-owned subsidiary company under its holding company. 

However, this arrangement was not approved by the Tribunal, stating that such arrangement is not covered under Section 66 of the Act and since no reason as such was given for such reduction of share capital, the selective reduction would go against the provisions of the Articles of Association of the company. The National Company Law Appellate Tribunal (NCLAT) reversed the judgement of the National Company Law Tribunal (NCLT), holding that such reduction can be covered within the purview of Section 66. Furthermore, the non-promoter shareholders requested such a decision since they were looking for an opportunity to dispose off their shares in the Appellant company; thus, making the decision itself sound and not against the Articles of Association of the company since the majority of the shareholders approved of it.

Conclusion

Articles of Association is an essential document in the scope of corporate governance, without which the regulation of internal matters and management can be challenging, to say the least. The Memorandum and the Articles of Association form the core constitution of the company along with setting the rules and regulations by which the company and its members may abide by.

In the end, both the AOA and the MOA are crucial documents of the company which are also available in the public record for anyone to access with a prescribed fee. Without their presence, no company can even attain their legitimacy, let alone function with proper corporate governance.

Frequently Asked Questions (FAQs)

Is AOA the Constitution of the company?

No, the Articles of Association is not the Constitution of the company, it is the Memorandum of Association. AOA, instead, acts as a rulebook of the company that sets the regulations and by-laws of the company as per the scope set by the MOA since it supersedes the Articles.

Who can enforce the Articles of Association?

The members of a company can enforce the clauses under the Articles of Association since it legally binds the members with the company as well as with the other members of the company. Thus, the members have the right to enforce the AOA in respect of their rights and obligations as well as restrict the company in case of any breach of the provisions given under the AOA.

Where to find a company’s AOA?

As mentioned earlier, both the AOA and the MOA of a company are in public records after their registration and they can be accessed through the following:

  • In the Company Public Document Section of the Ministry of Corporate Affairs website;
  • In several private platforms that also have company public documents available, such as InstaFinancials, etc.

Is the MOA easier to alter than the AOA?

No, the Articles of Association are much easier to alter than the Memorandum of Association since to alter the AOA, one needs to pass a simple special resolution in the general meeting of shareholders, as mentioned earlier. However, MOA can only be altered in specific circumstances and with the explicit permission of the Central Government in some cases. The alteration procedure of MOA also needs to follow the provisions of the Companies Act, 2013 strictly. 

References 

  • Company Law by Avtar Singh (Seventeenth Edition)
  • Company Law by H.K. Saharay (Seventh Edition)

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Formation and incorporation of a company

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Registration/Incorporation of the Company
Image source - https://bit.ly/2PcrbrF

This article is written by S. Aditya, and further updated by Gautam Badlani. It explains the concept of the formation and incorporation of a company. The article explains the four stages involved in the incorporation of a company. It also sheds light on the various documents that are required to be prepared in the process of registering a company. 

Introduction 

The formation and incorporation of a company are very similar to the birth of a human, as it also goes through various stages of the formation of its body parts during the womb stage. Various groundwork is carried out to bring a company into existence. The process of an idea converting into a company includes various stages; these crucial stages of the pre-incorporation and formation stages are discussed in detail below. 

This article explains the functions, duties, and liabilities of a promoter, along with providing insights into cases regarding pre-incorporation contracts. This article delves into the integrated process of company registration.

Stages of formation of a company

The entire process of the formation of a company can be largely classified into four stages: 

  • Promotion,
  • Registration,
  • Flotation, and
  • Commencement of business.

Promotion for formation of a company

The expression ‘promotion’ is a very wide term that includes all the preliminary steps that are taken for the purpose of the formation of a company. All the steps of formation of the company have been explained in detail. 

As the name suggests, this stage of incorporation deals with the promotion of the yet to be incorporated company. It is the stage where the promoter walks into the market of potential investors to collect their investment in an idea, which might be his own brainchild or that of someone else.

A promoter is to a company, as parents are to a child. The promoter, along with convincing investors towards the idea of the company, also brings together the physical capital of the labour, raw materials, managerial ability, machinery, etc. The promoter is passionate about the company’s ideas, but has to SWOT (Strength, Weakness, Opportunity, and Threat) analyse the idea with respect to future prospects and feasibility with respect to societal dynamics. 

The promoter instils confidence in the idea among the investors and tries to build upon the investment so as to be able to incorporate the company. Promoter has been defined under Section 2(69) of the Companies Act, 2013. However, there are certain inherent difficulties in laying down a precise legal definition of a promoter. This expression is a business term and not a legal one. Section 2(69) states that promoter is a person who has been named as promoter in the prospectus issued by the company or who has direct or indirect control over the company’s affairs or on whose advice and directions, the Board of Directors of the company exercise their decision-making power. 

Technically, a promoter is a person so named in the prospectus of the company. The company shall also name their promoter in the annual return made under Section 92 of the Companies Act, 2013.

The idea of a promoter can be seen from three different perspectives: 

  • promoter is someone who is identified in the prospectus of the company or is mentioned as a promoter in the annual returns of the company, and/or 
  • promoter is a person who has the power to appoint the majority of members of the board of directors or the person who has authority over making policies or decisions for the company, and/or 
  • promoter is a person on whose advice the board of directors is accustomed to acting.

Legal status of a promoter 

The promoter has a fiduciary relationship with the company. He is the one who conceives the idea of the formation of the company, ensures that the Memorandum of Association (MOA) and Article of Association (AOA) are prepared and registered, finds the first directors of the company and arranges initial capital for the company. It can thus be said that the promoters are the persons who control the affairs of the company until the formation of the first Board of Directors. 

The promoter is neither a trustee nor an agent of the company. He is not an agent, since the promoter’s role began before the formation of the company. Similarly, he is not a trustee, since no trust is in existence when the promotion begins. 

Functions of a promoter

Spotting a business demand in the market 

The promoter, before promoting a company idea, first identifies a potential business opportunity. The potential opportunity may be any new product or a new service, or it may even be the production or manufacture of an already established product by new means.

The promoter has to evaluate the idea of the new potential company under the magnifying glass of technical and financial feasibility. Therefore, it is important that the promoters undertake detailed studies regarding all aspects of the business idea by using various tools, such as the economic studies of the market, the opinions of the technical experts of such products, opinions of chartered accountants, economists, etc. The idea that the promoter intends to use for perpetrating the market The feasibility of the idea can be evaluated using the below-mentioned three tests.

  • Technical conceivability: the ideas of the business may be good, but sometimes they may be technically difficult to conceive into reality given such hurdles regarding the raw material acquisition, the difficulty of making a product with limited funds, etc.
  • Budgetary feasibility: Sometimes it may not be possible to gather the large funds required for the business due to limited means and sometimes stipulated time. Also, financial institutions may be hesitant to give huge loans to new ventures.
  • Monetary feasibility: A business idea may be technically and financially feasible, but not monetarily appreciable. It may not be profitable or may not return enough profits. In such a case, the promoters refrain from promoting the idea of business.

Name of the company

The promoter, after fixing the launch of the idea, intends to give a name to the company. The promoter applies to the registrar of companies of that jurisdiction, wherever the promoter intends to make the registered head office of the company. The application to the registrar contains three names, “X or Y or Z,” in order of priority, and the promoter adheres to Rule 8 of the Companies (Incorporation) Rules, 2014.

Preparation of necessary documents

The promoters are the ones who are responsible for collecting documents that are submitted to the Registrar of Companies to get the company registered. These documents are a return of allotment, a MOA and AOA, the consent of directors, and a statutory declaration.

Further, the promoters decide who will be the members signing the Memorandum of Association of the Company, which is to be formed. Generally, the signatories of the MOA are the first directors of the company. The written consent of the signatories to the memorandum is essential to becoming directors of the company.

Hiring professionals

Promoters are required to appoint certain professionals, such as mercantile bankers, auditors, lawyers, etc. These professionals aid the promoter in the preparation of the necessary documents that are to be filed with the Registrar of Companies (ROC) during the registration of the company.

Duties of a promoter 

The relationship of the promoter with the company cannot be described as a principal-agent relationship, as during the pre-incorporation stage, the company has not even come into existence. Various judicial interpretations towards understanding the nature of the relationship between the promoter and the company have taken place in the common law courts as well as the Indian courts, and it has been decided that the relationship between the promoter and the company is fiduciary in nature. 

In the landmark case of Erlanger v. New Sombero Phosphate (1878), it was held that the promoter stands in a fiduciary capacity with the company. He cannot be considered as an agent of the company because there is no principal. Similarly, a promoter is not an agent, as there is no beneficiary in the relationship. The persons who are responsible for the incorporation of the company are known as promoters in the common parlance, and they have a quasi-trusteeship relationship with the company. 

The duties of the promoter shall be discussed herewith: 

Duty to disclose secret profit

As mentioned earlier, the promoters have a fiduciary relationship with the company that will be incorporated. The duty of a promoter is to disclose the secret profit made by him, if any, to the company. The promoter has a right to claim expenses, if any, made during the incorporation stage from the company.

The disclosure has to be made to an independent board of directors. The requirement of disclosure would not be fulfilled if it were made to the mere nominees of the promoter himself.

However, it is not always possible for a promoter to constitute an independent board of directors for the company. For example, private companies are usually floated by the promoters with the object of retaining control over the company. If the company does not have an independent board of directors, then the disclosure should be made to the shareholders of the company. This duty of disclosure continues until the profits are adequately accounted for. 

Duty to keep the company informed about the transactions

A promoter may intend to sell, lease or rent any property of the company. But if such a transaction is made without informing the company, the company may repudiate such a contract of sale, lease, or rent, and the company may even claim the profit made by the promoter from the transaction by allowing such a contract.

Fiduciary duty towards the future shareholders

The promoter is bound by a fiduciary relationship with the company, signatories to the Memorandum of Association and also shows the future allottees of shares in the company. The relationship of trust between the promoter and future shareholders goes to show that the promoter will uphold all the values expected of him by the company.

The promoter stands in a fiduciary relationship with the company. 

Duty to disclose profits gained during promotion

The promoter, during the promotion of the company, may at certain times be subjected to certain private arrangements leading to his personal profit. Given that the promoter stands in a fiduciary relationship with the company, he must disclose the profits gained during the promotion as explained to the company.

Liabilities of a promoter

A promoter is subject to liabilities under the various provisions of the Companies Act, 2013. The liabilities of the promoter are:

Liability to justify the transactions to the company

The promoter stands in a fiduciary relationship with the company; therefore, the company has all rights to inquire into the transactions made by the promoter without the consent of the company. The company, while dealing with such a transaction, may either repudiate such an agreement made by the promoter with the third party or may even sue the promoter to recover the money along with profits so made by him behind the back of the company.

Liability against the misstatement made in the prospectus

Section 26 of the Companies Act, 2013 lists the matters that are to be stated in the prospectus. The promoter may be held liable for not having complied with the provision. 

Section 447 of the Companies Act provides the punishment for fraud, and this provision can be invoked for determining the liability for false statements in the prospectus. The promoters would be liable to be punished with up to 5 years of imprisonment or 50 lakh rupees fine, if the fraud does not involve public interest. The promoters would be liable to be punished with up to 10 years of imprisonment or a fine of up to 3 times of the fraud, if the fraud involves public interest. 

Section 34 stipulates criminal liability for false and misleading statements contained in the prospectus. It provides that the persons who authorize the issue of such misleading prospectus would be punishable under Section 447 of the Act. 

Similarly, Section 35 entails civil liability for the persons who authorize the issue of a misleading prospectus. Such persons would be liable to pay compensation to the persons adversely affected by the misleading statements

Personal liability towards the contracts

In all the contracts entered into by the promoter during the pre-incorporation stage of the company, the promoter may be held personally liable for the aforementioned contracts until they’re discharged according to contract terms or when the company takes up the liability from the promoter after it is incorporated.

Status of contract in pre-incorporation and the principle of promoter’s liability in pre-incorporation of a company

The pre-incorporation contracts are the contracts entered into by the promoter before the company is incorporated, and these are essential for the successful running of the company in the future. The nature of these pre-incorporation contracts is, however, different from that of an ordinary contract. These contracts are bipartite, and their effects are tripartite. The promoter enters into a contract with the service providers or interested persons and the consequential effect of these contracts helps the prospective company, which is still lingering in its non-incorporated stage. The instruments of contract are essentially used for quid-pro-quo transactions between two parties, but here they are remarkably used for the benefit of the non-party to the contract, as legally, the company is non-existent. 

The company is essentially the beneficiary of the pre-incorporation contracts, as inferred from the above paragraph. Now, it might stir up doubt as to why a company is not liable for the pre-incorporation contracts. The answer to the question, to be simply put, is that one cannot make someone liable if they are non-existent and hence not a party to the aforesaid pre-incorporation contract. 

When a company is liable for pre-incorporation contract

The non-liability of the company with respect to the pre-incorporation contracts was the same as the common law court in India until the passing of the Specific Relief Act, 1963. The Specific Relief Act, 1963, essentially under Section 15(h) and Section 19(e), makes the pre-incorporation contracts and agreements valid, deviating from the trajectory followed under the common law.

Section 15 (h) provides details as to who may obtain specific performance of the contract from the company. Clause (h) provides that when a promoter gets into a contract before incorporation on behalf of the company and the company warrants such contract, such company must have sent a communication of acceptance to the other party of the contract.

According to Section 19(e), a party may seek specific performance relief from the company if the company’s promoter entered into a contract before incorporation and the contract was justified at that time. The company must have accepted the contract and communicated such acceptance to the other party.

The aforementioned provisions of the Specific Relief Act, 1963, change the course of action in a case between parties where a contract was made before incorporation; unlike the regular course of action against the promoter, here the company can be made liable if it has accepted the contract and has communicated such acceptance to the other party to the contract.

Various cases have come before the judiciary. In order to understand the liability of promoters and company in case of pre-incorporation contracts, we shall be discussing such cases below:

In the case of Weavers Mills vs. Balkis Ammal and Ors. (1976), the promoter had agreed to purchase some properties on behalf of the company. After incorporation, the company took possession of the properties and also constructed structures upon it. It was held that, although conveyance of the property had not taken place through a proper sale deed, the company’s title over the properties was valid and couldn’t be set aside. The Madras High Court had extended the scope of interpretation of the principle mentioned above. Promoters are generally held personally liable for the pre-incorporation contract, unless the company ratified the contract.

The landmark case of Kelner vs. Baxter (1866), which is a case where “the principle of promoter’s liability in a pre-incorporation contract”, was explained. In this case, the promoter of a company was approached by one Mr. Kelner to purchase his wine, and the promoter had agreed to purchase the same on behalf of the company. Later on, the company was unable to pay Mr. Kelner, who sued the promoter. It was interpreted as determining whether the promoter was in a principal-agent relationship with the company and if liability could befall the company. The learned judge interpreted that the principal agent relationship was not in existence, as the principal of the agent cannot have existed without the incorporation. It was further added that a company cannot take the liability of pre-incorporation contract through adoption as the company is not privy to the contract and the company was not even existent at the time of the contract.

In the case of Newborne v Sensolid Ltd., (1954), wherein the Director (Newborne) of the company had entered into a contract before the company was incorporated. Subsequently, Newborne approached the Court of Appeal seeking enforcement of the contract. He contended that he had the locus standi to seek the specific performance of the contract, as he was a party to the contract. The defendants contended that the contract was not valid as it was entered on behalf of a non-existent company. The court concluded that since the company was not existent at the time of the signing of the contract, the contract was invalid. 

Finally, it can be concluded regarding the pre-incorporation contracts and the principle of promoter’s liability in pre-incorporation that common law clearly shows that the promoter shall be held personally liable for the pre-incorporation contracts of the company and the same was followed in England and India prior to the legislation of the Specific Relief Act, 1963. It basically goes on to suggest that there is no escape from the liability of the promoter. In cases of pre-incorporation contracts, there are recognised ways in Indian law to shift the liability of the promoter to the company, such as novation of contract. India has uniquely legislated the Specific Relief Act, 1963, providing provisions wherein if the contract was entered upon by the promoter during the pre-incorporation stage, the party to such a contract can make the company liable, if the company ratifies such contract and sends communication to such a party of the ratification of the contract. But otherwise, the promoter is held liable in the case of pre-incorporation contracts.

Incorporation of a company

The registration of the company is a legal recognition given to the body corporate under the Company law. The procedure for registration has been clearly stated in Section 7 of the Companies Act, 2013. This provision clearly lays down the requirements for the incorporation of the company. The details of the documents, namely:

  • Memorandum of Association, which is the constitution of the company, wherein the signatories, in case of a public company, has been fixed to a minimum number of 7 and for a private company, a minimum number of 2. This document is duly stamped; 
  • Articles of Association, this is the document filed along with the MOA; 
  • List of directors, wherein the details regarding their names, occupation, and address is mentioned; 
  • Written consent of the directors is to be submitted to the registrar of the companies; 
  • Verification document, wherein such document is to be digitally signed by any recognised chartered accountant, company secretary, advocate.

Procedure for registration of a company

The promoters have to decide certain aspects, such as the type of company and the name of the company, before they can file an application for registration of the company. Moreover, they have to oversee the preparation of several documents, such as Memorandum of Association, Articles of Association, consent, particulars of the directors, etc. 

Types of companies

The promoters have to decide the type of company they want to float. The various types of companies are

  1. Private company: A private company has been defined under Section 2(68) of the Companies Act, 2013 and a private company can be formed by two more persons. A private company is one that restricts the maximum number of members to 50, limits the rights of its members to transfer the shares, and prohibits the issue of shares to the public. 
  2. Public company: A public company has been defined under Section 2(71) of the Companies Act, 2013. A public company is a company that is not a private company and has a paid up capital of Rs. 5 lakhs or more. At least seven members are required to form a public company.  

Name of the company

The promoters have to decide the name of the company. Section 4 of the Companies Act provides that the name of the company must not be identical to or nearly resemble the name of an existing company. Moreover, the name must not appear to be undesirable to the Central Government and the use of the name should not be an offence under the law of the country. For example, the name of the company should not infringe on the registered trademark. Thus, the promoters are expected to exercise caution while choosing a name for the company. 

Once a company gets its name registered, it acquires a monopoly right to use that name. No other company can thereafter register with an identical or similar name. The name of the company is considered to be an inherent part of its public reputation. Section 13 of the Companies Act provides that a company can change its name only with the prior approval of the Central Government. 

Preparation of documents 

Various documents, such as the memorandum of association and articles of association, have to be prepared. 

Memorandum of Association 

A Memorandum of Association (MoA) is also known as a company’s constitution. It defines the scope of a company’s actions. The Memorandum of Association states the object of the company’s formation, the authorised share capital that the company can raise, the extent of liability that the members undertake and other particulars such as the name of the company and location of the registered office. 

The MoA of a private company has to be signed by at least two people, while the MoA of a public company needs to be signed by at least seven people. The signatories to the MoA are known as the subscribers, and each subscriber, has to take at least one share in the capital of the company. 

Articles of Association 

Articles of Association (AoA) are the byelaws that govern the functioning and management of a company. They represent the ethics and values of the promoters. 

All the subscribers to the MoA are required to sign the AoA. It is pertinent to note that the AoA is a document that is subordinate to the MoA. If the AoA and MoA contain inconsistent provisions, then the MoA would prevail over the AoA. The MoA states the object for which the company is formed, while the AoA embodies the manner in which the object is to be achieved. 

Integrated process of company registration

On the website of the Ministry of Corporate Affairs, there are options through which one can register their company online, integrating various legal steps of incorporation into the same portal. By filling Form INC-29, the company can seek integrated incorporation. The certificate of incorporation can be obtained in a few days by choosing this method. 

The process then involves filling out the form online; the form is named “simplified proforma for incorporation”. The performa gives a viable option to incorporate a company online, which starts by filling up the details regarding the information of the promoter of the company. Secondly, the electronic form numbers INC-33 and INC-34 provide the option of filling up the e-MOA (Memorandum of Association) and e-AOA (Articles of Association), respectively. The MOA, as we know, is the constitution of the company: it usually describes the object of the company and also describes the directors involved during the incorporation of the company. After the Memorandum of Association, the e-AOA option is provided so as to ease the process of incorporation even further. An e-AOA lays down rules and regulations for company affairs. E-AOA also lays down the powers, duties and rights of managers, officers and the board of directors. 

The Article of Association may be made by the company according to its own requirements, or it may be selected by such a company from the various options available in the Schedule of Companies Act. The AOA must be signed by all the directors and also attested by two witnesses. The Articles of Association of a company are also known as the by-laws of the company. They deal with various issues such as:

  • amount of share capital and kinds of share,
  • rights of each kind of shareholders, 
  • procedure for making allotment of shares, 
  • procedure for issuance of share certificate, 
  • transfer of shares, 
  • procedure for conducting meetings, 
  • procedure for appointing or removing directors of the company, etc.

All the documents declared to be necessary under Section 7 of the Companies Act are supposed to be attached, along with the digital signatures of all the directors. The Ministry of Corporate Affairs has tried to simplify the process of getting a DIN number for the directors of the newly incorporated company by including such a request form along with the PAN and TAN cards of the proposed entity that is being incorporated. The single-window clearance regarding the incorporation of a company was an action taken by the central government of India to increase the feasibility and scope of the incorporation even further.

Effect of incorporating a company on false information

If a company is found to have been incorporated on the basis of false information, then the promoters, first directors and any other person would be liable to be charged with the offence of fraud under Section 447. As per Section 7 of the Act, the following documents have to be submitted at the time of incorporation of the company:

  • MOA and AOA
  • A declaration by the Chartered Accountant, Company Secretary or Cost Accountant stating that all the requirements of the Companies Act, 2013 and the rules made thereunder have been complied with. 
  • Name, address and other particulars of the subscribers to the MOA 
  • Name, address and other particulars of the Directors of the company. 

Certificate of incorporation of a company

The registration of the Memorandum of Association, the Article of Association and other documents are filed with the registrar. After getting satisfied with the application and documents submitted, the registrar will consider issuing the certificate of incorporation’. A certificate of incorporation is the ultimate proof of the existence of a company.

Once the documents are enumerated under Section 7 and submitted, they are scrutinised by the registrar, who checks whether the documents fulfil all the legal requirements. If he is satisfied with the documents, then he registers the name of the company in the Register of Companies and issues a certificate of incorporation. 

The government of India issued a circular in 2011 to all Regional Directors and all Registrar of Companies. This circular aimed to ease the registration process by making it possible to obtain online and quick incorporation. The Ministry of Corporate Affairs has started issuing digital certificates of incorporation. The digital services enable the promoters to get their companies registered within a period of 24 hours, which provides great ease to the corporate world. 

Effect of the Certificate of Incorporation 

Conclusive evidence 

A certificate of incorporation is conclusive evidence of the legal existence or presence of the company as per Section 7 of Companies Act, 2013. The certificate serves as legal proof that all the legal requirements mandated for the incorporation of the company have been complied with.  

In the case of Moosa v. Ibrahim (1912), a company had been incorporated, but later it was found that there were certain procedural irregularities as the MoA had been signed by a guardian of five minor members. However, the Court held that the certificate of incorporation was valid and conclusive proof of the company’s lawful formation. 

Similarly, in the case of Jubilee Cotton Mills v. Lewis (1924), a company filed for registration before the Registrar of Companies. The documents required for registration were submitted to the registrar on January 6th. On January 8, the registrar issued a certificate of incorporation, but he mentioned the date of incorporation as January 6 on the certificate. The company had allotted certain shares to Lweis on January 6th itself, and the validity of the allotment was challenged before the House of Lords. The Court held that the company came into existence on the date mentioned on the certificate of incorporation and thus, the allotment was legally valid. 

  • Even if there are formal deficiencies in the documents submitted for the incorporation of the company, once the certificate of incorporation is issued, the certificate becomes conclusive evidence regarding the legal existence of the company from the date mentioned in the incorporation certificate.
  • If the certificate of incorporation was received on 24th, but the certificate reflects the date of the 22nd, then the company shall be taken to have come into existence on the 22nd as reflected by the certificate of incorporation, and this will also authenticate the transactions made by such company on 22nd and 23rd in the eyes of law.

Raising of capital for a company

A company is formally floated for the raising of capital after it has been registered and the certificate of incorporation has been issued. The company thereafter raises the capital required for the commencement of the business. 

There are three ways of raising capital:

  • Private placement
  • Through the issue of bonus shares
  • Inviting public to investment in the company through shares 

In the case of a private company, the issuance of shares to the public is prohibited, and thus, the capital has to be raised from friends, relatives or any other sort of private arrangement. 

In the case of a public company, capital can be raised by the issuance of shares and debentures to the public at large. 

Certificate of commencement of business

  • As soon as a private company gets the certification of incorporation, it can start its business. Once the certificate of incorporation is received by the company, a public company issues a prospectus inviting the public to subscribe to its share capital. It fixes the minimum subscription in the prospectus. Then, it is required to sell the minimum number of shares mentioned in the prospectus.
  • After completing the sale of the required number of shares, the certificate is sent to the registrar along with a letter from the bank stating that all the money has been received.
  • The registrar then scrutinises the documents. If all the legal formalities are done, then the registrar issues a certificate known as ‘certificate of commencement of business’. This is conclusive evidence for the commencement of business for the public company.

The certificate of incorporation plays a crucial role in proving that the company has been duly incorporated, and the same cannot be taken back unless the winding up is initiated. The certificate of incorporation speaks for itself and the receipt date of the same does not affect the date of incorporation, i.e., if the incorporation certificate clearly specifies the date of incorporation as February 14, although the certificate is received on February 20, all the transactions taken place after February 14, shall be taken to be done in compliance with law.

Conclusion

From the above article, we understand that the company’s incorporation period is the sum of the pre-incorporation period and the incorporation period. Pre-incorporation period may be understood as the phase in which the idea of the company is manifested into a reality. The promoter whose name is reflected in the prospectus of the company plays a very important role in collecting initial funding for the company. The promoter also conducts a SWOT analysis of the company to understand its potential in the marketplace and make it a feasible option for investors to invest in. The duties and liabilities of the promoter have been discussed in detail, showing how the relationship between the promoter and the company is fiduciary in nature. 

The principle of the promoter’s liability in relation to the pre-incorporation contract has been dealt with in detail, leading to the conclusion that the promoter shall be held personally liable for all the pre-incorporation contracts unless there is a novation of the contract or in the case of India, when the provisions of the Specific Relief Act apply, wherein the company ratifies the contract and sends communication to the other party of the contract regarding their liability. The role of the government in easing the process of incorporation is very crucial, as it determines the potential intentions of investors towards companies in the market. 

The ease of incorporation has been increased by making it an online affair. The Ministry of Corporate Affairs provides options to incorporate the company with a unique name by providing the online option of submitting the Memorandum of Association along with the Articles of Association online with the declaration digitally signed stating that all the procedures of incorporation of a company under law have been followed by the respective company. The state’s duty as an enabler of business for the growth of the economy finds its presence in this legislation. 

Frequently Asked Questions (FAQs) 

What is the doctrine of ulta vires?

The Memorandum of Association of a company contains an object clause that specifies the object and purpose of the company. A company is bound to operate within the scope of its object clause. Any act done by the company that is beyond the ambit of the MOA would be ultra vires or null and void. 

What is a prospectus? 

Prospectus has been defined under Section 2(70) of the Companies Act, and it refers to a document that is issued by a body corporate inviting the public to subscribe to its securities. It includes a shelf prospectus and a red herring prospectus. 

What are the different types of prospectus?

A deemed prospectus, which is mentioned in Section 25 of the Companies Act, is a prospectus issued by a company to allot any securities of the company. Section 31 of the Companies Act defines a shelf prospectus. When a company issues securities under a shelf prospectus, it is no longer obliged to issue a fresh prospectus for a further and subsequent issue of shares. It can make a further issue of securities on the basis of a shelf prospectus without issuing a new prospectus. 

Section 32 of the Act defines a red herring prospectus as a prospectus that does contain the exact particulars of the number and price of securities proposed to be issued. 

Lately, there is Abridged Prospectus which constraints all the information in brief to give a summary to the investor on which he can rely for his decisions. 

References 


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Injunction : meaning, types, laws and landmark judgements

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This article is written by Aarchie Chaturvedi, and further updated by Shefali Chitkara. This is an exhaustive article explaining the meaning of an injunction, describing their types and including the concepts of discretionary relief, disobedience, arbitration and damages in cases of injunction. The authors have tried to give a brief overview with a focus on the need and relevance of such preventive measures in upholding equity and ensuring justice. Further, the authors have mentioned laws that govern various types of injunctions and the requisites for presenting an injunction application or a suit in the case of a permanent injunction before the court. The author has also tried to explore similarities and differences in different types of injunctions through various landmark judgements.

This article has been published by Shashwat Kaushik.

Table of Contents

Introduction 

What if a person is throwing waste material or blood remains of a slaughterhouse in front of your house continuously, carrying construction work in your plot of land despite you trying to stop the same, or utilising the work of one company in a new company when specifically barred from doing the same? In all these circumstances, there is a need to prevent or mandate the doing of something in order to ensure the enjoyment of rights by another person. A court can issue injunction orders in these cases and thereby prevent a person from creating nuisances for the applicant. An application can be filed before the court in the cases of temporary injunctions and a suit in cases of permanent injunction.

What is an injunction

Injunction litigation is a crazy ride consisting of low points, high points, twists, turns, and challenges. An injunction, by its very name, means preventive relief. The grant of an injunction is an equitable remedy that prevents a defendant party from doing certain demonstrations or certain acts or makes them do such acts so that they are not bothersome or do not cause any nuisance to the plaintiff.

When a court comes up with a judgment in such a suit, the parties must abide by and adhere to the ruling, in the absence of which there can be severe monetary penalties or even imprisonment in a few cases.

An injunction can be defined as discretionary relief by the court, either requiring the party to do something or refraining from doing something. It may be in the form of an interim order or a final order. The few instances where the remedy of injunction is used are:

  • To prevent someone from publishing content online or offline or to destroy the already published content,
  • To prevent from further construction on a piece of land or from selling or transferring any property in question,
  • To grant a search order,
  • To prevent someone from leaving the place or country.

Injunctions can be called one of the powerful tools that can be used by the courts to not only stop someone from violating another person’s rights but also to mandate the doing of an act to enforce another person’s rights. 

Historical background of injunctions

The origin of the power to grant injunctions is equity, and it has been the discretion of courts under equitable considerations. It can be traced back to the equity jurisprudence of England, which borrowed it from Roman law, where the injunctions were called ‘Interdict’. They were of three types, prohibitory, restitutory and exhibitory. At the time of Henry VI, injunctions developed as a chancery remedy whereby the Chancellor prohibited the execution of the decree of the common law court through this remedy. However, the same became a matter of conflict between the Chancery Court and the common law courts. Finally, the matter was referred to the then Attorney General, Bacon, who settled it in favour of the Chancellor. The remedy was affirmed and termed a strong arm of the court of equity.

Need of injunctions

When irreparable damage is suffered by an individual from the actions of another individual and the same cannot be remedied through any other means, there is a need for injunctions in order to stop that other individual from doing those certain actions.

  • It is necessary for the courts to grant injunctions in order to enforce and protect the rights of the people and prevent the breach of obligations that are in existence. 
  • While granting injunctions, the courts must also record reasons and objects and how the delay would defeat the purpose of law in this regard. 
  • It can only be issued against the party (the defendant) and not a stranger to the case or a third party, as has been held in the case of L.D Meston School Society v. Kashi Nath (1951)
  • If any other efficacious relief is available, then the courts can refuse to grant an injunction, and only a monetary loss can be the sole ground for claiming irreparable damage under an injunction.
  • It has been recognised as a legal tool for justice through which courts enforce the rights of individuals by granting injunctions against those who are violating such rights.
  • It is used as a preventive measure by restricting the one who creates a nuisance for others.
  • It is an equitable relief that aims at providing equity under the law to restore the positions of both parties.
  • It is essential in any legal system since it aims at maintaining the status quo of the parties by issuing such injunctions against the wrongdoer.
  • Apart from restricting, injunctions can also be granted to ensure specific performance of certain acts in order to uphold the rights of the affected party. 
  • It provides for a tailored solution for the parties based on facts and circumstances of each case by restricting anyone from creating nuisance or ordering the destruction of such posts that could affect the plaintiff.
  • Further, the injunctions aim to undo the irreparable harm suffered by any party. 

Laws governing injunctions

The provisions regarding injunctions are covered under three main acts:

Under the Code of Civil Procedure, 1908, Section 91 states about the institution of a suit for a declaration and injunction in cases of public nuisance or other wrongful acts affecting or which may affect the public, by the Advocate- General or two or more persons with the permission of the court. Further, Sections 94 and 95 also talk about temporary injunctions granted by the courts to meet the ends of justice and compensation against the plaintiff for obtaining an injunction on insufficient grounds. Furthermore, Rule 32 of Order XXI talks about the enforcement of a decree for a specific performance or for an injunction. Order XXXIX specifically deals with temporary injunctions and interlocutory orders. 

The Specific Relief Act, 1963, was enacted for the protection and enforcement of the primary rights of the parties. It provides for the following reliefs:

  • Recovery of possession of property
  • Specific performance
  • Rectification or cancellation of instrument
  • Recession of contract
  • Declaratory decree
  • Injunctions

Injunctions are provided as preventive reliefs under this Act. The Act talks about three types of injunctions, temporary, perpetual and mandatory. A temporary injunction is also provided under the Code of Civil Procedure, 1908. A perpetual injunction is permanent in nature, unlike a temporary injunction, and a decree is passed for the same. A mandatory injunction is aimed at making an individual do something in order to enforce the rights of another individual, like an injunction for destroying the already published copies that are infringing on the rights of the other party. 

Part III of the Specific Relief Act, 1963, deals with these preventive reliefs. Chapter VII talks about injunctions generally, under which Section 36 states that preventive relief is granted by temporary and perpetual injunctions at the discretion of the court. Section 37 gives an explanation of temporary and perpetual injunctions, as mentioned below. Further, Chapter VIII talks about perpetual injunctions. Section 38 states the cases wherein the court can grant perpetual injunctions. Section 39 mentions the mandatory injunctions. 

Section 40 also states that damages can be provided in lieu of, or in addition to, injunctions when claimed by the plaintiff. Section 41 outlines the circumstances under which an injunction cannot be granted. Section 42 also states that the court can grant an injunction to perform a negative agreement when a contract comprises both an affirmative agreement and a negative agreement, even when the court is unable to compel specific performance of an affirmative agreement.

In addition to these, Sections 133, 142 and 144 of the Code of Criminal Procedure, 1973, also deal with the grant of injunctions by the court in cases of nuisance.

Requisites for an injunction application

In order for an injunction application to succeed, the following three points have to be established or an application for injunction should be furnished when:

  • There exists a strong prima facie case in favour of the petitioner, the word “prima facie” means either on first sight, on the first presence, or on the face of it. Prima facie case means that recorded evidence should fairly enable the complainant’s search for the inference. In Martin Burn Ltd. vs. R.N. Banerjee (1957), the Court discussed the meaning of the ‘prima facie’ case. The Court noted, “A prima facie case does not mean a case proved to the hilt but a case which can be said to be established if the evidence which is led in support of the same were believed. While determining whether a prima facie case had been made out the relevant consideration is whether on the evidence led it was possible to arrive at the conclusion in question and not whether that was the only conclusion which could be arrived at on that evidence.” Prima facie case is a prerequisite for obtaining a temporary injunction. However, it is not sufficient and the only requirement of obtaining the injunctions because in order to obtain an order of temporary injunction, it has to be further proved that if the order is not granted, it will lead to irreparable damage for the petitioner. Further, in 2023, Justice Rajnesh Oswal, Jammu and Kashmir and Ladakh High Court reiterated that if, in a case for injunction, a party fails to prove a prima facie case, the court cannot grant the injunction order even if the balance of convenience is in their favour. The Court is not required to consider the balance of convenience and irreparable injury if a prima facie case is not proved.

The principle of ‘prima facie case’ was adopted by the courts in the case of Israil v. Samser Rahman (1913), where the Court clarified that the Court at the first stage has to determine whether there is a bona fide contention between the parties or there is a substantial question that has to be decided by the Court. Later, the Court also noted that the probability of success in the suit is also necessary for establishing a prima facie case. 

  • The balance of convenience also lies in the favour of the petitioner, “Irreparable harm” means any injury that cannot be fixed by damages adequately. The remedy in the form of damages would be insufficient if any were payable to the plaintiff in the case of victory in the litigation. It will not put him in the same place where he was before the injunction was denied. In the case of Anwar Elahi v. Vinod Misra and Anr (1995), the meaning of “balance of convenience” was explained by the Delhi High Court. According to the Court, “Balance of convenience” means that when comparative mischief or inconvenience which is likely to arise from withholding the injunction is greater than that which is likely to arise from granting it, a balance has to be drawn. While applying this principle, the court has to measure the amount of substantial inconvenience that is likely to be caused to the applicant if the injunction is rejected and compare it with that which is likely to be caused to the other side if the injunction is granted. 
  • The petitioner would suffer irreparable damage in case the injunction is not granted in his favour. The question of balance of convenience arises where there is uncertainty as to the satisfaction of the respective remedies in damages available to either party or both. The parties must strike a proper balance, and the balance cannot be a one-sided affair. In the case of Dinesh Mathur v. O.P. Arora and Ors (1997), the appellants have been using the premises for commercial purposes since 1937. The respondent then filed a suit for the first time after 54 years on the ground that respondent had violated conditions of the lease. The Hon’ble Supreme Court noted that granting injunction is a matter of discretion. Balance of convenience and irreparable injury are triable issues and are required to be proved positively. But, in this case, the proof of the same was lacking, the balance of convenience did not lie in the favour of respondent for issuing injunction order. Thus, the injunction was granted in such a case. 

Further, in the case of Nagar Palika, Raisinghnagar v. Rameshwar Lal and Another (2017), the Supreme Court highlighted the importance of three ingredients for the grant of injunctions. In this case, the plaintiff had filed a suit for permanent injunction to restrain the defendant, Nagar Palika, from dispossessing the plaintiff from the suit land. The plaintiff was able to prove that he was holding a patta of land and was in possession of the same. He also established all three ingredients for the relief of injunctions, prima facie case, balance of convenience, and irreparable injury if the prayer is not granted. Thus, the plaintiff was rightly granted a permanent injunction against the defendant in relation to the said suit land. 

Types of injunction 

The Specific Relief Act, 1963 discusses the various types of injunctions. To prevent possible future injury to the plaintiff, the plaintiff would have to bear the consequences if the relief is refused. There are certain kinds of injunctions provided, as mentioned below:

Temporary injunction

Under the Specific Relief Act, 1963, Section 37 deals with a temporary injunction. Temporary injunctions continue for a specified period of time or until the further order of the court. They may be allowed at any stage in a suit and are managed by the Code of Civil Procedure, 1908. 

The essential purpose of granting this injunction is to secure the interests of an individual or the property of the suit until the final judgement is passed. The factors looked into while providing such an injunction are:

  1. If a party has a prima facie case,
  2.  If the balance of convenience is in favour of the complainant,
  3. Whether the plaintiff would suffer irreparable damages if the injunction were not allowed?

The time period of such an injunction is dependent on the discretion of the court. This kind of injunction was also provided in the case of Union of India v. Bhuneshwar Prasad (1962), wherein the Patna High Court rejected the application filed by the defendant against the order of the Ld. District Judge, who upheld the order of grant of temporary injunction to the plaintiff restraining the defendant from removing the plaintiff from the services as there was a prima facie case in favour of the plaintiff and there was a balance of convenience in his favour as well.

Some examples of cases, as stated in Rule 1 of Order XXXIX of the Code of Civil Procedure, 1908, where a temporary injunction can be granted are:

  • Where any property in dispute in a suit is probable of getting wasted, destroyed or estranged by any party to the suit, or illegally sold in execution of a decree; or
  • Where the defendant threatens to remove or dispose of his property in order to defraud his creditors; or
  • Where the defendant threatens to deprive the plaintiff of his property or threatens to cause injury to the plaintiff in connection with the property in dispute in the suit; or
  • In any case to prevent the defendant from committing a breach of a contract or any other injury;
  • Where, pursuant to Sections 38 and 41 of the Specific Relief Act, 1963, no perpetual injunction or mandatory injunction could be granted;
  • Where to stay the operation of an order for the transfer, suspension, reduction of rank, obligatory retirement, dismissal, removal or otherwise termination of service of any person appointed to public service and post in connection with State affairs, including any employee of any company or company-owned or controlled by the Government of the State;
  • Where to stay any disciplinary proceedings, pending or intended or having the effect of any adverse entry against any person appointed to the public service and to post in connection with the State’s affairs, including any employee of the company owned or controlled by the State Government; or 
  • To restrict any election;
  • Where to restrain any auction intended to be made or restrain the effect of any government auction; or stay the proceedings for the recovery of any dues recoverable as revenue on land unless adequate security is provided, and any injunction order granted in breach of these provisions shall be void.

In all cases, except where the object of granting the injunction appears to be defeated by the delay even before the injunction is granted, the Court shall issue a direct notice of the request for the same to be given to the other party:

Provided that, where it is proposed to grant an injunction without notice to the other party, the Court records the reasons for its view that the purpose of granting the injunction would be defeated by delay and requires the applicant to:

(a) deliver to or send to the other party by registered post, immediately after the order of granting the injunction, 

(i) a copy of the request for the injunction together with a copy of the affidavit filed in support of the request;

(ii) a copy of the complaint; and

(iii) a copy of the documents on which the applicant relies; 

(b) to file, on the day on which such an injunction is granted or on the day immediately following that day, an affidavit stating that the copies aforesaid have been so delivered or sent. 

However, the court must dispose of such suits within a period of thirty days from the date of granting an injunction, and in instances where it is not able to do so, it must specify the reasons for its inability.

Order for injunction may be discharged, varied or set aside

Order XXXIX Rule 4 of the Code of Civil Procedure, 1908 also states that any order for injunction may be discharged, varied or set aside by the Court at the request of any party who is dissatisfied with the order. The proviso also states that the Court has to vacate the injunction if a party in an injunction application has made a false or misleading statement in relation to a material particular and the injunction was granted without giving notice to the opposite party.

Further, where an injunction has been issued after giving a party the opportunity to be heard, the order shall not be discharged, varied, or set aside on the request of that party unless such discharge, variation, or set-aside is necessitated by a change of circumstances or unless the Court is satisfied that the order has caused that party difficulty and hardship.

Injunction binding on officers of the corporation

An injunction against a corporation is binding not only on the corporation itself but also on all members and officers of the corporation whose personal actions it seeks to curtail.

The interlocutory orders passed with regard to injunctions as stated in the CPC are as follows:

Power to order interim sale 

Upon application by any party to a lawsuit, the Court may order the sale by any person named in that order, and on such terms as it considers fit, of any movable property that is the subject of such a lawsuit or that is attached before a judgement in such a lawsuit, which is subject to rapid and natural decline, or which it may, for any other just and sufficient reason, be desirable to be sold off.

Detention, preservation, inspection, etc. of the subject-matter of the lawsuit

(1) The Court may, at the request of any party to the proceedings and under such conditions as it considers fit:

(a) make an order for the detention, preservation or inspection of any property that is the subject of the proceedings or as to which any question may arise therein; 

(b) for all or any of the aforementioned purposes authorise any such person for any such purpose;

(c) authorise samples to be taken or any observations to be made or experiments to be tested for all or any of the aforementioned purposes which may seem necessary or useful for the purpose of obtaining full information or evidence.

(2) The provisions governing the execution of the proceedings shall, mutatis mutandis (making necessary alterations while not affecting the main point at issue), apply to a person authorised to enter under this rule.

Application for such orders to be made after notice 

(1) The plaintiff may request an order under Rule 6 at any time after the suit has been instituted.

(2) An application by the defendant for a similar order may be made at any time after its appearance.

(3) Before making an order pursuant to Rule 6 or Rule 7 on an application for that purpose, the Court shall, except where it appears that the purpose of making such an order would be defeated by a delay, issue a direct notice to the other party.

When a party may be put in immediate possession of land which is the subject-matter of a suit

This is applicable if the party is in possession of land which is paying revenue to Government or tenure liable to sale and fails to pay the Government revenue, or the rent due of the tenure to the proprietor and such land or tenure is consequently ordered to be sold. In such a case, any other party to the lawsuit claiming to have an interest in such land or tenure may, upon payment of the revenue or rent due previously to the sale (and with or without security at the discretion of the Court), be placed in immediate possession of the land or tenure.The Court in its decree, may award to the defaulting party the amount so paid, with interest at the rate that the Court considers fit. It may charge the amount so paid, with interest at the rate ordered by the Court, in any adjustment of the accounts may be directed by the decree passed in the suit.

Deposit of money, etc. in Court 

Where the object of a lawsuit is money or anything else capable of delivery and any party thereof admits that it holds such money or anything else as a trustee for another party or that it belongs to or is due to another party, the court may order the same to be deposited in court or delivered to that last-named party, with or without security, subject to the provisions of the judgement.

Perpetual injunction

When a perpetual injunction is granted by the judgement, it ultimately disposes of the injunction suit. It is ordered at the time when the final judgement is given. It is a final relief injunction and is not given on an interim basis. The granting of a perpetual injunction is defined under Section 37(2) of the Specific Relief Act, 1963. The section says that only by the decree issued after an inquiry and on hearing the merits of the case can a perpetual injunction be granted; the defendant is thus perpetually enjoined to exercise his right or to forever pervade his conduct, which would be in conflict with the rights of the plaintiff. According to Section 38 of the aforesaid Act, a perpetual injunction can be granted to the plaintiff when:

(1) In order to avoid a breach of duty in his favour, either specifically or by consequences, subject to the other requirements contained or as provided for in this Section; and 

(2) If such obligations arise out of the contract, the court shall be directed by the provisions and rules contained in Chapter II of the Specific Relief Act, 1963; and

(3) When the defendant invades or attempts to invade the plaintiff’s right to, or enjoyment of, property, the court may grant a perpetual injunction in the following cases, namely:

(a) where the defendant is the plaintiff’s property custodian; 

(b) where there is no standard for the determination of the actual damage caused, or where the invasion can reasonably be caused;

(c) where the invasion is such that adequate aid and help cannot be provided by compensation in money;

(d) where the injunction is required to avoid the ever-rising increase in the no.of multiplicity of judicial proceedings. Thus, there are different reasons for the existence of a perpetual injunction. 

The plaintiff must prove the breach of the obligation by showing the infringement of a legal right; thus, the burden of proof lies with the plaintiff. The plaintiff must also lawfully possess the item and must prove that the defendant had no legal possession over the item. An injunction cannot be sustained on the basis of wrongful possession against the lawful owner. 

The continuance of possession by the lessee (a person who holds the lease of a property; a tenant) without the consent of the lessor (a person who leases or lets a property to another; a landlord) may not be “lawful possession,” but it is “juridical possession,” and the juridical possession is protected by law, and an injunction can be granted in such cases. 

Ownership and lawful possession are two different things. A person can be evicted by the process of law, and such a person can resist any kind of invasion by the real owner and may be granted an injunction. The contract for litigation funds is not per se illegal, and the Court can grant an injunction to protect the rights of the plaintiff arising out of the obligation. In the case of Nuthaki Venkataswami v. Katta Nagi Reddy (1962), the Court held that the champertous agreement (the one in which a person not a party in a suit bargains to aid in prosecution or defense in consideration for a share in the proceeds) in itself is not void, and if the recovery is not against public policy, it can’t be called illegal, and thus an injunction may be granted.

In the case of Walter Louis Franklin v. George Singh (1996), where the plaintiff filed a pleading before the Court to grant perpetual injunction to restrain the defendant from unlawfully using his land where the defendant claimed that he was the real owner, the Court, however, held that the perpetual injunction shall be granted as the land was in the possession of the plaintiff.

Moreover, in 2020, it was ruled by Justice Mohd. Akram Chowdhary, Jammu and Kashmir and Ladakh High Court, while hearing a civil second appeal, that in case a suit is presented for grant of perpetual injunction, the plaintiff has to establish the title to claim settled possession over the property in question. 

Mandatory injunction

Section 39 of the Special Relief Act, 1963 deals with the Mandatory Injunction. The section doesn’t clearly define a mandatory injunction but deals with the grant of a mandatory injunction. The section says that in order to prevent the breach of an obligation, the court can compel the performance of certain actions at its discretion, which it is capable of enforcing and can issue injunctions for the infringement complained of. The principle of mandatory injunction is used to grant final relief and not interim reliefs, like in exceptional or exemplary cases like saving life, etc. There are essentially two conditions requested for mandatory injunctions:

(a) the defendant must be obliged to perform an act and any such breach of the obliged act must be claimed by the plaintiff;

(b) the reliefs, as asked for, must be enforceable by the court. The principle says that the defendant must do a positive act in order to restore the wrongful act committed by him. 

In Dorab Cawasji Warden v. Coomi Sorab Warden (1990), the Supreme Court held that: 

1. The complainant must present a strong case in the court and it should be of a level higher than that of the prima facie case; 

2. The plaintiff must make it clear that the grant of a mandatory injunction is obligatory to prevent irreparable damage or serious injury which cannot be compensated in terms of money; and,

3. The balance of convenience should also be in favour of the complainant as against the defendant.

In the case of Laxmi Narain Banerjee v. Tara Prosanna Banarjee (1904), where the plaintiff and the defendant were joint owners of the land and the defendant planted several trees that penetrated the foundation of the building and damaged it, the plaintiff then prayed for a mandatory injunction to the court, and the court accordingly granted it and held that the roots were damaging the building that belonged to the plaintiff. On the contrary, in the case of N.E. Sankarasubbu Pillai v. Parvathi Ammal Others (1960), the plaintiff, whose right to land was encroached upon by the defendants, pleaded before the court to grant a mandatory injunction which was not granted as the essential conditions for the mandatory injunction was not fulfilled. However, in the case of C. Kunhammad v. C.H. Ahamad Haji (2000), the plaintiff demanded a mandatory injunction alleging that his land had been trespassed by the defendant by drawing a pipeline on his land and digging a trench up to 65 feet. The court in this case accordingly granted it as it held that the essentials were fulfilled and directed the defendant to remove the pipeline.

Other type of injunctions mentioned under Specific Relief Act, 1963

Apart from the injunctions mentioned under the Specific Relief Act, 1963, there are various other types of injunctions as recognised by our legal system and which can be granted by the courts.

Interlocutory injunction

It is also a type of temporary injunction, similar to a temporary injunction. The same is issued by the court in the midst of the case while awaiting the ultimate order. The ultimate objective of this injunction is to maintain the status quo between the parties. In Wander v. Antox (1990), India, it was noted that the request for an order of interlocutory injunction is usually made when the plaintiff’s legal rights and its purported infringement are disputed. For granting or denying any interim injunction, the courts have to consider the following three factors:

  • There is a prima facie case as established by the petitioner,
  • The balance of convenience lies in the favour of the petitioner, and
  • The petitioner would suffer irreparable damage if an order granting an injunction is not passed in his favour.

Interlocutory Injunction versus Interim Injunction

An interim injunction is a temporary injunction which is granted by the courts before a trial in urgent cases where immediate action is sought and needed. However, an interlocutory injunction is granted after the trial but before the final decision is made. We can say that the major difference between the two lies in the timing at which they may be granted. Interim injunctions are usually granted on an ex-parte basis, whereas interlocutory injunctions are granted after hearing both parties. 

Preliminary injunction

Preliminary injunction is also granted before the trial ends and is referred to as an ad-interim injunction. The main aim of this injunction is the same as that of any temporary or interlocutory injunction, for maintaining the status quo of the parties until the final determination of the case. 

Prohibitory injunction

Prohibitory injunction is given under Section 38 of the Specific Relief Act, 1963, and can also be called a restrictive injunction, which prohibits or abstains an individual from doing a specific act to prevent the violation of rights of the other individual.

Permanent injunction

Permanent injunction is also known as a perpetual injunction, which is granted by the Court as a decree after the hearing and conclusion of trial in a case. Through this decree, the defendant is permanently prohibited from doing a certain act which would be contrary to the plaintiff’s rights. The provisions of a permanent or perpetual injunction are not given in the Code of Civil Procedure, 1908 but mentioned under Sections 37(2) and 38 of the Specific Relief Act, 1963. In the case of K Venkata Rao v. Sunkara Venkata Rao (1998), the Court stated that the relief of permanent injunction cannot be given if any other alternative relief is available in any other usual proceedings. 

Quia Timet injunction

Quia Timet injunction was first discovered in English jurisprudence. This can be granted by the courts when the right of an individual has not been violated yet but there is an apprehension about the same or it has been threatened to be injured. This injunction may be temporary or perpetual, prohibitory or mandatory. In the case of Redland Bricks v. Morris (1970), it was held that there must be clear and strong proof regarding a violation of right that is likely to happen. There could be two types of Quia Timet as described by Lord Upjohn. The one where the defendant has not caused any damage till now but is threatening to do the same and the other where the plaintiff has been compensated for the damage he has suffered and claims that there could be more lawsuits against the actions of the same defendant in the near future. 

In India, Mars Incorporated v. Kumar Krishna Mukherjee and Ors. (2003) was the first case where the Delhi High Court established the Quia Timet Action principle under the law of injunctions. In this case, there was a threatened invasion by the defendant of the food items of the plaintiff, who was the proprietor of the trademark “MARS”. The defendant did not start their business under the name of the plaintiff but was a mere threat to the plaintiff. Thus, the Court granted them an injunction by Quia Timet Action and held that the apprehension by the plaintiff that the defendant may start manufacturing under the same trade name is a real possibility, and the plaintiff would suffer great hardship in that scenario. 

Dynamic injunction

In the digital world, the courts have largely granted dynamic injunctions against rogue websites and URLs. This injunction helps the Intellectual Property rights holders. In the case of UTV Software Communication Ltd. v. 1337X.TO and Ors (2019), the Delhi High Court defined dynamic injunctions as an injunction order that is dynamic and not static, because even if it is passed against one such website, it will automatically apply to any other mirror websites that are made. In this case, the plaintiffs sought an injunction against the websites created by the defendant, who were infringing on the copyrighted work of the plaintiffs by communicating it to the public, enabling the users to download and share the same. The Delhi High Court tried to frame a solution to combat rogue websites. Rogue websites are those that predominantly share infringing content. The Court concluded that the websites of the defendants were rogue websites and should be blocked. By exercising the inherent powers mentioned under Section 151 of the Code of Civil Procedure, 1908, the Court developed the concept and remedy of dynamic injunction in this case. 

The basic problem with blocking specific websites is that they tend to create mirror websites which would have different URLs. This is a very easy task; thus, these types of injunctions were developed in order to combat such practices. The said injunction order will now be automatically applied to all the mirror websites and will block new means of accessing the infringing websites. This was much needed to prevent multiple suits by the same plaintiff, save time for the courts, and also protect the plaintiff. Though the judgement in the above-mentioned case has been given with proper reasons, it has not dealt with the following issues:

  • The evidence required to prove that the websites are infringing, and
  • The manner in which the affected party will be communicated about the blocking of websites.

It can be clearly seen that the dynamic injunction is the result of judicial adaptations. 

Anton Piller Order

These orders are generally given for the purpose of enabling one party to gain access to the premises of another party and thereby giving that party the right to search and seize the infringing materials that could be used as evidence. Under Indian law, as per Rule 1 of Order XXX of Code of Civil Procedure, 1908, we have the provision for “John Doe Order or Ashok Kumar Order” which can be issued when the plaintiff has reason to believe that their copyrights, trade secrets, or any other works can be copied for financial gain. It was first issued by the Delhi High Court in the case of Taj Television Ltd. and Others v. Rajan Mandal and Others (2002). In this case, unlicensed cable operators were restrained from broadcasting the FIFA World Cup of 2002 as the defendants herein were illegally transferring through the plaintiff’s channel. A John Doe order was passed against the whole world by the court. It is usually passed or required when the identity of the defendants is unknown at the time and an unknown party is sued by the plaintiffs since it is practically impossible for the plaintiffs to identify all the infringing parties. The plaintiff has to satisfy the following essentials in order to obtain a John Doe order:

  • The plaintiff has to completely disclose all the information of the work which is sought to be protected, including the previous breach of such rights and actions taken to protect the same.
  • There must be proof of rampant infringement or apprehension of such infringement.
  • There must be a prima facie case in favour of the plaintiff.
  • The proof of irreparable harm to the plaintiff if the order is not passed in his favour.

Further, to make it easier to understand, the Delhi Court in the case of Luxottica Group Limited vs. M/s Mify Solutions Pvt. Ltd. (2009), passed a John Doe order against several unknown defendants for selling counterfeit ‘Ray Ban’ products. In another case of Ardath Tobacco Company Ltd. vs. Mr. Munna Bhai (2009), this injunction order was passed against the defendants from selling counterfeit cigarettes under the trademark of plaintiff. 

Mareva injunction

Mareva injunction is usually granted in order to restrict a party from dispossessing the assets that can be used to satisfy a prospective judgement. This is frequently used in cases of asset misappropriation and was first granted in the case of Nippon Yusen Kaisha v. Karageorgis (1975). This injunction is regarded as an order for attachment before a judgement is pronounced under Rule 5 of Order XXXVIII under the Code of Civil Procedure. In the above-mentioned case, three ships were let on charter by the shipowners in Japan. The persons to whom the ships were chartered did not give the rents as decided through the contract and went missing thereafter. The plaintiffs had reason to believe that defendants had funds in the banks of London, and to retain the money there, they filed for an interim injunction so that it could not be transmitted out of the jurisdiction. The Court noted that this type of injunction has never been given before so as to seize the assets of the defendants in advance of judgement. There was a strong prima facie case, and if the injunction is not granted, the money could be removed from the jurisdiction and cause irreparable injury to the plaintiffs. Thus, this injunction was granted in favour of the plaintiff. 

Difference between temporary and mandatory injunction

Basis of differentiationTemporary InjunctionMandatory Injunction
Time periodTemporary injunctions continue for a specified period of time or until the further order of the court.The principle of mandatory injunction is used to grant final relief and not the interim relief.
ProvisionsIt is discussed under Section 37 of the Specific Relief Act, 1963.It is discussed under Section 39 of the Specific Relief Act, 1963.
PurposeThe essential purpose for granting this injunction is to secure the interests of an individual or the property of the suit until the final judgement is passed.The essential purpose of granting a mandatory injunction is to control exceptional or exemplary cases like saving a life, etc.
EssentialsThe factors looked into while providing such an injunction are:(a) If a party has a case of prima facie?(b) If the balance of convenience is in favour of the complainant?(c) Whether the plaintiff would suffer irreparable damages before the judgement is passed?There are essentially two conditions requested for mandatory injunctions.(a) the defendant must be obliged to perform an act and any such breach of the obliged act must be claimed by the plaintiff.(b) the reliefs, as asked for, must be enforceable by the court. The principle says that the defendant must do a positive act in order to restore the wrongful act committed by him. 
Relevant JudgementThis kind of injunction was also provided in the case of Union of India v. Bhuneshwar Prasad (1962), where a railway employee had filed a suit against his removal from service stating that his suspension was illegal. He was granted an interim injunction restricting the defendant from removing him from service until the suit is decided and it was also observed that this did not mean that he would be put back to work. If a case is a proper one for specific performance and the plaintiff is likely to suffer irreparable injury unless the breach of contract is immediately restrained, the court will grant a temporary injunction to limit the breach of contract.An example of this kind of an injunction can be the case of Laxmi Narain Banerjee v. Tara Prosanna Banarjee (1904), where the plaintiff and the defendant who were joint owners of the land and the defendant planted several trees that penetrated the foundation of the building and damaged it, the plaintiff then prayed for mandatory injunction to the court and the court accordingly granted it and held that the roots were damaging the building that belonged to the plaintiff. Thus, two conditions essential for mandatory injunction were fulfilled. Firstly, the defendant was obliged to see that the trees he planted did not penetrate and damage the foundation of the building but he failed to do so. And secondly, the damages asked for by the plaintiff were enforceable in the particular court and so the mandatory injunction was granted.

Difference between temporary and permanent injunctions

Basis of differentiationTemporary InjunctionPermanent Injunction
Application or suitOnly an application is filed for temporary injunction.A suit is filed for permanent injunction
Time periodIt is continued for a specified period of time or until further orders of the court but not after the case.It can only be granted by the decree made at the hearing and upon the merits of the case.
Order or decreeAn order is passed for temporary injunction.The conclusion of the trial results in decree in the case of permanent injunction.
Another nameIt can also be called an interlocutory injunction.It is also known as perpetual injunction.
Stage The order for temporary injunction is passed during the pendency of the suit.The order for permanent injunction is passed at the end of and upon the merits of the case. 
Provisions It is given under Code of Civil Procedure (Order XXXIX) as well as the Specific Relief Act (Section 37 (1)). The provisions regarding the permanent or perpetual injunction are given under the Specific Relief Act (Section 37(2) and 38).
IllustrationA is continuously constructing on B’s plot of land, the Court can issue the order of temporary injunction till the final order of perpetual injunction so that B could be stopped from continuing the construction till the final orders. In the same illustration, when the Court on the final disposal of the case grants permanent injunction against A, the case will fall under this type of injunction.

Breach of an order of injunction

Although an injunction is a remedy in itself, in the event of a breach of this order, there needs to be another remedy to protect the complainant. The Latin term ‘Ubi jus ibi remedium’ which means where there is a right, there is a remedy, is often used in explaining this concept, as courts also need a remedy against the person who breaches their order to prevent further dishonouring of their orders. The remedies available for a breach of injunction are as follows:

  • Order 39 Rule 2A of the Civil Procedure Code– The CPC states that the court that granted the order or any other court to which the case was referred to may order the attachment of property of the individual, culpable of such disobedience, in view of the ‘disobedience of the breach of injunction’ or in view of the disobedience of the terms under which the injunction was granted. The court may also require the person to be detained in civil prison for a period of time not exceeding three months. However it must be noted that nothing attached under this order shall remain in force for a period of more than one year, and if at the end of one year the breach continues to occur, the attached property may be rented out, and the court will award compensation as it finds appropriate to the injured party and pay balance if any to the party entitled to it.
  • Order 21- Rule 32 of the Civil Procedure Code– It provides that a defendant who fails to comply with the decree will, in the first place, forfeit his right of ownership, and the Court may later seize his property at its discretion.

Damages in addition to an order of injunction

Section 40 of the Specific Relief Act, 1963, specifically talks about the damages or compensation that can be given by the courts in lieu of or in addition to the injunction. The Section states that: 

(1) In a claim for a perpetual injunction pursuant to Section 38 or for a mandatory injunction pursuant to Section 39, the plaintiff may claim damages in addition to or in substitution for such injunction, and the court may, if it considers it appropriate, award such damages.

(2) No compensation under this provision shall be granted unless the claimant requests such relief in the plaint. Provided that where no such damages have been asserted in the plaint, the court shall, at any point of the trial, which may be just and fair for that argument, allow the plaintiff to amend the plaint.

(3) The dismissal of a claim to avoid the breach of a contract existing in favor of the plaintiff shall preclude his right to sue for damages for such infringement.

Grounds for refusal to grant injunctions

Section 41 of the Specific Relief Act, 1963, mentions those cases wherein the Court cannot grant an injunction. An injunction cannot be granted in the following cases:

  • To stop any person from prosecuting a judicial proceeding pending at the institution of the suit of injunction. However, it does not cover a scenario when such a restraint is essential to prevent multiplicity of proceedings; 
  • To stop or restraint any person from applying to any legislative body;
  • Where the plaintiff has no personal interest in the case;
  • To stop any person from prosecuting any proceedings in any criminal matter;
  • To stop any person from prosecuting any proceedings in a Court which is not subordinate to the one from which the injunction is sought;
  • To stop an act on the ground of nuisance, for which it is not reasonably clear that it will create a nuisance;
  • To stop any continuing breach for which the plaintiff has acquiesced;
  • To stop the breach of contract, the performance of which would not be specifically enforced;
  • When the conduct of the plaintiff or any of his agents is such so as to disentitle him from the assistance of the court;
  • When an equally efficacious relief is available and can be obtained by any other means except in case of breach of trust;
  • If the same would hamper or delay the completion of any infrastructure project or interfere with any relevant facilities or services which are the subject matter of that project.

Landmark judgments on injunctions

Gujarat Bottling Co. Ltd v. Coca-Cola Co. (1995)

Facts of the case

In this case, Gujarat Bottling Company and Coca Cola Company entered into an agreement in September 1993 through which they agreed to bottle and market certain products that were brought by Coca Cola from Parle. As per Paragraph 14 of the contract, Gujarat Bottling Company was prohibited from dealing with the products of any other firm for the duration of the contract. It may be dissolved by providing a one year notice or by mutual consent. They entered into another contract in 1994 for the purpose of registering under the Registered User Agreement. It also lowered the length of prior notice for dissolution from a year to 90 days. 

Due to some problems with the expansion of Gujarat Bottling Company, the shares of the company were sold to Pepsico in 1995, which resulted in the surrender of ownership rights.  The new owners claimed that the new contract of 1994 replaced the previous contract of 1993. Thus, they gave 90 days notice to terminate the 1994 contract with Coca Cola. 

Issues raised

Two major issues were raised in this case:

  • Was the contract of 1993 replaced by the subsequent contract of 1994?
  • Whether the contract of 1993 violated Section 27 of the Indian Contract Act, 1872?

Judgement given

The Supreme Court observed that both contracts were made to serve different purposes. There was no such aim to substitute the previous contract between the parties, and it cannot be held to supplant the existing contract. Thus, the Gujarat Bottling Company failed to act in accordance with the contract by not giving one year’s notice. The court further observed that Paragraph 14 of the contract of 1993 did not restrict commerce since its effect was limited to the duration of the contract and is not violative of Section 27 of the Indian Contract Act, 1872. Thus, the court held that the grant of injunction was justified as it intended to prevent Pepsi from gaining advantage over Coca Cola and the conduct of Gujarat Bottling Company was held to be unfair. 

The Court in this case also considered the factors to be considered while dealing with the application of interlocutory injunction. The Court has to exercise its discretion by considering the balance of convenience, prima facie case, principle of equity and overall conduct of the parties.

Cotton Corporation of India v. United Industrial bank (1983)

Facts of the case

In this case, the party sought an injunction to restrain the other party from instituting or presenting a winding up petition under the Companies Act, 1956 and the Banking Regulations Act, 1949. 

Issue raised

Can an injunction order be granted by the court to prevent a party from instituting a proceeding in a court which is not subordinate to the present court?

Judgement given

The Supreme Court in this case dismissed the petition as it was not competent to grant an injunction restraining the defendant from instituting the proceedings in a court which is not subordinate to it as per Section 41(b) of the Specific Relief Act. In this case, no perpetual or even temporary injunction could be granted. 

Jujhar Singh v. Giani Talok Singh (1985)

Facts of the case

In this case, a son has prayed for a permanent injunction to prevent his father, who was the Karta of the Hindu Undivided Family, from selling the property of that Hindu Undivided Family.

Issue raised

Can the court grant a permanent injunction to prevent the Karta from selling the Hindu undivided family property?

Judgement given

This suit was set aside, and the High Court held it to be not maintainable because the son had other remedies, such as challenging the sale and getting it set aside afterwards. The remedy of injunction would be detrimental for the Karta as he would not be able to sell it even if he is required to do the same as a Karta to fulfil his legal obligation. 

Jai Dayal and Ors. v. Krishan Lal Garg and Anr. (1996)

Facts of the case

In this case, the appellant filed a suit against the respondent for perpetual and mandatory injunction to retrain him from blocking the passage of 5 feet and removal of obstruction between the house of appellant and the respondent. The trial court passed the decree of mandatory injunction to remove the obstruction and the perpetual injunction by restraining the respondent from blocking the passage of the appellants. This was also upheld by the appellate court. The execution was also done as per the orders of the court which was also upheld by the appellate court. 

Subsequently, a shop was constructed as an obstruction to the passage since it blocked that passage in question. Due to this, the appellants again filed the execution application. The trial court directed the respondents to remove the obstruction and issue an injunction not to disobey the mandatory injunction. It was stated that if the obstruction is not removed, the property will be attached, and respondents will be detained in civil prison. The Additional District Judge confirmed the same. However, in the second execution appeal, the decree was reversed. 

Issue raised

The question was whether the order of the High Court reversing the decree of injunction was correct in law.

Judgement given

It was contended that the view of the High Court was in error since it proceeded on the premise that the rights of the parties were required to be adjudicated as per Section 22 of the Easements Act. It was noted by the court that once the decree of perpetual injunction and mandatory injunction has become final, the decree is required to be obeyed by the judgement debtor. In case he did not obey the injunction, he is liable to be detained in the civil prison and to proceed against the property under attachment. Section 22 of the Easements Act could come into picture only when the question arises for the first time before the court. But, at present, the court had already allowed the perpetual and mandatory injunctions against the defendant, thus, the defendant cannot now take the defence that he has not obstructed the area. The view of the High Court was held to be clearly in error and appeal was allowed. The order of the trial court and the appellant court was restored. 

Conclusion 

Injunction is an equity-based relief. It is completely at the court’s discretion to grant an injunction or to refuse it. The relief cannot be claimed as an affair of right however worthwhile the applicant’s case may be. The power to grant an injunction must, therefore, be exercised with the utmost prudence, vigilance, and care. It is an extraordinary and sensitive power that is associated with the risks of imposing losses or disadvantages upon the innocent party. Thus unlike all other things in this world, the grant of an injunction is also not absolute. 

One of the greatest hurdles in administering justice today is a delay. Delay in justice needs to be tackled by the joint efforts of all stakeholders. However, the harsh truth in today’s world is that we are progressing towards a society that is overrun by hordes of lawyers, hungry like locusts, and bridges of judges in numbers that have never been considered before. But it is wrong to believe that ordinary people want black-robed judges, well-dressed lawyers, fine-tuned courtrooms to resolve their disputes. People with legal issues, such as people with pain, want relief and want it as quickly as possible and an injunction is just one of the methods to help those people in seeking relief for upholding their rights.

The grant of injunction is not a matter of right but it is the full discretion of the courts and the parties cannot claim it as a right. The injunctions can be granted by the courts only when they feel that the case fulfils the criteria as laid down under the Acts for grant of injunctions and it should be as per the sound principles of law and ex debito justito. The following are few of the principles that are to be borne in mind while dealing with any such applications:

  • Where there is a right, there is a remedy (Ubi jus ibi remediam).
  • The one who is seeking equity must do equity and must come with clean hands (Ex turpi causa non oritur actio).
  • Equity follows the law (Aequitas sequitur legem).
  • Law aids those who are vigilant and not those who are indolent or sleeping over their rights (Vigilantibus Non Dormientibus Jura Subveniunt).

It can be said that the plaintiff has to establish the legal right and his exclusive possession to get the relief of injunction and the court has the power  and discretion to grant the injunction order to prevent the breach of obligation and protect the rights of the people. Since the power to grant injunction is discretionary, the refusal to grant the same by the court is, thus, proper and cannot be said to be arbitrary.

Frequently Asked Questions (FAQs)

Under which law one can claim injunction against a party?

One can claim injunctions under Code of Criminal Procedure, 1973; Code of Civil Procedure, 1908 and the Specific Relief Act, 1963.

Can injunction be claimed as a matter of right?

No, injunctions are the discretionary relief given by the court and not a matter of right of the parties as has been held in various cases including Dalpat Kumar v. Prahlad Singh (1993)

What is the aim of injunctions?

The injunctions are aimed at either prohibiting or stopping a person from doing a particular act or mandating the doing of something by that person to maintain status quo of the parties and restore their earlier position.

Where are the grounds of refusal to grant injunctions given?

The grounds for refusal to grant injunctions are mentioned under Section 41 of the Specific Relief Act, 1963.

How many types of injunctions can the court grant?

There are broadly two types of injunctions namely, temporary and perpetual (or permanent) which can either be mandatory and prohibitory in nature.  

What are the three essentials to be proved for injunction application?

The plaintiff has to prove prima facie case and balance of convenience in his favour and that he will suffer an irreparable injury if the injunction is not granted by the courts.

From where did the concept of injunction come into picture?

The origin of this concept can be traced back to the equity jurisprudence of England that borrowed it from the Roman Law. 

Which type of injunctions can be claimed as per the Specific Relief Act?

Under the Specific Relief Act, 1963, one can file an application for temporary, perpetual or mandatory injunction.

Which injunctions are covered under the Code of Civil procedure?

The Code of Civil Procedure majorly covers temporary injunctions and interlocutory orders under Order XXXIX.

Is there any difference between interim and interlocutory injunction?

Interim Injunction is granted before a trial is concluded whereas interlocutory is granted after the trial but before the final decision is pronounced but both are a type of temporary injunctions as opposed to perpetual injunction.

Which order deals with the provisions relating to temporary injunctions?

Order XXXIX of the Code of Civil Procedure, 1908 deals with the provisions relating to temporary injunctions.

References 

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Separation of powers under the Indian Constitution

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This article has been written by Krutika Rode pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

In India, the Constitution is regarded as the supreme law of the land. No authority can be deemed superior to the Constitution. After the attainment of independence, the initial task was to create a constitution to achieve a state of law and establish its recognition in the world. The Indian Constitution is regarded as the most unique constitution in the whole world as it is a combination of several constitutions adopted from different countries; its provisions are adopted from the Government of India Act of 1935, and it was passed by the British Parliament in August 1935. Some of its important features are as follows:

  • It established a federal form of Indian government.
  • It led to the distribution of powers between the Centre and the States.
  • It also introduced the concept of voting, wherein 10% of the Indian population participated in voting.
  • It also led to the formation of federal courts, which came into force in 1937.
  • It introduced the concept of the Upper House and Lower House, i.e., two chambers within the state and laid down restrictions for their smooth functioning.
  • It also proposed the railways and gave its authority to the federal railways, which were governed by the Governor General of India and they were not answerable to anyone for their actions.

Borrowed features of the Indian Constitution

Some examples of the borrowed features of the Indian Constitution are:

  1. British Constitution: 
  • Parliamentary form of government;
  • Legislative functions;
  • Single citizenship;
  • Bicameral legislature;
  • Cabinet system; and
  • Prerogative writs.
  1. Irish Constitution:
  • Directive Principles of State Policy; and
  • President’s election.
  1. American Constitution:
  • Impeachment of the President;
  • Removal of the Supreme Court and high court judges;
  • Concept of fundamental rights;
  • Article 13, i.e. judicial review;
  • Independent judiciary;
  • Preamble to the Constitution;
  • Functions of the President and the Vice-President; and
  • Electoral college.
  1. Canadian Constitution:
  • Centrifugal form of government where the centre has the most powers; 
  • The centre has the residuary powers;
  • Supreme Court acts as an advisory jurisdiction; and
  • The centre appoints the governors to the states.
  1. Australian Constitution:
  • Independence of trade and commerce; 
  • Article 108, i.e., the joint sitting of both houses; and
  • Concurrent list.
  1. USSR, i.e., the Russian Constitution:
  • Fundamental duties.
  1. German Constitution:
  • Suspension of fundamental rights during emergency.
  1. French Constitution:
  •  Concept of republic.
  1. South African Constitution:
  • Amendment of the Constitution; and
  • Election of the members of the Rajya Sabha.
  1. Japanese Constitution:
  • The concept of “procedure established by the law”.

The chairmanship of Dr. B. R. Ambedkar led to the successful creation of the longest-written constitution in the world. Careful planning, legal opinions, judicial precedents, etc. were kept in mind while making the constitution.

Dr. Ambedkar also stated that it is important to amend the Constitution in light of changing times. When India attained freedom from prolonged British rule, it had its first intention in mind to establish its sense of government and distribute the powers equally to establish justice, equity, and good conscience. Furthermore, becoming a democratic country was the goal to promote growth, opportunity, and well-being for the citizens of the state.

The hierarchy

It can be understood that the authorities that come into action after the Constitution are the legislative, executive, and judiciary. These organs of government are of crucial importance as they help in the functioning of the state, though they have different functions. All these organs keep a close watch on actions taken by one another, and often they go through positive and negative criticism to attain efficient law and order. In simple words, the relationship between these three organs can be understood as:

  1. The legislature proposes the law.
  2. The executive enforces the law.
  3. The judiciary is the watchdog of the law.

The doctrine of separation of powers implies that there should not be a concentration of powers to achieve a ‘zero corruption’ form of government.

The nineteenth-century British politician Lord Acton stated, “Power tends to corrupt, and absolute power corrupts absolutely.” 

If we apply this thought to the twenty-first century, it will exactly fit into today’s scenario. 

If absolute power is enjoyed by anyone, there are high chances of misconduct. Therefore, it is important to have separation of powers but at the same time, there should be vigilance maintained to avoid the misuse of powers.

The Union executive

The Constitution provides a parliamentary form of government, unlike the American Constitution. The essence of the parliamentary form of government is that the head of state is the constitutional head, i.e., the President and the real executive powers are vested in the Council of Ministers. The Prime Minister is regarded as the head of the Council of Ministers. Furthermore, the Council of Ministers is responsible for the House of People. Though executive power is vested in the President, he must always seek aid and advice from the Council of Ministers. The Council of Ministers is elected by the people and the representatives form the legislature.

Therefore, we can derive that even if powers are vested in the executive, the legislature is still taken into consideration.

The President 

Article 52 of the Constitution of India, titled “The President of India,” establishes the office of the President as the head of state of the country. This article explains the constitutional provisions and requirements for the President of India.

According to Article 52, there shall be a President of India, who is the head of state and represents the unity and integrity of the nation. The President is elected by an electoral college consisting of elected members of both houses of Parliament as well as elected members of the legislative assemblies of all the states and Union Territories. The President serves a five-year term and is eligible for re-election.

The President is empowered with various functions and responsibilities under the Constitution. These include:

  1. Executive powers: The President is the head of the executive branch of the government. They appoint the Prime Minister and other ministers on the advice of the Prime Minister. The President also has the power to dissolve the Lok Sabha (lower house of Parliament) and dismiss state governments in certain circumstances.
  2. Legislative powers: The President has a crucial role in the legislative process. They can promulgate ordinances when Parliament is not in session, which have the same force and effect as laws passed by Parliament. The President also gives assent to bills passed by Parliament before they become law.
  3. Judicial powers: The President has limited judicial powers, such as granting pardons, reprieves, and remissions of sentences in certain cases. They also appoint the judges of the Supreme Court and High Courts in consultation with the Chief Justice of India and the respective state governors.
  4. Diplomatic powers: The President is the head of state and represents India in international affairs. They receive foreign dignitaries and ambassadors, negotiate treaties and agreements with other countries, and appoint Indian ambassadors and diplomats abroad.
  5. Emergency powers: In times of national emergency, the President can issue proclamations to suspend certain fundamental rights and impose the President’s rule in states where the constitutional machinery has failed.

The office of the President of India is a symbol of national unity, integrity, and sovereignty. The President upholds the values enshrined in the Constitution and ensures the smooth functioning of the government according to the principles of democracy and rule of law.

Article 53 states that the executory power of the Union shall extend to the matters for which Parliament has the power to make laws and includes the exercise of such rights, authority, and jurisdiction as are execrable by the Government of India under any treaty or agreement. Hence, the powers exercised by the President are co-extensive with the legislature. However, the definition of executive power remains vague and it is not mentioned in the Constitution.

In Rai Sahab Ram Jawaya Kapur and Ors. vs. State of Punjab (1955), even the Supreme Court found it difficult to interpret the meaning of executive power. Therefore, the Court observed that it is impossible to provide an exhaustive enumeration of the kinds and categories of executive functions. Under Article 73 and Article 163, the executive power cannot be kept limited to the administration of laws because it also adheres to government policy, the legislature, law and order, the promotion of social and economic welfare, foreign policy, and the vigilance of the administration of the state.

Article 63 prescribes that the Vice-President of India is elected by the members of both Houses of Parliament in a joint session by secret ballot. The Vice-President is also the ex-officio chairman of the Rajya Sabha. But he cannot vote as he is not a member of the Rajya Sabha. Whenever there is a vacancy in the president’s office, he acts as president until the new president is elected.

The Prime Minister

The Prime Minister is the head of the Council of Ministers, says Article 74 (1).

The leader of the ruling party in Lok Sabha is considered the Prime Minister. Similarly, on the death or resignation of the Prime Minister, the ruling party elects a new leader. Hence, there is no actual role of the President in electing the Prime Minister; it is merely a formality.

Article 78 provides that it shall be the duty of the Prime Minister:

  1. Aid and advise the President in the exercise of his functions: The Prime Minister serves as the chief advisor to the President of India, offering counsel and recommendations on matters of governance and policy.
  2. Furnish information to the President: The Prime Minister is responsible for providing the President with all necessary information relating to the administration of the Union and the proposals for legislation.
  3. Communicate to the President all decisions of the council of ministers: As the head of the Council of Ministers, the Prime Minister is required to communicate to the President all decisions taken by the Council, ensuring that the President is kept informed about the government’s actions and policies.
  4. Countersign orders and other instruments executed by the President: The Prime Minister, along with the appropriate minister, countersigns orders and instruments that require the President’s signature, authenticating and validating these documents.

By fulfilling these duties, the Prime Minister plays a crucial role in assisting the President and ensuring the smooth functioning of the executive branch of the Indian government.

The Parliament

The Parliament of India has three organs the President, the Council of States (the Rajya Sabha), and the House of People (the Lok Sabha). Though the President is not a member of the Parliament, he is an integral part of the Parliament. The President has important functions such as summoning the House of People and giving assent to bills.

Rajya Sabha

It can also be regarded as the Council of States in the Upper House of the Union Parliament. The maximum number of members is limited to 250 in the Rajya Sabha, of whom 12 shall be nominated by the President and the remaining 238 shall be representatives of states and union territories, according to Article 80 (1).

The opposition parties are always part of the Rajya Sabha but in respect of the Money Bill, they can’t participate as the Money Bill can only be presented in the Lok Sabha.

In the Federal Constitution, a second chamber is a necessity and it plays an important role in matters of legislation.

Lok Sabha

It is the most popular house. The members of the Lok Sabha are directly elected by the people. The maximum number of Lok Sabha members should be limited to 550. Article 81 states that not more than 530 are elected by the votes in the states and not more than 20 are elected by the Union Territories. Under Article 331, the President may elect up to two members of the Anglo-Indian community if he feels that the community needs to be adequately represented in the Lok Sabha.

The representatives of states are directly elected based on adult franchise.

Article 326 states that every citizen of India, male or female, who is not less than 18 years of age and is not disqualified on the grounds of non-residence, unsoundness of mind, crime, or corrupt or illegal practice, is entitled to vote at the election of the Lok Sabha.

The judiciary

The Supreme Court is regarded as the guardian of the Constitution. The essence of the federal constitution is the division of powers between the central and state governments. The language of the Constitution is not free from ambiguities; hence, it is likely to be misinterpreted, which would further rise to disputes. Therefore, to maintain the supremacy of the Constitution, there should be an impartial authority to decide disputes between the Centre and the States. As the judiciary is regarded as the interpreter of law, this function is entrusted to the judicial body. The Supreme Court is the highest authority in the hierarchy of courts and the decision made by the Supreme Court is regarded as final. The Supreme Court is also the guardian of the fundamental rights of the people. 

The Supreme Court of India has a Chief Justice and seven other judges. But the Parliament may increase the number of judges by law. Originally, the total number of judges was seven but in 1977, this was increased to 17, excluding the Chief Justice. In 1986, this number   increased to 25, excluding the Chief Justice. Thus, the total number of judges at present is 34, including the Chief Justice.

The President appoints the judges of the Supreme Court. Article 124 (2) states that the Chief Justice of the Supreme Court is appointed by the President with the ‘consultation’ of such judges of the Supreme Court and High Court as he deems necessary for the purpose. 

In S.P. Gupta vs. Union of India and Anr. (1981), this case is popularly known as the Judges Transfer case, and the court unanimously agreed to the meaning of the term ‘consultation’. The court derived the meaning of the word ‘consultation’ from Article 124(2), the same as in Articles 212 and 222 of the Constitution. The only ground on which this decision can be challenged is that it is based on mala fide and irrelevant considerations. This is when the constitutional functionaries expressed an opinion against the appointment.

Articles 124(4) and (5) state the removal of judges, i.e., impeachment:

A president, on the grounds of proven misbehaviour or incapacity, can impeach a judge. The President should address the removal of the judge to both houses of Parliament in the same session. The decision should be supported by the majority.

Conclusion

In a parliamentary form of government, the executive, legislature, and judiciary equally hold importance. Executive and legislative authorities are co-extensive and they are inseparable. In a democratic country, the Rajya Sabha is as important as the Lok Sabha. However, Lok Sabha is directly elected by the citizens and Rajya Sabha consists of the opposition parties. But it is crucial to have balance in both to not vest absolute power in a single ruling party, as it is prone to misuse. Furthermore, it helps to bring out the ambiguity of opinions, which leads to making diverse decisions.

The legislature understands the needs of the people and presents the bill in Parliament for the welfare of the people. When the bill is accepted, it is enforced in the state by the executive body. Lastly, the judiciary punishes people who violate the law. The judiciary also has a special power called judicial review under Article 13. Any law not adhering to the Constitution can be struck down by the Apex Court to maintain the supremacy of the Constitution.

References

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Punishment under Section 153A IPC 

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This article is written by Kaustubh Phalke. As we navigate the contours of this legal provision the article discusses the history of the Section and the misuse that is generally done by governments to muzzle the voices that are against their policies. The article aims to foster a deeper understanding of its implication on individual and societal cohesion by explaining every corner of this Section.

This article has been published by Shashwat Kaushik.

Table of Contents

Introduction

“I believe in freedom of speech, but I believe we should also have the right to comment on freedom of speech.”

– Stockwell Day

The sine qua non of democracy lies in freedom of speech and expression. However, this freedom is not absolute and reasonable restrictions are already there with Article 19(2) of the Constitution of India, 1950 (“Constitution”) to prevent any chaos. In line with this, Section 153A of the Indian Penal Code (1860) (hereinafter referred to as “IPC”) attempts to penalize any act intended to promote enmity between two groups on the basis of religion, race, place of birth, residence, language, etc. In February 2023, Pawan Khera, chairman of the media and publicity department of the All India Congress Committee, was arrested for the alleged offence of promoting enmity between different religions, among others.  

There have been numerous instances of application of this Section throughout the year. However, the conviction rate for this offence is comparatively low. As per the report of the National Crime Records Bureau (NCRB), in 2020, 1,804 cases were registered, and the conviction rate is only 20.2%. This trend shows that there has been an increase in the registration of crime by the police, which is quite different from the increase in the crime itself. Thus, it can be clearly seen that there has been gross misuse of the provision, which was simply aimed at preventing class hatred in a diverse country like India. 

In this article, the author will highlight various forms of misuse of Section 153A along with possible solutions to prevent such misuse. 

History of Section 153A IPC

Section 153A IPC was added to the Code in the year 1898 by the Indian Penal Code (Amendment) Act, 1898, seeing the rise in the number of cases of violence arising out of breach of public tranquillity. Before this Section was enacted, ‘promoting class hatred was part of the English law of sedition. 

It was later amended in 1969. The intention behind the amendment of 1969 was to enhance the punishment to make the offence cognizable and to put a strong bar on the offences arising out of the hatred created by people. The punishment was now increased, which may extend up to 3 years or a fine or both. Interestingly, if the offence is committed at a place of worship, the punishment may even extend to five years or a fine or both.

The history of hate speech laws marked from the year 1927. A book was published which put some disparaging remarks on private life of Prophet Mohammad. A case was booked against publisher of Rangila Rasool (Mahashay Rajpal) under Section 153A of IPC. The Punjab and Haryana High Court has acquitted the publisher in this case, and this acquittal was criticised. Ultimately, the publisher was murdered in that year only. After this case, a need for a law against blasphemy was felt and the British government enacted Section 295A in IPC. According to the reports of the select committee, the purpose of enacting this Section was to penalise persons who were involved in wanton vilification and or attacks upon other religions, etc.

Punishment under Section 153A IPC

The purpose of this provision is to punish a person who disturbs peace and harmony in society or promotes enmity amongst different groups. The provision attempts to punish those who engage in promoting any kind of enmity amongst different groups on the basis of religion, caste, race, place of birth or residence, or even language. The provision herein aims to take preventive actions for offences that can lead to disharmony or may disturb public tranquillity. The term ‘hate’ has been nowhere defined in the Indian Penal Code, 1860. For the purpose of Section 153A, is interpreted as any act through speech, writing, or behaviour that attacks religion, ethnicity, nationality, race, colour, descent, gender etc. 

Under this heading, each sub-section and clause of Section 153A has been explained separately. 

Sub-section 1 of Section 153A(1) IPC

Subsection 1 of this provision in its three clauses explains three distinct acts which, if done, would amount to spreading enmity between different classes. 

Clause 1: Acts promoting enmity between groups

Clause (a) of this provision states that any person, who promotes or attempts to promote enmity between different groups as specified in this clause, would be liable under this Section. The act of promoting enmity between different groups can be done by any of the following means- 

  • Either by spoken or written words;
  • By signs; or
  • By visible representations.

For the purpose of this clause, the grounds for promotion of hatred can be religion, race, place of birth, residence, language, caste, community or any other ground. If any person, on the said grounds, promotes disharmony or feelings of enmity, hatred or ill-will between different religious, racial, language or regional groups or castes or communities it would be counted as a punishable offence. 

Further, it should be noted that this clause would be applicable only if the hearted or disharmony is created between certain specified groups. For instance, this clause would be applicable if the enmity is created between two religious groups or linguistic groups but on the other hand it would not be applicable if enmity is created between different political parties or different households. If the enmity is spread between the following groups, then this Section would be applicable-  

  • Religious groups; 
  • Racial groups;
  • Language groups or regional groups; or 
  • castes or community groups.

Clause (b): Acts against the maintenance of harmony of Section 153A(1)

Clause (b) of this provision states that any person who does any act which creates hurdles in the maintenance of harmony between different religious, racial, language or regional groups or castes or communities would be punishable for the same. It also states that if a person tends to disturb or is likely to disturb the public tranquillity, then he shall also be punished in accordance with this Section.

In the recent case of Amish Devgan v Union of India (2021), the Hon’ble Supreme Court interpreted the ingredients of Section 153A, Indian Penal Code 1860. It stated that the term ‘disturb public tranquillity’ must be strictly interpreted in consonance with public order and safety. It should not be interpreted as any normal law and order issue that does not endanger the public interest at large. 

Clause (c): Organizing activities to spread violence of Section 153A(1)

Clause (c) takes into account a person who has organized or participated in the preparation or training of such people who tend to create hatred, criminal force, and violence amongst the following groups:

  • Religious group
  • Racial group
  • Language or regional group
  • Caste
  • Community

The punishment in the above-mentioned cases shall be imprisonment which may extend up to three years, or with a fine, or with both.

Sub-section (2) of Section 153A IPC

Sub-section (2) of this provision talks about offences committed in the place of worship and their punishment. This subsection does not create any new offence, rather is an aggravated form of the offences discussed in subsection 1. The provision states that the person who commits the above-mentioned offences at such specific place i.e., a place of worship shall be punished with imprisonment which may extend to five years and shall also be liable to a fine.

Punishment for the crime committed under Section 153A IPC

Whosoever commits an act which falls under clause (a), clause (b) or clause(c) of 153A(1) IPC shall be punished with imprisonment for a term which may extend up to three years or fine or both. Since the offence under three clauses of Subsection 1 contains a less severe offence than in Subsection 2, the punishment for the offence in Subsection 2 is more. Subsection 2 states the condition when the offence is committed at the place of worship.  Thus, where the offence is committed at a place of worship, the term of imprisonment may extend up to 5 years or a fine or both.

Essentials for an offence under Section 153A IPC

Certain essential conditions which would constitute an offence under Section 153A are discussed below- 

Specific grounds for offence

The essentials of the provision as discussed under subsection (1) clause (a) of this provision include grounds of commission of offence which are used to spread disharmony or feelings of enmity, hatred or ill-will between different religious, racial, language or regional groups or castes or communities. These grounds include religion, race, place of birth, residence, language, caste, community or any other ground whatsoever. According to the essentials of this provision, hatred can be spread through spoken or written words, signs visible representations or otherwise. The essentials of this Section include promotion and attempt to promotion of such acts.

The essentials covered under subsection (1) clause (b) includes acts of a person which are prejudicial to the maintenance of harmony between different groups, castes etc and if the acts disturb public tranquillity. 

Subclause (c)  includes a person who has participated in the preparation or training of such people who tend to create hatred between different religious groups and people. It includes activities causing fear or alarm or a feeling of insecurity among members of any religion, race etc. The punishment for the above-mentioned cases shall be imprisonment which may extend up to three years, or with a fine, or with both.

Mens rea

Mens rea is an essential ingredient for the offence of Section 153A. The words, expressions, or gestures should be malafide and intentional in order to make someone liable for an offence under Section 153A of IPC. It is the duty of the prosecution to prove the malafide intention of the accused to cause enmity between different groups of people on the basis of different grounds, religion being one of them.

Promotion of class hatred

The most essential element of this Section is to promote hatred or enmity between several classes. This intention can be inferred from the words used, their effect on the class they are referred to and the state of mind of the two communities at the time of the offence. Every other thing becomes immaterial when the intention to promote hatred is proved.

Place of commission of offence

The essential under sub-section (2) of this provision is about the place of commission of offence, i.e., any place of worship and its punishment. It states that those who commit the same offence at any place of worship or in any assembly that performs religious worship or other religious activities shall be punished with imprisonment which may extend to five years and shall also be liable to a fine.

Nature of offence under Section 153A IPC

The offence committed under Section 153A is cognizable i.e. the police can arrest the person without any prior warrant. The offence is non-bailable and is to be tried by a judicial magistrate of first class.

Features of Section 153A IPC

Maintaining communal harmony

The Section focuses on maintaining communal harmony through penalising acts that promote enmity between different groups on the grounds of religion, race, place of birth, residence, language, etc that may disturb public tranquillity.

Wide scope

The Section covers a wide scope of methods that can be used to disturb public tranquillity. The Section covers direct as well as indirect methods that may disturb public tranquillity. Direct methods include words and expressions, and indirect methods include acts such as aiding in the organising of certain movements that may disturb peace among all.

Specific grounds of offence

Specific grounds of offence such as words (spoken or written), visual representations, and signs with the intention of causing disharmony, hatred, or disturbance among people belonging to different groups, religions, castes, or communities have been mentioned in the Section which draws the scope for the applicability of the Section.

Intention is an essential condition

The intention of the offender in the Section plays an important role in establishing the offence against someone. The prosecution must establish the intention of the accused. There are serval cases where the court has highlighted the importance of intention, i.e., deliberate and malicious intent to constitute an offence under Section 153A. In the recent case of Amish Devgan vs. Union of India, the Supreme Court has stated that an offence under this Section would not be constituted if there was no apparent malicious intent to promote class hatred. 

In the case of PK Chakraverty vs. Emperor (1926), it was held that  “the intention as to whether or not the accused person was promoting enmity is to be collected from the internal evidence of the words themselves”. However, it does not mean that evidence other than internal evidence would be overlooked. There are the cases, for instance, Gopal Vinayak Godse vs. Union Of India and Ors. (1969), where the High Court held a narrower approach and stated that for a person to be presumed to intend the natural consequences of his act showing that the language of the writing is of such a nature that it promotes enmity or hatred will be enough. However, the recent case of Amish Devgan has upheld the earlier broader interpretation where due consideration was given to the ill intention of the accused. 

Maintaining public tranquillity

Public tranquillity refers to the acts or conduct that can disturb peace and harmony in society. These acts can be provoking in nature and may disturb the peace amongst different religious groups of society. The Section focuses on maintaining public tranquillity by penalising the acts that may cause any threat to public tranquillity.

Enhanced punishment for special places

As mentioned earlier, if the offence is committed at the place of worship, the punishment under Section 153A IPC would be enhanced and the person shall be punished with imprisonment which may extend to a term of five years and shall also be liable to a fine.

Misuse of punishment under Section 153A IPC

Section 153A of IPC focuses on maintaining harmony and promoting peace amongst different groups, but many times this provision is used to suppress legitimate issues raised by the people. The following are certain misuses of this provision:

Violation of freedom of expression

The Section focuses on the prevention of enmity between different groups, and the Section is misused to curb the freedom of expression when the person is trying to express his dissent over some custom or tradition of a specific group. The right to freedom of speech and expression is defined under Article 19(1)(a) of the Constitution of India, which gives the right to the citizens to express views and opinions freely. These rights are subject to certain restrictions on the grounds of which are mentioned in Article 19(2). One of the ground on which reasonable restriction can be imposed is public order. Section 153A curbs the right to freedom of speech omn this ground only. However, certain times such a restriction on right to speech is not reasonable enough so as to justify Clause 2 of Article 19. 

There are several cases in which Supreme Court has considered the question whether Section 153A of IPC is voilative of Article 19 (1)(a) of the Constitution. Till now, this Section is not held unconstitutional. In Ramji Lal Modi v. State of UP (1957), the Supreme Court conveyed that even if the law does not deal with public order it could be read to be ‘in the interest of’ public order. The Ramji Lal Modi standard was refined in Superintendent, Central Prison, Fatehgarh v. Dr Ram Manohar Lohia (1960) which is also known as Lohia-I. Here, the Supreme Court found that restrictions ‘made in the interests of public order’ must have a ‘reasonable relation to the object to be achieved’. 

The Section becomes a weapon to muzzle the voices of citizens who raise their voices against the bad customs or traditions of any community. The youth might get discouraged due to the misuse of the Section. Fear of being charged under Section 153A IPC negatively impacts the citizens to raise their voices against wrongs and are compelled to accept the wrongs.

Prejudice in enforcement

This prejudice in the enforcement of the Section results in the misuse of power and ultimately suppressing the voices against the mischiefs. The law enforcement agencies can be biased in enforcing this provision towards a particular group. The Section may be applied to areas where there is no enmity or intention to create any enmity but a mere dispute between two religious or social groups. Many times, because of these conflicts amongst groups, and police officers, acts that are not intended to spread disharmony or hatred are considered to spread the same.

Misinterpretation of terms

Certain terms used in the Section are ambiguous and misinterpreted, such as disharmony and enmity. However, it is to be noted that vague terms are not misused in itself. Rather, taking advantage of different interpretations of the vague terms can be termed as misuse. 

These are open for interpretation and hence can be interpreted in a way to misuse the Section. For example, the word disharmony and the promotion of enmity can be labelled to any act which is intended to dissent from some custom or tradition. 

Prevention of misuse of Section 153A IPC

Effective application of this provision and prevention of misuse of the provision is necessary to uphold the rule of law. The prevention of misuse discusses the solution on how to prevent the misuse of the provision. The following measures can be taken to prevent the misuse of this provision:

Unambiguous definitions

The ambiguity in the Section can be reduced by providing a precise application to prevent the misuse of Section 153A of IPC on certain terminologies acts, words etc. Terms such as disharmony and hatred are misinterpreted and misused against people to take personal revenge arising out of interpersonal conflicts. This could be corrected by judicial review, i.e., the power of the Supreme Court to examine the law and its constitutionality.

Specified criteria for prosecution

These criteria will help in determining if the action is taken in cases only where the genuine intent was to promote enmity. For this three things should be kept in mind i.e. intent, context, and impact. As in the case of Manzar Sayeed Khan vs State Of Maharashtra & Anr (2007), the Apex Court stated that it is the duty of the prosecution to prima facie establish the mens rea of the accused to cause enmity between different classes of people in Section 153A IPC.

In the recent case of Raja Singh Thakur and Ors. Vs. State of Karnataka (2023), the Karnataka High Court held that the proceedings under Section 153A would not continue without necessary sanction under Section 196 CrPC. In this case, the fundamental defect in the prosecution’s story was the absence of sanction. Justice M Nagaprasanna quashed the proceeding against the legislator of Karnataka Raja Singh Thakur and other accused.

Interpretation by the courts

The courts should closely observe cases under Section 153A IPC to prevent the misuse of the Section. Courts must exercise their power of judicial review in a proactive manner. Herein, it is not stated that the court usually does not keenly observe the cases, rather, the court has given serval guidelines so as to curb the ongoing misuse of the provision and miscarriage of justice. For instance, in the case of Arnesh Kumar vs. State of Bihar (2014) the Supreme Court has given a set of guidelines to prevent indiscriminate arrest by the police. Further, in the case of Amish Devgan vs. Union of India, where petitioner (a journalist) has filed a written petition to quash the FIR filed against him under Section 153A when he made a remark against Sufi Saint Moinnuddin Chisthi. The Apex Court though has dismissed the petition because the petitioner has claimed that the FIR should be quashed as were registered in places where no cause of action arose. However, the court has also highlighted that the malice intention is an essential ingredient to constitute an offence under Section 153A.

Creating awareness about 153A IPC

People should be educated about Section 153A of IPC. They should be taught about their fundamental rights and the available judicial remedies for the violation of their rights. This can be done through conducting seminars and lectures, nukkad natak, posters, distributing pamphlets, organising essay writing competitions in educational institutions, etc.

Further, law enforcement agencies could be given proper training through workshops for the applicability of Section 153A IPC. These workshops will help them understand the applicability of the Section.

Periodical review of provision

The loopholes in the legislation should be periodically reviewed and should be made dynamic. After judicial review, they should be changed accordingly and further guidelines must be issued to reduce the scope of misinterpretation and misuse. IPC is, in itself, age-old legislation, and it was formulated according to the circumstances prevalent in British India. To avert any kind of misuse of this provision and to get this provision to clarity in accordance with the present society, the Indian Penal Code, 1860 is being replaced by Bhartiya Nyay Sanhita, 2023. 

Section 153A of IPC, 1860 will soon be replaced by Section 194 of Bharitya Nyay Sanhita, 2023 as the Code is yet to be enforced. A major change in the provision is that electronic communication has been added to the mode of communication of disharmony, hatred, etc.

Comparative study of Section 153A IPC with other provisions

Basis Section 153ASection 295Section 295A
Purpose Deals with offences promoting enmity between different groups on grounds of religion, race, caste, etc.Deals with offences intended to destroy, damage, or defilement a place of worship or an object held sacred, with intent to insult the religion of a class of persons.Deals with offences related to deliberate and malicious acts intended to outrage religious feelings.
Punishment. Imprisonment may extend up to 3 years or fine or both and if at the place of worship is enhanced up to 5 years and fine.  Imprisonment that may extend up to 2 years or fine or both.Imprisonment that may extend up to 3 years or fine or both.
Nature of offence.The offence is cognizable in nature.The offence is cognizable in nature.The offence is cognizable in nature.
Bailable or non-bailable offence.The offence is non-bailable.The offence is non-bailable.The offence is non-bailable.
Compoundable or non-compoundable offence.The offence is non-compoundable, i.e., the out-of-court settlement cannot be done.The offence is non-compoundableThe offence is non-compoundable

Case laws surrounding Section 153A IPC

Ramji Lal Modi v. State of U.P. (1957)

Facts of the case

In this case, Ramji Lal Modi was the editor, printer, and publisher of a monthly magazine called as ‘Gaurakshak’ which was devoted to cow protection. In 1952, a controversial article was published containing matter regarding the Muslim community that was alleged to spread hatred, enmity, and disharmony. This became the ground for the prosecution of the petitioner. He was charged under Section 153A and Section 295A of the IPC. The Sessions Court of Kanpur acquitted the petitioner of the charge under Section 153A but convicted him under Section 295A. Upon appeal, Allahabad High Court also upheld the ruling of Sessions Court.

Afterwards, the petitioner challenged the constitutionality of Section 295A in the Apex Court. The grounds for challenging Section 295A IPC were that the impugned Section infringed his fundamental right to freedom of speech and expression conferred by Article 19(1)(a) of the Constitution, and was not a law imposing reasonable restrictions on the right in the interests of public order under clause (2) of Article 19, which alone could have afforded a justification for it. 

Issues in the case

The issue in this case pertained to the constitutionality of Section 295-A IPC. 

Judgement of the case

For the issue of contention, i.e. constitutional validity of Section 295A of IPC, the Supreme Court held that this Section is constitutionally valid because it was for the maintenance of public order well within the ambit of Article 19(2). Thus, the constitutionality of Section 153A of IPC was upheld. 

Gopal Vinayak Godse v. The Union of India and Ors. (1971)

Facts of the case

In this case, the author and publisher of a controversial book called “Gandhi-hatya Ani Mee” (Gandhi-assassination And I) challenged an order of the Delhi administration. The order was regarding the forfeiture of this book as per Section 99A of the Code of Criminal Procedure (CrPC). After that, the Constitutionality of both Section 99A of the CrPC and Section 153 of the IPC was challenged.

Issue in the case

Whether Section 99A of CrPC and Section 153A of IPC are constitutional? 

Judgement of the case

Upholding the constitutionality of Section 99A CrPC and 153A IPC, it was held that to charge someone under Section 153A IPC, “one cannot rely on stray, isolated passages for proving the charge nor indeed can one take a sentence here and a sentence there and connect them by a meticulous process of inferential reasoning”.

The court further stated that  ‘adherence to the strict path of history is not by itself a complete defence to a charge under Section 153A’. Also, ‘greater the truth, greater the impact of the writing on the minds of its readers, if the writing is otherwise calculated to produce mischief’.

Maulana Azizul Haq Kausar Naquvi v. State (1980)

Facts of the case

In this case, the applicants called into question the validity of the notification dated June 28, 1977. By this notification, the State Government of Uttar Pradesh forfeited the book while exercising its power under Section 95 of the CrPC. The forfeited book is titled “Munaqib-e-Ahle Bait” (In Praise of the Members of the Household of the Holy Prophet). It was claimed by the state government that the said notification would cause disharmony between Shia and Sunni Muslims which in turn would disturb the public tranquillity, and thus it attracts Section 153A of IPC. 

Issues of the case

The issues in the case were whether notification of forfeiture of publication to the government, under Section 95 of CrPC should be quashed.

The following were the points of consideration: 

1) Whether detailed reasons on the basis of which state government’s opinion was formed necessary?

2) Whether “Muavia” is held in high esteem by the Sunni Muslims?

3) Whether the publication of the book (looking at its contents) is punishable under Section 153A IPC

Judgement of the case

The Allahabad High Court, in this judgement, firmly established both that in India and in England, criminality for the offence of blasphemous libel, of criminality under Section 153A of the Indian Penal Code, does not attach to the things said or done but to the manner in which it is said or done. If the words spoken or written are couched in temperate, dignified, and mild language, and do not have the tendency to: insult the feelings or the deepest religious convictions of any section of the people, penal consequences do not follow.

The book does not contain any matter that may be characterised as written in bad taste or couched in offensive or intemperate language, publication of the book cannot be said to be punishable under Section 153A IPC and the notification of the State Government is liable to be quashed.

Bilal Ahmad Kaloo v. State of Andhra Pradesh (1997)

Facts of the case

In this case, the appellant was an active member of a militant group named Al-Jehad. This group aimed to separate Kashmir from the Indian Union. Keeping the same intention in mind, Bilal Ahmad Kaloo who was the appellant in the instant case used to spread hatred amongst the Muslim youth in old Hyderabad and inspired them to join these militant groups and undergo arms training. He was alleged to be brainwashing the Muslims in Hyderabad that Muslims in Kashmir are going through atrocities of the Indian army. After a close investigation by police, he was arrested. The appellant was charged under Sections 124A (sedition), 153A and 505(2) IPC (statements conducing to public mischief), under Sections 3(3), 4(3) and 5 of the Terrorist And Disruptive Activities (Prevention) Act, 1987 and also under Section 25 of the Indian Arms Act,1959.

Issue in the case

Whether the charges against the appellant can be upheld?

Judgement of the case

It was held by the Supreme Court, in this case, that the common feature in Section 153-A and Section 505(2) IPC is the promotion of peace and harmony between different groups and communities. To be charged under these two provisions, there must be at least two different groups. Merely inciting the feelings of one group without any reference to another group or community will not attract these provisions.

Amish Devgan v. Union of India (2021)

Facts of the case

The facts of the case were, that certain remarks were made by journalist Amish Devgan in a live session on a TV news channel. The petitioner, while hosting the debate, made a comment on Pir Hazrat Moinuddin Chishti, also known as Pir Hazrat Khwaja Gareeb Nawaz, who is a well-known saint of the Muslim community as “aakrantak Chishti aya… aakrantak Chishti aya… lootera Chishti aya… uske baad dharam badle”. This meant that the religions changed after the terrorist and robber Pir Hazrat Moinuddin Chishti came, which prima facie conveyed that ‘the Pir Hazrat Moinuddin Chishti is a terrorist and robber. It also conveyed that he used fear and intimidation to convert the Hindus to Islam. Pir was a celebrated saint of the Muslim community who was equally revered by Hindus and it was alleged that the petitioner insulted Pir and thus hurt and incited religious hatred towards Muslims. Resulting which several complaints were filed against him under Section 153-A IPC and various other provisions of IPC.

Issues raised

  1. Whether the criminal complaints filed against him should be quashed?
  2. Whether his remarks constitute an offence under the Indian Penal Code?

Judgement of the case

The Supreme Court once again highlighted the essential ingredient of the crime such as intent, especially for Section 153A. The court interpreted the meaning of the term ‘public tranquillity’ and stated that the word public tranquillity shall be read in conjunction with ‘public order’ hence the normal issues of law cannot come under the ambit of public tranquillity. The court firmly stated that the misuse of this Section should not be allowed to any extent.

The application for quashing FIR was rejected. His defence of causing slight harm was not entertained. Interim relief was granted based on his cooperation with the police.

Arnesh Kumar v. State of Bihar (2014)

Facts of the case

Arnesh Kumar is the husband of Sweta Kiran. They were married on 1st July 2007. Sweta Kiran, wife of Arnesh Kumar alleged that her mother-in-law and father-in-law demanded a dowry of  8 lakhs along with other valuables such as a car, TV, etc. On complaining the same to her husband, he refused to revoke the demand and threatened to marry another woman. Sweta alleged that she was forcefully thrown out of the home for not fulfilling the demand of dowry.

Arnesh Kumar applied for anticipatory bail to prevent his arrest for the charges alleged by his wife. This application was rejected in Sessions Court and High Court. He applied for a special leave petition in the Supreme Court for the same.

Issues of the case

  • The issue in this case was whether Arnesh could apply for anticipatory bail.
  • Can a police officer arrest someone in case of a complaint and the person is suspected of a serious offence? 
  • What guidelines are to be followed by the law enforcement agencies to make such an arrest? 
  • What actions are to be taken in case of misuse of Section 498A IPC by a woman?

Judgement of the case

The Supreme Court restricted the police from making arrests on complaints made under Section 498A IPC. The apex court held that this provision has become a weapon for disgruntled wives who tend to threaten innocent in-laws and husband. Innocent in-laws and husband get arrested based on the complaints, without any strong evidence.

The Apex Court issued certain guidelines on arrest which are popularly known as Arnesh Kumar guidelines. The following guidelines were issued by the apex court:

  1. The state governments to direct the police officers to not make arrests in cases of Section 498A IPC unless necessary. They should be directed to follow the procedure mentioned under Section 41, Cr. P.C.
  2. The police officers are to be provided with a checklist under Section 41(1)(b)(ii)
  3. Police officers are to duly file and furnish the checklist before the magistrate while asking for further detention along with the reason for making the arrest necessary.
  4. The Magistrate to authorise detention only after his satisfaction and considering the report of a police officer.
  5. The decision not to arrest an accused shall be forwarded within two weeks to the magistrate. The calculation of two weeks would be from the date of institution of the case. The Superintendent of Police of the District will extend the copy of the magistrate recording the reasons for not making an arrest in writing.
  6. Notice of appearance to be served to the accused as per Section 41A of Cr.P.C. within two weeks from the date of institution of the case, which may be extended by the Superintendent of Police of the District for the reasons to be recorded in writing.
  7. The police officers on failure to comply with the directions aforesaid shall be liable for departmental action, and they shall also be liable to be punished for contempt of court to be instituted before the High Court having territorial jurisdiction
  8. Authorising detention without recording reasons as aforesaid by the Judicial Magistrate concerned shall be liable for departmental action by the appropriate High Court.

The aforesaid directions will also be applicable to cases where the offence is punishable with imprisonment for a term that may be less than seven years or which may extend to seven years; whether with or without fine.

Conclusion

India is a country which is known for its diversity, being it in terms of flora and fauna and religions. In such a country with diversity, the differences between groups and religions are pervasive and not a thing to be shocked by. People are given fundamental rights, hence there need to be safeguards as well to protect the misuse of power and fundamental rights as well. Hence, Sections like 153A under IPC are necessary for peace and to maintain public tranquillity and public order. But still, some questions remain unanswered e.g. reasonability factor, essential ingredient of enmity etc. Legislation should focus on stating the scope of enmity and its exceptions.

Frequently Asked Questions (FAQs)

What is the difference between Section 295A and 153A IPC?

Section 295A focuses on punishing offenders who tend to offend any religious group or institution. Whereas, Section 153A penalizes the offence of promoting enmity between two or more different groups.

What is the nature of the offence under Section 153A IPC?

The nature of the offence under Section 153A is a cognizable offence, i.e. the police can arrest the accused without any judicial warrant.

Whether the crime under Section 153A is a bailable offence or a non-bailable offence?

The crime defined under Section 153A is a non-bailable offence. The right to bail here doesn’t exist, and it is upon the discretion of the court to grant bail.

Which court has jurisdiction to try the offence under Section- 153A IPC?

The crime under Section 153A IPC is triable by judicial magistrate first class.

Is intention necessary to constitute an offence under Section- 153A IPC?

Yes, it has been decided in many cases that intention is the most important element to constitute an offence under Section 153A of IPC.

What is the punishment under Section 153A of IPC?

The offender of 153A IPC shall be entitled to three years or fine or both, and where the offence is committed at a place of worship the punishment may extend up to 5 years or fine or both.

References

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The future of AI

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This article has been written by Abhishek Ray pursuing a Training Program on How to Use Generative AI for Career Growth for Senior Professionals from Skill Arbitrage.

This article has been edited and published by Shashwat Kaushik.

Introduction

The concept of artificial intelligence truly became significant to a luddite like me, a regular Indian, only with the onset of the recent pandemic. With so much lazy time to sit around at home, there were a lot of attempts at reading and gaining knowledge from my end. With the virtual offices concept coming in it was a sort of an eye opener to me, how much disruption can technology cause. However, artificial intelligence has been there or rather, has been born and is growing, since 1956. Interestingly, the history of AI began with stories, rumours, and folktales of  master craftsmen creating artificially intelligent beings by gifting them with consciousness and brainpower. 

During the 1990s, AI had already solved multiple problems like data mining, speech recognition, industrial robotics and our very own Google. However, it received little or no credit as it came under the gigantic umbrella of the subject we know as computer science. We may say that artificial intelligence was still not in sight of the big marketing guns of the world and thus these achievements were not labelled as AI.

And now that we can say that artificial intelligence is very much here to stay, it would not be a waste of time to imagine what the future would be like. For starters, picture this : In the near future, the swiggy delivery boy will be replaced by a Drone hovering outside your window at any skyfloor you might be in. The drone delivers your piping hot Chinese food and, in no time, vanishes. The service is super efficient, a little pricier (technical cost ) and, of course, hassle free. In this scenario, would you miss the human touch of the delivery boy and the occasional pleasant doorstep human to human conversation? Would you miss the basic satisfaction of the rating of the delivery boy, as the DRONE would give a shit about your service rating? Reflect upon this scenario and consider the potential impact on the delivery boy’s job and its broader implications as he makes his living from this job.

A peek into the future

Being a father is definitely one of the most powerful emotions that we experience in our lifetime and by God’s grace, I am one too. I never gave a serious thought to a responsible, research based approach to see how my future would be. Certainly, I had aspirations centred around owning a couple of cars, enjoying holidays, having a corporate career and having a relaxed family life, and that was it. But as a father, trying to gaze into the future of my son became an unintentional habit. The desire to anticipate and carve the way for his journey naturally became a part of my daily reflections. What would the world look like in 30 years? What skills would be obsolete? What skills would flourish? And this quest brought a non tech savvy guy like me face to face with the subject of artificial intelligence. The whole point of me writing this article is not to provide you with a picture of what the future will be with artificial intelligence and how it will impact our lives, because that’s impossible. Rather, the idea is to make more and more of Mom and Pop’s alert and aware and to think of how artificial intelligence will affect the future.

So let’s ignite!

As far as my memory goes back to my days of academia in the recent past, we have been taught that humans are the smartest animals who have lived and survived on mother earth. We, as a race, have been enormously successful to the extent that we virtually control this planet. We have been responsible for getting several animal species extinct. We have the knowledge and the tools to revive long gone species using several de-extinction techniques at our disposal. We have abused natural resources and nature to the point that we are already witnessing the effects of global warming. Now we have the power to use renewable energy to further our ambitions. As if Mother Earth were not enough, now we are eyeing other planetary bodies to expand. How do we do this? What’s so special about humans that has helped them achieve so much? To put it in the most simplistic manner, it’s our cognitive abilities combined with the ability to process information. The neurons in human brains are wired primarily for the 3 things- Power, Money and sex. These neurons with special abilities and a non relenting focus on the three things have led this human race to hegemony. 

With artificial intelligence, it may happen that this human supremacy will be challenged if not entirely transferred to machines. And that is frightening. Now let’s look at a human-less economy scenario. Let’s say there is a corporation named Klabus Mining Inc. that uses robots to mine iron and directly sells iron to another named Tedbas Corp., which manufactures robots and sells them to Klabus Mining Inc. Imagine how much both companies save from running an entire human resources department with no annual appraisal, which in any case does not achieve 100% employee satisfaction. They save a huge amount of money by not having departments like ethics and corporate governance, finance, sales, etc. There are no marketing budgets to factor in, no post retirement benefit funds, and no employee engagement costs. Their bottom lines will be growing exponentially for, god knows, how many years.

Where humans fail

At a basic level, artificial intelligence is the science that gives machines or robots the ability to work like humans. We already have a sea of virtual assistants on our mobile phones, getting more and more real with every upgrade. It started with the basic assistance of “call Mom” to read me the news headlines. But now that they have the ability to know and suggest what news you would like to listen to, they can create a tailor made song playlist for you based on your listening habits and mood. Imagine Siri saying tomorrow, “I think you should call your ex girlfriend” Will that not be too much of a privacy breach by a machine. 

Applications help us to be productive and manage our time well, but what we need to answer is what will humans be productive in and what will they do with the time saved when everything will be done by machines. Junk foods and television gave us obesity; this tsunami of applications will give us redundancy. In my pursuit to find the answer to this question and to the best of my ability, I have made my brain tread into many aspects of life that may be affected by the overpowering of AI, but I don’t intend to put all those in my article and act as an AI for you. Rather, I hope that this article ignites your thought process and makes you contemplate the effects, good or bad, of AI on our future. Just think, will your profession, be it singing, teaching, selling, etc., exist in the future? Do you have any moats that cannot be breached by artificial intelligence? Just to add onto an interesting piece of information for you, AI has long ago mastered some of the most intelligent games in the world. A Google chess playing application mastered the game in just four hours. Can you beat that?

A few months ago, in the flood of WhatsApp forwards, I came across one that hinted towards the effects of artificial intelligence on human privacy. It is said that our phones and applications are marketed as our virtual assistants or productivity enhancing tools, which save us time on tasks that, if done the old fashioned way, would take a lot of time and energy. Say, for example, that your online payment apps make payments for your holidays, dinners, and insurance for your regular online purchases. While doing that, they gather a lot of your intimate and private preferences. It’s up to us to decide how much of our personal lives we want to share and what impact it’ll have on the future.

From what I have understood, humans are losing it to artificial intelligence, apart from the fact that the speed of processing is twofold. The first one is interconnectivity. Take a very basic example of a couple. No matter how blissful their relationship may be, they can never be absolutely connected and synchronised at a mental level. It may happen that both of them are worried about one possible immediate problem they are facing but their connectedness ends there. Because after that point of singular connectedness, individual neuron networks will be processing separate emotions, different levels of intellect, and different ways of approaching the problem. These differences, in spite of them tackling the same issue, will not keep them in sync or connected. On the other hand, computers can be connected to such a level of perfection that they will store the same information, process it with the same set of algorithms and process it at the same speed. They will never pose a threat to each other in terms of emotional conflict and avoid wrecking the desired result.

The second one is upgradability. All or for that matter, even a few humans cannot be downloaded or upgraded with a new set of information at the same time, with the exact level of accuracy desired. Let’s take, for example, a finance class where students are being taught the basic concepts of accounts. At no point in time will they absorb the same level of information being provided to them. That’s why there  are toppers, mediocres and failures in our education system. At the end of the class, all of them will leave with a varied level of knowledge of the concepts they have acquired. To add to the problem, the ability to save the information gained will vary to such an extent that a significant number of students will start forgetting the concepts by the time their break between classes is over. Had they all been artificially intelligent, all it would have taken was for the teacher to press the enter button and the job would have been done.

As far as my memory goes back to my days of academia in the recent past, we have been taught that humans are the smartest animals who have lived and survived on Mother Earth. We, as a race, have been enormously successful to the extent that we virtually control this planet. We have been responsible for getting several animal species extinct. We have the knowledge and the tools to revive long gone species using several de-extinction techniques at our disposal. We have abused natural resources and nature to the point that we are already witnessing the effects of global warming. Now we have the power to use renewable energy to further our ambitions. As if Mother Earth were not enough, now we are eyeing other planetary bodies to expand. How do we do this? What’s so special about humans that has helped them achieve so much? To put it in the most simplistic manner, it’s our cognitive abilities combined with the ability to process information. The neurons in human brains are wired primarily for three things- power, money and sex. These neurons with special abilities and a non relenting focus on the three things have led this human race to hegemony. 

With artificial intelligence, it may so happen that this human supremacy will be challenged if not entirely transferred to the machines. And that is frightening. Now let’s look at a human-less economy scenario. Let’s say there is a corporation named Klabus Mining Inc. that uses robots to mine iron and directly sells iron to another named Tedbas Corp. that manufactures robots and sells them to Klabus Mining Inc. Imagine how much both companies save from running an entire human resources department with no annual appraisal, which in any case does not achieve 100% employee satisfaction. They save a huge amount of money by not having departments like ethics and corporate governance, finance, sales, etc. There are no marketing budgets to factor in, no post retirement benefit funds, and no employee engagement costs. Their bottom lines will be growing exponentially for, god knows, how many years?

And these two  problems with humans lead me to think of another human less economic scenario. The airline industry, which is primarily a service sales industry, is also one of the prime business sectors of today and involves a lot of human capital. Once the ticket is booked online, it’s primarily human capital that drives this business. Pilots, ground personnel, on air staff, security personnel, air traffic managers and so on. Pilots need to be upgraded with every minute change in aircraft, which is not only expensive but time consuming, considering the hours required for the training and the risk of the pilot joining another airline. All air and ground staff need constant training to achieve desired customer satisfaction on departures, and arrival and so on. Air traffic managers need to upgrade with each technological change and work on a zero margin of error, considering what calamities can happen due to human error. Security check personnel need upgrades, even more so with terrorists and illegal traffickers relentless search to find new means and use of technology to get their evil jobs done. You must already be bored with my usage of the word upgrade, but know that this scenario is only a miniscule portion of how such a complex industry runs. So moving ahead to visualise this human less economy, let’s replace all the humans with auto upgradable and interconnected machines running this complex industry’s day to day operations. You walk into the airport, flashing your online ticket at a scanner. A facial recognition system checks its database and discounts you as a possible threat based on your past records. Your luggage is auto scanned, while a robot porter helps you with the same without asking for or expecting any tips. You pass through an extremely high tech scanner to get to the airline door. You pick up your pre allotted meal while moving towards your allotted seat. Once seated, you may hear an artificially intelligent voice with visual monitoring announcing the passengers to kindly take their seats, followed by a door closing announcement and basic flight information like flight travel time, weather, etc. Another voice introduces him/herself as your autopilot, which will ensure a smooth and safe flight, so sit back and relax. One deeply imbibed culture Indians have is the itch to deboard the plane most of the time with a hunchback stand that begins even before the flight has stopped taxing. Another latest issue that has come in is the peeing adventure embarked on by a few free drink guzzlers. All of these issues lead to discomfort for the fellow passengers and, needless to say, the inflight staff. With a human less operation, all that is needed is a robot present in the flight to handle these uncultured, insensitive and sometimes shameful acts performed by us humans. The mere presence of a robot as an in -flight bouncer will share the shit out of the pee offender and make him hold his drink. In this scenario, humans will be restricted to buyers only and that is indeed frightening. All the jobs in such an important and growing industry have gone just like that, not only unaffected but gone for good from the airline companies point of view.

These scenarios presented lead to a very dark and terrifying future, a future where humans become redundant. Is it so? Is this so simple? The human race’s supremacy for billions and billions of years is gone, just like that! This question leads us to the next part of the article and that is, where and how do humans have an edge, if any?

The initial portrayal of my opposition to new technology might have led you to perceive this article as harbouring an anti technological sentiment. However, this inclination is outweighed by the potent emotion of fatherhood, which has led me to try to visualise a future intertwined with artificial intelligence. With a pragmatic approach, it becomes extremely crucial that we scrutinise our human attributes, which will serve as the foundation of our relevance and survival in this new technological era.

A beacon for the future

First and foremost, humans have an edge due to their physical dexterity. To illustrate, consider the ability to play a guitar. Playing guitar involves intricate and coordinated movements of the hands and fingers. Our hands, arms and fingers have evolved in such a way that we are able to play guitar by  natural means of balancing between the extremes of delicate and robust grips. This special ability of ours aligns with the principle of natural selection, reinforcing our adaptability and survival in different environments.

Second is the crucial aspect of our ability to adapt. The human race has not only survived but thrived by adapting to various harsh environments for many centuries. Why we look different and have different eating habits is mainly based on which part of the world our ancestors belonged to. Today, armed with expanding scientific know-how and its practical applications, we will most surely adapt and thrive in a wide array of global settings.

The third advantage that humans have is their social nature. We collaborate, forge alliances, thrive and build on our combined strengths. This trait helps political parties with diverse perspectives come together for effective governance. This advantage helps build resilient nations capable of facing global challenges and emerging superiorities. Our social nature is a powerful catalyst that has helped us grow. You can think of any notable success story, be it in any field from science to technology to art, and you will find a narrative of individuals pooling their strengths, experience and knowledge. It would inadvertently have a collaboration of people behind it.

The initial portrayal of my opposition to new technology might have led you to perceive this article as harbouring an anti technological sentiment. However, this inclination is outweighed by the potent emotion of fatherhood, which has led me to try to visualise a future intertwined with artificial intelligence. With a pragmatic approach, it becomes extremely crucial that we scrutinise our human attributes, which will serve as the foundation of our relevance and survival in this new technological era.

The fourth advantage is curiosity. This advantage is the starting point of all inventions and this is the key to finding a way to not only co-exist with artificial intelligence but to reap its benefits by customising it. It was curiosity that led humans centuries ago to invent fire and since then, this advantage has led humans to cross milestones after milestones. Even today, in this generation of startups, it’s curiosity that leads to problem solving that’s finally monetized.

The fifth is empathy. It is our unique attribute of responding to and understanding others’ mental states. This quality has been the foundation upon which the intricate tapestry of a civilised society is woven. It has helped us in our collective well being and progress through the centuries. It plays a pivotal role in fostering collaboration and strengthening relations between individuals.

It is with these advantages that we shall carve our place on this earth in the future. These traits are the key differentiators that strengthen our arsenal to secure our importance and relevance, as they have always been. From the point of view of jobs, these attributes will be a core part of future job descriptions.

Accountability for the way forward                   

Humans have been exceptionally good with inventions but at the same time, they have been very bad in using these inventions wisely. Greed in humans has led to the mishandling of the marvels invented. Nuclear energy is a boon to our race and we all know what Armageddon can bring upon us if used otherwise. We have invented a way to harness solar energy, which is again a great invention and will help us achieve our zero carbon goals. But are we responsibly planning for an effective way of recycling or disposing of the solar cells or have we already started creating our next big environmental issue, which would be solar garbage everywhere? While we never voted for the internet, we quickly embraced it and understood its benefit in terms of opening up an infinite source of information to us, but it also brought a lot of bad influence upon society, be it the easy availability of pornographic contents to virtual gaming applications to the latest addition to the list being deep fakes. Whether or not artificial intelligence will overpower humans, take away jobs or be our next major milestone of success entirely depends on us. The world as a whole, nations , governing authorities and every individual would be the deciding factors of our future. There should be dedicated and strict laws pertaining to artificial intelligence and its uses. Laws should be kept in mind and respect human privacy. Governing bodies need to create laws that will not only manage the associated risks but also promote artificial intelligence and its applications. The corporations that deploy artificial intelligence need to be held accountable for the risks that artificial intelligence may create.

So while I presented you all with some dark scenarios of a human-less economy, the advantages that we have as a race will be the key to how we shape our future coexistence with artificial intelligence. Our curiosity and adaptive traits should be directed towards engineering and solving the problem we are standing face to face with. The education sector in today’s world needs to evolve quickly to impart future generations with the right tools and knowledge to be able to forge a long lasting and beneficial future. I think that a future as presented in the much loved franchise of Terminator movies, where humans become the underdog in the war with Skynet’s intelligence network, is not possible. However, humans must restrict and control artificial intelligence to the extent that the human race does not become redundant.

References

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Is it difficult to become an immigration lawyer in the UK

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It has been published by Rachit Garg.

Introduction

Wherever you are on this planet, it is widely accepted that the legal profession is one of the most competitive and challenging career options you may choose. 

And yet it is super exciting and super attractive because it promises real life, real problems to solve and real people held sleepless at night by these problems, and then a real and immediate impact of your professional insight and the joy of warm tears of gratitude and relief flowing in abundance from the eyes of your rescued clients. 

It also gives you a good remuneration to boot.  

UK requirements for a legal career

Every country has its own requirements for a career in law. Some require that you have a first degree in an unrelated field and a second law degree, other countries require just a law degree, and others require lengthy professional training as an apprentice.

The UK, as always, is a bit different from everyone else. Here you don’t have to have a law degree to become a lawyer. The complexity of the British legal system is that it is not uniform – England and Wales have their own legal system, Scotland has its own, and so does Northern Ireland. A barrister or solicitor qualified in England and Wales is not accepted as a legal professional in Scotland or Northern Ireland.

UK requirements for an immigration law career

British immigration law is above these divisions and is the same for all parts of the country. Yet, a solicitor or barrister qualified in England and Wales cannot represent a client in Scotland unless they have additional qualifications or accreditation.

To become a country-wide UK immigration lawyer with permission to practice in any part of the UK you have to pass special exams in immigration law and get accreditation from the OISC – Office of Immigration Services Commissioner, which is the regulating body for immigration advisors across the UK. 

There are three levels of accreditation.

Level one

Level one allows you to handle cases that fall squarely under the immigration rules which do not require exercise of discretion by the decision maker and do not bring up any special circumstances or command special treatment. 

Level two 

Level two allows you to handle more complex cases. 

Level three 

Level three extends to challenging adverse decisions and representation in the immigration tribunals across the UK, including Scotland and Northern Ireland.

There is no formal requirement for a law degree but to pass the exams it certainly helps to have a legal background. Immigration law is notoriously complex and is often quoted as the most complex area of law in the UK!

Step-by-step guide : how to become a lawyer specialising in immigration

Step one: Initial degree

You need a degree recognised in the UK. It doesn’t necessarily have to be a law degree, but it can be a law degree outside the jurisdiction of England and Wales. You may also study history, physics, medicine or anthropology for your first degree. There is no discrimination. 

You can check with ecctis if this degree is accepted in the UK at its value. Sometimes, it may be downgraded and you may need a Master’s degree to be accepted as a Bachelor in the UK.

Step 2: Law conversion course

A law conversion course is for those who initially qualified in another jurisdiction or had a degree outside of law.

In England or Wales, you can take a graduate course which will allow you to convert your degree into a law degree within the jurisdiction. This course takes one year if done full-time, or two years part-time.

Once you have passed the exam, your academic tuition as a lawyer is over. You may think that it is not that much, but you will work very hard over this year and you would probably wish that you had more time to take it all in. – 

Step 3: Further academic specialization (optional)

Some aspiring lawyers wisely seek to dive deeper into a specialization area and go for a Master’s or an MPhil degree in a subject of their choice. 

Step 4: Professional course

The practical side of the legal profession is taught to barristers and solicitors separately. 

Barristers

Barristers are lawyers who represent clients in court or give opinions on the legal position of the party and have to take a Bar Professional Training Course (BPTC). They are trained in advocacy, examination of witnesses, and pleadings, but also in interviewing witnesses, delivering advice and negotiating settlements. It is a lot of fun and courses are often taught as a group play with roles assigned to all and each participant improvising their role.

Solicitors

Solicitors take a Legal Practice Course where they are taught court rules and procedures for filing and administering claims, as well as client interviewing skills, drafting witness statements and pleadings and … the rules about instructing barristers.

At the end of the course, both solicitors and barristers have to pass their respective exams and be “called”, or initiated, into the profession by their respective regulating bodies.

Step 5: Practical training

Practical training comes as a pupillage for barristers or a training contract for solicitors.

Barristers

For barristers, it is pupillage. It usually takes 12 months. Pupillage is arranged with a chamber of barristers who have a very competitive selection process. You will have to pass an interview and sometimes several rounds of interviews before you are selected. A pupil barrister spends the first six months as an assistant to a qualified barrister and the second six months work under supervision, representing clients in court in less complex cases. Barristers normally specialise in a given area of law, but sometimes they have expertise in several related areas.

Solicitors

For solicitors, the training contract takes two years. The training contract is with a firm of solicitors and is usually divided between four different areas, with six months spent in each field. This allows the trainee to “taste” different areas of law and select where they feel most at home.

Training as an immigration lawyer

You can undertake the OISC exam at any stage of your career as a lawyer, but you will certainly find the skills taught in the Legal Practice Course and the Bar Professional Training Course most useful.

To find out if it is hard to be a lawyer, join a UK-based immigration law firm, and experience for yourself the joys and challenges of the legal profession.


Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

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Doctrine of holding out 

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business partnership agreement

This article is written by Satyanshu Kumari. This article provides details of the doctrine of holding out under the Partnership Act, 1932 and Limited Liability Partnership Act, 2008, with the help of different case laws and illustrations to make it understandable. 

This article has been published by Rachit Garg.

Introduction

The term “holding out”, is not a mere concept, but it is the application of the doctrine of estoppel. By going to the definition of the doctrine of holding out, it means that any person who represents himself to another person that he is the partner of some XYZ Firm or even allows the others to represent him as the partner and the other person believes in him, such person shall not be deprived or estopped from his representation. Let’s suppose: Mr Arun represents to Mr. Ram that he is a partner of LK Firm, and Mr. Ram, believing in him enters into some transaction, then upon default of payment, Mr. Arun is estopped from denying this representation that he is not the partner of the firm. 

The concept of holding has been discussed in more detail under Section 28 of the Indian Partnership Act, 1932 and Section 29 of the Limited Liability Partnership Act, 2008. The similarity between both these sections under these Acts is that they hold a person liable by holding out if given conditions are fulfilled by them.  

Essentials of the doctrine of holding out

There are two essentials of the doctrine of holding out, these are as follows:

  • Representation 
  • Knowledge of representation 

Representation 

When a person voluntarily represents to other people, either by words, in written, or spoken, or by conduct, to be the partner of any firm, he is called a “partner by estoppel”. The concept of holding out is applicable when a person knowingly represents or permits himself as the partner of the firm and does not deny it at the appropriate time. When another person represents a person as a firm’s partner and allows the same to happen, he cannot deny the same afterwards. This means that the person himself represents or causes others to represent himself as a partner of the firm, may be held liable for the losses incurred by the third party which acted in good faith on such representation. 

This is explained with the help of an illustration below: 

  • Mr. A had given a loan to Mr. D, to establish a cattle business. Mr A had a very profound interest in the business, and he secured a lease for the farm premise using his contacts and was always available to accommodate the guests and their requests.  Mr B was the person who supplied all the materials required to build the business, and he was under the impression that Mr A was the partner of the firm. In this situation, Mr A is liable as a partner by holding out by way of his actions and not by words. The illustration stated is the facts of a landmark judgement in the case of Porter v. Incell (1905).
  • Where A introduces B to C as his partner, where he is the partner and B stands there silently, A will be held liable by holding out. 

Mode of representation

Representation can be made in two ways:

Express or Direct: The representation can be made through spoken or written words or by the person’s conduct. For example: Suppose A told B that he is a partner of ‘XYZ and Associates, where the fact is he is not the partner of the firm, this will amount to direct representation and A can be held liable. 

Implied or Indirect: It means that when a person knowingly lets his name be used by the firm for use in the name, title, or signboard of the firm, and he does not repudiate it within a reasonable time. For example: Mr. A allowed Mr. H to use his name as the title of the firm as an ‘A & H Associate’ indicating himself to be the partner of the firm, but in fact, Mr. A was not the partner of the firm. It was held that he would be liable to the third party who acted in good faith on such representation. 

Bevan v. National Bank Ltd.(1906)

Facts of the case

In the case of Bevan v. National Bank Ltd.(1906) 23 T.L.R. 65, Mr. M was Mr. A’s business manager. But the business was carried out in the name and style of ‘M and Co.’ The plaintiff who used to supply goods to Mr. M sued them for the recovery of the money, and he sued Mr. M for the money as one of the firm’s partners. Mr A contended that he was not liable since the business of the firm was carried out in the name of Mr M. 

Held

The court held that Mr M as well as Mr A both are liable and also laid down that where a person carries any business in the name of an individual with the addition of the word “and Co” and employs that individual as the manager of the entire management of the business, that does not amount to holding out that the person is the sole owner of the business. The court held that Mr M is also liable since he permitted the use of his name in the title of the firm, which makes him one of the partners of the firm and was also responsible to anyone who gives credit to the firm on that representation. 

Acting on representation 

The person making the representation must have the full and complete knowledge of his actions. The plaintiff who is making the defendant liable must know the representation and have acted on it in good faith. If the plaintiff wants to hold the defendant liable, the plaintiff has to prove that the defendant has himself or by his conduct makes the person think that he too is the partner of the firm. If the plaintiff, after such representation, believes and acts upon it in good faith, the fact that the defendant has the knowledge of it or not becomes immaterial, and the defendant can be held liable to the plaintiff. If there is no representation to the plaintiff, or there is no representation to his knowledge, his rights to sue that person making such representation does not arise. 

In the case of Smith v. Bailey, the court held that to make the defendant liable as a partner by estoppel or holding out specifically due to the credit extended by the firm of the transaction made by the plaintiff in reliance on the representation. The liability does not extend to other torts or civil wrongs committed by or on behalf of the firm. 

Retirement of a partner and application of the doctrine of holding out

When a partner decides to withdraw his partnership with the consent of another partner or as per the provisions of the partnership deed or by providing notice to the other partners about his retirement is termed as the retirement of the partner. Section 32 of the Partnership Act, of 1932, states about the retirement of a partner. 

Sub-Section (1) states that a partner may retire with the consent of all the partners of the firm, under an express agreement by the partners or where the partnership is made on the will, by giving the notice in writing to all other partners of his intention to retire. Further, Sub-Section (2) states that the retiring partner may be discharged from any liability to the acts of the firm done before the retirement of the partner by an agreement made by him with the third party and reconstituted firm, such agreement may be implied in the course of dealing between such third party and reconstituted firm after he knew the retirement. Sub-Section (3) states that a retired partner and other partners of the firm continue to be liable as the partner to the third party for any act done by them which would have been constituted as the act of the firm if done before the retirement of the partner until public notice is given of the retirement. 

Provided that the retired partner is not liable to the third party who deals with the firm without the knowledge that he was the party. 

Sub-Section (4) provides that notice under sub-section (3) may be given by either the retiring partner or by any partner of the reconstituted firm. 

Liability of a retiring partner

Section 32(2) of the Partnership Act, of 1932, states that every partner shall be liable for all the acts of the firm done while he was the partner of the firm. Any kind of liability has arisen during his being a partner, such liability does not come to an end by his retirement, and he shall be liable for the liability for the debts contracted before his retirement. A retiring partner may be discharged with the liabilities to any of the third parties for the acts done by the firm before his retirement by an agreement made by him with the third party and the partners of the reconstituted firm, and such agreement shall be implied by a course of dealing between such third party and the reconstituted firm after he knew about such retirement.  

Scarf v. Jardine (1882)

Facts of the case 

In this case, Scarf and Rogers were two partners of a firm. They conducted their business smoothly, but after some time, Scarf retired and Beach joined Rogers and continued with the conduct of the business as it was. No public notice was issued concerning Scarf being no longer a partner of the firm, and no official notice was released that Beach had joined as a partner in place of Scarf. Since the whole change was internal, no one was informed, neither the customer nor the suppliers. Jardine was one of the old suppliers of the company and supplied ordered goods without the knowledge of the change that had happened in the company. The new company was not able to pay him the dues, so when he sued the company, he came to know about the changes that took place. Since the company went bankrupt and could not pay him the dues left, Jardine sued Scarf for the recovery of the money. 

Held

The Court held that the retiring partners must give notice of their retirement from the firm in the same manner as a notice of the appointment is given so that the people who are associated with the firm can get to know about their status concerning the firm. If not done so, he might be treated as a partner of the firm by holding out no matter how long back he retired from the firm, without notice. The court in this case held that the notice should be given by either the retiring partner or any of the firm’s existing partners. Unless and until such notice of the retirement is given to the old customers or the creditors, the firm will be liable for the acts of such retired partners. 

A person who is not a partner of the firm may be liable to the third person, upon the ground that he has represented himself out to the world or permitted others to represent himself, and is therefore estopped from denying the same, as against those who have in good faith dealt with the firm. A partner of the firm will be liable by way of holding out to the person who is giving him the credit, and to compensate for the losses suffered by the third party. He does not acquire any claim over the firm and is not a real partner, but he will be liable for the compensation to the third party whom he induced as a partner by holding out and causing him to suffer any loss or injury due to such representation. 

It also must appear that the person dealing with the firm believed and had a reasonable right to believe that the party he seeks to hold as a partner was a firm member and that the credit was to some extent induced by this belief. The most important part is that the plaintiff should have acted in the faith of the representation, and he incurs the liability on this representation. It is immaterial that the defendant did not have any knowledge that this representation had reached the plaintiff. In the present case, the plaintiff did not know about the representation, he did not know the real truth, in such cases, no liability for holding out will arise. 

In cases where the person is sought to be charged as a holding out, his representation by way of words or conduct, other party’s belief, or transaction done in good faith with that belief, all are questions of facts.

Effect of the doctrine of holding out

When the doctrine of holding out is made applicable, the effect of it is on the person who represents himself directly or indirectly to be a partner of a firm is made liable as a partner to all such persons who have faith in his representation and have given credits to the firm or entered into the transaction with the firm. However, that person cannot claim any right in the firm’s property and his rights will be limited to the representation only. 

In English law, the partnership by holding out is referred to as an apparent partnership instead, and the legal provisions in both India and the UK are very similar. As a matter of law, to raise any issue under the doctrine of holding out, firstly, the representation of the person as the partner of the firm should be there, secondly, the plaintiff should not know the same, and the act should be based upon that knowledge has to be proved. And lastly, the damage to the plaintiff must be established, to hold the person liable under the doctrine of holding out.  

Provisions related to the doctrine of holding out 

The concept related to the doctrine of holding has been provided under Section 28 of the Partnership Act, 1932, as well as under Section 29 of the Limited Liability Partnership Act, 2008. 

Doctrine of holding out as per the Indian Partnership Act, 1932

Section 28 of the Partnership Act, of 1932, states about holding out.

Sub-section (1) of Section 28 provides that, any person by way of words spoken, or written or conduct, represents himself or knowingly lets the person believe that he is the partner of the firm, in such cases he will be held liable to anyone who in good faith believes in such representation and provides such person with credit or supplies any good, and whether the person representing himself or represented to the partner does or does not that the representation has reached to that person so giving the credit.

Sub-section (2) of Section 28 provides that: After the death of any partner of the firm, the old firm continues the business under that name or of the deceased partner’s name as the part thereof, does not make his legal representatives or his estate liable for any act of the firm done after the death of such partner.

Simply, it means when a person: 

  • Represents himself or,
  • Allows the partners of the firm to do so, and 
  • Upon such faith of representation, the credit has been acted.

Then, in such a situation, the person will be held liable for the doctrine of holding out. 

The doctrine of holding out as per the Limited Liability Partnership Act, 2008 

Section 29 of the Limited Liability Partnership Act, 2008, states about Holding out.

Sub-section (1) of Section 29: any person, who by way of words spoken, or written, or by way of conduct, represents himself or knowingly permits or allows himself to be represented, to be a partner in a firm, will be liable to anyone, who in good faith of any such representation given credit to the limited liability partnership, whether the person representing himself or represented to be a partner does or does not know that the representation has reached to that so giving credit. 

Provided that: any credit received by the limited liability partnership as a result of such representation, the limited liability partnership shall, without damage to be liable of the person so representing himself or as a partner of the firm, be liable to the extent of credit received by it or any financial benefit driven thereon. 

Sub-section (2) of Section 29: after the death of the partner, if the business is continued in the same limited liability partnership, the use of that name or the name of the deceased partner shall not make any of his legal representatives or his estate liable for any act of the limited liability partnership. 

Exceptions to the doctrine of holding out 

There are certain situations under which the doctrine of holding out is not applicable, which are discussed below:

  • Deceased Partner or when a partner dies: Death itself constitutes sufficient notice to all, and therefore, the doctrine of holding out is applicable in cases where the partner of the firm has died. 

In the famous case of  Venkatasubbamma v. Subba Rao (1964), it was held by the court that the death is a notice by itself, and hence the estate of a deceased partner is not liable for any act of the firm done after the death even if the business is continued by the surviving partners in the same manner and style and the place and even if his name appears in the name and affairs of the firm. 

  • Insolvent Partners or when a partner becomes insolvent: A partner of a firm ceases to be a partner from the date of his insolvency and his estate will be no longer liable for the firm’s acts, done after his insolvency. It is immaterial whether the notice is given or not, however, the insolvency of the partners is sufficient notice to all.
  • Dormant Partners or when a partner is dormant: A dormant or sleeping partner means a partner who did not take part in any conduct of the business as a partner, neither any of the customers know about him nor any of the clients of the firm knows about his participation in the working of the firm. So long as he remains as the partner of the firm, his liability will be similar to any of the acting, apparent or ostensible partners of the firm. There is no requirement for public notice of his retirement, and it is not necessary to terminate his liability via public notice.  It must be noted that if his presence in the firm was known to any of his customers, the news of his retirement must be given to them. 

Judicial pronouncements 

Farra vs. Delfinne (1843)

Facts of the case:

In this case, Todd and the defendant were partners for a very long period, and the plaintiff used to do business with them. They had dissolved their partnership, but the plaintiff continued to do business with them in the same manner. The plaintiff needed to be made aware that the partnership was dissolved, and only Todd was doing the business. When the dues were not paid to the plaintiff, he sued Todd as well as the defendant, though the contract for which he sued was made after the dissolution of the partnership. 

Issue raised:

Is there a need to create a distinction between the notorious partners and profoundly secret partners?

Held:

In the case of the notorious partnership, if the dissolution has taken place, but is not informed to the third party by notice, the defendant will be liable, and if the general notice somehow reached the third party that the partnership has ended, the defendant would not be liable, and if the general notice is given to some specific person but not to the third party, then the defendant will be liable. If there is any secret partnership that gives benefit to the defendant, even after the general notice and not the specific notice, the defendant will be liable. In this case, also, the defendant was liable as this was a notorious partnership and the plaintiff was not provided with any notice of the dissolution of the partnership. 

Tower Cabinet Co. Ltd. Vs. Ingram (1949)

Facts of the case

In this case, Mr. A.H. Christmas and Mr. Ingarm planned to start a business together with household furnishers as a partner. They worked together for several years and after some time, Mr. Ingram decided to leave the business and told Mr. Christmas and also asked him to inform all their suppliers of his withdrawal from the business. He further asked Mr Christmas to either rescind the contract he had made or inform the parties that he was no longer the partner of the firm. Mr Ingram also mentioned that for a long period, he would have no relation with the business except that Mr Christmas would pay him his shares in instalments. 

After the withdrawal of the partnership, the official paper of the company or the firm continues to use the name of the company. Instead of the terms of both the partners the name of Mr Christmas appeared on the paper along with the word ‘Director’ and his signature.  

After the partnership ended, the plaintiff signed an agreement with the firm where the plaintiff agreed to supply certain goods for a certain amount. By mistake, the draft agreement was the earlier paper, which had the names of both partners below the name of the firm. The firm failed to pay the dues on time, hence the plaintiff sued them, and Mr. Ingram too in the capacity of him being a partner. 

Held 

The court held that Mr. Ingram was not liable under any circumstance. The Court gave reasoning not to hold Mr. Ingram liable. 

Firstly, though there was no public notice executed stating that Mr Ingram is no longer a partner of the firm, he mentioned this to Mr Christmas to inform all the suppliers that he is no longer a partner and will not be part of any future contracts. He in no way represented or tried to represent himself as a partner of the firm, nor did he have any knowledge that he was represented as a partner by the firm.

Secondly, mere negligence in drafting the agreement on the wrong paper cannot make Mr. Ingram liable, as he neither represented himself as the partner to the third party nor had knowledge that he was represented by a third party. Mr. Ingram is not related to the business or any transactions under the firm and merely mentioning his name cannot be the reason for the third party to sue him.   

Conclusion 

The partnership of holding out means when a person knowingly permits other people to represent himself to be the partner of the firm and does nothing to stop such representation at the relevant time. Under such representation the third party gives credit to the firm, the person afterwards cannot deny his liability towards the third party. 

The liability of such an act is limited to such representation and cannot be unlimited. Furthermore, if the third party has the knowledge that such representation has been made and still enters into such transactions with the firm, then such a person would not be liable for the transaction. 

Certain facts must be established before the law to bar estoppel will be raised, there must be, first, a holding out by the party sought to be charged and secondly, a reliance by the plaintiff on this holding out, and third, the damages to the plaintiff.”

Frequently Asked Questions (FAQ) 

How is the liability of holding out different from the law of estoppel in partnership?

A partner by estoppel is almost similar to a partner by holding out, though there are some differences between them at some point. A partner by estoppel means by his action represents himself as the partner of the business or the firm, but they cannot later escape the liability as a partner who acted on their representation. But in case of liability of holding out, the firm or the business allows and lets the person misrepresent himself as the partner and the third party believing him. 

What is the doctrine of estoppel?

The Doctrine of Estoppel here means that a person who gives an impression to another person that he/she is the partner of the firm/organisation by way of his conduct, behaviour or initiative. These kinds of partners are liable for all the debts of the firm because, in the eyes of other people, he is considered the partner of the firm even though he is not associated with the firm capital or takes any part in the management. 

References 


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Intellectual property licensing in video game development

0

This article has been written by Amruta Patil pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

In the last four decades, the video game industry has undergone a huge transformation. Atari’s Pong, which had its commercial success in 1972, has laid the groundwork for the gaming industry, and it has been evolving since then. 

The developers are constantly on the lookout for new concepts to keep gamers engaged.

Introducing characters from various franchise units has allowed the game developers to tap into the existing fanbase. Even popular games are now being turned into full-scale movies and a prime example of that is the release of the movie Super Mario Bros. under the popular game character Mario, developed by Japanese gaming giant Nintendo.

With this evolution, video games have become more than entertainment; they now involve a blend of technology and artistic creativity, which requires a mechanism to bring them together without having to compromise on the gaming experience, which is where licensing of various intellectual properties comes into being.

This article explains the role of intellectual property licensing in video game development.

What is video game development

In simple words, video game development involves creating games, which can be done either by an individual or a unit like a gaming company. Much like the traditional game, which involves field engagement, video games can be very easily played within the comfort of our homes while offering a more immersive experience. Video game development requires an all-encompassing approach wherein there is an involvement of skills that include programming, designing the character, storyline VFX, and animations, to name a few. In addition to programming, character design, and storyline, video game development also involves a number of other important aspects, such as:

  • Level design: The process of creating the game world, including the layout of the levels, the placement of objects, and the design of the enemies and obstacles.
  • Art direction: The overall look and feel of the game, including the design of the characters, environments, and user interface.
  • Audio production: The creation of the game’s sound effects and music.
  • QA testing: The process of testing the game to ensure that it is free of bugs and that it meets the desired quality standards.
  • Marketing and distribution: The process of promoting the game and making it available to players.

Each of these aspects is essential to the development of a successful video game. By working together, a team of talented developers can create a game that is both fun to play and visually appealing.

With that being said, one can understand that developing video games is not exactly a one-man army task, although it is not impossible, but generally involves a set of people and huge financial investments, which is where licensing acts as a boon to the developers.

The following paragraph discusses further details regarding video game licensing and how IP licensing aids in the process.

What is video game licensing

Licensing is an agreement that is entered into between two parties, one being the owner/creator (licensor) and the other being the licensee, permitting the licensee to use the owner’s creation, which includes aspects such as characters for merchandising, music, and gaming related purposes, thus making use of the creator’s intellectual property.

Licensing plays an important role for the parties, the creator of the concept, and the party who is entering the licensing agreement. This can be a valuable option for creators who want to retain control of their work but still need to make money from it.

For the party who is entering the licensing agreement, licensing can provide access to valuable intellectual property that they would not otherwise be able to afford or develop on their own. This can be a great way for businesses to expand their offerings and reach new customers.

Licensing can also be a way for both parties to share risks and responsibilities. For example, the creator of the concept may be responsible for developing and marketing the product, while the party entering the licensing agreement may be responsible for manufacturing and distributing the product. This can help to ensure that both parties are invested in the success of the product and that everyone is fairly compensated for their contributions.

Overall, licensing can be a win-win situation for both parties involved. It can provide a way for creators to generate revenue from their work, and it can provide businesses with access to valuable intellectual property.

Elements that are licensed in video game development

As mentioned above, a video game has several elements that, when pieced together, make it a perfect game. To enhance the appeal of the game, it is often seen that few elements are frequently licensed when developing a video game.

The following are some common elements that can be licensed in the process of creating a successful video game.

Music

The right kind of music makes the game more interesting and has a significant role in meeting the gamers’ expectations. There are two kinds of licenses when it comes to music for video games, the are- Synchronization License and Master User License. While the former allows the licensee to use the copyrighted music in the game, the latter kind of license would require the licensee to seek permission from the artist owning the song.

Characters

Many games have introduced popular characters into their games, which allows them to increase the reach of their games to more people. This process requires permission from franchises, copyright holders, and even books to incorporate them into the game. This includes franchises, such as Star Wars or Marvel, as well as books, movies, and other works. The copyright holder may require the game developer to pay a licensing fee, or they may simply require that the developer obtain written permission to use the content. In some cases, the copyright holder may also require that the developer make changes to the content, such as altering the appearance of characters or removing certain elements. The process of obtaining permission to use external content can be complex and time-consuming, but it is essential to ensure that the game developer does not infringe on the copyrights of others.

Gaming engines

Licensing a gaming engine allows the developer to bypass the chain of extensive testing, allowing them to launch the game faster on the market. A licensed gaming engine also comes with the certainty that it has all the capabilities that will allow the game to run lag-free. It helps to meet the industry standard and players’ experiences as well. The updates on the licensed engines are maintained by the licensor and allow the licensee to potentially save on the cost of developing one from scratch.

Cross-platform integration

Many a time, some developers aim to introduce games that can be played on various platforms, such as PCs and mobile phones, which require them to obtain technological assistance to establish the game across various platforms where licensing software or technology helps in integrating the games seamlessly.

Logos

It helps users identify with the brands, giving them a unique identity to relate to. They are key tools used for marketing purposes. The licensing of logos also helps foster deeper fan engagement with the game. When fans see their favourite teams and players represented in a game, they feel more connected to the experience. This can lead to increased loyalty and spending, as fans are more likely to buy merchandise and other items related to the game. Additionally, the licensing of logos can help to promote the game to a wider audience, as fans of the teams and players who are represented in the game may be more likely to try it out. Overall, the licensing of logos is a valuable tool for game developers looking to increase fan engagement and reach.

Why does one need to license their intellectual property

The gaming industry is one of the most booming sectors in the entertainment segment. The video game development process involves multiple units such as design, software, coding, concept, and more. This would mean that there is a significant amount of financial investment that goes into the whole process of game development.

An average video game from concept to launching the game on the market can easily take somewhere between a few months and 3-5 years. The time and resources are also dependent on how easily or complexly the game is developed. 

The following explains the mutual benefits of licensing intellectual property in game development:

Technology and artistic amalgamation

Every component involved in the making of the game has some element of artistic creativity involved in the process, along with the technological aspect of the game, which falls under the ambit of intellectual property. While the artistic part of the game is covered under copyrights, the licensing of the software, which is the backbone of the game, is often overlooked. 

The technology used to run every game is unique in its format; licensing allows access to these technologies for other companies and upcoming game developers, providing them with a cost and time-effective approach. And since it’s already well tested, the possibility of failure or even building the whole thing from scratch can be skipped.

Similarly, the licensor can benefit by agreeing to new gaming concepts, which in turn keep the existing technology running. At the same time, the licensor does not have to further invest in developing a new concept for the game.

Audience presence

Launching a game under a popular franchise allows the developers to exploit the existing fan base while allowing them to gain more profits by partnering with various existing franchises. The existing audience presence helps them assess market demand better. This allows the developers to benefit from the fan base and the popularity that is gained along with the association with the popular brand name.

While the licensee scores on popularity and technology, the licensor benefits from an additional stream of income along with solidifying its market presence.

Utilisation of resources

With licensing agreements, the owner of the license, who already has a specific kind of technology, music, or storyline in which the characters have a backstory around them, can easily lease it to the developer in need, who can capitalize on the resources instead of working on getting a new one. The production and cost of marketing the newly developed concept can then be shared between the parties, making better use of the existing resources.

Collaborative venture

Each party in the licensing agreement brings their own set of strengths and areas of expertise, which help in building more successful gaming ventures. Many times, the game needs a new character or an upgrade in level in order to keep the game interesting for the audience. A collaboration with the popular franchises helps to keep the game going.

Better risk exposure and expansion of business

Launching a new game in a market where the audience is new and has backing from an existing franchise helps to navigate the risk better. The brand name helps to establish pre-established trust and experience among the existing users, which would help the licensee enter the new market without having to test the waters first.

That being said, this comes with a caveat, which is that if there is a chance of the game not meeting the expectations of the existing and new players, it can result in a huge financial deficit for both parties, but the opposite is true of the success of the collaboration can bring in more financial benefits to both parties entering the agreement.

The above-mentioned are just a few advantages that licensing the IP offers in the video game development arena. With effective utilisation of intellectual property, the parties can benefit by dividing the cost of the components, reducing the potential risk, and using the resources more judiciously while achieving their goals.

Drawbacks of licensing intellectual property in video game development

While licensing intellectual property certainly offers numerous benefits, it comes with its own set of limitations that must be considered when entering into an agreement for the same.  The following are a few drawbacks of licensing the IP in video game development:

Control over the IP

A key challenge faced by many game developers often revolves around control over the IP. This is because the game development process often involves multiple parties, each of which may have a stake in the IP. For example, the game developer may own the copyright to the game’s code, while the publisher may own the trademark to the game’s title. In such cases, it is important to have a clear understanding of who owns what rights to the IP and to ensure that all parties are in agreement on how the IP will be used. Oftentimes, it happens that the owner of the IP, i.e., the licensor, has major control over how the IP is to be utilised by the licensee, which results in restricting the creative freedom of the licensee and often hindering their vision from fully materialising.

Disputes for IP

Bethesda vs. Mojang (2011), where the dispute was filed for the use of the name “Scrolls.” Mojang was infringing the trademark by using the term Scrolls, which was owned by the parent company of Bethesda, namely Zenimax for their game series known as “Elder Scrolls V: Skyrim.” The dispute was not settled, as the court denied the request for an injunction filed by the parent company. The issue was settled with an agreement that Mojang would never become a competitor to the game owned by Bethesda, i.e., the Elder Scrolls.

Competition

With the licensing of the IP in the existing market, there is a high chance of the market becoming overcrowded with games of similar concepts floating around. This would eventually lead to the popularity of the originally held intellectual property being reduced in the market. This is because, as more and more people become aware of the new, more convenient alternative, they will be less likely to purchase the original product. This can lead to a decline in sales and profits for the original intellectual property holder, as well as a loss of brand recognition and customer loyalty. In some cases, it can even lead to the intellectual property being abandoned altogether.

There are a number of factors that can contribute to the decline in popularity of an originally held intellectual property. These include:

  • The introduction of a new, more convenient alternative
  • A decline in the quality of the original product
  • A change in consumer preferences
  • The emergence of new technologies

In some cases, the decline in popularity of an originally held intellectual property can be reversed. However, this is often difficult and expensive to do. It is therefore important for intellectual property holders to be aware of the potential risks and to take steps to mitigate them.

Expenditure and royalty payments

In the licensing agreement, the licensee pays an initial cost for using the IP to the licensor, which adds an increased financial burden on the licensee. It is highly imperative to evaluate the financial dealings before entering into the agreement.

Along with the initial cost, the licensee also ends up paying the royalties for the sale made through the video game, which is a way the licensor generates his profit for the IP licensed. All of this ends up adding more financial responsibility to the licensee; these factors are to be considered when entering into a licensing agreement.

Monopoly of the IP owner

Since the IP is owned by the licensor, the licensee is heavily dependent on the former party for continuous support and updates to the IP for the game to successfully function. The critical aspect here becomes the commitment of the licensor towards the licensee to maintain the support. In any event of uncertainty wherein the licensor decides to no longer pursue the said agreement, it could land the licensee in jeopardy, affecting the performance of the game in the market.

It is imperative to keep in mind, when entering an agreement, the challenges that can arise with the licensing of the IP. To overcome any such challenges, it’s important to structure the agreement with clear terms and conditions so that it does not hamper the video game development process.

Conclusion

While the developer benefits from access to cutting-edge well-established technology and not having to worry about the cost of developing a new technology to run the game, the key here is that in order to create a successful video game, one must strike a balance by entering into a mutually beneficial partnership where the collaboration addresses the challenges while sharing the benefits to create a win-win collaboration. On the one hand, it is important to partner with others who have the skills and experience necessary to bring a game to life. This can include developers, artists, and marketers. By working together, these partners can pool their resources and expertise to create a game that is more likely to be successful.

On the other hand, it is also important to be aware of the challenges that come with creating a video game. These challenges can include technical hurdles, creative roadblocks, and financial constraints. By addressing these challenges head-on, partners can increase the chances of creating a game that is both fun and profitable.

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All you need to know about home improvement contracts

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This article has been written by Husain Rizvi pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

In a world where residential transformations take place on an everyday basis, home improvement contracts are extremely crucial to ensure that the work is done correctly and that the interests of both the homeowner and the contractor remain protected. A home improvement contract covers projects on a much smaller scale, typically like renovating a residential property. This might include remodeling the drawing room, renovating the kitchen or upgrading a particular area of the house. 

One can say that a home improvement contract is an intricately woven document that serves as the fundamental principle between a homeowner and a contractor. The focal point of this article shall be to provide the reader with an insight into the key elements of a home improvement contract, along with its types and legal categorizations. Additionally, we shall also discuss the importance of home improvement contracts and their advantages and disadvantages.

What is a home improvement contract

A home improvement contract is a legally binding agreement between a homeowner and a contractor. It is supposed to serve as a legal framework that is supposed to govern the entire project of remodulating a house. It acts as a blueprint that meticulously outlines the important aspects of the project, such as the scope of work, project timeline, necessary permits, payment structure, insurances, warranties and the responsibilities of each involved party. 

The main agenda of a home improvement contract is to safeguard the interests of both the homeowner and the contractor by establishing clear expectations in an extremely transparent manner to minimise any potential misunderstandings or chances of disputes among the parties in the future.

Home improvement contracts may vary in terms of complexity; however, it is highly important that both parties become well versed in the nature and details of the contract and ensure that it fulfils their respective requirements.

Key elements of home improvement contracts

Here are the key elements of a home improvement contract listed in an orderly manner so that the reader may have a systematic flow while reading. From the introductory details to the contractual obligations, they are as follows:

Parties and contact Information

In a home improvement contract, the parties and contact information section is crucial, as it mentions the homeowner’s as well as the contractor’s information, which is vital for clarity and transparency. It shall include the involved party’s names, addresses, phone numbers, and any other relevant information too. This information ensures that all parties involved in the contract are clearly identified, and their contact details are readily available for effective communication throughout the duration of the project. It helps prevent any potential misunderstandings between the parties.

Scope of work

The scope of work outlines the boundaries of a renovation project, where it may provide a detailed description of things like the duration that the project is expected to last, the kind of material that is supposed to be used, and the kind of labour that is needed for the accomplishment of a particular task; it may even define a standard quality that needs to be met; or it may also mention a specific type of work that is expected to be performed by the contractor. Overall, the scope of work may cover various different things, depending on the complexity of the renovation process. Nonetheless, it shall cover all the essential aspects that can be both broad and basic in nature.

Timeline of the project

The timeline in a home improvement contract mentions the date on which the renovation project is anticipated to commence along with its expected completion date. This provides a clear framework for various stages of the project and gives an approximate idea to the contractor about the duration of time that it may take to complete the renovation. A timeline also consists of a schedule that outlines different phases of the project, such as key events and milestones. Such key events or milestones may include the completion of a specific area of the house, the addition of explicit features to a room, or the remodulation of the kitchen. This comes in handy for both the homeowner and the contractor to keep track of the progress of the renovation project. It also helps to manage and plan accordingly. Furthermore, the project timeline may include provisions for any potential delays or extensions, along with any adjustments to the schedule.

Permits and approvals

Permits and approvals refer to the permissions that are needed to be acquired from the relevant authorities before the commencement of the renovation project. Such authorities may include the local building department, health departments or environmental agencies. It is important to make sure that the appropriate permissions have been acquired and the renovation work strictly complies with the legal obligations framed by the aforementioned authorities. The permits and approval section ensures that the process of renovation abides by all the legal requirements. Moreover, it minimises the chances of potential legal issues. Hence, it’s crucial for both parties to adhere to the regulations established to ensure that the renovation process complies with all the legal norms.

Payment terms

Payment terms refer to the financial arrangements between the homeowner and the contractor. This section ensures that the payment terms are fair and transparent. Payment terms may include the overall cost of the project, due dates, payment methods, penalties for late payment and unforeseen costs (if any). Defining these payment terms in advance results in a clear understanding of the final amount. It also provides a precise breakdown, which keeps everything unambiguous and ensures a fair financial arrangement.

Change orders

Change orders are the documents that outline and mention any modifications that are being made to the original agreement. Such modifications may include the addition or deletion of a specific stage in the renovation project. While initiating the change orders, things like cost implications and changes to the timeline may occur. Furthermore, reasonable reasons for changes shall be provided, along with the approval of both parties, to avoid any misunderstandings in the future.

Insurance and liabilities 

Any unforeseen circumstances leading to accidents during the renovation project shall be dealt with under the insurance and liability section. In the event of any injuries sustained by the contractor during the work, they shall be managed under general liability coverage. On the other hand, the contractor shall also have worker’s compensation insurance to cover any injuries sustained by the workers during the work. The homeowners are also required to maintain property insurance. It shall provide safeguards against any unplanned occurrences such as theft, fire or vandalism.

The timeline in a home improvement contract mentions the date on which the renovation project is anticipated to commence along with its expected completion date. This provides a clear framework for various stages of the project and gives an approximate idea to the contractor about the duration of time that it may take to complete the renovation. A timeline also consists of a schedule that outlines different phases of the project, such as key events and milestones. Such key events or milestones may include the completion of a specific area of the house, the addition of explicit features to a room, or the remodulation of the kitchen. This comes in handy for both the homeowner and the contractor to keep track of the progress of the renovation project. It also helps to manage and plan accordingly. Furthermore, the project timeline may include provisions for any potential delays or extensions, along with any adjustments to the schedule.

Warranties and guarantees

Warranties and guarantees refer to the commitments of the contractor towards the overall quality and standards of the project. 

  • Warranties: Refers to the formal assurances by the contractor to replace or repair any faults that may arise after the completion of the project. They are legally binding and time-limited, therefore, the warranty period shall be clearly mentioned in the contract.
  • Guarantees: Refers to the assurances given by the contractor regarding the completed work meeting expected standards in terms of quality. Guarantees are more expansive and they may cover wider aspects like durability or the entire functionality of the project.

Clean up

The clean up clause addresses the responsibility for the removal of construction waste and other leftovers. The clause shall specify which party would be responsible for the disposal of the waste materials on site. It shall also outline the procedures for the cleanup, along with the timeline for the same. The procedures for site restoration to its pre-renovation state and penalties for non compliance shall also be mentioned.

Project termination

In cases of poor workmanship or any deviation from the original assigned scope of work, the homeowner may not be required to pay the contractor. In fact, the entire renovation project can be terminated in such scenarios. The termination clause states that the project can be terminated on the grounds of noncompliance with the legal norms, failure to meet the expected quality or any other breach of compliance on the part of the contractor. 

Signatures and dates

The signatures and dates section of the home improvement contract signifies that both parties have entered into an official agreement to proceed with the renovation process. Signatures of both parties indicate that they have read, understood and agreed to the terms and conditions of the contract. The date establishes a timeline as to when the agreement was entered into. The signatures and dates section stipulates the legal validity of the contract along with the timeline of the agreement. It further minimises the chances of any disputes. Therefore, it is crucial for both parties to review the contract in its entirety before proceeding.

Types of home improvement contracts

There are various legal categorizations of home improvement contracts, each designed to cater to different needs; they are as follows:

Fixed price contract

Fixed price contract is the most commonly used agreement in a home improvement contract. It is also known as a lump sum contract, as the contractor agrees to a fixed price for the entire project. The contract shall mention an agreed upon price for the entire scope of the project; this price shall be determined before the commencement of the work. It is important to note that, despite any unforeseen circumstances in the future, there won’t be any adjustments made to the fixed cost. This places a risk of cost overruns on the contractor, but on the other hand, it ensures budget credibility for the houseowner. 

Cost plus contract

In a cost plus contract, the homeowner agrees to pay for the actual costs of renovation and construction. Additionally, the homeowner also agrees to pay the contractor separately, which is the profit margin incurred by the contractor. It is generally charged as a percentage of the actual cost. The profit is added to the actual cost to determine the final price of the project. Unlike fixed price contracts, cost plus contracts have a lot of room for flexibility and change orders can be accommodated easily. Furthermore, the contractor doesn’t bear the risk of a cost overrun.

Time and material contract

In a time and material contract, the homeowner pays for the actual costs of materials, just like in a cost plus contract; however, the contractor is paid by the homeowner based on the amount of time he has spent on the project. So, instead of a fixed price, the contractor may charge hourly rates. Such contracts are very flexible; therefore, they are very useful in projects where the scope of work and timeline aren’t well defined. Moreover, they are very transparent in nature, so during the purchase of materials, the homeowner knows exactly about the allocation of money.

Unit price contract

A unit price contract outlines a predetermined price for each unit of materials and services that are to be used in the renovation project. In other words, the contractor is paid on the basis of each unit of work, time and quantity of material.

All the units that are to be used in the project have an established, predetermined price, which shall be discussed in advance by the respective parties. It’s worth noting that the cost of the materials is to be paid unit wise. For example- cost of labour per hour and the cost of paint per litre. Therefore, the homeowner is only billed on the basis of the actual amount of materials used in the project, resulting in a clear breakdown of costs.

Design-build contract

A design-build contract states that both the designing phase and the construction phase shall be the responsibility of a single entity. In simpler terms, under a design-build contract, a single contractor with interior design capabilities is supposed to take charge of the construction along with the design aspect. The design-build contract happens to be advantageous for a homeowner, as only a single entity is involved in the project, which results in enhanced cost efficiency since the homeowner will not be required to deal with contractors and interior designers separately. Besides, this makes the process of renovation much faster and more streamlined. 

Turnkey contract

Similarly to a design-build contract, under a turnkey contract, the contractor is supposed to take full responsibility for executing the construction along with creating the design as well. However, the key difference between a design-build contract and a turnkey contract is the extent of the homeowner’s involvement in the project. To put it simply, in a turnkey contract, the majority of the decisions are made by the contractor, and the involvement of the homeowner is very limited since they are required to hand over the key of the house to the contractor. We can say that a turnkey contract has a hands-off approach, and the homeowners may expect a fully finished project upon the completion of the renovation.

Major advantages of home improvement contracts

Home improvement contracts provide various safeguards that are legally binding in nature, making them beneficial for both the homeowners and the contractors. The benefits of the home improvement contracts are as follows:

Cost transparency

Home improvement contracts typically provide a detailed breakdown of the costs related to the renovation process along with their allocations. The homeowners are always aware of the costs of materials, labour, construction and permits. Such a level of transparency helps the homeowner understand the process of renovation and this also allows them to trust the contractor associated with the project.

Legal protection

Home improvement contracts provide various safeguards for both the homeowner and the contractor. Since the contract is legally binding in nature, neither of the parties can breach their respective duties, and they are obligated to fulfil their responsibilities. The contract also outlines clear terms and conditions regarding the scope of work, permits, timeline and payment, minimising any potential chances of disputes.

Project timeline

The contract mentions an expected duration of time for the project to be completed. This helps the homeowner anticipate when the renovation process may come to an end. The timeline also acts as a roadmap for the contractors, allowing them to have a rough idea of the various phases of the project, which is helpful for structuring and planning.

Payment terms

The contract tends to clearly outline the agreed upon payment terms, which ensures that the contractor receives a fair payment upon successful completion of the renovation project. Clear payment terms are important for both parties involved to make the project smooth and transparent. The contract should specify the total cost of the project as well as the payment schedule. The payment schedule should be based on the project’s milestones, such as when the contractor completes a certain phase of the work. This will help to ensure that the contractor is paid on time and in full and that the project stays on track.

The contract should also include a clause that outlines the consequences of late payments. This will help to protect the contractor in the event that the client fails to make payments on time.

Clear payment terms are essential for a successful renovation project. They help to ensure that both parties are protected and that the project is completed on time and within budget.

Accountability 

The home improvement contract clearly defines the responsibilities of both parties involved, making them obligated to perform their respective duties without any exceptions. The homeowners are required to adhere to the payment terms; on the other hand, contractors are required to comply with the timeline of the project. Mention of such obligations in the contract makes the responsibilities of the involved parties legally binding, which proves to be beneficial for both.

Insurances 

The insurance section in a home improvement contract defines the insurance coverage, which can be claimed in case of any injuries sustained by the contractor or workers during the renovation process. Contractors are typically required to carry general liability insurance and worker’s compensation insurance, which may deal with any bodily injury endured during the work. On the other hand, homeowners are required to maintain their property insurance. The coverage provided by property insurance can include protection against unforeseen circumstances like structural issues, subsurface conditions, neighbourhood restrictions, theft, fire or natural disasters. Therefore, it is very crucial that both parties involved understand the importance of their respective insurances and responsibilities.

Notable shortcomings of home improvement contracts

Although home improvement contracts provide multiple advantages and legal safeguards to the involved parties, there are certain aspects that are outside their dominion. They are as follows:

Incomplete specifications 

In various cases, the scope of work or the expected timeline for the project can be vague and ambiguous in nature. This may result in a lack of clarity as to what services are required to be performed by the contractor. It can also hamper the project plan and its management regarding the completion of different phases of renovation. An unclear scope of work or an uncertain timeline may ultimately lead to inconveniences and a potential dispute among the parties.

Unclear quality assurances 

Unclear specifications regarding the expected quality of the material that is being used may result in the homeowner being dissatisfied. The contractor may use material of lower quality than the one mentioned in the contract or dissatisfaction may arise due to poor workmanship. There could be a number of other reasons related to the failure to comply with the original project plan, which may be related to quality issues or deviations from the design creation. 

Rigidity 

Some types of home improvement contracts can be extremely inflexible in nature, which means they can’t accommodate changes in the event of any unforeseen circumstances. In such contracts, the implementation of change orders can be intensely challenging as well. Such rigidity may lead to potential delays in the project due to the lack of adaptability. Another challenge with inflexible contracts is that they can make it difficult to implement change orders. A change order is a written agreement between the homeowner and the contractor that modifies the terms of the original contract. Change orders can be necessary for a variety of reasons, such as to add or remove work from the project or to change the price or schedule. However, if the contract is inflexible, it can be difficult to get the necessary approvals to issue a change order. This can lead to delays in the project and can also increase the cost of the project.

The rigidity of a home improvement contract can have a significant impact on the project. A contract that is too inflexible can make it difficult to accommodate changes, which can lead to delays and cost overruns. It is important for homeowners to carefully review the contract before signing it to make sure that they understand the terms and conditions. If there are any provisions that they do not agree with, they should negotiate with the contractor to get them changed.

Project delays

Unanticipated variables and unforeseen circumstances, like bad weather conditions or subsurface issues, may lead to a delay in the completion of the renovation process. This may lead to an extension of the allotted timeline. However, it may result in an increase in potential costs and add complexities to the project that involved parties will have to deal with. Such circumstances are outside the scope of home improvement contracts. As a result, it is important for homeowners to be aware of these potential risks before signing a contract with a home improvement contractor.

Some of the specific circumstances that may fall outside the scope of a home improvement contract include:

  • Changes to the scope of work that were not agreed to in advance.
  • Unexpected delays or cost overruns.
  • Damage to the property was caused by the contractor.
  • Disputes between the homeowner and the contractor.

In the event that any of these circumstances arise, the homeowner may be responsible for paying for the additional costs or damages out of pocket. As a result, it is important for homeowners to carefully read and understand the terms of their home improvement contract before signing it.

Conclusion

In conclusion, we can say that a home improvement contract plays an extremely important role in a renovating project as a legally binding document. It serves as the foundation for a fruitful venture by outlining crucial aspects like scope of work, project timeline, payment terms and other dispute resolution mechanisms. The contract is designed in such a way that it safeguards the interests of both parties involved by providing a clear and transparent framework. While there are advantages such as legal safeguards and dispute resolution mechanisms, there are also various drawbacks such as unclear specifications, unforeseen circumstances or the potential for project delays. In order to navigate through such challenges in an effective manner, both parties involved are required to read, understand and discuss each and every aspect of the contract before the commencement of the project. This way, they can outweigh the potential drawbacks of the contract, which may contribute to a far more positive and successful renovating experience for everyone involved.

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