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Contractual breach and calculation of damages

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This article is written by Aparna Jayakumar, an Advocate at The Bar Council of Delhi. This article exhaustively discusses the contractual breach and the ways of calculating damages arising out of the breach.

Introduction

The Indian Contract Act, 1872, which is primarily based on English common law, regulates the law of contracts in India. The word “contract” is described in the Act as a legally binding arrangement. In other terms, it is a voluntary, legally enforceable, and binding arrangement between two or more competent parties for consideration and reciprocal obligations. The majority of commercial transactions are successfully and efficiently completed by contracts in today’s competitive market climate.

The parties of a contract face a risk of “breach of contract” when they enter into the contract. Such risk arises when any of the parties fail or refuse to perform the obligations as promised under the contract. A breach of contract is a failure, without any legal excuse, to perform any or a part of a promise that forms all or a part of the contract. Any party who has broken or failed to comply with the promises under the contract is liable to compensate or fulfil the damages and loss caused to the suffered party. Such remedial provisions are provided under Part VI of the Indian Contract Act, 1872.

However, Part VI of the Act does not deal with the method of computation and calculation of the damages arising out due to the breach of the contract. In M.N. Gangappa v. Atmakur Nagabhushanam Setty & Co. and Anr, 1972 the Apex Court held that the damages shall be computed taking the facts and circumstances in mind and for such computation, strict legal obligation, not the expectation must be considered. In this article, we will discuss the methods for calculating the damages arising out of a contractual breach. Compensation for failure to fulfil contractual obligations similar to those set out in the contract. Every person who fails to discharge a duty equivalent to what was established in the contract is entitled to the same reimbursement from the party in default as if that person had contracted to discharge it and had breached his contract.

Contractual Breach

The contract exists in the form of a legally binding agreement supported with some consideration, for the violation or non-binding of which damages as a remedy is available. The term “breach of contract” arises when a party or parties in the contract contravene the terms of the contract, break the promise, or don’t follow the terms and conditions in a manner as provided in the contract.

Section 39 of the Indian Contract Act defines the breach of contract as ‘when a party has refused to do or disable himself from performing his promise, this promise may put an end to the contract unless he has signified by words or conducted his acquiescence in its continuance. It means that if a party to the contract has promised to perform his obligation, and he fails to do the same, it is said that he has made a breach of contract.

For example- C is a builder who enters into a contract with his client B to construct a rectangular house of 1200 sq. feet having 4 windows and 2 doors. C builds a house of 1180 sq. feet with 3 windows and 1 door, violating the terms of the contract. Here, B is entitled to the damages for the losses incurred in conformity with the contract. 

The contractual agreement is based on the Latin maxim ‘Ubi jus, ibi remedium’ which means ‘where there is a right, there is a remedy’. So, the contract has a set of correlative rights and obligations for the respective parties to perform. In case there is a breach of contract, the remedies arise for the enforcement of such rights. In absence of remedies for the non-performance or violation of the contractual terms, the rights and obligations for the parties shall be of no value.

The party who commits a breach of contract is known as the “guilty party” whereas the party who suffers the loss is known as the “aggrieved party or injured party.”

Damages

Parties usually discuss and compromise on the various remedies that the injured party may invoke to mitigate and compensate for the damages it might suffer as a result of any violation as a measure of safeguarding, securing, and protecting their respective interests in the event of a breach of the contract’s terms. In other words, any infringement of the contract’s terms and conditions by any party (“Defaulting Party”) entitles the other party (“Non-Defaulting Party”) to sue the defaulting party for damages and/or other remedies. The Indian Contract Act does not describe the word “damages.”

The term ‘damages’ refers to the monetary compensation to the aggrieved party in a contract for the losses, injury, or damages caused by the guilty party. The quantum of the damages caused is determined by the magnitude of the damages caused to the injured party due to the breach of contract. As the injured party suffers loss or inconvenience so, if the matter for damages reaches the court it would want the victim party to accept his mistake and pay adequate compensation to the affected party for the damages. 

The principle behind the damages is explained by Fuller and Prude, the expectation interest, also known as performance interest, refers to putting the suffering party in a position where he would have been if the promise would have been fulfilled.  The reliance interest is also known as the status quo interest seeks to restore the position of the injured party where he was before the promise was made and in the course of which the promise altered his position by putting reliance over the promise. The restitution interest tends to prevent the defaulter promiser from gaining due to the loss caused to the promisee. Section 73 and Section 74 of the Indian Contract Act envisage the provisions of the contractual damages. Section 73 deals with the “general or unliquidated damages” whereas Section 74 deals with the “liquidated damages”. Since the contractual breach is civil, the purpose behind the damages is to compensate the injured party for the loss and not to punish the victim party.

Determining damages for different kinds of breaches 

To determine the amount of damages, the injured party must show that the breach of contract caused him or her financial losses. Before the court, the injured party (plaintiff) must determine the type of damages he or she is seeking. The court considers whether the violation is major or minor. In certain cases, the courts can grant damages that go beyond the traditional definition of compensation. Nominal damages, aggrieved damages, and restitution damages are forms of non-compensatory damages. The principles of remoteness, causation and mitigation apply to damages for breach of contract. We will now examine the Indian courts’ approach to assessing damages.

  1. Remoteness of Damages

The provision under Section 73 of the Indian Contract Act provides ‘loss or damages occurred in the usual course of things in a contractual breach’ as one of the important requirements for awarding the damages. So, the victim party (defendant) shall not be liable for the damages that are remote to the breach of contract. In a landmark common law case of Hardley v. Baxendale (1854), the principle of remoteness was described. The rules enumerated in this case was that the injured party can only ask for the recovery of damages where the damages are fairly and reasonably arising out naturally from the usual course of things; or supposed to have been reasonably in contemplation of both the parties at the time of the execution of the contract, as its probable breach. 

Now, in case the contract was executed under special circumstances and such circumstances were communicated to both parties, in such a situation the breach shall reasonably contemplate the injury as the special circumstances were duly communicated to the parties in the contract. But, if the party causing injury is fully unaware of the special circumstances and the damages arise out of the breach, such damages shall put the guilty party at an advantage depriving the other party.

In this case, the special circumstances were never communicated by the plaintiff to the defendant which resulted in losses to the plaintiff.  So, it was held that if the plaintiff proves that the defendant was in the knowledge of the special circumstances arising in the contract, the latter will be liable for the damages for the losses. However, if the defendant assumes the risks evolved under the special circumstances under the contract as a reasonable man would have, such assumption shall not be deemed as the communication of the special circumstances to the defendant and not make him liable for any breach.

The Indian Courts have also adopted this evolving jurisprudence while deciding the case on similar issues. The Kerala High Court in State of Kerala v. K. Bhaskaran (1984) held that the defendant shall be liable only for the natural and proximate consequences of breach or those consequences which were in the contemplation of the parties at the time of contract. The party guilty of breach shall be liable only for reasonably foreseeable losses that a prudent man possessing similar information during contract would have reason to foresee the future breach.

  1. Causation

Causation refers to the causal connection between the breach committed and the injury or losses suffered. The casual connection is said to be established if the defendant’s act amounting to a breach of the contract is a “real and effective” cause of the injury or damages claimed. In cases where multiple causes are present, the “dominant and effective” cause shall be taken into consideration.

Depending upon the facts and circumstances, the courts use several tests to establish a causal link. The “But-for” test is one of the most important tests used by the courts to determine whether the damages have accrued ‘but for’ the acts of the defendants. This test has been adopted in the case of Reg Glass Pty Ltd v. Rivers Locking Systems Ltd. (1968) where the defendant failed in installing the door and security system lock as per contractual norms. The plaintiff’s property was stolen and he claimed the damages from the defendant. The High Court of Australia held the defendant liable as the theft would not have happened if the defendant would have installed the locks and the security system as per contract.

In India, the Supreme Court has adopted the “but for” test in the case of Pannalal Jankidas v. Mohanlal and Another (1950). In this case, the ordinance stated that the government shall fulfil fully or partially the losses incurred due to fire explosion to the party who has got his property insured under the fire risk policy. The Apex Court stated that it was neglect on the part of the defendant to keep his goods insured as it led to his loss of claim from the government. The Court further held that as the appellant’s neglect of duty to get his goods insured was stated in the agreement, so the respondent could have recovered the full loss from the government. Hence, there was an established causal connection between the appellant’s default and the defendant’s loss.

However, in every case, the establishment of a connection shall not make the defendant liable as sometimes the causal connection is broken by the third party action or negligence on the plaintiff’s part. So, in such cases, the damages claim of the plaintiff shall be repudiated.

  1. Mitigation

The term mitigation of damages finds its place in the Halsbury Laws of England (4th edition, volume 12) as-

Plaintiff’s duty to mitigate loss. The plaintiff must take all reasonable steps to mitigate the loss which he has sustained consequent upon the defendant’s wrong, and, if he fails to do so, he cannot claim damages for any such loss which he ought reasonably to have avoided.”

As a result, the party alleging breach of contract or damages must have met the contract’s requirements. Consequently, before seeking damages, the obligation to mitigate losses is required. The mitigation of damages does not give the parties any rights; it is only used by the court to determine damages. The plaintiff’s effective mitigation measures will be determined entirely by the facts and circumstances of the case. However, in such circumstances, the plaintiff must ensure that he not only behaves in his own best interests but also in the best interests of the defendant, reducing the damages fairly, failing which he would not be entitled to the damages that might have been prevented.

The purpose of the duty to mitigate losses is relevant in the assessment of the damages where the plaintiff is not entitled to any damages of losses which (s)he is supposed to have mitigated. The Apex Court in M. Lachia Setty & Sons Ltd. v. Coffee Board, Bangalore (1980) held that the principle of mitigation of loss doesn’t give any right to the party who is in breach of the contract but it is a concept that has been born in the mind of the court while awarding the damages. In the case of Pannalal Jugatmal v. State of Madhya Pradesh (1953), the Court held that the mitigation of damages is incorporated under Section 73 of the Contract Act. The provision provides a burden on the party complaining about the breach of the contract to show that he doesn’t possess the methods for remedying the damages caused to the non-performance of the contract. The law for wise reasons imposes mitigating damages upon the party who has been subjected to the injury due to breach of contract, to make efforts for rendering the injury as low as possible.

  1. Damages for direct, consequential, and incidental losses

On the breach of a contract the defendant is not only liable to compensate the plaintiff for the injury and losses incurred but (s)he is also liable to compensate for the losses and damages “consequent to such loss and damage”. For example- In a contract of construction of a building the builder has assured to build it on time so that it could be let out on rent. Unfortunately, the building fell down and the builder had to reconstruct it. In this case, the builder is liable for the expenses incurred in the reconstruction of the building as compensation, the rent lost, and the compensation paid to the lessee for the period the building had not let out on rent as per contractual norms. Consequential damages are covered under special damages, as the losses that are supposed to have been, in contemplation of both the parties during the execution of the contract.

  1. Damages for non-pecuniary losses

Generally, damages are given for the breach of contract to compensate for the pecuniary loss. However, there are certain circumstances where the injured party can claim non-pecuniary losses. Non-pecuniary damages are losses that are incapable of being assessed by arithmetic calculations. The damages for mental anguish or suffering may be provided as a non-pecuniary loss where the contract is itself to provide enjoyment. For example- Breach of contract of services to click photos in a marriage. The term finds its reverence in the reference made by Justice Lahoti in “Chitty on Contract” which states as under-

Normally, there is no damages provided to the plaintiff for anguish, injury to his feelings, mental distress, annoyance, loss of reputation, and social discredit caused due to the breach of the contract. The exception is limited to the contract whose performance is to provide peace of mind and relief from distress.

So, in a contract specifically providing the enjoyment or the peace of mind, failing to perform the same, the injured party can seek the damages caused to him due to non-performance of the terms as contemplation of the parties during entering into the contract.

Calculation of the amount of damages for breach of a contract 

Determining the amount of the damages in a breach of the contract is said to be of utmost importance. The computation of the quantum of damages depends upon the magnitude of the injury caused to the plaintiff for the contractual breach. Section 73 and 74 of the Indian Contract Act, only deals with the measures for damages, not the method for calculating the quantum of damages incurred to the injured party. The Apex Court in the case of McDermott International Inc. v. Burn Standard Co. Ltd (2006) discussed the formulae for the computation of the damages caused due to contractual breach in detail. The formulas are provided as below-

  1. Hudson Formula

The Hudson formula is derived from the Hudson’s Building and Engineering Contracts and is used in the computation of delay damages in construction claims. The formula is stated in the following terms-

(Contract Head Office overheads profit %) x (contract sum ÷ period in weeks) x delay in weeks

  • Where Contract Head Office and profit percentage submitted in the tender.
  • Dividing the total overhead costs and profit of the organization as a whole by the total turnover of the organization arrives at the head office percentage.

As provided in the Hudson formula, the Head office overhead profit percentage is taken from the contract. Nonetheless, Hudson Formula has got judicial reverence in many cases, but it has been criticized principally as it obtains the contract head office overheads profit percentage from the contract as the factor for calculating the cost, which may have a little or no relation with the actual head office costs of the contractor. The Indian courts have applied the Hudson formula in several cases to calculate the quantum of damages.

  1. Emden Formula

The Emden Formula is derived from Emden’s Building Contracts and Practice and provided as below-

(Head Office Overhead & Profit ÷ 100) x (Contract Sum ÷ Contract Period) x Delay Period

  • In this formula, the total overhead cost of the contractor’s organization is divided by the total turnover, which results in the percentage based on the contractor’s actual head office overhead instead of one contained in an isolated contract.

The Emden Formula is used to measure the head office overhead percentage by dividing the gross turnover by the amount of the contractor’s overhead costs and benefits. The benefit of this formula is that it uses real operating costs and profit percentages rather than those specified in the contract. In many judicial decisions in India, the Emden Formula has been praised for its accuracy in measuring damages.

  1. Eichleay Formula

The Eichleay Formula has been evolved from the American jurisprudence and derived in a case of Armed Services Board of Contract Appeals, Eichleay Corp. It is applied in the following manner-

  • Step 1- Overhead is allocable in the contract. The portion of the overhead allocated to the project is calculated by this method.
  • (Contract Billings ÷ Total Billings for contract Period) x Total Overhead for Contract Period
  • Step 2- Daily Allocable Overheads/ Overhead rates. It is a method for calculating the daily allocation of Office Overhead.
  • (Allocable Overheads ÷ Total Days of Contract)
  • Step 3- Daily Overhead Rate/ Amount of Unabsorbed Overhead. This is a method of multiplying the compensable delays by the rate of daily allocable overhead.
  • Step 4- Daily Allocable Overheads/ Daily Overhead Rates x No. of days of delay. This formula is used for calculating damages where it is not possible to prove the loss of opportunity and the claim is based on actual costs. 

These formulas are mainly used in calculating losses incurred to the party in the Construction contracts.

Important tips to be kept in mind while computing damages

For calculating the damages in the manner subsequent to the breach of contract the Apex Court has laid down two underlying principles in the case of Murlidhar Chiranjilal v. Harishchandra Dwarkadas (1960). These principles are provided as-

  • As the breach of contract is proved, the injured party claiming the damages is placed in a manner as the money could put him in a good situation, as if the contract wouldn’t have been performed and;
  • The plaintiff is also duly bound to mitigate all the losses arising out of the breach and prevent him from claiming any kind of damages which is a consequence of his failure to mitigate the damages. 

The legal provisions in the Contract Act don’t specifically provide the measure for computation of the damages, so most of the time the courts have given free hand to the arbitrators for computation of damages. Regarding the measurement of the damages, the parties in the contract may execute stipulated norms as a specific measure for the calculation of the damages for the breach of contract.

In a contract, where the seller delays in delivering the goods the damages are calculated proportionally after mitigating the losses by the plaintiff. With respect to the time and place for the assessment of the damages, generally, the time and place where the goods ought to have been delivered are the value of the goods to the purchaser of such goods at the time and place they ought to have been delivered, and it is taken into consideration. 

Conclusion 

Damages are viewed as a more advantageous remedy than the other options available for contract breach. For the aim of calculating the damages stemming from the contractual breach, the judicial authorities have used their discretion and adopted jurisprudence from foreign courts. However, due to an increase in the number of instances involving contractual breaches, contracting parties prefer to have arbitration procedures in place for calculating damages in the event that one of the parties breaches the contract in the future. The legitimate basis for awarding damages to the harmed party is to restore the rights and responsibilities that have been infringed as a result of the victim party’s breach of contract. The Supreme Court has interpreted the legislative objective of Sections 73 and 74 on several occasions in order to award damages to the injured/suffered party.

References 


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IBA guidelines for drafting an international arbitration clause

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This article is written by Mayank Jain, pursuing Diploma in US Contract Drafting and Paralegal Studies from LawSikho. The article has been edited by Prashant Baviskar (Associate, LawSikho) and Ruchika Mohapatra (Associate, LawSikho). 

Introduction

The Committee within the International Bar Association (IBA) established task forces to address specific issues and one of the task forces developed IBA guidelines for drafting the international arbitration clause, which was adopted by the IBA Council on 7th October 2010. These guidelines were issued to enact an effective arbitration clause that reflects the fulfilment of parties’ needs and expectations in the arbitration process and the purpose of these guidelines is to assist in-house counsel, arbitration specialists, and business lawyers (ordinarily work in contract drafting) in drafting international arbitration clauses effectively. These guidelines cover and solve all the complexity and problems that arise while drafting the international arbitration clause. In this article, we will be discussing in-depth various guidelines for drafting the international arbitration clause issued by IBA, which will help you to understand and draft the international arbitration clause effectively as per your or your client’s needs and expectations.  

What is international arbitration?

International arbitration is an alternate dispute resolution method to resolve disputes between the parties without the intervention of courts, where the parties are from different states. International arbitration arises from the contract, where parties mutually decide to refer their disputes related to the present contract to the arbitration, as this contract takes place between two parties from two different states, so, under this contract, the arbitration is referred to as the international arbitration and the award passed by an international arbitration called as the foreign award. There are two Conventions i.e., New York Convention and Geneva Convention, many states and jurisdictions are members of any or both Conventions to enforce foreign awards in their states and jurisdictions, which safeguard the parties to enter into contracts with other parties from other states and it also motivates parties to make commercial agreements with other state’s parties. 

Benefits of IBA Guidelines

Today, most parties indicate an arbitration clause in their agreement and want to resolve their disputes through arbitration rather than approaching courts. As the arbitration clause is subject to agreement and parties can lay down their own procedure and rules for the arbitration in the arbitration clause, the clause must be effective and beneficial for both parties. But sometimes it does not happen, due to terrible drafted clauses which may cause additional challenges, cost and delay to the parties and either party may get an unethical advantage or escape from their obligations. So, IBA laid down the guidelines to protect the parties from bad and complex drafted arbitration clauses and to ensure they are effective and easy to use clauses, which reflect parties’ needs and wants. There are some more benefits of IBA guidelines herein mentioned below:

  1. Ensure an effective arbitration clause that considers parties’ needs and desires.
  2. Achieving an unambiguous arbitration clause that embodies parties’ wishes.
  3. Help to understand the best international practice in current situations.
  4. Explain essential elements of an arbitration clause and features of the process, which are open for the parties to determine in advance.
  5. Help the parties to understand what are the choices available and the pitfalls to avoid, in their arbitration clause.
  6. Help to tackle complex drafting issues like multiple parties, multiple dispute resolutions, etc.
  7. Provide a framework and detailed provisions for drafters of international arbitration clauses.

IBA Guidelines are divided into 5 parts as follows

  1. Basic Drafting Guidelines,
  2. Drafting Guidelines for Optional Elements,
  3. Drafting Guidelines for Multi-Tier Dispute Resolution Clauses,
  4. Drafting Guidelines for Multiparty Arbitration Clauses,
  5. Drafting Guidelines for Multi-Contract Arbitration Clauses.

Basic drafting guidelines

This part covers basic guidelines on what to do and what not to do, what to choose or what not to choose, what to add or what not to add in the clause.

  1. Guideline 1: The parties first should decide between institutional and ad hoc arbitration. 

While drafting the clause, the parties should first choose what option they want to proceed with- either institutional arbitration or ad hoc arbitration. 

  • Institutional arbitration is an arbitral institution that provides administrative assistance to the parties while arbitration proceeding against for a fee. Administrative assistance like organising hearings, payments to the arbitrators, handling communications between parties, appointing arbitrator on default of parties, etc. elsewhere, 
  • Ad-hoc arbitration is arbitration in which proceeding is not administratively supported by the third party, parties to the arbitration entirely have to manage all the arrangements of the arbitration proceedings like the appointment of arbitrators or designate a neutral third party to select arbitrators (explained in guideline 6), set out the designation of rules (explained in guideline 2), set out the procedure of arbitration, etc. 

2. Guideline 2: The parties should select a set of arbitration rules and use the model clause recommended for these arbitration rules as a starting point. 

Parties often face issues in the selection of set arbitration rules while drafting arbitration clauses. The set arbitration rules provide the framework for arbitration proceedings for smooth functioning and in absence of set rules for arbitration proceedings may create issues in proceedings.

  • In the case of institution arbitration, set rules for arbitration proceedings always agree with that institution of arbitration.
  • In the case of ad hoc arbitration, parties can select set rules of arbitration developed by different institutions and authorities for ad hoc arbitration i.e., arbitration rules by the United Nations Commission on International Trade Law (‘UNCITRAL’).
  • Once set arbitration rules are selected, the parties should use the module clause in the arbitration agreement or clause that is recommended by the same institute/ author/ authority from where parties selected set arbitration rules and may modify as per parties’ requirement and make sure that elements of the arbitration clause are valid, enforceable and effective.
  • In the case where parties agree to ad hoc arbitration without enacting a set of rules and where parties enter into a two-party contract may use a model clause recommended by IBA guidelines. 

3. Guideline 3: Absent special circumstances, the parties should not attempt to limit the scope of disputes subject to arbitration and should define this scope broadly.

The arbitration clause should be defined in such a way that a huge ambit of disputes covers, not only ‘arising out of’ the contract, but also all disputes ‘in connection with’ (or ‘relating to’) the contract, except special circumstances in which parties want to approach the court. Less scope of arbitration clause invites extra disputes about which matter or dispute subject to arbitration.  

Recommended clause: All disputes arising out of or in connection with this agreement, including any question regarding its existence, validity, or termination, shall be finally resolved by arbitration under [selected arbitration rules]. 

  1. Guideline 4: The parties should select the place of arbitration. This selection should be based on both practical and juridical considerations.

The parties to the arbitration should select the seat of arbitration. The selection of the arbitration’s seat should be based on both practical and juridical considerations. The selection of the seat of arbitration involves various considerations such as parties’ familiarity with the language, arbitrators’ and parties’ involvement in the process, etc. 

Generally, the parties to the arbitration should select the seat of arbitration in cases where the law allows the arbitration and where the court’s decision in arbitration matters supports the arbitration process by giving fair decisions. The seat of arbitration decides the procedural aspects of arbitration such as the arbitrator’s powers. The court can appoint or replace the arbitrators and can also interfere with the process of arbitration. The courts also have jurisdiction over the challenges made against the arbitral award.  And if the arbitral awards are set aside at the seat of arbitration, then that award may not be enforceable. However, in a case where arbitral award is not set aside then also the seat of the arbitration under international treaties may affect the enforceability of the arbitral award. If both the parties are unable to agree on the seat of arbitration then the arbitrators will select the seat of the arbitration.

In ad hoc arbitration if both the parties are unable to appoint the arbitrators and the seat of arbitration too then the arbitration may not take place unless the courts are ready to assist them. So, it is necessary for both parties that they should mention the seat of arbitration in their arbitration clause.

  1. Guideline 5: The parties should specify the number of arbitrators.

The parties should select and mention the number of arbitrators in contracts, mainly the sole or arbitration tribunal of three arbitrators chosen for arbitration. The number of arbitrators has an impact on the duration, overall cost, and quality of arbitration proceedings. A sole arbitrator is very less expensive and less lengthy than an arbitration tribunal, elsewhere an arbitration tribunal of three arbitrators may be better equipped, and may reduce the risk of an unreasonable award. 

In absence of a specified number of arbitrators in the clause, in an arbitration institution, the institute will decide the no. of arbitrators and in ad-hoc arbitration, no. of arbitrators decided as per the set rules of arbitration referred in the arbitration clause, in absence of set rules of arbitration then it is important to specify no. of arbitrators in the clause.

Recommended Clause: There shall be [one or three] arbitrator[s]

  1. Guideline 6: The parties should specify the method of selection and replacement of arbitrators and, in case of ad-hoc arbitration, parties should select an appointing authority.
  • In an arbitration institution, the procedure for appointment and replacement of arbitrators is already mentioned under the set rules of an arbitration institution; the parties may agree on an alternative method by spell out in the arbitration clause.
  • In ad-hoc arbitration, the parties either may already choose any set rules of arbitration which laid down procedure of appointment and replacement of arbitrators, and if not, then it is crucial for the parties to spell out the procedure of appointment and replacement of arbitrators including:
  1. Appointing authority means the third party, which appoints or replaces arbitrators if parties fail to do so. absence of appointing authority in the arbitration clause may affect parties in terms of expense and delay in the proceeding, as parties have to approach the court for appointment and replacement of arbitrators. Appointing authority can be an arbitration institution, court, trade, and professional associate, or any other neutral party; parties have to make sure that the proper and voluntary consent of the selected authority must be there for the performance of its duty.
  2. The time limit for appointment and replacement of arbitrators, the set rules of arbitration ordinarily include a time limit for appointment and replacement, but an absence of set rules or if parties depart themselves from appointment mechanism is set rules, then parties have to make sure time limit must be cover in the arbitration clause, so that time will not be wasted. 

Recommended clause: There shall be three arbitrators, one selected by the initiating party in the request for arbitration, the second selected by the other party within [30] days of receipt of the request for arbitration, and the third, who shall act as [chairperson or presiding arbitrator], selected by the two parties within [30] days of the selection of the second arbitrator. If any arbitrators are not selected within these time periods, the [institution] shall make the selection(s). If the replacement of an arbitrator becomes necessary, a replacement shall be done by the same method(s) as above. 

  1. Guideline 7: The parties should specify the language of the arbitration.

Parties to the contracts may have different languages between them or different languages from that of the place of arbitration. Parties must add the language of the contract and related documents and also add language for the qualification of arbitrators and councils. In absence of determining the language, arbitrators choose language as per their vision which may affect parties in terms of cost and delay. Choosing more than one language creates problems and challenges for arbitrators to conduct arbitration proceedings in two languages, which further may add cost and delay through translation and interpretation in proceedings. One language in an arbitration proceeding is suggested for better results.

Recommended clause: The language of the arbitration shall be […].

  1. Guideline 8: The parties should ordinarily specify the rules of law governing the contract and any subsequent disputes.

In international contracts, parties are from two different countries, which means two different governing bodies, so, parties need to select a rule of law that governs contracts and any subsequent dispute (the ‘substantive law’). The choice of substantive law is mainly referred to in a separate clause then arbitration clause but parties can refer to the clauses together by clearing that the clause serves a dual purpose, e.g., captioning the clause ‘Governing Law and Arbitration [or Dispute Resolution].  

Recommended clause: This agreement is governed by, and all disputes arising under or in connection with this agreement shall be resolved in accordance with, [selected law or rules of law].

Drafting guidelines for optional elements

This section of Guidelines deals with the various options that parties may consider under arbitration clause during negotiation of the arbitration clause, as arbitration is a matter of agreement, parties may amend, alerted arbitration clause as per parties needs and requirements, options under this section is not mandatory, it only depends upon parties that they want to add or not.

  • Option 1: The authority of the arbitral tribunal and the courts with respect to provisional and conservatory measures.

This option deals with the authority to order provisional and conservatory measures, either arbitration tribunal or court or both have the authority. it is less important to spell out in the arbitration clause, absence in the arbitration clause ordinarily authorised both the arbitration tribunal and court to order provisional and conservatory measures. The authority of arbitration tribunal arises from arbitration rules and arbitration laws, elsewhere the authority of court only arises from arbitration law.

Recommended clause: Except as otherwise specifically limited in this agreement, the arbitral tribunal shall have the power to grant any remedy or relief that it deems appropriate, whether provisional or final, including but not limited to conservatory relief and injunctive relief, and any such measures ordered by the arbitral tribunal shall, to the extent permitted by applicable law, be deemed to be a final award on the subject matter of the measures and shall be enforceable as such.     

  • Option 2: Document production.

This option deals with what type of documents should be produced during international arbitration proceedings, as documents and exchange of information vary from case to case and arbitrator to arbitrator. Mainly, parties have three options regarding document production that is:

  1. Not mentioned anything regarding document production, so by default parties rely on provisions laid down under arbitration law.
  2. IBA developed set rules on taking evidence in international arbitration, which address the production of both paper documents and electronically stored information, parties may adopt IBA rules.
  3. Parties may create their own standards and cover extensive documents that shall be produced by parties that have an impact on the dispute.

Parties may face difficulties in arbitration in absence of rules regarding exemptions given to the parties for not producing documents due to privileges under the arbitration clause. 

Recommended clause: [In addition to the authority conferred upon the arbitral tribunal by the [arbitration rules]], the arbitral tribunal shall have the authority to order production of documents [in accordance with] [taking guidance from] the IBA Rules on the Taking of Evidence in International Arbitration [as current on the date of this agreement/the commencement of the arbitration].

All contentions that a document or communication is privileged and, as such, exempt from production in the arbitration, shall be resolved by the arbitral tribunal in accordance with Article 9 of the IBA Rules on the Taking of Evidence in International Arbitration.

  • Option 3: Confidentiality issues.

To keep the information confidential in arbitration proceedings by parties is not mandatory, and the same is not assumed by parties without expressly indicated in their arbitration clause. While arbitration is private, it depends upon the parties, what they want to choose for their contract: which arbitration laws and arbitration rules are applied. Few national laws or arbitration rules enforce confidential obligations on the parties, elsewhere general duty is recognised as a subject of exceptions.

Parties have to keep in mind while inserting confidential information in the arbitration clause that the point doesn’t avoid absolute requirements, which means not restrict to the disclosure of confidential information which required by law, to protect or pursue a legal right or to enforce or challenge an award in subsequent judicial proceedings and also make sure exception persons (witness and experts) on which parties are may disclose confidential information.

Recommended clause: The existence and content of the arbitral proceedings and any rulings or award shall be kept confidential by the parties and members of the arbitral tribunal except (i) to the extent that disclosure may be required of a party to fulfil a legal duty, protect or pursue a legal right, or enforce or challenge an award in bona fide legal proceedings before a state court or other judicial authority, (ii) with the consent of all parties, (iii) where needed for the preparation or presentation of a claim or defence in this arbitration, (iv) where such information is already in the public domain other than as a result of a breach of this clause, or (v) by order of the arbitral tribunal upon application of a party.

  • Option 4: Allocation of costs and fees.

Cost includes arbitrators’ fees and expenses and, if applicable, institutional fees, and lawyers’ fees in international arbitration. It is tough to predict how the arbitral tribunal will allocate these costs and fees at the end of proceedings, it creates uncertainty for the parties to calculate costs and fees on their part. Parties may reduce this uncertainty by addressing this issue in their arbitration clause (such provisions may not be enforceable in certain jurisdictions). Parties have some options which they can choose for their arbitration clause:

  1. Parties hand over the powers to the arbitrators that they can allocate costs and fees as they see fit.
  2. Parties may provide that; arbitrators can’t allocate costs and fees.
  3. Arbitrators try to ensure that costs and fees are allocated to the ‘winner’ or the ‘prevailing party’ on the merits, or that the arbitrators are to allocate costs and fees in proportion to success or failure. Parties may make sure to avoid language (“shall”) while drafting such a clause, as it is difficult to identify the “winner” or the “prevailing party”. 

Recommended clause:

  1. The following clause provides Powers to the arbitrators to allocate cost and fees: The arbitral tribunal may include in its award an allocation to any party of such costs and expenses, including lawyers’ fees [and costs and expenses of management, in-house counsel, experts, and witnesses], as the arbitral tribunal shall deem reasonable.
  2. The following clause provides for the allocation of costs and fees to the ‘prevailing’ party: The arbitral tribunal may award its costs and expenses, including lawyers’ fees, to the prevailing party, if any and as determined by the arbitral tribunal in its discretion.
  3. The following clause can be used to ensure that the arbitrators do not allocate costs and fees: All costs and expenses of the arbitral tribunal [and of the arbitral institution] shall be borne by the parties equally. Each party shall bear all costs and expenses (including its own counsel, experts, and witnesses) involved in preparing and presenting its case.        

  • Option 5: Qualifications required of arbitrators.
  • The benefits of arbitration are that the parties can choose arbitrators with expertise or knowledge relevant to their dispute. But usually, it is not suggested to the parties to add qualifications of arbitrators in their arbitration clause, as parties may not predict that expertise is required at the time of dispute or not, and it also reduces the availability of the arbitrators. If the parties want to add qualification of arbitrators in the arbitration clause, then parties have to avoid overly specific requirements, so that parties do not face problems to identify individuals, who meet the specified qualification mentioned under the arbitration clause and are available to act as arbitrators.  

    Recommended clause: [Each arbitrator] [The presiding arbitrator] shall be [a lawyer/an accountant].

    Or,

    [Each arbitrator] [The presiding arbitrator] shall have experience in [specific industry].

    Or,

    [The arbitrators] [The presiding arbitrator] shall not be of the same nationality as any of the parties.

    • Option 6: Time limits.

    Parties may provide a fixed period of time initiates from the commencement of arbitration to pass an award to save time and cost, this process is also known as fast-tracking, but it also creates problems as parties don’t know what type of issue arises under their contract and how much it takes time to resolve. If the award is not passed within a defined period, it may be unenforceable or may engage in unnecessary challenges. Parties can sort out this problem under their clause by allowing the tribunal to extend the time limits to keep off the risk of an unenforceable award.

    Recommended clause: The award shall be rendered within […] months of the appointment of [the sole arbitrator] [the chairperson], unless the arbitral tribunal determines, in a reasoned decision, that the interest of justice or the complexity of the case requires that such limit be extended.      

    • Option 7: Finality of arbitration

    The benefits of choosing arbitration are that the arbitral award is final and not subject to appeal. In many jurisdictions, an award can be challenged only based on lack of jurisdiction, unfairness, or serious procedural defects, but not on the merits. Many sets of rules of arbitration reinforce the finality of arbitration and the parties waive any recourse against the award. That the parties should specify that the award is final and not subject to recourse when the arbitration clause does not contain arbitration rules or where the rules are incorporated but not contain the finality of arbitration and waiver of recourse. It is advisable to repeat the finality of arbitration and waiver of recourse in the arbitration clause even if it has already been mentioned under the rules of arbitration. The parties should analyze the law of the seat of arbitration to decide the ambit of what is being waived and the language needed under the lex arbitri.

    Recommended clause: Any award of the arbitral tribunal shall be final and binding on the parties. The parties undertake to comply fully and promptly with any award without delay and shall be deemed to have waived their right to any form of recourse insofar as such waiver can validly be made.

    Drafting guidelines for multi-tier dispute resolution clauses

    Multi-tier dispute resolution clauses are those clauses that refer the disputes to the alternate mechanism of dispute resolution (other than arbitration) like negotiation, mediation, and conciliation, as a primary mechanism, after that the dispute will be referred to the arbitration, as a secondary mechanism of dispute resolution. This section deals with the challenges while drafting a multi-tier clause in the contract.    

    • Multi-Tier Guideline 1: The clause should specify a period of time for negotiation or mediation, triggered by a defined and undisputable event (i.e., a written request), after which either party can resort to arbitration. 

    The parties should make a clause in the contract which specifies the time period for negotiation or mediation as only after the expiry of the specified time period parties can go for the arbitration and that time period should be short. While determining the specific period; Parties should be informed that starting of mediation or negotiation may not suspend the specified time period. The specified time period should be defined and undeniable.

    • Multi-Tier Guideline 2: The clause should avoid the trap of rendering arbitration permissive, not mandatory. 

    While drafting multi-tier dispute resolution clauses, parties unintentionally leave ambiguity on their intention to refer their disputes to arbitration, that disputes which are not resolved by mediation or negotiation. parties should lay down a clear intention to refer their pending disputes to arbitration.

    • Multi-Tier Guideline 3: The clause should define the disputes to be submitted to negotiation or mediation and to arbitration in identical term

    The parties should define the disputes which are to be submitted to negotiation or mediation and the disputes which are to be submitted to arbitration as a first step. If the clause does not define whether disputes are submitted to negotiation/mediation or to arbitration then such uncertainty recommends the disputes to arbitration as the first step, not to negotiation or mediation. The parties should specify this in their arbitration clause and if parties want to submit the dispute to the arbitration first then they should also specify this in the arbitration clause.

    Drafting guidelines for multiparty arbitration clauses 

    Sometimes more than two parties are involved in international contracts, parties may face difficulties in drafting a clause referring to the multiplicity of parties. Parties cannot always depend upon clauses given by arbitration institutes, as these are usually drafted for two parties. For multiparty arbitration clauses need specialized advice that should generally be sought to draft.    

    1. Multiparty Guideline 1: The clause should address the consequences of the multiplicity of parties for the appointment of the arbitral tribunal.

    In a contract of multiple parties, it is not feasible to lay down that “each party” appoints an arbitrator, which may create problems in the appointment of arbitrators. So, parties can solve this problem in both situations (sole arbitrator and three arbitrators) by laying down that the sole arbitrator (or three arbitrators, as per the situation) is to be appointed jointly by the parties or, in absence of agreement, by the institution or appointing authority. Parties may refer to recommended clauses mentioned under IBA guidelines.    

    2. Multiparty Guideline 2: The clause should address the procedural complexities (intervention, joinder) arising from the multiplicity of parties.

    There are numerous procedural complexities i.e., intervention and joinder in the multiparty contracts. Intervention means a contracting party, who is not a party to an arbitration initiated under the clause but may wish to intervene in the arbitration proceedings. and joinder means a contracting party, who is a respondent under arbitration proceedings, may wish to add another contracting party that has not been mentioned as a respondent. An arbitration proceeding would not be vitiated if parties failed to address procedural complexities, but such clauses create the possibilities of overlapping proceedings, conflicting decisions, and associated delays, costs, and uncertainties. In a general rule, the clause lay down that the notice of any proceedings initiated under the clause will be given to all contracting parties regardless, whether the contracting party is mentioned as a respondent or not, and the clause also provides the time period after the notice for intervention or join by any contracting parties in the proceedings and during the time period, no arbitrator should be appointed. Parties may refer to recommended clauses mentioned under IBA guidelines. 

    Drafting guidelines for multi-contract arbitration clauses

    This section deals with the drafting of an arbitration clause in multi-contract, where the parties incorporate several related contracts related to one single international transaction. 

    1. Multi-Contract Guideline 1: The arbitration clauses in the related contracts should be compatible.

    The parties need to avoid setting out different dispute resolution mechanisms in their related contracts, otherwise, arbitrators appointed in one contract may not have jurisdiction to consider a dispute that raises questions about related contracts, which invites parallel proceedings. parties may avoid parallel proceedings by establishing a stand-alone dispute resolution protocol, which should be signed by all the parties and then embody by reference in all related contracts. In case parties face problems in concluding such a protocol, then the parties need to ensure that the arbitration clauses in the related contract are complementary or identical to each other. It needs to define the same substantive law, set of rules, languages, number of arbitrators, and place of arbitration in their arbitration clause. The parties also mentioned under their arbitration clause that a tribunal appointed under one contract has jurisdiction to consider and determine issues related to the other related contracts. 

    Recommended clause: The parties agree that an arbitral tribunal appointed hereunder or under [the related agreement(s)] may exercise jurisdiction with respect to both this agreement and [the related agreement(s)]

    2. Multi-Contract Guideline 2: The parties should consider whether to provide for consolidation of arbitral proceedings commenced under the related contracts

    Sometimes several arbitrations may take place in related contracts. In some cases, parties to the arbitration are in the opinion of a single consolidated arbitration as consolidated arbitration is cost-effective. However, sometimes parties are not in the favour of consolidated arbitration; they want separate arbitration proceedings for each dispute that arose under related contracts as parties might be taught that separate arbitration is more effective and efficient than a single consolidated arbitration.

    If both the parties wish to have single consolidated arbitration proceedings for disputes then they should specify that in the arbitration clause. The parties should also describe the procedure for consolidating arbitration. Where the contract involves more than two parties then specialized advice is essential.

    Conclusion

    These guidelines are very helpful for the parties, attorneys, and drafters of an international arbitration clause to make an effective arbitration clause that reflects the fulfilment of parties’ needs and expectations in the arbitration process and reduces difficulties, unnecessary cost, and time to the parties. These guidelines provide model arbitration clauses which majorly include all issues and problems which may arise between the parties. IBA guidelines also resolve problems related to different situations and different needs of the parties and also provide model clauses that address different situations and needs of the parties. I would like to suggest before considering international arbitration in your contract or drafting an international arbitration clause you should read IBA guidelines which give you an idea about different problems and how you can resolve it, which you do not know initially but are also important to address in your contract to reduce future complexities between parties. IBA guidelines guide you, the best way to address the international arbitration clause in your contract and help you to understand points you should keep in your mind while drafting an international arbitration clause. These guidelines provide parties with both available choices and the pitfalls to avoid. Members of the IBA task forces are accountable for the IBA arbitration clause guidelines, which were adopted by a resolution of the IBA Council on 7 October 2010.

    References

    1. https://www.ibanet.org/MediaHandler?id=D94438EB-2ED5-4CEA-9722-7A0C9281F2F2
    2. https://www.ibanet.org/resources

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    China enters a new era of personal information protection

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    Image Source: https://rb.gy/c8fun6

    This article is written by Gayathri, pursuing Diploma in Cyber Law, FinTech Regulations, and Technology Contracts from LawSikho. The article has been edited by Prashant Baviskar (Associate, LawSikho) and Smriti Katiyar (Associate, LawSikho).

    Introduction

    Privacy of an individual or of the companies is important today as personal data passes through borderless networks due to the use and sharing of personal information to third parties without notice or consent of consumers. As of January 2021, with 130 jurisdictions – 128 out of 194 countries have adopted the legislation to secure the protection of data and privacy in which some countries have adopted sectorial or omnibus coverage having inconsistent regulation (UNCTAD, 2021) and (i-Sight, 2021). Figure 1 depicts the world map which has adopted the data protection and privacy legislation.

    On August 20, 2021, The National People’s Congress (NPC), adopted the first Chinese comprehensive data protection law called Personal Information Protection Law (PIPL) both in China and Hongkong. The law will be effective from November 1, 2021, and works together with existing laws – the Cybersecurity Law (“CSL”) and the Data Security Law (“DSL”). Many companies in China are already coordinating with relevant enforcement agencies for complying as the law enhances the scrutiny over the Tech sector by the government. (Hunter Dorwart; Gabriela Zanfir Fortuna; Clarisse Girot, 2021).

    According to China’s official news agency, scrutiny increases on Tech giants like Alibaba, Tencent, the taxi-hailing company – Didi and Foreign companies in China, etc., by prohibiting the illegal collection, usage, processing, transmission, disclosing and trading of people’s personal data with others. The consent of the individual should be obtained before processing of their sensitive personal information e.g., biometrics, medical and health, financial accounts, their whereabouts etc., “pushing, publication, data transferring or business marketing with the information of individuals through automated decision-making, personal information processing should provide the option of not targeting the personal characteristics or offering ways to reject the same. 

    Figure 1: Countries adopting the Data Protection and Privacy Legislation as of January 2021

    With the adoption of the new Protection Law in China, why do some companies feel that it has an impact on the global effect? This can be understood from the provisions in PIPL regarding; Scope of -Personal Information- Sensitive Personal Information and Processor, Processing, Special Processing, Territory and cross border transfer provisions, The rights, obligations and Enforcements, and understanding the Pros and Cons of law.  

    Scope of personal information : sensitive personal information and processor

    For the first time, the PIPL introduces the concept of “personal information processor”, which refers to the organizations and individuals who decide independently on the processing methods and the purpose of the personal information. “Personal information processing” is defined as inclusion, but not limited to, the collection, storing, using, processing, transmitting, provisioning, disclosing, and deleting personal information. In addition to ‘personal information’ that is as defined in the CSL, the PIPL defines “sensitive personal information” – the leakage or illegal use of which could easily lead to the violation of the personal dignity of a natural person or harm to person or property safety. This is the first national law in the PRC that defines sensitive personal information and sets out relevant obligations on processors handling information. 

    Now as per the PIPL, (a) “Personal Information” is all information that identifies or is identifiable of persons either electronically or otherwise recorded (such as videos, voice or image data), and excluding anonymised information. The “anonymisation” is different from “de-identification”, as it is still  Personal Information. (b) “Processing” is the collecting, storing, using, processing, transmitting, provisioning, disclosing or leaking and or deleting Personal Information. and (c) the “Personal Information Processor” (PIP) means the organisation or person processing Personal Information or who can determine the purpose and the method of processing. 

    Processing legal aspects in PIPL

    Prior to the adoption of PIPL, CSL’s – “notification and consent” was only the legal basis for processing personal information. The PIPL widens its ground based on data minimisation principles where,

    In addition to the above, the Processor has to understand – where to, 

    PIPL also sets the additional requirements for the processor to notify and take the consent of the individual involved regarding where and when the,

    PIPL also sets the Obligations and Responsibilities on all the processors that include:

    Special processing : legal aspects in PIPL

    PIPL defines the responsibilities and the obligations for the special processing activities, which are classified as:

    The law does not specify whether joint and several liabilities would arise in the event of violation by either party.

    Territory and cross border transfer provisions

    The PIPL applies within the territory of the PRC. In addition to this, it is applicable outside the territory of the PRC provided the:

    In addition, one of the following conditions is to be satisfied:

    The overall Requirements for Cross-Border transfer of information are depicted in Table-1 below


    Table 1 – Requirements for Cross-Border Transfer of information

    The rights, obligations and enforcements as per Personal Information Protection Law (PIPL)

    The rights of individuals

    Various individual rights recognised by PIPL in relation to their personal information are listed below. The individuals have the right to:

    The obligations of processors

    The major obligations of processors are:

    The enforcement 

    The obligations and penalties enforced when the Personal Information processing is in violation or noncompliance with the PIPL are:

    If the breach is particularly egregious, in addition to the penalties listed above, the PIP and DPO or other directly liable individuals may be subject to additional penalties, including:

    Understanding the pros and the cons of PPIL

    (https://www.easyllama.com/blog/pros-and-cons-of-privacy-laws) (EasylLama, 2021)

    The pros


    The cons

    Conclusions

    China focuses on Personal Information Protection with the new law PIPL which will be in force from November 2021. This law strengthens the individual’s autonomy and rights by keeping regulators’ eagle’s eyes on PIP’s.  

    As of date the social media and internet service providers are holding and using a lot of personal data. The use of it will be affected due to the PIPLs implementation. 

    Convergence of international data privacy regulations and adoption of some favoured international principles are seen in PIPL. Hence the processors need to be cautious in the data mining and the distribution process due to the restrictions in the new law. 

    On one hand, the act protects the individual’s rights from predatory online behaviours, on the other side, the potential of high exploitation and abuse due to loose and unstreamed clauses in law can be seen along with the requirement of heavy investments for data-mining companies. 

    Abbreviations used in this Article
      
    ADMAutomated Decision Making
    CACCyberspace Administration of China
    CSLCybersecurity Law 
    DSLData Security Law 
    NPCNational People’s Congress 
    PIPPersonal Information Processor
    PIPLPersonal Information Protection Law 
    PRCPeople’s Republic of China
    RMBRen Min Bi – Chinese Currency

    References


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    Evaluating existing cyber crime policies: do they suffice in today’s world

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    Cybercrime

    This article has been written by Neha Navneet Patil, pursuing a Diploma in Cyber Law, FinTech Regulations and Technology Contracts from LawSikho. It has been edited by Prashant Baviskar (Associate, LawSikho) Smriti Katiyar (Associate, LawSikho).

    Introduction

    Due to social distancing conventions and countrywide lockdowns, the COVID-19 pandemic has inevitably resulted in an increase in the usage of digital technology. People throughout the world have adapted to the changing work culture and lifestyle. A world without the internet is now unthinkable. The internet, which connects billions of people across the world, is a key component of the modern information society. There were 4.66 billion active internet users globally in January 2021, accounting for 59.5 percent of the global population.[1]

    In recent years, cyber crimes have increased due to the worldwide pandemic and growing digitalization. According to experts speaking at Pursuit 2021, an event on cybersecurity hosted by the Internet and Mobile Association of India, the number of breaches in India surged by 2000% during the epidemic (IMAI). Dr.Gulshan Rai, India’s first Cybersecurity Coordinator and Distinguished Fellow at the Observer Research Foundation (ORF), has cautioned that a rise in cybercrime or “cyberwar” has started to affect the business as well. Meanwhile, the National Cyber Crime Reporting Portal of the Ministry of Home Affairs claimed to have received over four lakh cyber threat reports in less than a year. Financial fraud accounts for around half of the instances. According to a recent analysis by global VPN service provider Nord VPN, India ranked 19th out of 21 nations in the National Privacy Test, indicating that it is at the bottom of a worldwide tally of countries with strong online security practices and cyber hygiene.[2]

    Statutes on cybercrime

    Many sovereign countries across the globe have laws in place for preventing, monitoring, criminalizing, investigating, and punishing cybercrime, and are working to establish legislation to address the threat posed by cybercrime:

    1. In 1997, the G8 released a Ministers’ Communiqué outlining an action plan and principles to combat cybercrime and protect data and systems from unauthorized access. It also stated that all law enforcement personnel must be trained and equipped to deal with cybercrime and that all member countries must have a point of contact available 24 hours a day, seven days a week.
    2. In 1990, the United Nations (UN) General Assembly passed a resolution on computer crime law. It also passed a resolution in 2000 to combat illegal misuse of information technology, and a second resolution in 2002 to oppose criminal misuse of information technology.
    3. The International Telecommunication Union (ITU), which is responsible for telecommunications and cyber security issues at the United Nations, issued the Geneva Declaration of Principles and Plan of Action in 2003, highlighting the importance of measures in the fight against cybercrime, and in 2005, the Tunis Commitment and Tunis Agenda for the Information Society.
    4. In 2001, the Council of Europe (CoE), which has 47 European member states, took the initiative by establishing the first International Convention on Cybercrime (Budapest Convention), which was developed in collaboration with the United States, Canada, and Japan and signed by 46 member states but ratified by only 25. The Convention, also known as the Budapest Convention, wsthe first international convention addressing crimes perpetrated over the Internet and other computer networks, focusing on copyright infringements, computer-related fraud, child pornography, and network security violations. It also includes a number of authorities and processes, such as computer network search and interception.
    5. The Asia-Pacific Economic Cooperation (APEC) published the Cyber Security Strategy  in August 2002, which is included in the Shanghai Declaration, as part of regional attempts to stop the tide of cybercrime. The aforementioned Cyber security plan focuses on six critical areas for member economies to collaborate on: legal changes, information exchange and cooperation initiatives, security and technological guidelines, public awareness, training and education, and wireless security, to name a few.
    6. In 2002, the Organization for Economic Co-operation and Development (OECD) issued “Guidelines for the Security of Information Systems and Networks: Towards a Culture of Security,” which included 34 nations.
    7. In 2002, the Commonwealth Nations submitted a model law written in line with the Convention on Cybercrime (International Telecommunication Union, 2009), which establishes a legal framework for harmonizing legislation throughout the Commonwealth and facilitating international collaboration.
    8. The Economic Community of West African Nations (ECOWAS), which consists of fifteen member states, enacted the Directive on Combating Cybercrime in ECOWAS in 2009, which establishes a legal framework for member states that encompasses both substantive and procedural criminal law.[3]

    World and cybersecurity

    The United States Of America

    In terms of cybercrime, the United States leads the globe. It has been the world’s most impacted country in terms of internet-related crimes, accounting for 23% of global cybercrime. It is, nevertheless, the country with the most stringent cyber regulations. Approximately 60% of cyber cases result in convictions and jail terms. The Computer Fraud and Abuse Act, enacted in 1984, was the first effective statute against such offences (CFAA). The statute, however, did not include a provision for harmful code that was used to intentionally harm equipment. Viruses, to put it another way.

    The National Information Infrastructure Protection Statute (NIIA) was proposed to strengthen the act. It was repealed as the earlier espionage rules made it unlawful to access computer data without permission. Beyond these regulations, the United States has created rigorous definitions and penalties for cybercrime. In cyberbullying, punishments range from expulsion to criminal misdemeanour to felony. Identity theft carries a punishment of 15 years in jail and penalties. Hacking and computer property damage carry a penalty of six to twenty years in jail. The United States has a stranglehold on cyber legislation. 

    The United Arab Emirates

    Among the Middle Eastern countries, the UAE has the most extensive and effective cybercrime legislation. The UAE is only exposed to 5% of the world’s cyber dangers. However, being the Gulf Region’s financial hub, it has robust rules in place to safeguard its companies from assaults.

    Each violation, as well as the penalty connected with it, has been precisely specified by the country. For the basic offence of internet stalking and harassment, the maximum penalty is two years in jail or a fine of 250-000-500,000 AED (Arab Emirates Dirham). Forgery can result in a sentence of up to two years in jail and a fine of up to two million AED. For cyber terrorism, he was sentenced to life in jail. For any cyber danger, the UAE has clear and strict regulations in place.

    Kingdom Of Saudi Arabia

    In comparison to the rest of the globe, Saudi Arabia has a low rate of cybercrime. These offences, on the other hand, have gradually increased over time. Pornography accounts for 76% of this, costing the country around 6.5 million dollars in 2016. While the Kingdom of Saudi Arabia has some laws in existence, most other cyber incidents, such as cyber bullying, piracy, and signature fabrication, remain undefined.

    Hacking, unauthorized data access, pornography, denial of service, and cyber terrorism are the only regulations in force. For cyber terrorism, the penalties range from a year in prison and a fine of 100,000 Riyals to a maximum of 10 years in prison and a fine of 5,000,000 Riyals.

    China

    In terms of cyber regulations, China has traditionally set the standard. While the Chinese government’s regulations may look authoritarian to outsiders, they are vital forthe country’s survival. The State Council formalized the ‘Computer Information Network and Internet Security, Protection, and Management Regulations‘ in 1997, which recognized and punished cybercrime. Acts like hacking, destroying data, or developing and spreading computer viruses are punishable by a minimum of three years in jail. In more serious situations involving sensitive data, the punishment is raised dramatically.

    The Chinese government has complete and total control over the internet within its boundaries. As a result, China has blocked several of the world’s most popular websites. Take Google, for example. While this may seem absurd to us, it has proven to be advantageous to China’s domestic e-commerce and digital businesses.

    The Cybersecurity Law, which took effect in June, is the most recent addition to China’s legal framework. All international firms must keep their vital data of use within the country, according to the legislation. In addition, the government will be able to perform checks on the company’s networks and data.[4]

    India and cybersecurity 

    To prevent such crimes and speed up investigations, the central government has made efforts to raise awareness about cybercrime, issue alerts/advisories, develop capacity/train law enforcement personnel/prosecutors/judicial officials, improve cyber forensics capabilities, and so on. Complainants can make complaints against Child Pornography/Child Sexual Abuse Material, rape/gang rape imageries, or sexually explicit information using the government’s online cybercrime reporting site, www.cybercrime.gov.in. The Indian Cyber Crime Coordination Centre (I4C) has been established by the Central Government to address matters connected to cybercrime in the country in a comprehensive and coordinated way. .According to the Indian Constitution, ‘Police’ and ‘Public Order’ are state subjects. Through their law enforcement apparatus, states/UTs are largely responsible for the prevention, detection, investigation, and punishment of crimes. Law enforcement agencies take legal action against cybercriminals in accordance with the law.

    Policies enacted by the Indian government to enhance the country’s cyber security include:

    • The Information Technology Act of 2000 is now the country’s principal statute for dealing with cybercrime and digital trade. The Act was initially drafted in 2000, then amended in 2008, and finally implemented a year later. The Information Technology (Amendment) Bill of 2008 made changes to a number of provisions pertaining to digital data, electronic devices, and cybercrime.
    • Sections 43 (data protection), section 66 (hacking), section 66A (measures against sending offensive messages), section 66B (punishment for illegally possessing stolen computer resources or communication devices), section 67 (protection against unauthorised access to data), 69 (cyberterrorism), section 70 (securing access or attempting to secure access to a protected system), and section 72 (privacy and confidentiality) of the Information Technology Amendment Act of 2008, among others, govern cybersecurity.
    • The government has adopted a framework to improve cyber security in India, with the National Security Council Secretariat serving as the main institution.
    • The National Cyber Security Policy of 2013 was created to ensure that India’s residents and companies have access to a safe and resilient cyberspace. The policy, according to the Ministry of Electronics and Information Technology, aims to protect information and information infrastructure in cyberspace, build capabilities to prevent and respond to cyber threats, reduce vulnerabilities, and minimise the damage caused by cyber incidents by combining institutional structures, people, processes, technology, and cooperation.
    • The National Technical Research Organization is the primary organisation in charge of safeguarding national critical infrastructure and responding to all cybersecurity events in the country’s key sectors.
    • In addition, the Indian Computer Emergency Response Team (CERT-In) is in charge of incident response, which includes cybersecurity analyses, predictions, and warnings.
    • The Ministry of Home Affairs (MHA) has issued advisories to states and union territories in the nation on how to combat cybercrime, which are published on the Ministry’s website.
    • The Cybercrime Prevention against Women and Children Scheme is being implemented by the Ministry of Home Affairs with the goal to prevent and reduce cybercrime against women and children. This plan would enact tighter regulations and rules, as well as run programmes to raise knowledge about cyber dangers and how to deal with them.[5]

    Conclusion

    The efforts made through legislations at regional, national and international, levels were discussed; without prejudice to the effectiveness of the existing laws in place to combat cybercrime. 

    The lack of a global consensus on the types of conduct that constitute a cybercrime; the lack of a global consensus on the legal definition of criminal conduct; the inadequacy of legal powers for investigation and access to computer systems, including the inapplicability of seizure powers to computerised data; the lack of uniformity between national procedural laws concerning cybercrime investigations; and the lack of extradition are Challenges to framing and enforcing  laws related to Cybercrimes.

    Experts think that combining AI-based cybersecurity solutions with trained humans will be the most effective method to deal with the increasing threat scenario. Developing and least developed nations must think and act quickly, else, there will be a significant digital divide between developed and developing countries. Through education and training, the government should begin by assisting its citizens in becoming more aware of the security problems surrounding information technology. Cultural differences and selfish gain have no place in this world. Adopting proper legislation and enforcing cyber laws, as well as a strong institutional structure and worldwide collaboration, are all essential for cyber security. An R&D department, for example, would almost certainly encourage innovation, making everything seem conceivable.

    Bibliography 

    [1] Statista. (2021, September 10). Worldwide digital population as of January 2021. Retrieved October 19, 2021, from https://www.statista.com/statistics/617136/digital-population-worldwide/

    [2] CXOtoday News Desk. (2021, July 19). 2000% Increase in Cyber Security Breaches during Covid-19 Pandemic. CXOToday.Com. Retrieved October 19, 2021, from https://www.cxotoday.com/news-analysis/2000-increase-in-cyber-security-breaches-during-covid-19-pandemic/

    [3] Ajayi, E. F. G. (2016). Challenges to enforcement of cyber-crimes laws and policy. Journal of Internet and Information Systems, 6(1), 1–12. https://doi.org/10.5897/jiis2015.0089 

    [4] Nazir, S. (2017, July 24). Cyber Laws: What Have Different Countries Done To Prevent Cyber Crime? UnBumf. Retrieved October 19, 2021, from https://unbumf.com/cyber-laws-what-have-different-countries-done-to-prevent-cyber-crime/

    [5] Cyber Crime And Policies To Address Security Concerns – Groups Master. (2021). Groups Master. Retrieved October 19, 2021, from https://groupsmaster.com/cyber-crime-and-policies-to-address-security-concerns/


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    Concept of contingency fees of advocates : cross-jurisdictional analysis of contingency fee

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    This article is written by Anushka Singhal, from Symbiosis Law School, Noida. In this article, she discusses the concept of contingent fees and their scenario in various jurisdictions. 

    Introduction

    “No win, no fee.” This is exactly the concept of contingent fees in litigation. In a contingency fees agreement, the advocate is paid only if he wins the lawsuit otherwise he gets nothing. This concept benefits those who are not able to pay for their suits. This concept is widely used in tort litigation throughout the globe but is not used in criminal cases. Civil cases involve only money while in criminal cases, life is at stake. Therefore, contingent fees contracts are only made for civil cases. Let us discuss how this concept is used throughout the world.  

    Types of contingency fees agreements

    There are as many as four types of contingency fees agreements. In all the four types, only one thing is common i.e. if there is no win then there are no fees. Apart from this commonality, these agreements differ in other instances. Following are the four types of contingency fees

    Speculative fees

    Here the lawyer charges his fee according to the number of hours he worked for the case. If an advocate wins the case, he will charge his hourly fees.

    Conditional fees

    This type of fee is also called the ‘uplift fees’. In this form of the fee agreement, a lawyer adds a certain percentage premium on winning the case.  So, in this type of agreement, a lawyer would get his normal hourly fees plus a certain percentage of ‘uplift’. 

    Percentage contingency fees

    In this type of agreement, the lawyer retains an agreed-upon portion, usually a third, of the money recovered by his client.

    Agreed contingent fees

    Here, an already agreed-upon amount is paid to the advocate after successfully winning the case. It is not necessary that the contingent fees agreements fit in either of these water-tight compartments. An agreement can be a hybrid of these four types. Various combinations can be made and each of them has its own advantages and disadvantages. 

    Contingency fees agreements in different jurisdictions

    India 

    In India, an advocate-client relationship is considered to be a relationship of ‘uberrimae fidei’ i.e. of ‘utmost good faith.’ A client relies solely on the expertise of his advocate. On the other hand, the profession of an advocate is one of the noblest professions and thus the lawyers try to do their best for their clients. The conduct of the advocates in India is controlled by the Bar Council of India and by the Advocates Act, 1961. In India, the Bar Council of India prohibits advocates from accepting contingency fees. Rule 20 of Section II, Part VI of the Bar Council Rules lays down that ‘An advocate shall not stipulate for a fee contingent on the results of litigation or agree to share the proceeds thereof.’ These contracts are said to be against public policy and thus under Section 23 of the Indian Contract Act, 1872 they are valid. 

    Ganga Ram v. Devi Dasi (1907) is a landmark judgment on the concept of contingency fees. The Court held contingent fees void and said that such a fee was against the concept of public policy and went against the ethical conduct of the lawyers. The case of V.C. Rangadurai v. D. Gopalan,(1978) aptly explains the need for ethical behaviour among lawyers. A disciplinary suspension of a lawyer upon professional misconduct was held valid by the Court. The Hon’ble Court said that the freedom of profession under Article 19 of the Indian Constitution and the Advocates Act does not only assure an income to an advocate but also comes with “a commitment to the people whose hunger, privation and hamstring human rights need the advocacy of the profession to change the existing order into a human tomorrow.” 

    In the case of Kathu Fairam Gujar v. Vishvanath Ganesh Javadekar (1925),  the Hon’ble Court held that giving an advocate a part of the property as a reward upon winning the case is against the public policy.  Therefore, Indian advocates cannot enter into contingent agreements. But as per the case of Jayaswal Ashoka Infrastructures v. Pansare Lawad Sallagar (2019), a person not admitted as an advocate under the Advocates Act, 1961 and representing his client as a ‘counsel’ can charge contingency fees. 

    United States of America 

    In the United States of America, Contingency Fee Agreements (CFA)  are considered to be valid. In the middle centuries, such agreements were considered void but as time passed, they became a ‘necessary evil’. In 1858, there was a case in which one of the High Courts said, “ what was illegal and disreputable has now become lawful if not respectable.” A lawyer can ask for money only upon successfully winning the lawsuit if he has entered into a contingency fees agreement. The CFA’s have been widely used in America since the nineteenth century and often they are considered as the ‘key to the courthouse door’ as they enable the poor litigants to fight for their cause. These contracts were traditionally used for employment and personal injury litigations but now they are being widely utilized in cases related to Intellectual Property Rights (IPR) and commercial disputes. Not only the poor but the big firms are also entering into CFA’S. 

    For example, Willey Rein LLP, a law firm, got $ 200 million for a case that they fought on a contingent basis for the plaintiff against Research Motions Ltd. Similarly a firm called Kirkland and Ellis LLP received $70 million for a contingent fee agreement.  The American Bar Association (ABA) has promulgated the Modern Rules of Professional Conduct, 1983. Rule 1.5 of the same  lays down that an advocate should charge a ‘reasonable fee.’ Therefore, a lawyer can enter into a contingent fee agreement but he has to ensure that his fee is reasonable. 

    Judicial control of contingent fee

    America is one of the best markets for CFA’s. With a number of contingent contracts being entered into each day, there arose a need for regulation. The American Courts have tried to control this area with the help of various approaches

    The freedom of contract approach

    Most of the courts do not interfere with such agreements as they feel that such interference would affect the freedom of contract of two independent parties.

    The ethical approach

    In this approach, the Courts see the ethical propriety of the contract. They observe whether the attorney has worked within the confinements of the Model Code of Professional Responsibility. The Courts ensure that the attorney does not charge exorbitant rates after the success of a case in a CFA. 

    The reasonableness approach

    This is another standard of observing the validity of a contingent fee agreement. The Courts look after the reasonableness of the contract as well as the fees. If it feels that the terms and conditions are not reasonable, it can show a red flag to the contract. 

    Singapore

    In Singapore, Section 107 (1) (b) of the Legal Profession Act lays down that no lawyer shall: “enter into any agreement by which he is retained or employed to prosecute any suit or action or other contentious proceedings which stipulates for or contemplates payment only in the event of success in that suit, action or proceeding.” The Legal Profession (Professional Conduct) Rules, 2015 also provides provisions for maintenance and champerty. In the case of Law Society of Singapore v. Lau See Jin Jeffrey (2017), there was a contract between the advocate and client under which the advocate was to be paid 20% of the damages awarded to the client, which could further increase to 25% in the event the client obtained more than $5m in damages. The Singaporean Court held that the lawyer had violated Section 107 (1)(b) and Section 107 (3) of the Legal Profession Act. As a punishment, he was suspended from his practice for a period of 12 months. Thus, contingency fee agreements are not allowed in Singapore but some liberal approach is adopted when it comes to maintenance and champerty. Recently Singapore launched a public consultation for its Civil (Amendment) Bill, 2019 on contingency or conditional fees agreements. 

    United Kingdom

    The Jackson Reforms in the year 2013, gave some reforms for the field of commercial funding. Following are the four major reforms introduced by the Jackson Reforms-

    1. The reforms encouraged the third party funding
    2. Damage Based Agreements were introduced
    3. No win, no fees agreements with large success fees payable after the suit’s success were abolished
    4. Recoverability of After the Event Insurance premiums from the losing party were ended

    In the year 2013, the concept of ‘Damage Based Agreement’ or (DBA) was introduced in the United Kingdom. DBA is a type of contingent fee agreement in which the fee of the lawyer is calculated as per the damages obtained by his client in the suit. In England, there is also the concept of the Conditional Fee Agreement (CFA) with After The Event insurance policy (ATE). Under a full CFA agreement, if the contracting party loses, then the lawyer is not paid his fees and other legal costs are also not paid while the successful party’s claims are fulfilled by the ATE policy. But now after the Jackson reforms both CFA and ATE can no longer be obtained from the losing party. 

    new legal draft

    Australia

    In Australia, contingency fee agreements are prohibited. Section 285 of the Legal Profession Act, 2006 lays down that, “ A law practice must not enter into a costs agreement under which the amount payable to the practice, or any part of that amount, is worked out by reference to the amount of any award or settlement or the value of any property that may be recovered in any proceeding to which the agreement relates.” The official site of the Australian Bar Association provides that contingency fees must remain unlawful in all states and territories. They are against ethics and thus should be disallowed. Recently, Victoria became the first state in Australia to permit contingency fee agreements in class action suits. 

    Advantages of contingent fee agreements

    1. They enable the poor to access justice. The best advantage that is associated with them is that a poor litigant can easily approach the court without thinking about the loss of his money. If the claim fails, he need not pay a penny to the lawyer and he suffers no loss.
    2. They help the plaintiff to file cases against giant companies against whom one would have never filed a case due to lack of resources and power. The defendants, in this case, are already insured and the real interested party in the suit is the ‘insurer’ while the plaintiff has no such backing and uses his own resources to fight the case.
    3. Linking the payment of a case to its result enhances the trust factor between the client and the advocate. It makes the client believe that the advocate would sincerely fight for his case as his payment is dependent on the outcome.
    4. In several jurisdictions, the lawyers are paid on an hourly basis and thus sometimes it becomes a bone of contention between the client and lawyer as they do not reach a consensus on the number of hours. In contingent fee agreements there is no need to calculate the hours. 

    The lawyers opting for a CFA would never take a case that they know will not yield results, therefore such cases will rarely reach the court, saving both the time and money of the court. 

    Disadvantages of contingent fees agreements

    Such agreements often receive widespread criticism. People are quite apprehensive when about contingent fee agreements.

     Following are some of the disadvantages of CFA’s-

    1. It can lead to the court being piled up with spurious cases as anyone can easily approach the court as he has to pay a fee only upon winning. This would lead to the wastage of time and resources of the court.
    2. It can affect the income of the advocates as they will get their fees only upon winning the case. As a result, only well-off lawyers would be able to enter into such agreements.
    3.  It may lead to advocates resorting to unlawful means to win the case as they will get the money only upon winning it.
    4. It is often said to advocates that in contingency fee agreements if the client fails, he gets nothing and if the client wins, the client gets nothing. This implies that sometimes the fee share for the advocate is very high leading to almost no benefit to the client.
    5. They can lead to a conflict between the lawyer and the client. 

    Conclusion

    Contingency fees agreements have always been a debated issue. While most question the ethics behind it, others feel that they help the litigants. Several countries have abolished such agreements while others have a well-flourished market of contingency agreements. Those who have made them void are now thinking of legalizing them with certain modifications. This topic is always developing and it would be interesting to see what new developments see the light of the day.

    Reference


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    Case analysis : HUL v Sebamed

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    This article is written by Shilpa Patil pursuing Diploma in Labour, Employment and Industrial Laws (including POSH) for HR Managers from LawSikho. The article has been edited by Zigishu Singh (Associate, LawSikho) and Smriti Katiyar (Associate, LawSikho).

    The company and products

    Hindustan Unilever Limited (HUL) is India’s largest fast-moving consumer goods company divided into four business segments such as home care, personal care, foods and refreshments. Personal products include skincare (excluding soaps), oral care, hair care. Beverages include tea, coffee. The Food products include staples (atta, salt, bread). Culinary products include (tomato based, fruit-based products), Others include chemicals and water business. HUL is a leader in the soap category and owns popular brands like Dove, Lux, Lifebuoy, Pears, Hamam, Liril and Rexona.

    Sebamed is a global premium skincare brand from Germany, best known for its pioneering pH5.5 products. The brand has been exclusively licensed to USV Pvt Ltd for marketing their baby and adult care range of products in India. USV Pvt Ltd, a leading healthcare company in India, has appointed Lowe Lintas as a creative agency for its consumer business including Sebamed range of products. 

    Marketing strategy

    Sebamed’s range of products are superior in quality and are clinically proven to provide the best protection for babies from day one. Association with Lowe Lintas was done because of their intuitive understanding and strategic approach towards developing a brand. Also, they are known for creating a challenging brand and disrupting the marketplace. Sebamed wanted an advertisement that promotes “evidence-based advertising”. 

    The placement of advertisement was done accordingly, wherein an authoritative figure like a doctor was introduced, to bring awareness on the concept of pH level. Girls in ancient attire, to emphasize the pH level of famous soap brands. Sebamed highlighted the name of competitor soap and the litmus test showcased the harshness of soaps, using taglines such as “Film stars ki nahi, Science ki suno” [Don’t listen to filmstars, listen to the scientific evidence].

    Advertisement objective

    The conflict was triggered by the advertisement of Sebamed. It was related to competitive advertising and the main issue was what the consumers think about the particular brand. This act easily diverted the mindset of the consumers. The advertisement focused on the soap from Sebamed and discussed the pH level of soap. Sebamed claimed that the pH level of their soap is “safe” for sensitive skin when compared to the soaps manufactured by HUL.

    The soap category at present is extremely competitive and the major market share is consumed by HUL’s brands. In this situation, it was difficult for any new soap brand to enter the market and make a mark. Soap is a loyalty driven segment when it comes to brands like Dove. Consumers do not change the brand unless it is “extremely necessary”. Hence this became the objective of Sebamed, to highlight that Sebamed soap contains the perfect “pH level” that’s needed for sensitive skin. Their strategy was based on two pointers: 

    (1) Sebamed soap has the perfect pH level for sensitive skin,

    (2) Other “sensitive soaps” do not have the perfect pH level.

    Sebamed has been in the market for a while, but the main idea was to obtain a space in “prescribed products”. For this challenging step, there should be ample data and research to back the claims that have been made in the commercial. By doing comparative advertising, Sebamed has managed to grab the attention of consumers.

    The legal battle

    The legal duel erupted between the two companies after Sebamed released advertisements targeting HUL Brands, such as Lux, Dove, Rin and Pears. Through Strategic advertising, USV compared the pH level of soaps. There were publicly displayed hoardings showing the comparison of pH levels of these soaps on a scale, pointing to the products that are safe for human skin. HUL filed a lawsuit against the German brand, without any prior notice to Sebamed.

    In the lawsuit, HUL said that the ad campaigns intended to create apprehensions in consumers’ minds by disparaging and denigrating its products and infringing its registered trademarks. HUL alleged that the comparison was only on the basis of pH level which cannot be the sole factor for judging the mildness and harshness of soap on human skin. In response, USV argued that it is a scientific fact that a higher pH level means more acidic and it is harsh on skin acidity level.

    The Bombay High Court in its interim order restrained Sebamed from running the ad campaign. But the Final court order allowed Sebamed to use the ads without mentioning Rin (being a detergent bar) since it is a detergent soap. Whereas the advertisement showing the comparison of Sebamed to Dove soap is concerned, the defendant (Sebamed) is permitted to air the advertisement in its current form. The court also reinforced the settled law on disparagement and its essential elements, which are as follows – 

    (1) The intent of the advertisement,

    (2) The manner of the advertisement, 

    (3) The storyline of the advertisement and the message it seeks to convey.  

    The court also held that the advertisements in the present case are targeted at the regular consumer who is unaware of the ingredients and effects of chemicals on the human body. In view of this, one must apply these tests viewing it from the eyes of a common man with average intelligence. Court emphasized that the companies dealing in this segment should bring in more clarity on the ingredient of the product.

    USV accomplished its strategy to the uproar in the market through this campaign and this initiative worked in their favour. HUL’s branding team will have to come up with a reply in response to these pH campaigns.

    Sebamed’s win-win situation

    Sebamed played a smart gambit by precipitating a competitive war with HUL, by making consumers aware of the acidity in soaps. As a new entrant and marginal player, they dared to challenge the known brand and forced them to respond. This helped them build huge awareness overnight wherein they could have taken years if they had not resorted to this competitive strategy. Sebamed products are priced at a much higher level than their competitor’s products, whereas for few consumers it may still be a challenge of affordability. The purchase is based on price – value proposition. Sebamed has just established its value proposition of being low on the acidity scale and has not proved that HUL’s products are inferior. 

    In a highly saturated market with large established brands, leveraging and claiming genuine product superiority backed by scientifically proven data seemed to be an audacious yet smart move, to attract the attention of all the consumers. Sebamed could have targeted soaps in their pricing range, that would be conventional marketing wisdom. But they aimed high and won, at least in terms of significant awareness. Sebamed focused on the mind of the consumers, brand purpose, which cannot be treated as regular exercise, rather gave importance to its consumers by highlighting the authenticity and bringing in transparency in their work. Good brands are always successful in maintaining an emotional attachment with the customers. The same can be achieved through the product experience and quality. Tactical marketing cannot do anything with trust and wealth of experience.

    Challenge for HUL

    The real battleground here is the consumer’s mind and the weapon of choice i.e balance of science and brand experience. Since Sebamed invested all its energy in gathering the scientific facts of skincare and brand promotion. Which is a small proportion, made giants such as HUL, run from pillar to post, to prove the genuineness of their skincare products, especially soaps.

    Under these circumstances, HUL can continue to build on its huge legacy of consumer trust and its portfolio of value-for-money products, while continuing to establish the value proposition of its various brands in the personal hygiene segment. HUL’s significant distribution advantage and products cross-price segments – is also a big factor that will help overcome any short term image loss. 

    Conclusion

    This kind of strategic comparative advertising is not a new tactic; it is used here to increase the search for a particular brand. The Pepsi challenge triggered the cola wars, Mac versus PC, BMW versus Mercedes, even HUL has used similar tactics as a part of their ad campaigns in the past. Brand owners resort to such campaigns to increase sales either by suggesting that their product is of the same or better quality than that of the compared product or by denigrating the quality of the compared product. While it may reap some immediate benefits in terms of increased brand visibility or a spike in sales, there are medium and long term effects of such advertising that must be considered too. There is no specific legislative mechanism regulating comparative advertising and that is the concern in such cases. A comprehensive legislative mechanism to address such emerging issues and guidelines or comparative advertisements would be extremely useful in the circumstances. With new brands emerging in the market on a daily basis, various challenges faced by the branding teams, a fine balance is required between the competing interests of advertisers and consumers. 

    The trust, preference, choice of the customer is completely dependent on their attachment towards a brand. It is also a big lesson for companies involved in competitive advertising, as they should always stay focused on their core value proposition. It is equally important to be 100% factual and not mislead consumers. Being competitive is good but being truthful and anchored in your value proposition is paramount.

    References


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    How can CLAT PG rank holders get lucrative jobs at India’s top PSUs

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    This article is written by Vanya Verma from O.P. Jindal Global University. This article focuses on how to get into public sector undertaking (PSU) through CLAT PG exam.

    Introduction

    There are several benefits of taking the CLAT PG exam. One of them, of course, is the opportunity to attend one of the country’s top law schools, the NLUs. However, there are even more reasons to take CLAT PG 2021 if you are a 3-year or 5-year LLB graduate. It’s because CLAT is used by several of the top public sector undertakings (PSUs) to recruit students.

    What are Public Sector Undertakings

    A Public Sector Undertaking (PSU) is a commercial corporation in which the Union Government, a state or territorial government, or both control majority shares (minimum 51 percent). In a few cases, the Union and the state governments may each own majority shares of the PSU. These massive corporations necessitate tens of thousands of staff, including a formidable legal team.

    PSU recruitment for legal advisors through the CLAT PG exam

    PSUs are commercial enterprises with tens of thousands of employees and a diverse range of economic interests across the country. A competent legal staff, as well as capable administrators and other professionals from diverse fields, is required to govern such a large organisation worth crores of rupees. Members of these PSUs’ legal teams are recruited based on their CLAT 2021 merit rank; shortlisted candidates may additionally be subjected to personal interviews as part of the selection process. CLAT is used by PSUs to recruit Law Officers, Legal Advisors, and Legal Executives. For PSU selection, only the current year’s CLAT LLM score is accepted.

    According to the present trend, approximately six public sector organisations (PSUs) express interest in hiring persons based on CLAT scores each year. Legal advisor posts are advertised by PSUs, and CLAT results are used to choose candidates for these positions. Here’s how public-sector utilities operate:

    1. Candidates must apply for open vacancies in each PSU separately, following which the organisations will release their merit list based on CLAT LLM exam scores.
    2. Candidates in the top 50 are usually contacted. So, stay alert; getting an NLU is simple, but getting a call letter from a PSU is difficult.
    3. Each PSU will have its unique qualifying standards; candidates should read each PSUs notification to learn about the prerequisites that must be met before applying for legal adviser positions. (Some PSUs require experience, while others do not.)
    4. The CLAT selection process for executive legal trainees in PSUs will be based on the test takers’ scores.
    5. Candidates will be invited in for subsequent selection phases, which include an interview and a group discussion procedure, based on their CLAT scores. Furthermore, candidates should be aware that while some PSUs accept last year’s CLAT score, others may not; as a result, candidates should examine each PSUs selection procedure.

    Eligibility criteria of PSU recruitment through CLAT PG

    Before applying for the PSU recruitment through CLAT, the candidate must ensure that they meet the prescribed eligibility criteria. It’s worth noting that each PSU may have its own set of eligibility requirements that the candidate must meet. The basic qualification for qualifying for PSU is as follows:

    1. LLB degree; both 3-year and 5-year LLB graduates are eligible to apply.
    2. Candidates must clear the CLAT PG exam; candidates who have passed the CLAT PG exam in prior years may not be considered for selection.
    3. When applying for a PSU, a student must obtain the required minimum marks in CLAT PG: 55 percent for General/OBC; 50 percent for SC/ST.
    4. An applicant may also be required to score 60 percent or higher in order to be considered for specific PSUs. It differs from one PSU to the other.
    5. When it comes to applying to a PSU, the age limit differs from PSU to PSU.
    6. Predicting the minimum cutoff is difficult; nonetheless, it can be assumed that a candidate must score in the top 30 in PG to be considered for a PSU selection.

    Types of PSUs hiring through CLAT 

    PSUs in India can be classified into:

    1. Central Public Sector Enterprises (CPSEs), 
    2. Public Sector Enterprises (PSEs), and 
    3. Public Sector Banks (PSBs). 

    CPSEs are further categorised into ‘strategic’ and ‘non-strategic’ categories and are given the status of Maharatna, Navratna, and Miniratna.

    1. Maharatna

    Companies with Maharatna status have an average annual turnover of Rs 20,000 crore in the previous three years and an average annual net worth or combined value of assets of Rs 10,000 crore.

    1. Navratna 

    CPSEs with a Schedule ‘A’ and Miniratna Category 1 status are eligible for Navratna consideration. The designation allows the PSU to invest up to Rs 1,000 crore without seeking government approval.

    1. Miniratna

    CPSEs that have consistently produced profits for the past three years and have a positive net worth are eligible to apply for Miniratna status.

    Selection process for PSU recruitment

    1. Candidate shortlisting

    In the first phase, the PSU will shortlist candidates based on their CLAT merit rank.

    1. Invitation to shortlisted candidates

    Candidates will get interview invites; at the time of the interview, the candidate must present the interview call letter, as well as any other papers required, such as the CLAT score card 2021 and academic credentials.

    1. Interview

    The mode of the interview (offline or online) will be communicated to the candidates prior to the interview. A group discussion (GD) may be included in the selection process.

    List of PSUs recruiting through CLAT 

    S.NoList of PSUs recruiting through CLAT 2020
    1Bharat Heavy Electricals Limited (BHEL)
    2Oil and Natural Gas Corporation (ONGC)
    3Power Grid Corporation of India Limited
    4Oil India Limited (OIL)
    5Indian Oil Corporation Limited (IOCL)
    6National Thermal Power Corporation Limited (NTPC)

    CLAT 2022 PSU recruitment dates

    List of PSUsApplication OpensApplication Closes
    Bharat Heavy Electricals Limited (BHEL)1st week of April, 20221st week of May, 2022
    Oil and Natural Gas Corporation (ONGC)3rd week of March, 20222nd week of April, 2022
    Power Grid Corporation of India Limited (PGCIL)To be notifiedTo be notified
    Oil India Limited (OIL)2nd week of May 2022Last week of May 2022
    Indian Oil Corporation Limited (IOCL)2nd week of July, 20221st week of August, 2022
    National Thermal Power Corporation Limited (NTPC)2nd week of May 2022Last week of May 2022

    PSU recruitment through CLAT eligibility company-wise

    Company-wise eligibility criteria, pay scale, age limit and other requirements for PSU companies through CLAT are given below:

    BHEL 

    EligibilityThe candidates must have passed their bachelor/LLB approved by BCI
    Age LimitUnreserved/ General: 30 yearsOBC: 33 yearsSC/ST: 35yearsPWD (Person with Disabilities): 40 years
    PayscaleINR 24,000 – INR 60,000

    ONGC

    EligibilityA graduate degree in LawMinimum 60 percent marks
    Professional ExperienceA working experience of 3 years would be preferred
    Age Limit30-40 years
    PayscaleINR 60,000 – INR 1,80,000

    IOCL 

    EligibilityA graduate degree in Law with 60 percent or 55 percent for reserved category candidates
    Age LimitSC – 35 years OBC/NCL – 33 years J & K Migrants– 35 years Ex-Serviceman (XSM) – 35 years
    Professional Experience2 years of proven work experience in the law field
    ReservationSC/ST/OBC/PwD posts are reserved as per the guidelines of Government of India
    PayscaleINR 60,000 – INR 70,000

    NTPC 

    EligibilityA graduate degree in Law with 60 percent or 55 percent for reserved category candidates
    Age LimitSC – 35 years OBC-NCL – 33 years PwD General – 40 years PwD OBC – 43 years PwD-SC – 45 years J & K Migrants (domiciled between 01.01.80 to 31.12.89) – 35 years Ex-Serviceman (XSM) – as per Govt. of India norms
    Professional Experience2 years of proven work experience in the law field.
    PayscaleINR 20,600 – INR 46,500

    OIL 

    EligibilityCandidates must have passed their bachelor/LLB approved by BCI
    Age LimitMaximum 29 years
    PayscaleINR 24,900 – INR 50,500

    PGCIL 

    EligibilityCandidates must have a graduate degree in Law along with minimum60 percent (General/OBC-NCL category) 55 percent (PwD candidates) 50 percent (SC/ST candidates)
    Age limitMaximum 28 years
    Relaxation in age LimitOBC (NCL) – 3 years SC/ST – 5 years PwD – 10 years over and above category relaxation (i.e. 10 years for a PwD candidate belonging to General category, 13 years for a PwD candidate belonging to OBC(NCL) category) J & K migrants/Ex-servicemen/Victims of Riots – As per Govt. of India Directives
    ReservationReservations relaxations will be provided as per the Directives of Government of India

    Conclusion

    It’s never too late, start preparing for your CLAT PG exam to get a placement in PSU. Focus on the syllabus and follow strategies.

    References


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    Promises broken vs. promises betrayed : metaphor, analogy and the new fiduciary principle

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    This article is written by Harsh Gupta from the School of law, HILSR, Jamia Hamdard. This is an exhaustive article which deals with the concept of fiduciary, its obligation and theories associated with it in a detailed manner. 

    Introduction

    Fiduciary relationships are formed when one person places some trust, confidence, or reliance on another. If trust and confidence are delegated, the person has a fiduciary duty to act in the other party’s interest. Fiduciaries are those who have to act in the best interests of the other party. The party to whom the duty is owed is called the principal.

    Contracts, wills, trusts, election results, and corporate relationships are all instances when fiduciary relationships are created. In the fiduciary relationship, the principal objective is for two parties to establish a relationship of trust and confidence where one party is confident that the other party is working in his or her interests and not for the benefit of another.

    Scope of fiduciary obligation

    Fiduciary obligations are a complex product of the interactions between the agreement agreed upon between the parties, implied obligations arising from their conduct, and legal obligations. There is one clear lesson that the fiduciary obligation imposes no duty of altruism; it is not a duty of selflessness. No blackletter principle tells a trustee that her interest should always come before the beneficiary’s in a fiduciary relationship, including trustee/beneficiary. A trustee may be a member of a class of beneficiaries as well as trustees. The trustee, in this case, is in a situation that is analogous to another traditional fiduciary relationship, a partnership, where the interests of the trustee and the beneficiary are coextensive. Fiduciaries are obligated to place the other party’s interests on an equal footing with their own, but must not prioritize one’s interest over another’s. Traditional fiduciary relationships are by no means divorced from self-serving concerns. Traditional fiduciary relationships are often entered for self-interested reasons.  

    The traditional theories of fiduciary relationships

    Fiduciary duty has been the subject of various theories by commentators. According to these theories, the existence of a fiduciary relationship depends on whether one of four characteristics exists: (1) status, (2) reliance, (3) entrustment, or (4) assumption of fiduciary duty.

    Status theory

    According to the most basic theory, the status theory, a fiduciary is someone who belongs to one of the traditional categories of fiduciaries, such as a trustee, agent, partner, etc.  

    Reliance theory

    In addition, one of the most frequent expressions of the nature of fiduciary relationships is the reliance on which one party relies. Dependence is most often caused by an unequal relationship. Fiduciary relationships, according to this theory, exist when one party relies on the other and positions trust in them. This theory has several obvious shortcomings. 

    Entrustment theory

    Entrustment theory describes situations in which one party has conferred power on another, requiring the entrusted party to exercise discretion over the entrusting party’s financial well-being. It is somewhat attractive to consider this theory. This theory is in part derived from the classical “trust” paradigm in which one party “places” control over another party’s property. 

    Assumption of fiduciary duty theory

    ‘A voluntary assumption theory’ was developed by Professor Shepherd to achieve the benefits of Scott’s original theory while avoiding its pitfalls. Professor Scott originally defined a fiduciary as a person who undertakes to act in the interest of others.

    Remedies for breach of fiduciary duty 

    Unlike breach of contract, breach of fiduciary duty brings a much broader range of damages to bear. The argument is that “even though the contract may be a foundation for the relationship, recovery is based on breach of the implied duty created by the relationship rather than on breach of the contract itself.” Traditionally, when someone has breached fiduciary duties, they are liable for disgorgement of profits, an action accomplished by imposing a constructive trust (a trust imposed by law rather than by intent). Accordingly, it is constituted as an equitable obligation to transfer property from the owner, on the ground that he would unjustly enrich himself if he was allowed to retain it.

    New fiduciary principle 

    Fiduciary responsibility allows liability to be tailored to the harm caused by the breach of trust, rather than being boxed under the dreaded terms of ‘contract’ or ‘tort.’ If someone violates trust intentionally or egregiously, then it may be appropriate to award punitive damages, but not if the breach was caused by carelessness alone. In essence, the ‘new fiduciary principle’ is the understanding that fiduciary relationships can never remain static. 

    Fiduciary relationships are evolving, dynamic concepts which can be identified, explained, analyzed, and criticized, but they cannot be rigidly classed as one thing or another. Although courts and commentators frequently comment on fiduciary relationships as amorphous, they often analyze cases through the trustee/beneficiary relationship as the only appropriate definition. When courts reason by analogy in this way, they fossilize the concept of fiduciary obligation.

    Essential elements of the new fiduciary principle

    In terms of the new fiduciary principle, there is a fiduciary relationship whenever there is 

    • One party’s dependence or vulnerability to the other, that 
    • Resulting in power being conferred on the other 
    • As a result, the entrusted party is not able to protect themselves effectively, either through “cover” or other means, and 
    • Fiduciary duties are imposed on the party that solicited or accepted this entrustment.

    A relationship based on trust involves vulnerability or dependence leading to the transfer of power. Fiduciary principles share most of these elements with traditional models. If dependency or vulnerability and the entrustment of power were the only criteria for the existence of fiduciary relationships, then virtually all contractual relationships would be fiduciary. Third, the practical inability to “cover” or otherwise protect oneself is a vital component of the new fiduciary principle. It reinforces the message found in both the cases and in general contract law, which is that individuals should look out for themselves, especially when entering into a contract with another. The new fiduciary principle focuses almost exclusively on the situation and conduct of the entrusting party in the first three elements. An entrusted party cannot completely determine extracontractual damages or the intense duty that accompanies a fiduciary relationship. Accordingly, the fourth element of the new fiduciary principle is the requirement to assume fiduciary status expressly or impliedly. As a result of the new fiduciary principle, a party may explicitly or implicitly request or accept a heightened duty toward the other party.

    Application of the new fiduciary principle

    The courts, knowingly or unknowingly, tend to award tort damages only in cases where they find fiduciary elements present. As a result, judges tend to rigidify processes if they do not recognize the reasoning behind their decisions. The doctrine of the implied covenant of good faith has been explained by cases that hold that an employment relationship cannot give rise to a tort claim. However, it is not necessary to be rigid. These cases can be understood as a new type of breach of fiduciary duty that can provide a source of law that clarifies the circumstances under which duty may be imposed and its limitations. 

    Hilker v. Western Automotive Insurance Co. (1931)

    It was held that; “by purchasing an insurance policy, an insured is protecting himself to the best of his abilities.” In such cases, an insured cannot obtain additional insurance coverage to cover the judgment amount in excess of the limit of the first policy; the insured is not covered. The insured cannot purchase another policy to pay the judgment over the limit of the first policy. The insurance firms undoubtedly use some of the most direct appeals to the human want for security and safety in their solicitation and acceptance of financial power: “You’re in good hands with All state.” 

    In the context of third-party settlement, courts have generally permitted extracontractual damages for breach of the implied covenant of goodwill and fair dealing in part because these aspects of the insured/insurer relationship are present. Analysis of these cases, however, clearly illustrates the new fiduciary standard.

    Gruenberg v. Aetna Insurance Co (1973)

    Courts have tended to be more conservative in permitting tort damages when an implied covenant of good faith is violated. In Gruenberg, the California Supreme Court held that when an insurer acted unreasonably and refused to pay a claim, the insured could claim tort damages. In its ruling, the court stated: 

    Previous cases examined the insurer’s duty to act fairly and in good faith in handling claims asserted against the insured by third parties, referred to as the insurer’s “duty to accept reasonable settlements.” In the case before us, we look into the insurer’s responsibility to deal fairly with the claim of an insured, particularly a duty not to withhold unreasonably payments due under a policy. There is no difference between the two aspects of the same duty. However, defending, settling, or paying are not requirements outlined in the policy. It may also give rise to a cause of action in tort for a breach of an implied covenant of good faith and fair dealing if it refuses, without proper cause, to compensate its insured for a loss covered by the policy.

    The more serious problem with the argument is that it ignores the new fiduciary principle inherent in the first-party context. There is only one difference between first- and third-party contexts, and that is the degree to which one acknowledges that when an insured buys an insurance policy, he or she gives the insurer power over their financial interest.  

    An insured who surrenders all control over the litigation and settlement to the insurer confers power on the insurer in a third-party context. When an insured is covered under a first-party policy, their money is surrendered in exchange for a promise from the insurer to provide the insured with adequate financial protection, as defined by the policy. 

    Foley v. Interactive Data Corp.(1988)

    The Foley court (Courts of appeals) determined that even making use of “special relationship” analysis when considering tort damages based on violations of the implied covenant of good faith, the employer-employee relationship was not sufficient to justify tort remedies. 

    In support of its ruling, the Foley court distinguished the employer-employee relationship from the insurer-insured relationship. There are four main differences highlighted by the court. When an employer breaches its employment contract, an employee is not in the same tough position as an insured is in when the insurer breaches its contract. A wrongfully terminated employee cannot seek out another job to mitigate damages when an insurer takes such actions. However, a wrongfully terminated employee can (and must, to mitigate damages) make reasonable efforts to obtain alternative employment. Additionally, employers do not have a “quasi-public” responsibility that warrants a higher standard and employers do not in any way provide the same benefits to their employees as insurers do. On the other hand, small businesses do not offer the same amount of financial security as insurance companies do.

    However, the California Supreme Court ruled that no tort damages could be awarded for breach of implied covenants of good faith and fair dealing resulting from wrongful termination of an employee. It appeared that the Court was reluctant to adopt an approach that would permit extra-contractual damages when a party to a “special relationship” breaches the contract in bad faith. 

    Commercial Cotton Co. v. United California Bank (1985) 

    When a bank negligently paid a cheque drawn on a customer’s account, the California Appellate Court found that it failed to uphold the implied covenant of good faith and fair dealing by raising false defences, refusing to compensate the customer for losses, and refusing enforcement of the covenant. Using this analogy, the Court concluded that an account customer and a bank have a relationship comparable enough to that between an insured and an insurer to warrant extra-contractual damages if certain implied covenants of good faith and fair dealing are breached. 

    In this case, the Court found that banking and insurance have a lot in common, both being highly regulated industries that provide essential public services substantially impacting welfare. Apart from state or federal regulatory oversight, the depositor of a non-interest-bearing checking account is reliant on the bank to which he or she entrusts his or her funds and depends on its honesty and expertise to protect the funds. In addition to providing services to depositors, banks use party policy defences to generate profits through monitoring deposits and withdrawals. In exchange for the convenience of not having to deal in cash and the security that comes with having the bank safeguard those funds, the depositor allows the bank to use those funds. Banks have a quasi-fiduciary relationship with their depositors, and depositors reasonably expect that a bank won’t claim nonexistent legal defences to avoid reimbursement when the bank negligently disburses funds. According to the jury, the bank’s claimed defences are irrelevant here, and the bank’s attempt to prevent an innocent depositor from recovering money entrusted to and lost through the bank’s negligence is a breach of the covenant of good faith and fair dealing within the bank.

    Garrett v. Bankwest, Inc (1990)

    To prove a fiduciary relationship between the lender and borrower, the Court noted that “activity on a day-to-day basis or the ability to compel the borrower to engage in unusual transactions” is essential. In Garrett, the plaintiffs contended that the bank had acted as a friend, confidant, and business advisor to their 5400-acre farm and cattle ranch, beginning when the Garretts decided to expand the ranch’s crop-growing potential by installing a costly irrigation system. By signing a memorandum requiring the Garretts to adhere to a cash flow statement, the bank eventually took full control of the ranch’s finances, the Garretts claimed. 

    According to the South Dakota Supreme Court, this transfer was not significant enough to trigger a fiduciary relationship, so the Garretts could have adequately protected themselves. In its judgement, the Court noted that the cash flow statement and memorandum represented a negotiated agreement between the Garrett family and the bank for the repayment of the Garretts’ operating loan. According to the Court, the Garret family had the right to refuse to renew their loan with this bank. Banks did not control the Garrett family’s day-to-day operations and did not have any business expertise to compare with the Garretts. Therefore, the Court ruled that the Garretts and the bank did not have a fiduciary relationship. According to this case, courts in lender liability cases carefully evaluate the alleged facts, permitting extracontractual damages only in cases in which the borrower fully entrusted the lender with determining its fate and is no longer capable of protecting itself.

    Moore v. Regents of the University of California (1990)

    In recent years, courts are now applying fiduciary principles more directly to doctor-patient relationships, unlike traditional ones. The California Supreme Court held that the patient may claim that the doctor violated his fiduciary duty when he failed to disclose details of his research and economic interest in tissues and blood taken from the patient during the process. The Court recognized there was no obligation for the physician to not experiment on the patient or to carry out research on their bodies. In other words, a fiduciary obligation does not require the fiduciary to sacrifice its interests. According to the Court, the fiduciary and the beneficiary might share a common interest: “Progress in medicine often depends on physicians, such as those at the hospital where Moore received treatment, who conduct research and care for patients simultaneously.”

    The Moore case illustrates the new fiduciary principle pretty well. This is an important decision applying fiduciary obligations to a relationship that was not traditionally viewed as fiduciary. The fiduciary is an overly broad term in some respects, the court noted. The term “fiduciary” refers only to a physician’s obligation to disclose all facts relevant to the patient’s decision. Physicians are not financial advisers to patients. Physicians must disclose possible conflicts of interest not just to protect their patients’ financial interests, but also because certain personal interests may affect their professional judgment.

    Constraints on and implications of the new fiduciary principle 

    Inherent constraints on the new fiduciary principle

    Fiduciary principles have been criticised for their amorphous nature, including their potential to open the floodgates for frivolous claims and punitive awards of damages. This stock argument can be answered in at least two ways. First of all, there is no doubt that this argument has been made against every tort ever created, torts now considered well-established, settled, and hornbook law. Second, the new fiduciary principle is actually rather limited in its scope. It limits the application of the new fiduciary principle that benefits must be limited to those who cannot realistically cover themselves. 

    Possible procedural modifications of the new fiduciary principle

    There is a widespread belief that juries will reach inconsistent, irrational verdicts and award excessive damages. An example of this is the fear that damages will be excessive. It is possible to respond to this objection in several ways. This argument is a conservative reaction to inescapable changes in common law, as is the case with any new tort claims. There are many members of the legal community who simply reject change. Uncertainty brings challenges to those who feel more comfortable with the existing rules and system.

    Conclusion 

    Explicitly acknowledging a new fiduciary principle has several significant advantages. Fiduciary obligations provide a better understanding of what a contracting party owes to its partners in certain “special” relationships. Fiduciaries are held accountable to a combination of (1) the agreements expressly reached by the parties to the relationship, (2) obligations implied by their conduct, and (3) obligations expressly demanded by law. Due to the wide range of fiduciary obligations arising from a variety of sources, neither the ‘tort’ theory (which defines only duties implicit in contracts) nor the ‘contract’ theory (which defines only obligations arising from independent relationships) can explain tort damages resulting from breach of contract. 

    However, the description of fiduciary obligations here is still inherently ambiguous, despite being clearer than previous formulations. Even a small degree of clarity can be more cruel and arbitrary than the illusion of true clarity. Furthermore, until courts can come up with a better reason to allow extracontractual damages in breach of contract cases, some courts will eliminate causes of action while others will create new ones. As a consequence, litigants would have alternative causes of action such as defamation, intentional infliction of emotional distress, and bad faith denial of the contract with court denials of summary judgment motions. A new fiduciary theory will rise from the ashes of previous theories that have been eliminated by judicial opinions just as the mythical phoenix does.

    References 


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    What are proxy advisory firms and their role in Indian corporate governance

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    This article is written by Pranjali Aggarwal, from the University Institute of Legal Studies, Panjab University, Chandigarh. This article elucidates the basic meaning of corporate governance and proxy advisors, how corporate firms depend on proxy advisors and talks about guidelines issued by SEBI on proxy advisors.

    What is corporate governance

    The word ‘corporate’ basically means a body that can either be public or private and is a legal entity in the eyes of law. Once formed, it becomes a corporate citizen and enjoys independent existence from its owners. The word ‘governance’ is derived from the Latin word “gubanare” which means “to steer” and in the ordinary sense; it refers to the exhibition of powers to control, direct and guide the actions and affairs of any entity in order to achieve a particular goal. Thus corporate governance is the framework that acts as a guiding tool for the businesses that aids in the drafting of rules, policies, and guidelines that are not only just and fair for all the stakeholders but even aim at reaping profits for the corporate. Corporate governance can be described as an “amalgamation of rules, law, and voluntary private sector practices which helps the firms to utilize their economic and financial resources efficiently to generate profits for its shareholders while also paying heed to the interests of stakeholders and society as a whole”. The basic aim of corporate governance is to facilitate effective, entrepreneurial, and prudent management that can ensure long-term success by ameliorating a company’s image, efficiency, effectiveness, and social responsibility.

    It basically encompasses aspects like accountability, transparency, independence, honesty, fairness, sustainability, ethics, stakeholder interfacing, good board practices, etc.  

    Proxy advisory firms

    Proxy advisory firms are relatively new institutions in the corporate landscape but they play an imperative role and have gained popularity among the shareholders of the company. According to Regulation 2(1)(p) of the SEBI (Research Analysts) Regulations, 2014, ‘proxy advisor’ refers to any individual or any organization that prepares recommendations and gives advice for the institutional investors or shareholders so as to aid them in the casting of their vote in respect of any policy issues or a public offer.

    These are independent research outfits that weigh all the pros and cons of any decision and thus provide research and voting recommendations for their clients. Generally, only the directors decide upon the everyday issues of the company but as shareholders are the real owners of the company, they also vote on the crucial matters of the company. Some shareholders are mainly concerned about the profits (dividends, interests, etc) and thus are not well-acquainted about the issues, policies, and notices of the company and thus need an independent analyst to evaluate the decision taken by the company and here the proxy advisory firms act as a helping hand and provide recommendations to shareholders according to which they can cast their vote on issues such as executive compensation, corporate governance, etc.

    Evolution of proxy advisory firms

    At first, when the companies were formed, the best possible way to have a unanimous decision was voting and for this purpose the physical presence of all the members was necessary.  This is not a practical situation to have every member in the meeting every time because people buy shares through the share market and do not have any personal access to the firm. Moreover, because of the global market, even foreigners invest in the companies, and thus it is not feasible for everyone to cast their votes physically and it is a cumbersome and expensive process even for the firms to follow. These reasons lead to the evolution of the concept of ‘proxy’  in which one person was appointed to represent the other and the proxy has the power to vote on the behalf of the shareholder if the shareholder authorized the proxy for the same and this emerged as a more convenient way of voting.

    This mechanism of voting evolved according to the needs of society and the proxy advisory firms came into the picture that acted as third-party consultants and provided expert advice and recommendations on whether to vote ‘for’ or against’ the motion decided in the company. Basically, these firms are products of shareholders’ activism that have boomed because of unscrupulous corporate governance in the organizations. Their main aim is to provide counseling to the shareholders but they can also be given the right to vote if they are expressly authorized by the stockholders. 

    This system was prevalent in the USA’s financial market from the 1980s but in India, the proxy advisory industry was even invisible during the 2000s. In 2009, when the Satyam scam took place, the entire financial market shivered. SEBI incorporated several steps to prevent these scandals and one such measure was the passing of the Securities and Exchange Board Of India (Mutual Funds) (Amendment) Regulations, 2010 in July 2010. This regulation demanded more transparency in the voting and disclosure of the norms followed to determine the voting right of the shareholders. This regulation by SEBI and as already there was a rise in shareholder’s activism and indulgence, investment climate was becoming more common day by day, leading to the beginning of the proxy advisory industries in India. The ‘InGovern Research Services’ was the first proxy advisory firm of India started by Mr. Shriram Subramanian in June 2010. Since then several firms like the Institutional Investors Advisory Services (IIAS), Stakeholders Empowerment Services (SES), etc have been incepted and enormous growth of these firms has been recorded. 

    Functions of advisory firms

    • The major task is proxy advisory i.e. advising on the intricate matters of the company.
    • They aid shareholders in exercising their voting rights in the company in significant decisions like the appointment of the directors, changes in the policies of the company, etc.
    • To provide a report that is basically a scorecard or rating on the corporate governance of the entity.
    • To provide the Environmental, Social, and Governance (ESG) analysis. ESG analysis is done to study all the factors (environmental, social, and governance) of the company to calculate all the prospective growth opportunities and threats. It helps the company and shareholders to prepare accordingly.
    • To monitor risks and protect the interests of the investors.

    Indian corporate governance and advisory firms

    The implementation of the Companies Act, 2013 and enhanced corporate governance standards under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, has made the role of proxy advisors very significant in the corporate landscape. The Economist even referred to advisors as to the ‘èminence grise’ of corporate governance which refers to a person who exercises power or influence in a certain sphere without holding an official position. In other words, the person or entity working behind the scenes. 

    Driving force for corporate governance 

    The proxy firms act as the shaping tool that helps in complying with the stringent corporate governance norms. Investors are drivers of corporate governance and they are assisted by these proxy firms to understand the agendas of the company, to provide them with analysis of different proposals and voting decisions of the company. Basically, they can guide them in every decision that is to be taken by the investors regarding the company. Corporate bodies also need to adhere to these recommendations otherwise it could negatively impact their reputation and adversely affect the confidence of the investors which may lead to a decline in share price, fewer funds, etc. There are several examples where the proxy advisors’ recommendations helped in the administration of better governance policies in the companies. For instance, the Global Funds advised against the appointment of Deepak Parekh as the non-executive chairman of HDFC as he was already on board of eight companies as they were of the view that he would not be able to handle all positions judiciously at the same time. Another situation where the InGovern advised against the appointment of B.C. Prabhakar as independent Director in Wipro, against Shardul Shroff in IDFC, and against S.H. Khan as ID of IDBI stating that they are in the same position for several years and remarked that their relationship is like, ‘if they are married to the company’. Another reason for such negative recommendations was the introduction of clause 49 in the Equity Listing Agreement between SEBI and listed companies. Thus, proxy advisors through their recommendations ensure the efficient functioning of the company.

    Recommendations drive companies to follow good governance policies

    Their reports help the companies to build their reputation and trust among the shareholders. If the report showcases a positive report of the company regarding their decisions and legal compliance, then this would attract investor’s confidence in the company. This helps in more investments in the company. Thus, companies tend to follow good governance policies so that the recommendations drafted by the proxy advisors favor them. Generally, it is seen that shareholders like to invest in the companies that fall under the jurisdiction of these advisory firms because they could access insider information and the status of the company which would otherwise not have been available for the investors.

    Watchdogs for the companies

    They act as the watchdog for the corporate bodies. They keep a check on companies whether they are adhering to the rules and regulations and working in the interest of shareholders. Earlier investors only acted as passive members in the firm and because of this they were not able to analyze the pros and cons of the changes made in the organization and this affected them adversely. But this whole situation has been transformed by these advisors as now any matter that is against the interests of the shareholders can be called out by them and the same has to be considered by the company. Like in the case of Lavasa, where Ajit Gulabchand was receiving the salary five times than what was allowed by the Central government without any express sanction of the shareholders, which is necessary in this case. This scenario was analyzed by the proxy advisory firms and finally, he was ordered to refund all the excessive amounts that had been received by him over the years. Thus, the corporate bodies need to work according to the recommendations of the advisory firms.

    SEBI rules related to Proxy Advisory Firms

    As discussed above, proxy firms play a significant role while voting in the company. Any biased recommendation can be disastrous for the firm, as the major decisions to be voted upon by the shareholders in the company are influenced by their advice. Thus, to avoid such conflict of interest and any faulty report, the SEBI Guidelines, 2014 have been issued. These guidelines were developed for regularizing the powers of proxy firms on August 3, 2020, which came into force on January 01, 2021 (September 01, 2020, was earlier decided as the date of enforcement but was extended because of the COVID-19 pandemic). These were the first guidelines that brought proxy advisors under the umbrella of law where they could be monitored. Although these regulations were nascent but following parameters were mandatory to be followed:-

    1. First of all, all the proxy advisory firms have to get themselves registered with SEBI. 
    2. They have to disclose all the recommendations that are made by proxy advisors
    3. A proper framework is to be established to look after the internal functioning and discipline of the firm
    4. Proper records are to be maintained regarding the recommendations that are being given by the advisory firms.
    5. It also gave a roadmap regarding the code of conduct that is to be followed which encompassed eight principles like honesty, good faith, confidentiality, etc

    These guidelines were governing Indian proxy industries till 2018. In August 2018, there was a vote on the reappointment of three directors of a private sector bank in India. The domestic and international proxy advisors voted against this decision and as a result, two of them backed out and the third one was reappointed with a small margin as the director of the bank. This incident was criticized by several experts in the market. The main reason behind such criticism was that these pieces of advice are being framed by the international advisories and are not apt for the Indian scenario. As these international firms are formulating recommendations on the basis of practices as followed in their home country, the recommendations thus are not apt for the Indian scenario. So they feel that they are not competent enough to draft the advice for the Indian situation. Moreover, some baseless and hasty advice could lead to egregious results. The demand for stringent policy to regulate functions of the proxy advisory firms was made. Due to this incident, SEBI constituted a committee in November 2018 to look into this matter and to suggest any changes that can be made in the guidelines of 2014 that were guiding proxy advisories earlier. The committee issued its report in May 2019 to SEBI and newly formulated guidelines were enacted. These included procedural guidelines for proxy advisors, as well as the mechanism of grievance resolution between listed entities and proxy advisors. 

    New procedural guidelines for proxy advisors 

    1. They have to disclose policies on the recommendation of voting and these are to be reviewed every year.
    2. The report should be shared simultaneously with the company and investors and if there are any clarifications or comments that  the company wants to suggest, the same could be sent by the company to proxy advisors within the  timeline decided beforehand and the needful changes can be made in the report 
    3. If the opinion of the company varies from that of the proxy advisor’s report and it could not be justified by minor amendments then the needful changes can be done by issuing additional reports or adding an addendum depending on the issue.
    4. If there are any discrepancies, false information, or material revisions are required to be done, the same should be disclosed to clients within 24 hours of realizing such an error. (Regulation 20)
    5. The methodologies, procedures, and sources that were being referred to or followed, to formulate the report should also be disclosed to the clients.
    6. An explicit framework is to be set up to handle and resolve any conflict of interest that arises during the ancillary course of service like if they provide consultancy service in addition to the advisory which could lead to a biased point of view and the same should be disclosed to the clients also. (Regulation 15(1))
    7. Clarify the situations in which the firm will not provide voting recommendations in its voting recommendation policy.
    8. They also need to mention adequate reasons if they are suggesting any higher standard in their recommendations than generally stipulated by law.
    9. The stated communication process between clients and the listed company should be developed so as to interact and inform the clients regarding recommendations  and to get reviews on the same (Regulation 23)

    Grievance Redressal Mechanism for listed companies

    Apart from these disclosure measures for the proxy advisors, a mechanism has been set up by SEBI under these new guidelines which will redress the issues faced by listed companies and provide relief for the same. Under this, the aggrieved company that has a contrary opinion than that of the recommendations provided by proxy firms can report to SEBI about their grievance. The SEBI will act as an arbiter between the two and after examination of the issue,  will discharge the case accordingly. This system is based on natural justice as this provides the company with the right of being heard in case they are being exploited by the policies and recommendations formed by the proxy advisors.

    These guidelines will create additional safety for both the companies and the shareholders by regularizing the proxy industry. This will ensure transparency and even build the credibility of the advisors. Compliance with all these measures will however create additional liability on the advisory firms.

    Challenges faced by the proxy  advisory industry

    No doubt, there is a huge potential in this industry to boom but there are still some hindrances that should be paid heed to and incorporate necessary measures so as to overcome them. The hurdles faced by the proxy industries are as follows:-

    The passive attitude of shareholders

    The shareholders, most of the time, are unaware and indifferent about the norms of corporate governance of the organization unlike in the foreign countries where investors work according to the recommendations by the proxy industry. This is because they have had a passive attitude for many years. Thus, the awareness is to be created so that shareholder’s activism can boost which will in turn help in the rise of the proxy advisory industry. Many bodies like the Institute of Chartered Accountants of India, the Institute of Company Secretaries of India, and even SEBI have come forward to create awareness about them.

    Unacceptance by the corporate bodies

    They started facing resistance from the corporate entities before they could even win the confidence of the investors. Many allegations of having personal interest, not following proper research practices, lack of concern towards companies, and misleading investors through unreliable recommendations became very common. These allegations hampered their growth at the embryonic stage. And now after the guidelines issued by SEBI, the proxy firms have made them more credible but still, they need to put in more effort to prove themselves.

    Higher competition

    The limited scope of the firms is another drawback and that is why there is no room for multiple firms in this uncertain environment. In the USA also, the advisory industry mostly remained as a monopoly or duopoly only for the practical working of the market. Thus, where the space is limited and there are three firms in the Indian market and even international advisors, there exists cut-throat competition in the market to establish themselves. 

    Insufficient human resource availability

    There was no specialized degree or program that was curated for the employees so as to cater to the needs of this industry. The companies were hiring engineers based on their logical reasoning and then training them to induct them. Thus, it is a huge issue because there is a lack of desired human resources with expertise in this field.

    Hefty cost

    The whole process of preparing reports on the inside matters is cumbersome as well as expensive because it involves extensive research and analysis in itself but now as they have to build up the system for communication and even more detailed reports would require more funds to be incurred, thereby, putting a burden of additional cost to be borne by the proxy industry.

    Conclusion

    The stock market of India is growing day by day and investors have become more engrossed in the intricacies of the matter than before. This surely has created an apt situation for the growth of the proxy industry in India.  The proxy advisory firms have revolutionized the concept of corporate governance as they play a vital role in the working of the company. Now the annual meetings are not dictated by a few people only, instead, the directors of the company have to tune themselves and work according to the suggestions by proxy advisors because they are the guiders of the institutional investors. The firms ensure the system of transparency, check, and balances for the investors in the companies as the minute happenings in the company are notified to them which in some cases could go unattended. This could help in the better understanding of the situation and in turn aids in the formulation of the decisions by the shareholders. No doubt still the role of the proxy industry in India is very less as compared to the USA because India is the hub of family-owned businesses and the shareholders are in minority because of which the authority cannot be challenged easily. But this role of proxy advisors will likely change over the next decade because of an increase in startups that would have diversified shareholding and the firms could benefit from that and they will play a pivotal role in giving vent to investor concerns by engaging positively with the companies.

    References

    1. https://www.researchgate.net/publication/267327619_CORPORATE_GOVERNANCE_NOTES 
    2. https://www.fm-magazine.com/news/2019/nov/role-of-proxy-advisers-201922438.html
    3. http://www.legalservicesindia.com/article/2303/Role-of-Proxy-Advisory-Firms-In-Corporate-Governance.html
      https://www.livemint.com/news/india/sebi-issues-disclosure-standards-for-proxy-advisory-firms-11596457774523.html
    4. https://lexpeeps.in/shareholder-activism-and-corporate-democracy-in-india-and-u-s-a-role-of-proxy-advisors/ 
    5. https://www.fm-magazine.com/news/2019/nov/role-of-proxy-advisers-201922438.html
    6. https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-proxy-advisory-services/article9395194.ece/amp/ 
    7. https://m.economictimes.com/markets/stocks/news/sebi-extends-timeline-for-proxy-advisors-guidelines-compliance-to-jan-1/amp_articleshow/77781711.cms 
    8. https://www.ibanet.org/article/288eaa21-69da-4807-afb7-6e43071761fa 

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    Trade and environment : ‘Carbon Pricing’

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    This article is written by Megha Dalakoti of National Law University Orissa. The article has been edited by Smriti Katiyar (Associate, LawSikho).

    Introduction

    India learned two important lessons in 1991 while performing a tectonic shift in its economic policies that triggered the end of a socialistic controlled approach and birthed the liberalised, free-market approach of the post-1991 Indian economy. The first is that businesses and restrictions cannot go hand in hand and the other is that the economic development of people is driven by investments that respond to monetary incentives over anything else.

    These reforms are famously called the economic liberalisation of 1991 and are also known as the LPG (Liberalisation, Privatisation, and Globalisation) Model. Primarily, these reforms meant two major steps- ‘End of License Raj’ and ‘Incentivising Foreign Investment’, which are the off-springs of the two lessons mentioned above. 

    Years Later and in a totally different context, these two lessons again paved the way for a historic reform that transcended national boundaries and resulted in Article 17 of the Kyoto Protocol, signed in 1997 by the parties to the United Nations Framework Convention on Climate Change (UNFCCC), which envisaged the basic principles of ‘Trading of Certified Emission Reductions’, commonly known as carbon trading.

    Carbon trading essentially means identifying and quantifying emissions of CO2 and other greenhouse gases and enabling the trading of certificates obtained by ensuring reductions in emission levels at domestic and international levels aimed at imposing a cost on emission-based industries while incentivising the ecologically sustainable technologies and industries to strike a balance between such industries and especially between developed and developing countries. 

    In the course of this article, we will discuss the necessity and introduction of carbon trading as a flexibility mechanism in the Kyoto Protocol along with the purposes served by it as visible from modern-day examples of benefits accrued and criticisms leveled at the carbon trading model, also including the legal shape of carbon trading in India. 

    Industrial revolution and anomalies in carbon and greenhouse gas emissions in developed and developing countries

    In the late 1700s, major inventions like steam engines and mechanised factories, especially in weaving, led to an unprecedented spurt in the production of goods which consequently resulted in huge gains in per capita income of Britain and was later termed the industrial revolution. Britain, being at the helm of various colonies like India itself, had access to cheap, extorted raw materials and was the dreamland of inventions and technology in the early 1800s. Naturally, this made Britain the principal benefactor of the industrial revolution, followed closely by other European nations primarily due to their geographical proximity to Britain. At that time, apart from the European Nations, Japan and the United States were the only major non-European countries that gained from the industrial revolution. However, the majority, if not all, of Asiatic, African, and eastern countries were hung out to dry by those gaining at the expense of these colonized countries. The newfound technologies that enabled the processing of fossil fuels like coal, petroleum, and hydropower, started a rat race that had one objective- industrialisation and increased production in a bid to attain global supremacy. Subsequently, the two most important events in 20th-century history i.e., World Wars I and II further aggravated the push of global powers to engage in mass production of everything ranging from oil and food to weapons and automobiles. In the midst of these power battles or battles for survival, not one global power had the time to think about abstract but basic necessities such as air, water, climate, clouds, and existence-friendly temperatures.  

    However, as so often happens, the vision gets clearer as the dust settles, which in this case was the formation of the United Nations, aimed at resolving issues of international importance through peace, dialogue, and cooperation. Though the need of a discussion on conservation and utilisation of resources was identified as early as 1949 in the UN Scientific Conference (New York), and followed up in the Stockholm Conference held in 1972, also known as the First Earth Summit, the issue of climate change and global warming did not result in any concrete plan of action, but only in broader principles. However, the effects of global warming and the need to prevent climate change, caused by increased human economic activity across the globe, was a prominent feature of most discussions on challenges to the human race.

    By the end of the 20th century, the world was a hugely divided place in terms of the economic and technological advancements of various countries. While those countries which had gained significantly during the early stages of the industrial revolution were already thriving, even the newly liberated or still developing countries had witnessed the tremendous potential of Industrialisation owing to the growing rates of global travel, international trade, and cultural exchange i.e., globalisation. This had instilled an urge to industrialise and attain self-sufficiency in these developing nations as well. Moreover, most of such nations had an abundance of natural and fossil resources waiting to be extracted. This led to a situation where on one hand, the developing nations were already thriving with functioning factories and near-optimum production levels which also meant successively higher emission rates with no sign of slowing down, whereas, on the other hand, the developing nations either already had plans or were making plans to increase the rate of industrialisation which meant that the existing lower levels of emissions were set to increase in such parts of the world as well. 

    As a result of this grave anomaly in economic development and distribution of wealth in the world, it was hard to strike a balance between the will to grow industry and trade (i.e., emissions) and the need to opt for sustainable methods of development which were slower, but more desirable. The developed countries deemed it too great an investment to shift the already installed machinery and technology towards non-emission-based or renewable technology, which was still developing and fairly expensive. On the other hand, any expectation of slower but sustainable development from the already looted or lagging developing countries was met with hostility seeing them as nothing but political connivance by developed countries to keep the fresher players at bay. This was also a reason for the failure, or relatively negligible success of the Stockholm Conference, as political agendas took precedence over addressing the issue of environmental protection and conservation.

    ‘UNFCCC’ and ‘Kyoto Protocol’

    In the third Earth Summit held in Rio de Janeiro, Brazil in 1992, 154 member states of the United Nations Conference on Environment and Development signed the United Nations Framework Convention on Climate Change (UNFCCC). The UNFCCC then negotiated and finalised the Kyoto Protocol in 1997 which was the first concrete step towards identifying and quantifying emission rates and setting precise goals and guidelines towards reducing the emissions of greenhouse gases such as Carbon dioxide, Methane, Nitrous Oxide, Hydrofluorocarbons, etc. The Kyoto Protocol, though adopted in 1997, was not enforced before 2005, and adherence to the goals of reduction in carbon and greenhouse gas emissions was voluntary on the part of various nations. The Kyoto Protocol aimed at dividing the countries on the basis of their incomes and emissions in two groups i.e., Annex I and Annex II (Non-Annex I) countries. The developed or high income-high emission countries such as most European countries, United States, Australia, and Russia were listed as Annex I countries, and the low income, developing countries were listed as Annex II countries. While detailed guidelines and steps were listed in the Kyoto Protocol along with individual targets to countries in both these lists, Article 17 provided for emissions trading or carbon trading. 

    Before delving into the contents of Article 17 of the Kyoto Protocol, it is necessary to introduce one gentleman, Mr. Arthur Pigou, who as an economist proposed theories that later culminated in carbon pricing. Arthur Pigou was an English scholar and economist who first noticed that while various costs such as extraction and processing of fossils, transportation of finished products, and allied costs with consumption are included in the market prices of products of such fossils-based industries ranging from petroleum to air ticket prices to electricity, etc, there is no quantified cost of environmental damage caused in providing such goods and services to the end consumer. For example, while the cost of extraction of coal, transporting it to the thermal power plant, and generating electricity along with supply chain expenses and profits are included in determining the final price to be charged on the end consumer, there is no methodology in place to determine the cost of the air pollution caused by the burning of coal or the cost of cutting thousands of trees for the purposes of mining coal. Since that cost is not included in the cost price of the finished product, the market does not react to the damage being caused by heavy industrialisation at the expense of the environment and there is neither any cost for damaging the environment nor any incentive to refrain from it. 

    It was basically this proposal of determining the price of carbon emissions a.k.a. carbon pricing which laid the foundations for the measures suggested in the Kyoto Protocol which included determining the country-wise emissions and setting quantified and achievable targets to be met in the reduction of carbon emissions by the end of December 2020. While a host of nations have attained or exceeded the targets ratified in the Kyoto Protocol, the United States did not ratify the protocol and Canada withdrew from the same after the expiry of the first commitment period (2008-2012) in 2012. Though originally, Kyoto Protocol was to last till 2020, in 2016, it was superseded by the Paris Agreement within UNFCCC. 

    A bare perusal of Article 17 of the Kyoto Protocol leaves no element of doubt that the introduction of carbon trading was a supplemental measure and not the principal solution to eradicate all issues pertaining to carbon emission and global warming.

    The necessity to introduce carbon trading as a flexibility mechanism

    At this juncture, it is appropriate to refer to the two lessons learnt by India that resulted in the liberalisation of 1991 as mentioned in the introduction of this paper. As detailed earlier, the deadlock between the unwillingness of developed countries and developing countries, in shifting to an emission-free mode of industries and halting the industrialisation in the wait of cheaper and accessible emission-free technologies, respectively, meant that no uniform methodology could have been adopted to ensure that countries forfeit their short-term gains and patiently move towards sustainable development. This is where, the two lessons learnt by India prior to 1991 reforms become relevant, which are – 

    1. Businesses and restrictions cannot go hand in hand. 
    2. Economic development of people is driven by investments which respond to monetary incentives over anything else.

    Since, prior to the Kyoto Protocol, the only tool widely used to curb high emission tendencies or to discourage high emission industries was carbon tax, there only existed a financial liability in going beyond a limit of emissions and absolutely no incentive for the usage of emission-free technologies. Further, complying with the tax proportions was much more feasible for established high emission industries to even consider switching towards low emission technologies as the cost to implement the same was significantly more than the carbon tax imposed generally. This was because the imposition of such a tax was a populist measure but no Government wanted industries to die out for mere eco-friendly appearances. 

    Further, non-rationalisation of taxes would have ultimately resulted in the eradication of industries which was highly undesirable. Even if imposed, if compliance with tax norms threatens the very existence of any industry, usually such liabilities are resolved by way of litigation or amicable settlements which resulted in an escape at lower sanctions. Since the nature of the Kyoto Protocol was voluntary, and the needs and challenges of countries and industries differed from one and another, the existence of a flexibility mechanism without resorting to extreme sanctions was necessary to achieve better compliance of the targets that were set out. Carbon trading as a flexibility mechanism, not only gave away to such industries which surpassed their limits of permissible emissions by purchasing CERs from other eco-friendly industries, but also enabled highly industrial countries to purchase CERs from the developing countries and stay compliant to the norms set out without being overburdened by extraneous financial liabilities which would have ultimately resulted in a breakaway from the Kyoto Protocol itself. The aim was to incentivise the emission-free industries without insisting on a total closure of high emission conventional industries wherein one such year, for any reason and by any quantity, the prescribed ceiling of emissions was surpassed. 

    The larger purposes served by carbon trading (in respect of developed and developing countries, emission based and emission eradicating technologies/industries/businesses)

    Article 17 of the Kyoto Protocol, which required that all parties (member nations) shall define the relevant principles and rules for verification, reporting, and accountability for emissions trading, marked a shift from the carbon tax approach to the cap-and-trade approach. This meant that while acknowledging the reluctance of developed nations and the eagerness of developing nations, an arrangement was required to be made; which first fixed a maximum cap or ceiling of permissible emissions for all member nations but which could also provide flexibility in case such a cap was surpassed by way of trade. This was sought to be achieved in a two-fold manner: – 

    1. Countries staying below their prescribed cap will gain “Certified Emission Reductions (CER).” Similarly, industries based on renewable or emission free technologies will also gain “Certified Emission Reductions”. For example, one ton of CO2 emitted equals one CER. Thus, one less ton CO2 emitted means gain of one CER while one more ton of CO2 emitted than prescribed limit by an industry, means that industry will need to buy one CER to stay compliant of the norms laid down. This created a financial incentive to go towards emission free technologies while also facilitating conventional industries to simply trade CERs if they exceeded their prescribed limits rather than face unnecessary sanctions or litigations. 
    2. UNFCCC would also enable developed countries that are exceeding their prescribed limits to fund and implement projects in developing countries based around renewable and sustainable emission free technologies which ensured a necessary transfer of funds and technology to the developing nations. This enabled the developed nations or conventional industries to gain CERs by funding overseas projects and assisted developing countries in gaining access to newer technology which would otherwise have cost too much to import from such developed countries. 

    The two methods mentioned above are basically implementations of the two lessons i.e., finding a way to impose a cost on emissions without unreasonable restrictions, and at the same time, offering a monetary incentive to shifting towards greener, emission-free technologies. At present, carbon trading in itself is a multi-million-dollar industry that has managed to grow even during the great recession of 2007. This is solely because it offers flexibility to conventional industries in complying with the prescribed caps by enabling the trade of CERs and imposes costs in a manner that empowers low emission industries and provides the necessary funding and technology transfer. The second method of the undertaking and implementing projects in developing countries is mentioned under Article 12 of the Kyoto Protocol under the heading of clean development mechanism. India has been a major benefactor of the same and more than 20% of the total projects approved under this mechanism have been in India till 2014. 

    One of the best international examples of the benefits of carbon trading is that of Tesla Inc., electric cars, and a clean energy company. Another car manufacturer, Stellantis Cars announced in May 2021 that they will no longer purchase CERs from Tesla and rather look towards complying with emission norms by shifting to partially or fully electric vehicle models. Tesla Inc, being a clean energy company from day one, is said to lose a significant chunk out of the 518 million dollars that were earned through sales of CERs in the first quarter of 2021. This amounts to around 6 percent of total revenue earned by Tesla, but it is key to note here that this money is earned without having to manufacture any product to sell, but only because Tesla’s entire business is based on emission-free renewable technology. Further, if this income from carbon trading is excluded, Tesla would struggle to remain profitable consistently over a longer period of time. This single example encompasses the benefits of carbon trading in achieving both objectives i.e., of providing funds/profits to a renewable energy-based company initially and ultimately resulting in instigating another company to shift from conventional high emission trade to a renewable low emission trade. 

    Similar examples in India include that of Jindal Vijaynagar Steel which installed its steel plants with Corex Furnace Technology. This enabled the plant to emit 15 million tons less carbon and it is estimated that 225 million dollars can be earned through carbon trading of the aforesaid saved carbon in one decade. Rural areas of India have also benefited from carbon trading with companies engaged in business in Andhra Pradesh and Madhya Pradesh reported to have saved tons of carbons or restoration of forests resulting in additional income from carbon trading. 

    The major criticisms on the carbon trading model

    Over the years, there has been multi-dimensional criticism of the Carbon Trading Model. Hardcore environmentalists argue that by proving a flexible mechanism of Carbon Trading, the necessity to strictly adhere to the prescribed limits has been done away with, which provides a back alley escape to repeat offenders. Their case is that, since no penal sanctions are there to be faced by countries and organisations violating the prescribed cap of carbon emissions, the cost factors involved in carbon trading are simply included in product price essentially being paid out of the pockets of the end consumer and not the industrialists or capitalists causing damage to the environment. It is further alleged that there are severe lacunas in the manner in which the price, quantity, and entitlement of CERs are computed and traded and even corrupt practices are not ruled out in overplaying or underplaying the emissions while determining CERs entitlement and liability to suit the needs of huge corporate giants enabling easy escape from any consequence of non-compliance. The lack of a competent and specialised agency, especially in developing or remote countries, to stringently deal with foul play and the still under-evolved legal framework further adds to the no-consequence scenario.

    Cries for a total prohibition on highest emission industries are a common sight every now and then and there is little evidence to suggest that the insatiable lust of industrial growth can be prevented from demolishing any part of the environmental ecosystem that stands in the way of fulfilling this lust. 

    The legal position of carbon trading in India

    Carbon trading or CER Trading in India happens on the commodities market of the country and at present are governed by the provisions of the Indian Contract Act, 1872 and Forward Contracts Regulation Act, 1952 due to the nature of the transaction which is that of forwarding contracts. 

    Acknowledging the need to further strengthen the Forward Markets Commission constituted under Section 3 of the Forward Contracts (Regulation) Act 1952, the Central Government also introduced the Forward Contracts (Regulation) Amendment Bill 2010, which is yet to be passed by the Parliament. After the enforcement of the Constitution (One Hundred and First Amendment) Act, 2016 and the introduction of the Good and Services Tax, a clarification has been issued by the Ministry of Finance vide its circular dated 01.03.2018 wherein the context of priority sector lending certificates it has been mentioned that PSLCs akin to freely tradeable duty scripts and renewable energy certificates are taxable as goods at the standard of 18%. CERs being similar to renewable energy certificates also fall within the same bracket. 

    Conclusion

    In conclusion, it can be said, though not completely free of the scope of further improvement, carbon trading is a necessary measure to enable flexible operations and the positives far outweigh the negatives. Further, the negatives are not of such a nature that cannot be eliminated by way of introducing corrective measures. The problem lies in treating carbon trading as the panacea to all emission problems. Carbon trading essentially provides a stop-gap solution that enables industries and businesses to thrive while the world can shift towards sustainable technologies and businesses in a cost-effective and economically viable way. However, if no concrete steps are taken to realise the other more important goals of sustainable development, some of which find their place in the Paris Agreement, then mere reliance on carbon trading would render it useless in the long run. Examples like those of Tesla and Jindal Vijaynagar Steel clearly provide evidence that in circumstances where the stakeholders have acted with transparency and honesty, Carbon trading on its own has the potential to alter the balance sheets of companies and drag them from losses to profits. 

    References

    • Rakesh Mohan, India Transformed: Twenty-Five Years of Economic Reforms (Brookings Institution Press, 2018).
    • David S. Landes, The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor (Norton 1999).379–80.
    • David A. Hounshell, From the American System to Mass Production, 1800–1932: The Development of Manufacturing Technology in the United States, Baltimore, Maryland (Johns Hopkins University Press 1984).
    • The International Studies Encyclopaedia (2010) vol 7, page 4476.
    • ‘The Warming Effects of the Industrial Revolution’ (Climate Policy Watcher, 21 March 2021) < The Warming Effects of the Industrial Revolution – Global Temperatures (climate-policy-watcher.org)> accessed 21 February 2021.
    • Astrachan, Anthony, ‘Goals for Environment Talks Listed’ Times Herald (The Washington, March 17, 1972) A20.
    • UNTC, ‘List of Participants along with dates of acceptance of Doha Amendment to Kyoto Protocol’ (2020).
    • Chrisitiaan Hetzner, ‘Tesla stands to lose lucrative business selling CO2 credits to Fiat Chrysler successor Stellantis’ (6 May 2021) < Tesla stands to lose lucrative business selling CO2 credits to Fiat Chrysler successor Stellantis | Fortune> accessed 21 May 2021.
    • Monil Khatri, ‘Carbon Financing in India’ (Team India Blogs, 26 March 2021) < Carbon Financing in India (investindia.gov.in)> accessed 21 May 2021.
    • Anurit Kanti, ‘Carbon Trading: An Overview and Criticism’ (BW Business World, 9 September 2017) < Carbon Trading- an Overview And Criticism – BW Business world> accessed 21 May 2021.

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