Image Source:

This Article is written by Harmanjot Kaur and the article has been edited by Khushi Sharma (Trainee Associate, Blog iPleaders).


According to the worldwide report, a total of 2.8 trillion USD has taken place in the US alone from the period from 1985-2020. According to the land use pattern in India, it is evident that due diligence in land acquisition and use is a topic of great concern.

Due diligence refers to a screening test about the viability and the credibility of our future transactions in a systematic order. This can be observed in a wide range and forms. This can be related to a property transaction, checking the previous debts, criminal reports and financial competence of a company before investing in it by a new company.

Download Now

Personal or commercial?

This can have varied forms and scope according to the needs. This can be personal as well as the public in its utility. We see it even in the Hindu Marriage Act, where there is a check about the adoption laws, guardianship act etc. The age gap of 21 years between parents and the adopted child is one such example. 

We also see the conundrum of personal laws and the constitutional rights of a person. In that case, we see a priority given to constitutional rights over personal laws. This can be observed in the case of Mr X vs Hospital Z, where there was a termination of marriage, due to the HIV +ve status of one of the parties.

Why is due diligence vital in land acquisition?

The concept of due diligence is not having any fixed statute or governing principles. The terms about which areas to focus on is related to the type of transactions and the area of the deal. It is an unwritten law that is dependent on the needs and the specific circumstances of the parties. 

However, we see that it is based on the maxim of equity and natural justice. The idea of unjust enrichment as highlighted in the Indian Contract Act can be observed here. This means that no party should have profited at the loss of the other party. In case there is a profit by one party at the loss of the other party, it should be duly compensated as explained in the clause of quasi-contracts in the Indian Contracts Act.

Checking of the special zones as related to J&K, Himachal Pradesh

In the case of due diligence, one should get accustomed to the state laws very carefully. It has been found that there are certain states where the purchase of land is not allowed to an immigrant or non-domicile holder of that state. Such states include Jammu and Kashmir, Himachal Pradesh etc. We can see the instances such as M.C. Mehta vs Kamal Nath & Ors, 1996 where the deviation of the Beas river was forbidden as it was disturbing the natural ecology of the surrounding areas. Similarly, M.C. Mehta vs Union Of India And Ors., 2013 also known as the Taj Trapezium case, where the pollution causing vehicles and factories were displaced. Here, special provisions regarding chimneys were presented so that a balance between the commercial interests and the environmental laws can be maintained.  

What does the contract law say about it?

According to Section 24 and Section 25 of the Indian Contract Act, 1872 it is mandatory to have a lawful object of the task, which one is performing. These sections talk about the lawful object and purpose of the contract. These even include the acquisition of land. For example, although the law gives us the right to acquire land, at the same this right should not compromise public policy and morality. One cannot own land to start a brothel or the farming of any illegal drugs such as marijuana etc. One cannot start a wine shop just by acquiring land. One has to ask for the licencing for it. Also, the regulatory procedure such as no wine shop near school areas etc. should be complied with.

What does the law of torts say about it?

According to the case of Webb v. Bird, there was a dispute between the plaintiff and the defendant over the construction of a windmill. The defendant built a new windmill which blocked the passage of air to the plaintiff’s windmill. However, it was held that there was no perspective right acquired by the plaintiff. Hence, there would be no ‘nuisance’ in this case.  

However, on the flip side, in the case of Bass vs. Gregory, the defendant made a shaft because of which the ventilation of the plaintiff’s home was disturbed for forty years. Here, it was held that this would amount to a nuisance. 

Due diligence in the light of the Transfer of Property Act

During the Transfer of a Property Act, we see a variety of areas that are covered under it. Section 4 of the transfer of property act talks about the provisions in a detailed manner. However, before actually proceeding we have to make due diligence on the various terms that are therein. Here is the list of the things one must check at the time of due diligence. 

Due diligence in the light of the Merger and Acquisition Act

At the time of merger and acquisition, one has to carefully take a look at the past transactions of the company. Who were the partners of the law firm previous to the agreement of merger and acquisition? What can be the potential competitors of the law firm? Were there any instances of any criminal charges related to the company’s default?

All these questions should be answered after doing meticulous due diligence.

Due diligence in the light of the Sales of Goods Act?

We observe the application of due diligence even in the case of the Sales of Goods Act. In this, we see the areas such as conditions and warranties, estoppel, rightful ownership of the title of goods. All these areas are related to the scrutiny of the data and then coming up with an idea of whether the agreement should be entered into. 

The maxim of nemo dat quad non-habet, which talks about the transfer of ownership under Section 27 comes into play here. Hence, we see that there are instances of due diligence here.

Due diligence in the light of Environmental Law

In the environment law also, we see instances of the application of due diligence. It is crucial to see the local laws and the related provisions such as ‘special zone’, which is declared by the government keeping an eye on the flora and fauna, habitat of that place. Faulty due diligence before establishing factory results in litigation. Some of the landmark judgements are as follows:

MC Mehta vs Union of India 1996: This case is also known as the ‘Taj Trapezium case’. Here, NEERI prepared an overview report of the air pollution in the area. It was found that since the area has pollution of 10 times than the permissible limit, some of the factories and industries need to be scrapped or displaced from that area. Thus, a balance between the right to life under Article 21 and Article 51A(g) has been established under this case. 

Orisha State vs M/s Orient Paper Mills & Anrs. 2003: In this case, it was held that the state government has the power to declare any area as the Air Pollution Control Area. However, it was held that Section 19 uses the term ‘may’ and not ‘shall’, therefore it was not mandatory. However, the precautionary steps taken to conserve the environment cannot be challenged by any other party. 

VS Damodaran Nair vs State of Kerala, 1995: In this case, there was a small scale management factory at Cochin city. However, this factory was causing poisonous fog formation in that area. The court held that the company was to shift to any other place or scrap itself so that there is a balance between the right to life under Article 21 and Article 51A(g) as established by the constitution of India. 

Animal Feeds Diaries & Anrs. vs Orisha State (Prevention and Control of Pollution Act) 1994

In this case, it was held that keeping an eye on the important international conventions signed by India such as Stockholm Convention, the Indian government and courts have the right to amend the local laws according to the needs of the society.

Relevance of these cases in the land acquisition?

Since the local laws change with time keeping an eye on the balance between the commercial interest and the right to a safe environment, the prospective company has to be very careful regarding the land acquisition in that place. One has to run due diligence before planning to buy land in the prospective area of interest.

Legal due diligence and Criminal Procedure Code

Before finalising any deal due diligence should be there regarding the status of the prospective partners. We should check whether they have been involved in some criminal matters. Similarly, we should see if there is some attachment of property as the security to bail application etc.

Legal due diligence and Code of Civil Procedure

Before finalising any deal, due diligence should be there regarding the status of the prospective partners. We should check whether they have been involved in some civil matters. Similarly, we should see if there is some attachment of property as the security related to some summons. Section 60 of the Code of civil procedure talks about the attachment of property for the execution of the sale decree, Section 61 as the partial exemption of the agriculture produce. Or some serious areas such as Section 62 regarding the seizure of the property in dwelling house etc. We should also see if the property has been attached to the decree of the court as explained under Section 63.  

Similarly, a critical analysis of Section 65 related to the Purchaser’s Title related to the sale of a property should be examined properly.

What are the consequences of faulty due diligence?

The due diligence process should not be motivated by greed or personal profits. It should be done neutrally, looking at the demands put forward by the client. Hence, strong ethical integrity is a must to work efficiently in the due diligence process. 

Would the due diligence attorney be personally liable for the faulty due diligence?

No, one cannot be held liable personally in case of new findings after the due diligence. Furthermore, to ensure the limited liability of the person who is performing due diligence, the attorney writes a clause in the submission report about it. 

It says, that all the due diligence has been done with due care. The data and the material presented by the other party was assumed to be correct. Furthermore, it is also stated that since there was a paucity of time and the specific commercial intent of the client was taken care of, efforts have been made so that there is enough due diligence in the respective fields only which were demanded by the client at the time of contract.

What are the key terms to be noted in the case of legal due diligence?

What are the documents which must be checked?

The person should make due diligence with special care to be taken about the commercial transactions, dues and debts (if any), who were the partners of the company in the past? What were the prospective areas where the competitors can have an undue advantage? 

All other similar areas of interest are highlighted so that the company can save itself from falling into any trap by becoming partners and later getting liable for some wrong which they have not even committed.

Apart from this, we see that there is a check on the previous litigations through which the company has been. Also, there is a check on the branches of the company, their reach and the places where they have their head office.

What are the important terms related to legal due diligence?

Deal Makers:

These are the areas that act as the good points which could help in the successful completion of a deal. However, in every due diligence, these are always minimal. This is not because due diligence is meant to break the deal of the prospective customers, but it is presented as a critical analysis of all the areas of the prospective company to the client. This later helps them to negotiate the terms effectively.

Deal Breakers:  

These are any instances of financial or commercial transactions which can act as a roadblock in the successful completion of a deal.

Deal Cautioners: 

These are some of the areas which are present there as the red flags for the successful completion of a deal. However, since these are temporary and can be ratified, these are not a big area to worry about. However, these are some of the weak areas that can be used so that there can be a manipulation related to the negotiation of the contract which the parties are about to enter into.

What are the limits of due diligence related to the Property Law?

One has the access to an online government database, the data provided by the other party and the questions asked by the attorney to the executives of the prospective company. One assumes the data to be correct which has been presented to him. 

Since the amount of data is large and the time is less, the attorney asks the client about the specific areas where he wants to focus on. Later, he focuses only on those specific areas.

What should the attorney appointed keep in mind related to ‘Ethics’ during the task?

Mostly, we observe that the attorney comes up with lots of critical areas in due diligence. Most of them are called deal breakers. These may range from previous criminal litigations, financial incompetence etc. These may be similar to a bitter pill to swallow. However, looking at the importance of ethics and an honest solution to the client is more important than sugarcoating some fake things only done to make the client happy for a short period. Even if the attorney has come up with some critical areas, this can act as a deal maker as the parties could easily negotiate with each other as they are aware of the weak areas of the other party. 

However, this does not mean getting crooked and present a faulty report. One should pay heed to the ethics as discussed by the Nolan Committee related to public life. These are as follows:

  1. Integrity: The attorney should keep in mind the necessity to work impartially and conduct due diligence without getting affected by the outcomes of the due diligence. We observe that integrity is the key. One should not be afraid about whether the deal can be broken only because of his due diligence. The new facts which can be the potential deal breakers should not be overlooked.
  1. Selflessness: One has to be impartial at the time of conducting the due diligence. We cannot expect every finding to be the deal makers. However, we should honestly tell our client about the potential pitfalls and grey areas that can be the potential threat in the future. 
  1. Objectivity: One has to objectively look at the matter with a keen eye on attention to detail. One should not get subjective when the other party tries to make up the findings and conceal some of the potential threats. One should not be afraid to present the correct report without getting affected by personal relations of past enmity. 
  1. Accountability: One should be accountable at the time of due diligence. Since the material related to due diligence constitutes very sensitive details opened to the attorney for a limited period, one should be extra careful so that one does not miss any detail. 
  1. Honesty: One should honestly explain the criminal findings, commercial defaults, amount of shareholders, debentures, stocks and other related issues without getting partial to any of the parties. One should objectively explain the areas.
  1. Leadership: Since the work of a due diligence attorney is full of huge piles of statistics, data and reports; he should be able to make deliberate efforts to delegate the work efficiently among his subordinates. He should be able to have EQ so that he could relate to them, their experience and whether they can understand and implement the work carefully. 
  1. Openness: One should be able to work in a team. Since there is a need to share the data and cooperation, one should be very diligent and capable of operating as a team player. Each member can thereafter be assigned special tasks related to their subject and area of research.

Thus, one should act fairly and objectively irrespective of the personal profit related to the act. One should not fear the conviction as one has given an honest picture of the whole scenario without compromising with the ethics. 

What is the way forward?

From the above discussion, we have found that due diligence is a job that demands attention to detail. There should be minuscule and painstaking details which one should go through before making a deal final. Therefore, it is necessary to be very careful in due diligence. However, we should pay attention to details and try to understand the commercial intent of the client before starting due diligence. Since there is a paucity of time, it is a better option if one would try to incorporate the use of Artificial Intelligence so that the accuracy and the speed can be increased.


In the light of the above discussion, we see that there are many areas where the process of due diligence can be a tedious task. One has to go through piles of datasheets and statistics before concluding the data presented. However, because the due diligence conductor has to rely on the data presented to him, the word of mouth of the other party’s claims; one cannot be personally liable for the defects in due diligence. 

During the submission of the report on due diligence, one can mention in a clause stating that he has relied on the data presented to him by the firm. Therefore, in no circumstances, he can be held liable in case there are new facts revealed later, which were not presented to the attorney at the time of his due diligence. 

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.


Please enter your comment!
Please enter your name here