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Litigation that brings a bad name to country

September 14, 2016 10:43 IST

 Owner of brand name to pay sales tax; Insurance company can't change stand; Customs duty outside octroi net; Award on music rights set aside; Confidentiality clause can't restrict trade.

Some court rulings from the world of business and industry.

Illustrations by Uttam Ghosh/

The Supreme Court has commented that one of the reasons India is extremely low in the World Bank rating in enforcing contracts and ease of doing business is the failure of the parties to adhere to the terms in documents such as “notice inviting tenders” and “general terms of contract”.

The court made this observation in its judgment on the Central Coalfields Ltd vs SLL-SML (Joint Venture Consortium) case, in which litigation over a bank guarantee for Rs 2,000 crore dragged on for a year, stalling a project. The issue was whether or not the bank guarantee should be in the format set by the coal firm (CCL). Though several bidders conformed to the electronic format, the JVC in this case argued it was not essential to stick to the format prescribed by the employer and it used another format which was rejected.

The Jharkhand high court accepted the argument and set aside the rejection of the JVC’s bid, observing there was substantial compliance of the guarantee form. The coal firm appealed to the Supreme Court, which quashed the high court ruling. The judgment said it was the employer who would decide what the essential conditions were.

“What is extraordinary about this case,” the court remarked, “is that CCL seeks to adhere to the terms of the contract issued by it, but the submission of JVC is that CCL should actually deviate from the terms of these documents so as to benefit the JVC.”

Owner of brand name to pay sales tax

The Supreme Court has dismissed the appeal of ACC Cement, ruling that if a product is manufactured by one firm and sold by another with the latter’s brand name, that sale would attract sales tax, not the first transaction.

In this case from the Kerala high court, ACC entered into an agreement with Cochin Cement Ltd under which the latter would supply goods to ACC. On the basis of intelligence report, the assessing officer found that Cochin Cement was manufacturing cement and handing it over to ACC.

The latter argued that the sale effected by Cochin Cement should be treated as the first sale for tax purposes. The Supreme Court rejected the contention and stated that Cochin was only a manufacturer with raw materials supplied by ACC. Cement was supplied to the godowns of ACC, which is marketing it under its brand name and trade mark. Cochin is not allowed to sell the product. So, ACC was liable to pay the tax.

Insurance company can’t change stand

If an insurance company repudiates a claim on one ground, it cannot add new grounds when its action is challenged in a consumer forum or court.

In this case, Galada Power & Telecommunications Ltd vs United India Insurance Co, the firm which makes aluminium wires supplied 21 trucks of it packed in wooden drums to Power Grid Corporation. The corporation noticed shortage. The insurance company appointed a surveyor who found transit loss assessed at Rs 43 crore.

The insurer rejected the claim of the supplier saying it was not covered by ‘transit loss’. The supplier moved 21 complaints before the consumer commission in Andhra Pradesh. It ruled that the carrier and the insurer are jointly and severally liable to pay.  

On appeal, the National Commission reversed the ruling, accepting the contention of the insurer who took a new ground that the claim was not made within seven days of the arrival of the vehicles at their destination. The Supreme Court stated that the commission was wrong. The repudiation did not mention delay but only that the claim was not covered by the transit loss clause. Since the insurer even appointed a surveyor, it should be presumed to have waived its right which was in its favour.

Customs duty outside octroi net

The Supreme Court has overruled the Bombay high court and stated that customs duty shall not be added to the value of goods for the purpose of payment of octroi under the Bombay Municipal Corporation (Levy of Octroi) Rules.

In this case, Eastern Peripherals vs Brihanmumbai Mahanagar Palika, the firm imported computer parts and after manufacturing process, re-exported the goods. It claimed exemption under a notification under the then Exim policy. The corporation argued that as 25 per cent of the articles were released in the domestic area, customs duty should be included in the value of the goods. The court rejected the claim.

Award on music rights set aside

The Bombay high court last week set aside the award of the arbitrator in the disputes between Indian Performing Rights Society and Entertainment Network. It ruled that the arbitrator had no jurisdiction to decide the issues, which were not arbitrable, and were in the realm of civil courts. The society, whose members are holders of copyrights in music, alleged that the opposite party, which consists of FM broadcasters in seven cities, had violated the terms of agreement between them. It alleged that the broadcasters did not make advance payment, failed to announce the authors’ names and continued to claim the ‘infancy discount’ given during the early days of FM stations, though FM broadcasts have become a full-blown sector. The high court set aside the award which ruled that the broadcasters were not required to obtain licence from the society for airing sound recordings.

Confidentiality clause can’t restrict trade

The Delhi high court has dismissed the petition of Stellar Information Technology Ltd alleging that three of its former employees had set up a rival firm breaching the “Confidentiality and Invention Assignment Agreement” and “Employee Confidentiality Agreement”.

They set up a firm Techchef showing their wives as promoters, though the ex-employees were in real control of it and the business was the same -- data recovery and allied services. It was further alleged that the rival firm was stealing customers through details taken in a laptop/tablet.

The court found no evidence of data theft and stated that the names of customers are in public domain. It further said the confidentiality clause could not be applied to restrain freedom of trade; otherwise such negative covenants would violate the law of contract. Employer-employee contracts are different from commercial contracts and courts take a strict view because in business agreements, the parties are on equal footing.

In employer-employee contracts, the norm is that the employer has an advantage over the employee and it is quite often the case that employees have to sign standard form contracts or not be employed at all.

M J Antony