Commercial Common Sense Justice

The judiciary is ambivalent on the sanctity of commercial contracts. All too often, the judge prioritises a quest for what he thinks is justice over the integrity of contracts in the market place.

To make India a wealthy country, we don’t need to read Arnold Toynbee’s twelve volume “A Study of History”. We do, however, need to get together and agree that we really do want to be rich! As far as I am concerned, for most of my life, and for a hundred years before that, this has definitely not been the case. Back during the British colonial period, businessmen –  ‘box wallahs’- were treated with a kind of tolerant contempt, not quite good enough for gymkhana membership. Small town Jammu of the late 1960s, where I grew up, put businessmen far below bureaucrats and soldiers in the pecking order of respectability. The generalised attitudinal shift by which greed has become good and wealth is for flashing is less than two decades old.

This paradigm shift is yet to be universally embraced. As late as UPA2, we have witnessed pitched battles between those who want development at almost any sufferable cost and those who want development only if it has very little cost. I have commented on some of these battles over the years: environmental protection versus industry (see BusinessworldEnter The Sandman), agrarian rights versus land for industry (see BusinessworldLand Vs Industry), and Transparent Regulation versus Crony Capitalism for quick growth (see BusinessworldThe Pontyfication Of Politics Processes). While flaunting my share of ambivalence on many of these issues, I can add that I am not alone in this failing!

Indeed, as India transforms, this ambivalence rages unabated. Everyone wants to earn an arm and a leg but everyone is definitely not prepared to work 80 hour a week with no vacation for five years. What is more important to you: attending the closing of the next small share acquisition your company is making under your guidance in Jhumri Tallaiya or going to Haridwar to morally support your cousin who just lost his father? When I was a little boy, this truly was a no-brainer. Family then was sacred. Fifty years later, the reverse is doubtless true for urban go-getters. By the same token, if you should get hit by a truck today, how many of your cousins will offer to pick up the hospital night duty?

It should not surprise us then that the judiciary is equally ambivalent on the sanctity of commercial contracts. Far too often, its conscience is pricked enough for it to play God between businessmen who consented not so long ago to enter into one or another type of business arrangement. All too often, the judge prioritises a quest for what he thinks is justice over the integrity of contracts in the market place. The problem though is that when the judiciary succumbs to your everyday human failing, the cost can run into billions and billions. This came home to me last week when a client walked in the door asking me to help him get possession of a 360 sq yard plot he had booked with DLF in Gurgaon in 1991, and which DLF cancelled in 1994 after receiving 80 per cent of the money.

In the twenty years since this cancellation, this gentleman had been religiously fighting his court case without result. In this time, he had progressed the case by no more than 10 per cent of its normal total life cycle (assuming two regular appeals and no more) which meant that other things being equal, he could expect a decision in 200 years. How had this happened? The responsibility, if that is the word for it, rested squarely with the judiciary. Let me explain.

Section 20 of the Code of Civil Procedure permits parties to sue the defendant where the defendant resides or where the cause of action arose. DLF’s head office is located in Delhi and the buyer purchased the property and paid for it in Delhi. DLF’s plot buyer’s agreement specified that disputes were subject to Delhi Jurisdiction. Naturally, the buyer sued DLF in Delhi in 1995.

Ten years later, in Harshid Chiman Lal Modi vs DLF (AIR 2006 SC 646), the Supreme Court decided that such cases can only be filed where the property is situated. That took the case back to square one and a new beginning in a new court. Why a citizen should suffer ten wasted years of litigation because the judiciary changed its mind on this or that point of procedure is a question that the judiciary really should address.

Gross miscarriage of justice of this type is far more common than our rose tinted attitude to courts would lead us to believe. On August 1st, 2014, the Supreme Court in Dasrath Rupsing Rathor v State of Maharashtra (Cr App 2287 of 2009) in effect decided that a ‘cheque bouncing’ case under Section 138 of the Negotiation Instruments Act can only be filed in a court convenient to the defaulter. Let’s understand this.

If your debtor makes over a cheque to you and it bounces, you can send him a notice under Section 138. If he does not pay within two weeks, you can drag him to a criminal court. When parliament created this law in 1988, it presumably intended to restore some credibility in commercial life, premised on the assumption that anyone who issues a cheque ought, barring truly exceptional circumstances, to be bound to honour the payment that it represented. This makes perfect commercial sense because all business runs on trust. A society where no one trusts anyone naturally adopts complicated measures to secure payment and it becomes that much more difficult to seamlessly conduct business at speed. It follows that if you encourage a system for the administration of justice where cheques bounce with wild abandon and recourse is long and hard, you will naturally help create a dishonest commercial environment. At the best of times, legal recourse in India is prolix, complex and expensive. This is why parliament did not limit the victim’s ability to sue on a bounced cheque anywhere it chose.

As a general proposition, in Indian law, a case can be filed in a court where an offense occurs. Five candidates fit the Section 138 bill: the place where the cheque is issued, the bank where the cheque is deposited for collection, the place where the cheque is presented for payment, the place where notice under Section 138 is issued and the place where the maker of the cheque failed to pay the holder of the cheque. For my money, the wider the choice available to the victim of a bounced cheque, the easier it is for him to get help from a court. Perhaps this is why traditionally, you could sue the maker of the cheque anywhere and the courts would happily take up your case. Not anymore. The court has now decided that the offense is committed when the cheque is returned by the bank for insufficiency of funds.

In the upshot, the victim of a ‘cheque bouncing’ can only sue where the cheque is dishonoured. A cheque is always dishonoured by the bank on which the cheque is drawn. People only open accounts with banks located conveniently close to them. Ergo, the victim is now compelled to sue in a court close to the home of the perpetrator of the crime. The court was quite aware of the implication. It explicitly stated that allowing any of five courts to try such a case would “lead to harassment of the drawer of the cheque”. Clearly, the convenience of the defaulter took priority over the convenience of the victim of this crime.

What is consequence of this new decision? In time, people will no doubt refuse to accept payment by anything but a local cheque, doing nothing for the promotion of commerce across India generally. More alarmingly, this judgment applies with retrospective effect. In the months to come, lakhs of 138 cases are going to get transferred to courts convenient to the defaulter. Since many of these have been languishing in courts for years already, this body blow will no doubt encourage some creditors to give up and go away. As far as I am concerned, in passing this judgment, the Supreme Court has implement a kind of debt write off, just as Governments do before elections. Only this time, it’s not the tax payer who gets it in the neck; it’s the credulous creditor who accepted a cheque rather than receiving cash. Guess what he is going to do next time?

Originally Published on September 15, 2014 in Businessworld


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