Are Film Plots Protected By Copyright?

Recently, the Delhi High Court dismissed an application for interim injunction filed by a script writer against the release of the film ‘Lootcase’ on the OTT platform, Disney+ Hotstar. In Vinay Vats v. Fox star studios India Pvt. Ltd. & Anr. [I.A. No. 6351/2020 in CS(COMM) 291/2020; Hari Shankar, J.] the plaintiff claimed to be the author and the first copyright owner, of a script for a film titled ―Tukkaa Fitt which was written in 2010-2011, and the trailer for which was released in the year 2012. The Plaintiff filed the application for an interim injunction a day before the scheduled release of the film, Lootcase, based on the similarities between the plot of his film and the trailer of the film, Lootcase. The Defendants submitted that the promos for their film were available in the public domain since June 2019 and on the other hand, the script of the Plaintiff was made public only when it was filed along with the plaint. The Defendants also pointed out that the Plaintiff in moving the court at the last minute was trying to arm- twist the Defendants and secure gains.

The Court in dismissing the Plaintiff’s application, stated that no copyright exists in the plot or theme of a film and reiterated the salient points from the landmark decision in R.G. Anand v. Deluxe Films and Ors. [AIR 1978 SC 1613; Raja Jaswant  Singh, R.S. Pathak and S. Murtaza Fazal Ali, JJ.], wherein it was laid down that:

There can be no copyright in an idea, subject matter, themes, plots or historical or legendary facts and violation of the copyright in such cases is confined to the form, manner and arrangement and expression of the idea by the author of the copyrighted work.

Where the same idea is being developed in a different manner, it is manifest that the source being common, similarities are bound to occur. In such a case the courts should determine whether or not the similarities are on fundamental or substantial aspects of the mode of expression adopted in the copyrighted work. If the defendant’s work is nothing but a literal imitation of the copyrighted work with some variations here and there it would amount to violation of the copyright. In other words, in order to be actionable the copy must be a substantial and material one which at once leads to the conclusion that the defendant is guilty of an act of piracy.…

Where the theme is the same but is presented and treated differently so that the subsequent work becomes a completely new work, no question of violation of copyright arises.…” [Emphasis supplied]

The Court went on to hold that “the plot idea is as old as the hills…the mere fact that certain plot points, between the plaintiff’s script and the story of the upcoming film ―Lootcase as reflected in the trailer…may be common, cannot be the basis to lay a claim to copyright, as the plaintiff has chosen to do. The plot points…such as persons losing bags of money, claiming the same and such bags being sought by members of the underworld, are plot points, which may figure in more than one cinematographic film and cannot, therefore, be said to be the exclusive province of the plaintiff.

In light of the above decision, this article will analyze prior jurisprudence to discern whether there is blanket ban on the protection of plots/themes of a film or if there are special circumstances where courts may allow protection to copyright in the themes or plots of films.

In Zee Telefilms Limited v Sundial Communications Private Limited [2003 (27) PTC 457; A.P. Shah and D.K. Deskmukh, JJ.]  a division bench of the Bombay High Court held that “merely because some of the components of the story are common or in public domain, the concept or idea does not become incapable of protection”. The Court, while upholding the decision of the single judge bench granting permanent injunction in favour of the plaintiffs, evolved certain tests for determining copyright infringement, viz. (a) the works should be considered on the basis of the observations and impressions of the average viewer and not hypercritically; and (b) what is to bee seen is the substance, the foundation, the kernel and the test as to whether the reproduction is substantial is to see if the rest can stand without it.

In XYZ Films LLC and Ors. v. UTV Motion Pictures/UTV Software Communications Ltd. and Ors. [2016 (67) PTC 81 (Bom); G.S. Patel, J.], the Plaintiffs claimed that the Defendants had condensed the contents of its film, The Raid: Redemption into the last 20 minutes of their film, Baaghi. The Plaintiffs argued that the length of the film is immaterial, and that should any viewer see the last 20 minutes of Baaghi, they would undoubtedly conclude that it is a copy of The Raid: Redemption. The Court applied the kernel test laid down in the Zee Telefilms case and stated “the ‘kernel’ of Baaghi, if one is forced to it, is one of filial duty, of fighting for one’s love against all odds. Everything else is secondary, and none of this is even remotely suggested in The Raid: Redemption.” The Court, accordingly, refused to grant an injunction in this case.

More recently, in Shamoil Ahmad Khan vs Falguni Shah [2020 (3) ABR 541], a single judge bench of the Bombay High Court applied a test of ‘abstraction’ to arrive at the conclusion that the plaintiff’s copyright has been infringed. The Court stated that only when you strip a story of its embellishments, descriptions of moods, etc. can you arrive at the plot and story line. The Court concluded that, in this case, when the embellishments are removed from the Defendant’s web series, the life and blood of the series boils down to “…the protagonist coming into possession of a prostitute’s vanity box and bringing it home and noticing perceptible changes as a result of its use in the appearance, mannerism and behaviour of his wife and daughter” which is nearly identical to the Plaintiff’s short story which revolves around the theft of a vanity box and changes to the behaviour of characters in the thief’s family. The Court added, the addition of more characters, the fact that the moral character of the protagonist is different since he does not ‘steal’ the vanity box, etc. are mere embellishments added to lengthen the Defendant’s web series. The Court, therefore, held that “…instead of granting a temporary injunction against exhibition of the web series, interests of justice would be served better if the suit itself is set down for trial and the Defendants are asked to maintain accounts of the profits made from the web series in the meantime…however, further adaptation or use of the web series in a different format may be restrained.

From a review of the cases above, it is clear that copyright protection in plots and themes of films is not a lost cause, and it is possible to protect the plotlines and themes of films from infringement. However, overzealous protection of broad plotlines and themes may result in stifling creativity. Therefore, it is for the courts to walk the fine line between copyright protection and copyright monopolization.

While it is safe to say that in order to determine copyright infringement, courts more often than not apply the average consumer test, the kernel test and the abstraction test, however, the differing approaches taken by courts does not offer a clear-cut path to protection. For filmmakers, the stance taken by a majority of the courts in India, is a wake-up call to step outside the box and away from archaic tropes and plot lines!

Disclaimer: Views, opinions, interpretations are solely those of the author, not of the firm (ALG India Law Offices LLP) nor reflective thereof. Author submissions are not checked for plagiarism or any other aspect before being posted.

Copyright: ALG India Law Offices LLP.

Lease Deeds – The Frustrating Issue Of Enforceability Of Force Majeure Clauses On Account Of The COVID-19 Pandemic

The year 2020 has perhaps elevated the status of force majeure clauses among the most important boiler plate clauses that ought to feature in an agreement or a contract. The COVID-19 pandemic has impacted businesses to evaluate the impact of force majeure clauses on obligations of parties. Doubt has also been cast on whether or not force majeure clauses can be invoked/enforced to frustrate contracts. This article explores the position of these issues in India in respect of lease agreements/lease deeds.

Force majeure has been defined as “an event or effect that can be neither anticipated nor controlled” and the term includes both acts of nature (viz. floods, hurricanes, etc) as well as human acts (viz. riots, strikes, war, etc.) [1]. Force majeure clauses feature in most types of contracts, including lease deeds/agreements, and are usually incorporated to excuse one or all of the parties from performance of the contract during events beyond their control (usually in case of an act of nature/act of persons/act of god).

Force Majeure can be understood as part of the Doctrine of Frustration embedded in Section 56 of the Contract Act, 1872 (hereafter the “Contract Act”) which states, “a contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful”.

The Supreme Court of India interpreted Section 56 in Satyabrata Ghose v. Mugneeram Bangur & Co. and Anr. [AIR 1954 SC 44; J C Shah and V Ramaswami. G K Mitter, JJ.] and observed that, “this much is clear that the word “impossible” has not been used here in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose which the parties had in view and if an untoward event or change of circumstances totally upset the very foundation upon which the parties rested their bargain, it can very well be said that the promisor found it impossible to do the act which he promised to do.” Therefore, it can be arguably said that the Contract Act provides statutory cover for the COVID-19 pandemic which has created a restricted commercial climate globally and as such, the pandemic is a ‘frustrating’ force majeure event.

The Supreme Court in Raja Dhruv Dev Chand v. Raja Harmohinder Singh and Anr. [AIR 1968 SC 1024; B K Mukherjee, Vivian Bose and Natwarlal, JJ.] settled the position of law in respect of leases. The Apex Court observed that, “the chapters and sections of the Transfer of Property Act which relate to contracts are to be taken as part of the Indian Contract Act, 1872…and cannot be read as enacting that the provisions of the Contract Act are to be read into the Transfer of Property Act…By its express terms s. 56 of the Contract Act does not apply to cases in which there is a completed transfer…” and held that Section 108 of the Transfer of Property would apply to lease of land and thereby, to lease deeds. Furthermore, in Sushila Devi and Anr. v. Hari Singh and Ors. [1971 AIR 1756; K S Hegde and A N Grover, JJ.] the Supreme Court held that “Section 56 applies only to a contract. Once a valid lease comes into existence the agreement to lease disappears and its place is taken by the lease. It becomes a completed conveyance under which the lessee gets an interest in the property. There is a clear distinction between a completed conveyance and an executory contract.”. Therefore, it is an established principle of law in India that Section 56 would not apply to a lease deed, because execution of a lease deed completes a transfer and therefore executes a contract. Section 56 by its express terms is only applicable to contracts which are yet to be performed/executory contracts.

The provision to most closely import the Doctrine of Force Majeure in the Transfer of Property Act, 1882 (hereinafter the “TPA”) is Section 108 which renders a lease void only when the property is destroyed or is rendered substantially and permanently unfit for the purposes for which it was let on account of “…fire, tempest or flood, or violence of an army or of a mob, or other irresistible force”. In such an event, the lease is terminable at the option of the lessee. The language in Section 108 can be said to cover acts of nature and acts of persons, however, it does not explicitly lend clarity to whether it would cover a situation like the COVID-19 pandemic. It continues to be a matter of endless debate as to whether the pandemic can be pegged as a man-made event or a force majeure event.

 Nevertheless, in essence, all lease deeds are agreements and therefore parties to a lease deed (yet to be executed) have the option to mutually agree and decide parameters by which an event would be regarded as a force majeure event and the consequences thereof, such as suspension of certain/all obligations. In lease deeds where the force majeure clause features language such as “including, but not limited to” or “any cause/ event outside the reasonable control of the parties” or any other phrase that would throw a wider net on the type of events which would invoke the force majeure clause, it can be argued that the clause subsumes an event such as the COVID-19 pandemic. In lease deeds where such language is absent or which contain provision contrary to Section 108, the parties may either continue to be bound to perform their obligations or may need to seek recourse and rely on the perspicacity of the courts to adjudicate the matter.

[1] Ramanand and Ors. v Girish Soni and Ors., 2020 (1) RCR (Rent) 468 [Delhi High Court, Prathiba M. Singh, J.]

Disclaimer: Views, opinions, interpretations are solely those of the author, not of the firm (ALG India Law Offices LLP) nor reflective thereof. Author submissions are not checked for plagiarism or any other aspect before being posted.

Copyright: ALG India Law Offices LLP.

Artificial Intelligence Created Inventions In India – Whether Patentable?

Artificial Intelligence (AI), over decades of innovation and development, has evolved to a stage of complete autonomy, i.e. to a stage of decision-making without the need for any human intervention. In addition to simplifying complex tasks, this autonomy has also contributed to growth in AI technology’s role from mere creations to creators of Intellectual Property. This growing role of AI in the field of Intellectual Property has, in recent times, most notably been highlighted in the “WIPO Conversation on Intellectual Property (IP) and Artificial Intelligence (AI)”.

Among the various identified issues, was the status of AI-created inventions and their inventorship under the current patent regime. In addition to the status of inventorship, it would also be beneficial to first understand if an AI-created invention would be included as patentable under The Patents Act, 1970.

What are ‘Inventions’?

Section 2(j) of The Patents Act, 1970, defines ‘invention’ as “a new product or process involving an inventive step and capable of industrial application”.

Section 2(ja) of the Act further defines ‘inventive step’ as “a feature of an invention that involves technical advance as compared to the existing knowledge or having economic significance or both and that makes the invention not obvious to a person skilled in the art”. (emphasis supplied)

Section 2(ac) of the Act states “capable of industrial application in relation to an invention, means that the invention is capable of being made or used in an industry”.

Section 2(l) of the Act defines a ‘new invention’ as “any invention or technology which has not been anticipated by publication in any document or used in the country or elsewhere in the world before the date of filing of patent application with complete specification, i.e., the subject matter has not fallen in public domain or that it does not form part of the state of the art. (emphasis supplied)

What inventions can be patented?

While The Patents Act, 1970 does not provide an exhaustive list of what constitutes patentable subject matter, the essential requirements for patentability, as inferred from the above definitions are – Novelty, Utility and Non-obviousness. The requirements of ‘Novelty’ and ‘Utility’ have been recognized as fundamental to Patent law by the Supreme Court of India in Biswanath Prasad Radhey Shyam vs Hindustan Metal Industries[1].

Section 3 of the Act, does however, expressly exclude certain categories from the scope of ‘invention’. The relevant excerpt of the  provision states:

“The following are not inventions within the meaning of this Act,—

…(k) a mathematical or business method or a computer programme per se or algorithms…”. (emphasis supplied)

The nature and scope of the bar/exclusion of algorithms under Section 3(k) of the Act has been clarified by the Delhi High Court in its decision in Telefonktiebolaget LM Ericsson (PUBL) vs. Lava International Ltd.[2], where it observed that “This bar of Section 3(k) does not apply when in a patent involving modern day technology, algorithms are employed in order to perform certain calculations or selections which are thereafter utilized by various hardware components or elements to produce/improve a technology and create a practical effect or result in a physical realization.”

A similar view was also taken by the Delhi High Court in the landmark judgement of Ferid Allani v. Union of India & Ors.[3], where it was observed that, “In today’s digital world, when most inventions are based on computer programs, it would be retrograde to argue that all such inventions would not be patentable. Innovation in the field of artificial intelligence, blockchain technologies and other digital products would be based on computer programs, however the same would not become non-patentable inventions – simply for that reason.”

Further clarifying the scope of the provision, the Court in Allani also held “Across the world, patent offices have tested patent applications in this field of innovation, on the fulcrum of ‘technical effect’ and ‘technical contribution’. If the invention demonstrates a ‘technical effect’ or a ‘technical contribution’ it is patentable even though it may be based on a computer program”.

In addition to the above, the Office of the Controller General of Patents, Designs and Trade marks issued Guidelines for Examination of Computer Related Inventions (CRIs), 2017 which also provide specific definitions to technical terms not defined under the Act, and the procedure for examination of applications for CRIs.

Who can apply for a Patent?

Under Section 6 of the Act, “an application for a patent for an invention may be made by any of the following persons, that is to say,—

(a) by any person claiming to be the true and first inventor of the invention;

(b) by any person being the assignee of the person claiming to be the true and first inventor in respect of the right to make such an application;

(c) by the legal representative of any deceased person who immediately before his death was entitled to make such an application.

(2) An application under sub-section (1) may be made by any of the persons referred to therein either alone or jointly with any other person.”

Section 2(s) of the Act, defines ‘person’ as including the Government. The above definition would, therefore, include natural as well as legal persons.

AI Systems & Inventorship – Position in India and other jurisdictions

AI Systems, although recognized as legal persons in some parts of the world, have not yet universally been granted personhood. In view of this, AI Systems cannot currently be named as inventors in patent applications under the current regime.

Additionally, the Patent regime of certain jurisdictions like the European Union also have the requirement that an inventor designated in an application must be a human being and not a machine. Citing this as a requirement under the European Patent Convention, the European Patent Office (EPO) refused two applications [4] filed before it, designating the AI System DABUS as an inventor.

In refusing the applications, the EPO observed “…the designation of an inventor is mandatory as it bears a series of legal consequences, notably to ensure that the designated inventor is the legitimate one and that he or she can benefit from rights linked to this status. To exercise these rights, the inventor must have a legal personality that AI systems or machines do not enjoy.”

The USPTO has also adopted a similar stance, in denying a patent application designating the AI System DABUS as an inventor [5] in respect of ‘Devices and Methods for Attracting Enhanced Attention’.  In doing so, it also emphasized on the requirement of an inventor being a human being.

Conclusion

In view of the above, inventions that meet the essential criteria of the Act, even if created by AI Systems would not be barred from the scope of patentability. However, the current regime does not recognize personhood of AI Systems. Until the time that this is expressly addressed, AI Systems cannot be designated as inventors in patent applications.

[1] AIR 1982 SC 1444

[2] 2016 (65) PTC 556[Del]

[3] 2020 (81) PTC 489[Del]

[4] Patent Application # EP3564144, Patent Application # EP3563896

[5] USPTO Patent Application 16524350

Disclaimer: Views, opinions, interpretations are solely those of the author, not of the firm (ALG India Law Offices LLP) nor reflective thereof. Author submissions are not checked for plagiarism or any other aspect before being posted.

Copyright: ALG India Law Offices LLP.

May The Courts Be With You – Exemplary Damages In IP Suits

The world is more connected than ever now – credit to globalization. Information is readily available and accessible to everyone and anyone, with the (literal) click of a button. It is redundant to enumerate the various boons of globalization, but it is definitely worth mentioning one bane in particular – the proportional increase in the volume of infringing activities. The readily available information on brands has made it easier to produce better copies than ever before – and the ‘force’ of greed has pushed many to the ‘dark side’ of the law.

With the ball of infringing activities gaining momentum, are injunctions – the most commonly granted relief in IP disputes – enough? If not, then what is?

There are different kinds of reliefs available to an IP holder in cases of infringement and/or passing off in India. While the most commonly granted relief continues to be by way of injunctions, precedents stand witness to Courts also awarding damages proactively in cases involving infringement or passing off. Post 2017, there have been several instances where Courts in India have granted not just compensatory, but even exemplary damages to wrongdoers – provided the facts of the case check certain boxes.

Provisions for Damages under various IP Statutes

Section 135 of the Trade Marks Act, 1999 [Relief in suits for infringement or for passing off], Section 108 of the Patents Act, 1970 [Reliefs in suit for infringement], and Section 55 of the Copyright Act, 1957 [Civil remedies for infringement of copyright] contain the provision for reliefs available in a suit for infringement of trade marks, patents and copyrights respectively. One of the reliefs contained in this provision is that of ‘damages’. Exemplary damages are one type of remedy claimed and is awarded by the judiciary. This is punitive in nature.  

Exemplary Damages in IP Disputes: The Foundation

The most widely discussed cases when it comes to punitive/exemplary damages in IP suits are:

Delhi High Court’s 2005 Order in Time Incorporated v. Lokesh Srivastava and Ors.[1]

The Defendant in this case had commenced the circulation of a magazine under the title “TIME ASIAN SANSKARAN”, which was a slavish imitation of the Plaintiff’s reputed magazines TIME and TIME ASIA. While granting exemplary damages amounting to Rs. 5 lacs against the Defendant, the Court observed that “…This Court has no hesitation in saying that the time has come when the Courts dealing actions for infringement of trade marks, copyrights, patents etc. should not only grant compensatory damages but award punitive damages also with a view to discourage end dishearten law breakers who indulge in violations with impunity out of lust for money so that they realize that in case they are caught, they would be liable not only to reimburse the aggrieved party but would be liable to pay punitive damages also, which may spell financial disaster for themThis Court is of the view that the punitive damages should be really punitive and not flee bite and quantum thereof should depend upon the flagrancy of infringement.”

Division Bench of the Delhi High Court’s 2014 Order in Hindustan Unilever Limited v. Reckitt Benckiser India Limited[2]

The Division Bench overruled the observation in the Time case and observed“…With due respect, this Court is unable to subscribe to that reasoning, which flies on the face of the circumstances spelt out in Rookes and later affirmed in Cassel. Both those judgments have received approval by the Supreme Court and are the law of the land…”.

The reasoning spelt out vis-à-vis exemplary damages in the Rookes case [3] was also discussed by the Division Bench – “…The House defined three categories of case in which such damages might be awarded. These are:

a. Oppressive, arbitrary or unconstitutional action any the servants of the government;

b. Wrongful conduct by the defendant which has been calculated by him for himself which may well exceed the compensation payable to the claimant; and

c. Any case where exemplary damages are authorised by the statute…”

Observing the Trend in Recent Cases

August 2018

The Bombay High Court awarded exemplary damages amounting to Rs. 1.5 Crore in the case of Glenmark Pharmaceuticals Ltd. V. Curetech Skincare and Ors.[4] whilst observing “…It is clear that the Defendant No. 2 is not only indulging in infringing activities by repeatedly copying brands of other companies but also appears to be in complete violation of the FDA regulations. The conduct of the Defendant No. 2 shows that this Defendant has no regard or respect to the rule of law. The consumers and general public are being repeatedly cheated by the Defendant No. 2. I am of the opinion that had this Defendant been imposed with exemplary costs at the very beginning of their infringing activities, this Defendant would not have been audacious in repeating its infringing activitiesThough the wrong done by the activities of the Defendant No. 2 cannot be quantified in terms of money, I feel that in the facts and circumstances of the present case, an amount of Rs. 1,50,00,000/- (Rupees One Crore Fifty Lakhs Only) is an appropriate amount of costs which should be paid by the Defendant No. 2.”

The Court directed the Defendant to pay damages to the Kerala Chief Minister’s Distress Relief Fund.

October 2018

The Bombay High Court relied on its reasoning in the Glenmark Case and awarded exemplary damages amounting to Rs. 1.5 Crore in the case of Shalina Laboratories Pvt. Ltd. And Ors. v. Twin Impex and Ors. [5]. The Court further observed “…Considering the dishonest conduct of the Defendants and considering the fact that the parties have left it to this Court to decide the amount of costs, even in the present case, I direct that an amount of Rs. 1,50,00,000/- (Rupees One Crore Fifty Lakhs Only) shall be jointly and/or severally paid towards costs…”

The Court directed the Defendant to pay the damages to the Tata Memorial Hospital, Mumbai.

March 2019

The Delhi High Court in Koninlijke Philips N. V. and Ors. v. Amazestore and Ors.[6] discussed and re-affirmed the ratio in the cases of Rookes and Cassel [7]while making its observations on “aggravated or exemplary damages”. The Court observed – “Rookes v. Barnard (supra) specifically states that the award of aggravated damages is justified when the Court finds the conduct of the Defendant to be extremely mala fide and wanton…” While quoting from the Cassel case on the “terminology” of damages (inter alia, “at large”, “punitive”, “aggravated”, “retributory”, “vindictive” and “exemplary”), the Court further observed “… Speaking for myself, I prefer “exemplary”, not because “punitive” is necessarily inaccurate, but “exemplary” better expresses the policy of the law as expressed in the cases…”.

Finally, the Court held that “The mala fide actions of the Defendants prove that they fall in the last category in the chart hereinabove, and that compensatory damage is inadequate to punish the Defendants for their outrageous conduct and therefore to deter them from repeating it, the Court awards some larger sum, i.e. aggravated/exemplary damages... Accordingly, this Court is of the view that the actions of the Defendants merit an award of aggravated damages.”

The Court also came up with an illustrative chart (below) for calculating quantum of damages:

The Court directed the Defendant to pay the damages to the Plaintiff.

April 2019

The Bombay High Court in Nippon Steel & Sumitomo Metal Corporation v. Kishor D Jain & Anr.[8], while awarding damages amounting to Rs. 5 Crores against the Defendant, held that “…While the parties are willing to settle the matter here, I am of the view that an example must be made of the present Defendants, to deter such entities / persons from conducting such fraudulent activities. They must know that the Courts are no longer willing to let such activities slide by and shall deal with the same with an iron hand… hough no amount of costs can justify the acts of the Defendants, I think costs of Rs. Rs.5,00,00,000/- (Rupees Five Crores Only) shall certainly act as a deterrent factor not only to these Defendants but also to the other unscrupulous parties/entities.

The Court directed the Defendant to pay the damages to the Tata Memorial Hospital, Mumbai.

Conclusion

Law evolves to cater to the needs of the evolving society. As can be seen from the above cases, the Courts in India are adopting a rather liberal, pro-brand owners’ approach in granting exemplary damages against wrongdoers. To prevent exploitation and misuse of exemplary damages, the Courts have ensured uniformity in the factors leading to the grant of  exemplary damages, after a thorough evaluation of the factual matrix. While the principles laid down in the cases of Rookes and Cassel still lead the way in determining whether an award for exemplary damages is warranted, other factors that seem to play a role are inter alia the history of the wrongdoer (i.e., whether she/he is a habitual offender), public policy aspect and consequences of the infringing activity, etc. Further, it is interesting to observe that damages are, in certain cases as directed by the Courts, payable to various “funds”, hospitals or charitable organizations and not the Plaintiff.

[1] 2005 (30) PTC 3 (Del)

[2] 2014 (57) PTC 495(Del)

[3]Rookes v. Barnard, [1964] 1 All ER 367

[4] 2018 (76) PTC 114 (Bom)

[5] MIPR 2018 (3) 282

[6] 2019 (78) PTC 618 (Del)

[7] Broome v. Cassel and Co., 1972 AC 1027

[8] COMIP (L) No. 283 of 2019

Disclaimer: Views, opinions, interpretations are solely those of the author, not of the firm (ALG India Law Offices LLP) nor reflective thereof. Author submissions are not checked for plagiarism or any other aspect before being posted.

Copyright: ALG India Law Offices LLP.

Proposed Decriminalization Of Compoundable Offences Under The Limited Liability Partnership, 2008 By MCA: Need For A Calibrated Approach

With a focus to increase and promote ease of doing business in India, the Government has in the past adopted numerous steps to attract foreign investments, including decriminalization of non-compliances and minor offences under the various laws including the Companies Act, 2013 (“Companies Act”), Foreign Exchange Management Act, 1999, etc. As per a recent report of the World Bank, India ranked 63rd amongst 190 countries on the ease of doing business index in 2020.

A major impediment for companies in attracting foreign investment is the risk of criminal action and imposition of heavy fines for actions or non-compliances which are not necessarily fraudulent. Many critics have questioned the efficiency of criminal law in dealing with corporate misconduct. With respect to corporate misconduct, the recurring issue is that the imposition of criminal sanction involves various complexities in criminal trials, which are time-consuming, cost-intensive and require that the onus and burden of proof be established beyond reasonable doubt. All of these factors, on one hand, reduce the chances of successfully prosecuting companies due to the complex nature of criminal trials and on the other hand, causes undue hardship to companies where the offence may have been committed by inadvertence, or where violations are not grave enough to cause injury to public interest. These factors act as a deterrent and are one of the major reasons which hinder investment from within and outside India and incidentally have an impact on the economy as a whole.

Given that the judicial system is heavily overwhelmed due to pendency of criminal matters and consequent delays in dispute resolution, various legislative measures have to be considered to boost business in India. A balanced approach needs to be taken between civil and criminal liabilities so that grave misconduct and mala fide intent is punished whereas minor and less serious offences are compounded.

The Department of Financial Services under the Ministry of Finance had issued on June 8, 2020 a Statement of Reason titled  “Decriminalisation of Minor Offences For Improving Business Sentiment And Unclogging Court Processes’ (refer here) ,  which proposed review by way of re-classification and de-criminalization of offences under various legislations and has also laid out the following principles, which are reproduced as follows:

Criminalizing procedural lapses and minor non-compliances increases burden on businesses and it is essential that one should re-look at provisions which are merely procedural in nature and do not impact national security or public interest at large. The following principles should be kept in mind when deciding on reclassification of criminal offences to compoundable offences: (i) Decrease the burden on businesses and inspire confidence amongst investors; (ii) Focus on economic growth, public interest and national security should remain paramount; (iii) Mens rea (malafide/ criminal intent) plays an important role in imposition of criminal liability, therefore, it is critical to evaluate nature of non-compliance, i.e. fraud as compared to negligence or inadvertent omission; and (iv) The habitual nature of non-compliance.” 

By virtue of an amendment in 2019, 16 offences in the Companies Act were re-categorized to civil defaults. The Companies (Amendment) Bill, 2020 decriminalizes several sections of the Companies Act. Recently, on September 19, 2020 the Lok Sabha passed the Companies (Amendment) Bill, 2020 in which 48 sections have been amended thereby de-criminalizing them and 17 sections have also been amended to improve ease of doing business. Moreover, many of the compoundable offences under the Companies Act will be dealt through an in-house adjudicating mechanism.

Taking the lead from the reforms aimed at decriminalizing the provisions of the Companies Act,  the Ministry of Corporate Affairs (“MCA”) had issued a Statement of Reason dated June 19, 2020 titled ‘Decriminalisation of Compoundable Offences under the Limited Liability Partnership (LLP) Act, 2008, for Greater Ease of Doing Business for law abiding LLPs and Declogging of Criminal Justice system’ (refer here), which identified and listed out 20 sections of the Limited Liability Partnership Act, 2008  (“LLP Act”)and decided to review the penal provisions therein with a view to decriminalize compoundable offences involving minor, procedural or technical violations of the LLP Act, or offences which may not involve any harm to public interest.  Comments have also been invited by stakeholders on the 20 sections which cover provisions such as those pertaining to registration or change of designated partners, maintaining books of accounts, duty of partners to produce documents and evidence,  duty of limited liability partnership to file its annual returns, etc. The reason behind MCA’s proposed changes to the LLP Act is to provide better procedural leverage for companies in conducting their businesses and decrease the burden on criminal courts by reducing criminal liability.

In order to meet the above objectives, in appropriate cases, ‘criminal fine’ should be changed to ‘civil penalty’. In the Companies Amendment Act 2019, the term ‘fine’ was replaced with the term ‘penalty’ in an effort to reduce the hardship of companies. Under the Companies Act, there is a difference between the two terms viz. fine and penalty. Fines are levied by courts for non-compliance of certain statutory provisions of the Companies Act and involve a trial. On the other hand, penalties are levied by the executive body of the MCA after a summary proceeding and is usually adjudicative in nature. Levying a penalty involves a far quicker process than the imposition of a fine.

In K. Singh Deo v. Jenson And Nicholson India Ltd., (1985 CriLJ 464), the Calcutta High Court observed that “…there is a gulf of difference between “punishment” and “penalty”. In Section 53,I.P.C., various types of punishments have been described of which fine is one. It is doubtful if liability to pay fine makes an act or omission an offence. Imposition of fine may be treated as a penalty. Because penalty generally means payment of a fine for breach of law, rule or contract ; and in sports it means a disadvantage imposed on a competitor for breaking a rule ; the essence of penalty is payment of money interrorem by the party at fault. Such observation cannot be made with regard to punishment the effect of which is not preventive in so far as the offender is concerned.

In Adamji Umar Dalal vs The State Of Bombay; (AIR 1952 SC 14) Supreme court opined that the magnitude of an offence needs to be considered when deciding the quantum of penalty. The Supreme court observed that “The determination of the right measure of punishment is often a point of great difficulty and no hard and fast rule can be laid down, it being a matter of discretion which is to be guided by a variety of considerations, but the courts has always to bear in mind the necessity of proportion between an offence and the penalty. In imposing a fine it is necessary to have as much regard to the pecuniary circumstances of the accused persons to the character and magnitude of the offence, and where a substantial term of  imprisonment is inflicted, an excessive fine should not accompany it except in exceptional cases.” (emphasis supplied)

The MCA’s Statement of Reason for Decriminalisation of Compoundable Offences under the Limited Liability Partnership (LLP) Act, 2008is a welcome measure, which is intended to benefit the stakeholders and the investors by facilitating ease of doing business, which is more important than ever given the negative economic impact of COVID-19. The re-categorization of offences and the use of  an in-house adjudication mechanism, have the ability to help to reduce protracted criminal proceedings and reduce the existing backlogs in the judicial system. Instances of non-compliance due to inadvertent omission(s) can be quickly resolved by imposition of penalties instead of fines. Further, no element of mens rea needs to be established, for imposition of penalties by the adjudicating officer designated by MCA, thus making the resolution process faster than a criminal prosecution.  

On the flipside, if decriminalisation of certain offences under the LLP Act is not rightly implemented, many of the provisions which are sought to be de-criminalized may turn out to be a toothless measure which may not act as a good deterrent and may not ensure compliance of the statutory provisions by the companies. In order to fulfil the objective of the proposed measures, speedy disposal of cases will be imperative. Since decriminalization also has the potential to encourage an uninhibited corporate culture of purging defaults by merely expending funds, due deliberation needs to be undertaken by the legislators. Therefore, a balanced approach is required to be adopted by the Government before taking steps towards de-criminalization.

Disclaimer: Views, opinions, interpretations are solely those of the author, not of the firm (ALG India Law Offices LLP) nor reflective thereof. Author submissions are not checked for plagiarism or any other aspect before being posted.

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