Internet Censorship in India: Section 66A of the IT Act, 2000.

(Picture source: http://www.slideshare.net/qwsny/internet-censorship)

The Supreme Court's decision on internet censorship will impact the way in which people communicate over the internet and will also immensely affect the manner in which intermediaries deal with take down requests. In this bulletin we examine the Supreme Court decision of Shreya Singhal v Union of India and analyze the consequences of this decision.  

On 24 March 2015, a two judge bench of the Supreme Court of India (Supreme Court) ruled on the constitutional validity of Section 66A, 69A and 79 of the Information Technology Act, 2000 (IT Act). Shreya Singhal, the petitioner, challenged the constitutional validity of these provisions on the grounds that it violates the freedom of speech and expression under Article 19 of the Constitution of India and that the provisions suffer from vagueness.

Section 66A: Unconstitutional

As per Section 66A of the IT Act, a person shall be punishable with imprisonment and fine for sending by means of a computer resource or communication device (1) any information which is grossly offensive or has a menacing character; (2) any information which he knows to be false, but is sent for the purpose of causing annoyance, inconvenience, danger, obstruction, insult, injury, criminal intimidation, enmity, hatred or ill will; and (3) any electronic mail or electronic mail massage for the purpose of causing annoyance or inconvenience or to deceive or to mislead the addressee or recipient about the origin of such messages. This provision of the IT Act was struck down by the Supreme Court of India for being in violation of the fundamental right of freedom of speech and expression under the Constitution of India and for being vague and open-ended.

Freedom of Speech and Expression

The regulation of freedom of speech and expression is based on three important concepts; discussion; advocacy and incitement. Discussion and advocacy forms the essence of this freedom. It is only when such discussion or advocacy reaches the level of incitement will it need to be curtailed. Section 66A of the IT Act, imposes an embargo on the discussion and advocacy of information itself.

The Court observed that Section 66A puts "all information" disseminated over the internet through the tests of its sub-clauses. It would therefore suggest that, all kinds of information, whether scientific or artistic may be roped in and tried against the tests laid down under the provision. By putting all information through the test of its sub-clauses, Section 66A does not differentiate between mere discussion and advocacy of a point of view and incitement. This according to the Court, goes against the spirit of 'freedom of speech and expression' and hinders the free flow of opinions and ideas essential to sustain collective life of the citizenry.

The Court negated the contention of the Government of India and held that Section 66A cannot be justified on grounds mentioned under Article 19(2) such as of public order, defamation, and incitement to an offence, decency and morality. Article 19 can be curtailed only when the message transmitted has the 'tendency' to disrupt public order. Secondly, Section 66A cannot be equated to defamation, because under Section 499 of the Indian Penal Code for a message to be defamatory there must be injury to reputation. Section 66A does not concern itself with injury to reputation, as it only deals with the transmission of grossly offensive and annoying messages without affecting the reputation of another. The same applies for decency and morality, as what appears to be offensive and annoying may not be obscene or immoral. Lastly, Section 66A, does not have a proximate relation with 'inciting an offence' as it does not expressly use that term in the provision.

Vagueness

Elaborating the grounds for holding Section 66A of the IT Act as 'unconstitutional', the Court said terms used in the provision are vague, undefined and open-ended., Terms like 'annoying', 'inconvenience' and 'grossly offensive', used in the provision are vague and does not point towards a specific offence.

Striking down vague and open-ended provisions of Section 66A is a welcome move by the Supreme Court of India. This provision was viewed as a menace by the society as it deterred free flow of ideas and thoughts. This decision will immensely benefit social networking websites like Twitter and Facebook as users will now resort to such mediums to express their ideas without the fear of being prosecuted. The legislative intent behind introducing Section 66A appears to be curbing 'incitement of an offence' and 'protecting public order.' However the Legislature has gravely erred, in drafting it and also failed to notice that adequate safeguards are available under other provisions of the IT Act and the Indian Penal Code.

Section 69A and Information Technology (Procedure and Safeguards for Blocking for Access of Information by Public) Rules, 2009: Constitutional

Section 69A of the IT Act, empowers the Central Government, in the interest of sovereignty and integrity of India, defense of India, security of the state, friendly relations with foreign states or public order or for preventing incitement to the commission of a cognizable offence, to order any agency of the Government or intermediary to block access by the public any information that is stored, generated, transmitted, received or hosted in any computer resource. The procedural safeguards for such blocking of access by the public must be carried on in accordance with the Information Technology (Procedure and Safeguards for Blocking for Access of Information by Public) Rules, 2009 (Blocking Rules).

Section 69A of the IT Act and the Blocking Rules were challenged on the grounds that it does not provide the facility of pre decisional hearing and that it does not provide procedural safeguards such as issuance of a warrant for search and an application to the High Court or other Court to set aside the decision of blocking. The Court correctly identified that unlike Section 66A, Section 69A is narrowly drawn with several safeguards. Further, blocking can be resorted to only when the Central Government is satisfied and it falls squarely within the reasonable restrictions to freedom of speech and expression under Article 19(2). Lastly, the court recognized the possibility of hearing before the decision of blocking is finalized under the Blocking Rules and stated that failure to provide additional safeguards cannot be a ground for unconstitutionality.

This decision of the Supreme Court does not specifically alter the current position of law, however it has brought about some clarity. First, there is clarity on the point that there appears to be a co-relation with the conditions provided under Section 69A and Article 19(2) of the Constitution of India. This would suggest that the threshold of Article 19(2) must be satisfied before a takedown is affected. Secondly, there is more clarity on the point of hearing as the Supreme Court reinforces and clarifies that the Blocking Rules guarantee pre decisional hearing. Therefore any violation of this safeguard can give rise to a cause of action under Article 226 of the Constitution of India.

Section 79 and the Information Technology (Intermediary Guidelines) Rules, 2011: Constitutional, with caveats.

Section 79 of the IT Act provides for the conditions which exempt intermediaries from liability. It provides that an intermediary shall be exempt from liability if it observes the due diligence requirements under the Information Technology (Intermediary Guidelines) Rules, 2011 (Intermediary Guidelines), along with other conditions under the provision. It also provides that an intermediary shall not be exempt it fails to remove or disable content which furthers 'unlawful acts' after it has been brought to its knowledge. It is important to note that Rule 3(2) of the Intermediary Guidelines lays the obligation on an intermediary to inform third parties to not host, transmit, display, upload, publish, modify or share certain kind of content on its interface. Further, as per Rule 3(4) of the Intermediary Guidelines an intermediary must disable content which contravenes Rule 3(2) upon obtaining knowledge by itself or after it is brought to its actual knowledge by an affected person.

It was contended that the Intermediary Guidelines and Section 79 are open ended and vague as intermediaries are only persons who offer a neutral platform through which persons may interact with each other, and requiring them to exercise their own judgement in disabling content defeats the purpose of being an 'intermediary'. The Court saved the provision from being struck down by providing two very important caveats while reading this provision. First, an intermediary can remove content only after receiving a court order directing it to do so. It is only if it fails to follow this court order will it not be exempt under Section 79. For this purpose it clarified that Rule 3(4) of the Intermediary Guidelines must be read down in the same manner as Section 79(3)(b). This would suggest that the Rule 3(4) appears to be redundant, as only matters which fall within the ambit of 'unlawful acts' under Section 79(3)(b) can be taken down. On the same point the court then clarified the ambit of 'unlawful act' and stated that it encompasses only the restrictions under Article 19(2) and nothing more. This would mean that the offences such as hosting content which impersonates another would therefore not be subject to take down. The Court understood that most services agreements contain what is provided in Rule 3(2) and therefore restricted take down to only 'unlawful acts' which is nothing but Article 19(2) of the Constitution of India.

This decision of the Supreme Court of India immensely affects intermediaries. This decision paves the way for companies like Google and Facebook etc. to function without takedown hassles on the basis of a mere user complaint. Up till now intermediaries constantly had to deal with several complaints and also had to justify which takedown request was rejected. By having the judiciary determine takedown requests, companies need not take into consideration complaints that are made directly to them. What is pertinent to note here is that intermediaries now need to entertain only court takedown orders or executive takedown orders which are in line with Article 19(2) of the Constitution of India as any other form of takedown will impair the freedom of speech and expression. This would mean that an intermediary liability exemption is only restricted to ensuring the due diligence requirements under the Intermediary Guidelines and taking down content pursuant to court orders and executive action which can only be on the basis of Article 19(2) and not on the basis of Rule 3(4) of the Intermediary Guidelines.

Conclusion

The draconian section 66A which was originally meant to tackle spam and cyber stalking was gravely misused by the executive, especially by the Government in power. This crackdown of online dissent and criticism most definitely shunned people for using social media as means of disseminating information and voicing opinions. By declaring Section 66A unconstitutional, the Supreme Court has opened India to move online and engage in public dialogue and revived the freedom of bloggers. This will benefit social networking websites like Facebook and Twitter as they will now become important interfaces for information dissemination. The constitutionality of Section 69A was upheld primarily because there appears to be no procedural lacuna in the provision. This provision will continue to hold true in the light of internet censorship. Lastly, Section 79 of the IT Act along with the Intermediary guidelines were tested on the grounds of constitutionality. The interpretation accorded by the Supreme Court while limiting to take down of only court sanctioned requests has lifted a huge burden off intermediaries. Further, it has also given more light to the nature of 'unlawful acts' that may be subject to take down by limiting it only to the restrictions provided under Article 19(2).

Right to be forgotten: When privacy trumps freedom of speech

Source: mashable.com

In the EU, a citizen has the right to be forgotten. This right basically gives you the right to withdraw personal data. Very recently the EU extended this right against search engines like Google. So if your personal data is up on Google, you can ask them to disable links to such information, of course subject to a few conditions.

The European Court of Justice recently read the right to be forgotten within the realm of the 1995 Data Protection Directive. This case has gained immense popularity as it directed the search engine, Google, to remove links which impinged on the complainant's right to privacy.

Before we discuss the case, it is pertinent to understand, very briefly the data protection law that exists in the European Union (EU). The EU in its Data Protection Directive, 1995 expressly protects an individual's right to privacy with respect to processing of personal data. This directive is considered a milestone in the field of privacy laws. The growing dependency on technology and uneven enforcement of the directives forced the EU commission to formulate a new privacy law. Thus, in the year 2012, the commission proposed the new data protection regulation which aims at being a one stop shop for all matters concerning the protection of private data.

The commission's proposal seeks to modernize the 1995 directives such that the right to personal data is protected in the future. They focus on: reinforcing individuals’ rights; strengthening the EU internal market; ensuring high level of data protection in all areas, including police and criminal justice cooperation; ensuring proper enforcement of the rules; and setting global data-protection standards.[1] These regulations basically aim at empowering individuals to take control over their data and ensure that their personal data is protected.  The European Commission will also strengthen individuals’ right to be forgotten.

EU decision on the right to be forgotten

A Spanish citizen, Mario, lodged a complaint against a daily newspaper and Google Spain. Mario in his complaint urged the court to order Google to remove a link of a newspaper article concerning the public auction of his repossessed home. He contended that as this news is old and does not pertain to his current status in society, it infringed his right to privacy. It is relevant to note here, that Mario did not contend that the information is untrue or inaccurate, he merely stated that as the auction notice has no relevance to his present state of affairs and the continued existence of such information violated his right to privacy. He also urged the Court to order the newspaper to no longer keep within its possession such information. The Court recognized the right to be forgotten and ordered Google to deactivate links regarding the auction notice. However the Court struck a balance between the right to privacy and freedom of the media. While the Court ordered Google to delete access to the information deemed irrelevant but it did not rule that the underlying newspaper archive needs to be changed in the name of data protection.

The EU directives impose an obligation on 'controllers' to ensure protection of personal data and also undertake erasure of irrelevant and infringing data. A controller has been defined under the directives to mean a natural or legal person, public authority, agency or any other body which alone or jointly with others determines the purposes and means of processing personal data. The following paragraphs will highlight how the court equated Google to be a controller.

• Applicability of EU directives to search engines: The court ruled that Google is a controller as it performs the function of processing personal data. Processing of personal data has been defined to mean any operation or set of operations which is performed upon personal data such as collection, recording, organisation, storage, adaption or alteration, retrieval, consultation, use, disclosure by transmission, dissemination or otherwise making available, alignment or combination, blocking, erasure or destruction.  A search engine, like Google, processes personal data as it collects data which it subsequently retrieves, records and organizes within the framework of its indexing programmes, stores on its servers and, as the case may be discloses and makes available to its users in the form of lists of search results. 

• Right to be forgotten under the 1995 Directives: While reading into an individual's right under Article 12 of the directives, the Court held that individuals have the right to ask search engines to remove links which are inaccurate, inadequate, irrelevant or excessive. The court held that a case by case assessment must be made and the economic interests of the search engine must be weighed vis-a-vis the complainant's right to be forgotten. The court also clarified that this right is not an absolute right and will have to be balanced with other fundamental rights, such as the freedom of media.

The judgment does not clarify how search engines should implement this ruling, which has left Google in a fix. However, Google has introduced erasure forms. Complaints received by them are processed and the appropriate action will be taken. Google has indicated that it received over 12,000 removal requests on day one and over 41,000 requests by day four. Other search engines are also closely monitoring these developments and making the required changes to their privacy policy in order to implement this judgment.

Indian Legal System:

The right to privacy in India is protected under Article 21 of the Constitution of India. This right is not an absolute right and is subject to reasonable procedures established by law. There are no precedents which have interpreted the right to be forgotten as a subset of the right to privacy. Indian law only address direct infringement of privacy and does not give people the right to remove irrelevant and unnecessary information without approaching a court or tribunal. The right of erasure arises only once it is established that the material impinges upon the right to privacy by the relevant court of law.

The Information Technology Act, 2000 and the rules thereunder also do not expressly provide for the right to be forgotten. The only provision which can be read to include the right to be forgotten is the intermediary's duty to remove content which is infringing in nature[2]. This can be read broadly to include the right to be forgotten as the aggrieved can approach the intermediary and prove how the data is infringing in nature. The final decision rests with the intermediary. The other data protection rules merely provide the right to review information given and request for amendments and alterations. These rules do not expressly guarantee the right to be forgotten.

The Shah Committee Report, 2012 proposed that the new privacy law in India must give more powers to individuals. In one of its recommendations it proposed that individuals should have the right to be forgotten. The Report suggested that access to personal information held by a data controller; should be able to seek correction, amendments, or deletion such information where it is inaccurate; be able to confirm that a data controller holds or is processing information about them; be able to obtain from the data controller a copy of the personal data. The leaked privacy bill 2014 bill is very similar to the EU directive and extends the right to privacy to all residents of India. It imposes obligations on persons in control of data to ensure that privacy of data is maintained and also extends the right to erasure of data on residents.

It will be interesting to see how this right will be read in the Indian context.

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[1] http://ec.europa.eu/justice/data-protection/document/review2012/factsheets/1_en.pdf

[2] Rule 3, Information Technology (Intermediaries Guidelines) Rules, 2011

Death penalty: Hearing at review stage, permitted!

"The magic of the spoken word, the power of the Socratic process and the instant clarity of the bar-Bench dialogue are too precious to be parted with" - Krishna Iyer., J

Picture Source: Dominica Weekly

TheHon'ble Supreme Court of India upheld the right of a death penalty convict to a hearing at the review stage before the Supreme Court of India. The constitutionality of Order XXXVIII of the 1950 Supreme Court Rules read with Order XI Rule 1 was discussed. These rules state that all review cases should be heard by a bench of at least three learned Judges. This was reduced by the Supreme Court Rules 1966 to two Judges by Order VII Rule 1. Further, in 1978 a new sub-rule (3) was added to Order XL of the Supreme Court Rules providing that all review applications could now be disposed of and heard by circulation - that is without oral argument.

The petitioners urged that the impugned order of the Supreme Court Rules, 1996 be declared unconstitutional inasmuch as persons on death row are denied an oral hearing. It was further contended that the hearing of cases in which death sentence has been awarded should be by a bench of atleast 5 Supreme Court judges.

The respondents echoed the judgment of the Constitutional bench in Eshwara Iyer and stated that judges apply their mind while disposing review petitions in their chambers. It was further contended that the judiciary is overburdened and other jurisdictions also don't provide for hearings at the review stage.

The decision of the Court rests on the principles of Article 21 of the Constitution of India. It aims at upholding the right to life which is the spirit behind this provision of the Constitution. The Court by providing a dynamic interpretation of its decision in Eshwar Iyer held that death penalty convicts form a separate class of convicts. The Court went on to state that that death penalty is awarded in rarest of rare cases and two differently trained judicial minds may apply a different set of rules while determining the case which can seriously impact the convicts right to life under Article 21 of the Constitution of India. Therefore in cases of death penalty, limited oral hearing must be made a precondition at the review stage.

The Court further clarified that the right to limited hearing will be applicable in pending review petitions and future petitions. It will also apply where a review petition is already dismissed but the death sentence is not executed so far. In such cases, the petitioners can apply for the reopening of their review petition within one month from the date of this judgment. However, in those cases where even a curative petition is dismissed, it would not be proper to reopen such matters.

On the point of the number of judges hearing the petition where death penalty is awarded the Court held that in all cases in which death sentence has been awarded by the High Court in appeals pending before the Supreme Court, only a bench of three Hon’ble Judges will hear the same. This is for the reason that at least three judicially trained minds need to apply their minds at the final stage of the journey of a convict on death row, given the vagaries of the sentencing procedure outlined above. At present, the Court is not persuaded to have a minimum of 5 learned Judges to hear all death sentence cases.

However in the dissenting judgment Chelameswar., J stated that it has never been held, either in this country or elsewhere, that the rule of audi alteram partem takes within its sweep the right to make oral submissions in every case. It all depends upon the demands of justice in a given case. Eswara Iyer’s case clearly held that review applications in this Court form a class where an oral hearing could be eliminated without violating any constitutional provision. Therefore no separate oral hearing needs to be provided at the state of review.

This is an excellent example of how the judiciary has carved a niche exception to an already established rule. The majority very clearly extends this privilege to death penalty convicts only, whose right to life is protected under the Constitution of India. It is an established norm that this punishment is provided in rarest of rare cases and a rock solid reason must exist for this punishment to stand ground. Hence, in order to remove all possibilities of error this decision of the Supreme Court reinforces the convicts right to life and hearing.

Surinder Koli, the Nathiri killer, will be the first to enjoy the benefits of this judgment as he has filed for a review and his will be the first petition to heard in open court.

STOP: Mirror Mirror on the wall, who's the fairest of them all!?

A father who is struggling financially is saddened to have a dark skinned daughter instead of a son. The depressed girl upon using the fairness cream gets a job as a flight attendant and has changed the tide for her father. The Ministry of Information pulled down this ad as it promoted discrimination on the basis of colour.

This aim of the ministry has been codified by the Advertising Standards Council of India by through the 'Advertising for Skin Lightening or Fairness Improvement Products Guidelines, 2014'. These guidelines emphasize that advertisements should not deride race, caste, colour, creed or nationality.

The guidelines state that no advertisement of a fairness product shall reinforce negative social stereotyping on the basis of skin colour. Specifically, advertising should not directly or implicitly show people with darker skin, in a way which is widely seen as, unattractive, unhappy, depressed or concerned. These ads should not portray people with darker skin, in a way which is widely seen as, at a disadvantage of any kind, or inferior, or unsuccessful in any aspect of life particularly in relation to being attractive to the opposite sex, matrimony, job placement, promotions and other prospects. It also provides that the ad mustn't associate darker or lighter colour skin with any particular socio-economic strata, caste, community, religion, profession or ethnicity. Further the ad should not perpetuate gender based discrimination because of skin colour.

PC: www.respectwomen.co.in

These guidelines not only promote equality but attempt to uproot racism which runs deep in India's history. 

Fixing Indian Arbitration

The Law Commission of India’s Troubleshooter Report

It is no secret that for all the international jurisprudence establishing arbitration as an effective, cost efficient, prompt and necessarily independent system of resolving a wide range of disputes, the Indian experience has been rather different. Even after the Supreme Court’s decision in BALCO, India remains a jurisdiction where the Courts routinely read down the sacrosanct bar on judicial intervention, parties almost without exception challenge awards with significant success, high arbitrator fees and courts stifle arbitration and fairly non-committal towards institutional arbitration.  In its 246th Report the LawCommission of India has recommended amendments to the Arbitration and Conciliation Act 1996 (‘Act’) to address some of the concerns plaguing the law governing arbitration in India. In this post we discuss some of the salient suggestions. In the interest of brevity we have dispensed with a comprehensive section-by-section analysis.

I.                   Boost for Institutional Arbitration

In an attempt to boost institutional arbitration the Commission has recommended addition of Explanation 2 to Section 11(6A) to lay down a general mandate for Courts should encourage the adjudication of disputes by reference to institutionalized arbitration. In view of certain institutional rules such as those contained in Rule 26 and Schedule I the SIAC Rules 2013, the Commission has recommended widening of the definition of ‘arbitral tribunal’ to also include emergency arbitrator.

II.                Section 2

In another suggestion the Commission ,in complete endorsement of the decision in Chloro Controls (I) P. Ltd[1] in addition to its proposed amendment to Section 8, has recommended that all reference to ‘party ’ in the Act also includes persons who derives his interest from such party. Several other changes have been recommended to Section 2 in order to capture the import of the judgement in  BALCO.[2] Further, in what is set to be a point of great debate the Law Commission on page 39 of its report recommends:

“Also insert the following proviso [after subsection 2(2)] “Provided that, subject to an express agreement to the contrary, the provisions of sections 9, 27, 37 (1)(a) and 37 (3) shall also apply to international commercial arbitration even if the seat of arbitration is outside India, if an award made, or that which might be made, in such place would be enforceable and recognized under Part II of this Act.”

Article 1(2) of the UNCITRAL Model Law which provides that “The provisions of this Law, except articles 8, 9, 35 and 36, apply only if the place of arbitration is in the territory of this State." It would be over optimistic to expect that this will indeed clarify the law. With interim measures of foreign seated arbitrations back in the domain of the Indian Courts, albeit non-exclusively, the core issue of judicial overreach is likely to remain.

Interim Orders by a Foreign Court supervising Arbitration

The Commission could have tried to resolve the problem which exists insofar as there is no clarity as to the exact mode of enforcement of interim orders passed by a foreign court having supervisory jurisdiction over arbitration. Since an interim order is by nature not final and conclusive, lawyers have for long struggled to find a method of enforcing an interim measure issued by a foreign court in relation to an arbitration initiated under its jurisdiction. Any attempt to enforce such an interim order will fall foul of Section 44A of the CPC since the order will not qualify as a ‘judgement’ or ‘decree’. The other roundabout method for a party is to initiate contempt proceedings in the foreign court on the ground of non adherence to the initial interim order and subsequently attempt to enforce the judgement (not the underlying order but  the subsequent judgement holding contempt) under Section 13 and Section 44 of the CPC. Clearly, both these avenues are ineffective. While the Commission recognizes this problem, a clear remedy seems to have been left out. The Commission might have benefited by giving the issue more attention.

III.              Delay in the Arbitral Process

In its report the Commission seems to be generally concerned in Court based delays in arbitration matters, while particularly disturbed with the effect the decision by the Tribunal in White Industries[3] which exposed the far reaching consequences of inordinate delays in a jurisdiction with over 70 BITs most of which impose obligations of some variant of access to effective and prompt judicial process for investors. The Commission has therefore recommended some novel changes. In its opinion, restricting relevant ‘Court’ in case of international commercial arbitration involving foreign parties would be desirable owing to the expectation that commercially oriented judges would hear the matter expeditiously.  This would reduce what has been christened the “Investment Treaty risk.” While the concern is properly guided, there is no clarity as to how a change in the Court of supervision would directly reduce timelines in the backdrop of reports where where High Courts routinely perform below expectation due to a large number of pending cases. Policy measures such as training of judges to act with a heightened level of commercial orientation would perhaps be more effective. The Commission has however recognized that this suggested change cannot be a standalone remedy to counter the seemingly inherent malaise of delay so inherent in the current judicial process relating to arbitration. It has recommended that there is an urgent need to increase the threshold for judicial at both the pre and post award stage.

    A. Pre Judicial Intervention

In a concise manner the Commission expresses its disappointment that while the Supreme Court had the opportunity to clearly answer the question as to the scope and nature of permissible pre-arbitral judicial intervention, keeping in mind the bar under Section 5 of the Act, it framed the question in rather ineffective and infructuous manner focusing rather on the orthodox distinction between ‘judicial’ and ‘administrative’ power under Section 11 referring to a series of judgement culminating in SBP v. Patel Engineering[4] and the consequent clarification in  National Insurance Co. LTd v. Boghara Polyfab Pvt Ltd.[5] which divided this controversial matrix of precedent and laid down that the law in three distinct buckets, if you may. First, the category of issues which the CJI is obligated to decide. Under this category enquiry must be conducted as to whether the appropriate High Courts has been approached, whether there is an arbitration agreement and whether the party approaching the Court under Section 11 is party to such an agreement.  The second category includes issues such as whether the claim is a live claim and whether the parties concluded the transaction by satisfaction of rights and obligations. These issues in the second category are those over which the CJI/ designate may decide. The third category are those which must necessarily be left for the Tribunal to decide. These include questions of whether a claim is covered by an arbitration clause, and the merit of such claims.

The Commission simplistically refers to the desirability of extending these tests to Section 8 and Section 45 instead of restricting it only to Section 11. The Commission deserves merit to have pointed out that there exists no logical rationale to suggest that the scope and nature of judicial intervention on pre award stage should change on the fact that a party, which may intend to defeat the arbitration agreement refuses to appoint an arbitrator in terms of the agreement (covered by Section) or moves a proceeding before a judicial authority in spite of existence of such an arbitration agreement. (typically such cases in appear in relation to Section ). For a party intending to defeat the arbitration agreement, both the refusal to appoint arbitrator or initiation proceedings in Court serve the same purpose and therefore should not be subject to varying levels of judicial intervention. Therefore the Commission has recommended that Section 8 and Section 11

Section 8 and Section 11

The bar against bifurcation of claims under arbitration agreements so widely encompassed in  Sukanya Holdings[6] and so artfully skirted in Chloro Control is a valid subject of concern for the commission. To narrow down the effect of Sukanya Holding which stated that where all parties to a dispute are not parties to arbitration, the reference to the arbitration must be rejected. The Commission suggests adding of proviso to Section 8 stating that reference in such cases may only be rejected where all the parties are “necessary parties” to the action.  The term “necessary parties” has however not been defined.

The Commission also addresses the core question as to the depth of permissible judicial enquiry into the validity of the arbitration agreement. It recommends that if the authority is of the opinion that there is a prima facie arbitration agreement then it should refer the matter to the Tribunal and if the authority concludes that a valid agreement does not exist, such determination would be final and not prima facie. Similar amendments are proposed in Section 11 as well.  

Section 9 and Section 17

Perhaps the vehicle of abuse in many contracts containing arbitration, Section 9 of the Act per the recommendation of the Commission must be amended to have a 60 day limit to initiate arbitration proceedings where a party has obtained an injunction over subject matter covered by the arbitration agreement. Evidently, this is a legislative counter to the tendency of parties to obtain a Section 9 injunction and continue to take benefit of the same perpetually, without taking any steps taken to proceed with arbitration. However, the Commission is rather vague insofar as it recommends that the following clause be included

“(2) Where, before the arbitral proceedings, a Court grants any interim measure of protection under sub-section (1), the arbitral proceedings shall be commenced within 60 days from the date of such grant or within such shorter or further time as indicated by the Court, failing which the interim measure of protection shall cease to operate.

The provision dilutes the efficacy of what could have been a strict legislative deadline for commencement of proceedings and retains judicial discretion, which if routinely exercised in the proper manner in the first place would have not given rise to the problem in the first place.

The Commission has also recognized in relation to Section 17, that in India interim orders of the Tribunal are routinely rendered ineffective. The proposed amendment would give the tribunal the same powers as a civil court in relation to the interim measures.  Read with the amendment in Section 9, parties would be left with no option but to approach only the tribunal once the tribunal is constituted. The proposed amendment would also grant the tribunal the authority to grant interim relief even after the award has been rendered.

  B. Post Award Judicial Intervention

Section 34 (Setting aside of an award)

The Commission recommends to resolve the seemingly age-old problem of the interpretation of the grounds stated in Section34 for the setting aside of an award.  It recommends amendments to counter the widening of the words “morality or justice” used in the otherwise clear judgement in Renusagar by replacing it with a higher threshold of  the award being in “in conflict with the most basic notions of morality or justice” In an additional explanation suggested the commission seeks to bar erroneous application of law and re-appreciation of evidence as grounds for setting aside of awards. These were the grounds used in Saw Pipes[7]  to successfully set aside an award

Section 36 (Enforcement of Award)

The Commission took a cue for the Apex Courts observations in National Aluminium Company Ltd v. Pressteel & Fabrications (P) Ltd and Anr[8] where the Court stated that amendments to Section 36 was necessary to ensure that parties intending to defeat the arbitration do not get an automatic stay on enforcement by the mere filing an application of Section 36.   

Section 37

There exists a bar on second appeal from orders appealed under Section 37. However, inconsistencies in relation to parties succeeding in filing letters patent appeal where the Letters Patent Act of various high courts have not been suitably amended to conform with the provision in Section 37. The Commission has therefore recommended that Section 37 be amended to also bar letters patent appeals in addition to ordinary second appeals.

IV.              Other Salient Recommendation of the Law Commission

The Law commission has recommended a variety of other changes some of which are as follows:

1. Amendment to Section 16 in order to counter the effect of the Apex Court’s decision in N Radhakrishnan v. Maestro Engineers[9]  which restricted the authority of the tribunal to rule on questions of fraud, corruption etc.
2.  Amendment to Section 20 to provide for parties to agree to the seat and venue of arbitration instead of the ambiguous “place of arbitration” The amendment would recognize the distinction between the legal seat of arbitration and the venue of arbitration.
3. Amendment to  Section 23, by addition of  an Explanation which clarifies that the defence may set up a counter claim and such will be heard by the arbitral tribunal even if exceeds the terms of reference to the Tribunal as long as the claim is covered within the scope of the arbitration agreement.  The rationale for such a suggestion is self evident.
4. Amendment in Section 24 requiring that hearings and presentation of evidence be done on continuous days to avoid parties seeking unnecessary adjournments which drive up the cost of arbitration.

A significant and perhaps underestimated change suggested by the Commission is the addition of Section 6A which would lay down a regime for costs with a higher than expected adherence to the ‘costs follow the event’ regime. The effect of this clause is most likely to invisible since the purport of this amendment would lie in its significant effect on legal strategy by parties, many of whom have until now benefited without consequence from tactics which inflate the costs of arbitration.  If the amendment is actually made, a significant decline in the filing of frivolous claims may also be expected.

Having delved into the recommendations of the Commission, one can only hope that at the least, the significant suggestions be adopted by means of relevant amendment to the Act.

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[1] Chloro Controls (I) P. Ltd.v. Severn Trent Water Purification Inc. and Ors., (2013) 1 SCC 641

[2] Bharat Aluminium Company and Ors. etc. v. Kaiser Aluminium Technical Service, Inc. and Ors. etc., (2012) 9 SCC 552]

[3] White Industries Australia Ltd v. Republic of India, UNCITRAL, Final Award (November 30,2011)

[4] (2005) 8 SCC 618

[5] (2009) 1 SCC 267

[6] Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya and Anr., (2003) 5 SCC 531

[7] ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705

[8] (2004) 1 SCC 540

[9] (2010) 1 SCC 72)

The Curious Case of Bitcoins - Part II

In our previous post, we have highlighted the negative attitude of the Reserve Bank of India towards the use of BITCOINS. However it is important to note that BITCOINS are not illegal per se. There is tremendous scope for these trading units to be legalized in India. In this post we seek to highlight the possible ways in which these units can be legalized.

CURRENCY

 'Currency' is defined as " currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank.[1]" The definition gives the government wide powers to expand the scope of the definition. This power can be used to include BITCOINS as a currency. However as of now, a BITCOIN is not a currency as it does not satisfy the requirement mentioned in the definition.

SECURITY

The Securities Contracts (Regulation) Act, 1955 defines securities to include[2] -

"(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ia) derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id) units or any other such instrument issued to the investors under any mutual fund scheme; (ii) Government securities; (iia) such other instruments as may be declared by the Central Government to be securities; and (iii) rights or interest in securities;”

The law again gives the power to the government to include 'such other instruments' as securities. Therefore there is scope for bitcoins to be termed as securities. If the government does take this decision to qualify BITCOINS as a security, it would give birth to a plethora of regulations and guidelines issued by SEBI.

However currently BITCOINS doesn't qualify as a security as it doesn't fall under any of the permissible heads mentioned in the definition.

COMPUTER PROGRAMME

The Indian Copyright Act, 1957, defines the term "computer programme[3]" as "a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result." BITCOIN is a code which facilitates the transfer of bitcoin currency from one account to the other. Therefore BITCOINS can be regulated as a computer programme under the existing legal regime. As computer programmes are movable goods, therefore BITCOINS can also be categorized as a movable good.

Keeping in mind the growing popularity of BITCOINS across the globe, it will be interesting to see how the Government of India will regulate these virtual currencies in India.

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[1] S 2(h) of the Foreign Exchange Management Act, 1999 

[2] S. 2(h) of the Securities Contracts (Regulation) Act, 1955

[3]S. 2(ffc) of Indian Copyright Act, 1957

Crowdfunding

Crowdfunding is a method of raising funds from multiple investors over the web for a specific project, business venture or a social cause. The United States of America and the United Kingdom are seen as dominant players in this kind of funding. Crowdfunding has developed as an alternative means of raising funds, especially for start-ups and SMEs. Another reason for the popularity of this form of fund generation is the financial crisis in 2008 which resulted in restricted fund allocation by banks thereby giving rise to the need for an alternative method of funding.

Funding through this method has grown exponentially especially with innovative start-up companies. Max Gunawan’s startup managed to raise close to $600,000 in a span of 30 days through the process of crowdfunding. Julie Urman, a video game developer, raised close to $9 Million within a span of 30 days.

There are multiple types of crowdfunding:

1. Donation crowdfunding: As the name suggests it involves generation of funds for charity and philanthropic purposes.
2.  Reward crowdfunding: A form of funding which is dependent on a future of existing reward as consideration.
3. Peer-to-Peer lending: Is an online platform where lenders and borrows are matched for unsecured loans and the interest rate is determined or set by this platform.
4. Equity Crowdfunding: As the name suggests, funds are generated with equity of the funded company as consideration.

The United States and the United Kingdom have regulations on crowdfunding. India has seen the growth of this kind of funding, but it still stands unregulated. Recently SEBI released a consultation paper on crowdfunding which discusses the methods, risks and advantages of this form of funding. It provides a comprehensive note on the regulations in other countries and pinpoints the regulations which can affect crowdfunding in India. The provisions of the Companies Act, 2013 and various SEBI Regulations such as ICDR has been discussed.

Crowdfunding can be categorized as a form of private placement, therefore the provisions of the Companies Act, 2013 are attracted. Advertisements by companies raising money through private placements is prohibited and securities cannot be issued to more than 200 persons. However, QIBs and employees availing the employee stock option by companies are excluded. Further such offers can be made only to such persons whose names are recorded by the company prior to the invitation to subscribe.

However, as mentioned above, Companies Act, 2013 provides a window for making private placement offers to Qualified Institutional Buyers (QIBs) and the 'limit of 200' is not applicable to such QIBs. QIBs are the entities such as a MF, Foreign Portfolio Investor (FPI), AIF, Scheduled Commercial Bank, IRDA registered Insurance company etc. as defined in SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. This exception can therefore be exploited in order to generate funds under crowdfunding. 

Given the high-level of risks associated with this new way of fund-raising activity, SEBI has proposed that only 'accredited investors' be allowed to participate in crowdfunding activities. Such investors would include institutional investors, companies, HNIs and financially-secure retail investors advised by investment advisors or portfolio managers. SEBI has clarified that no regulations are under construction and this consultation paper is merely a medium to understand and garner public opinion on crowdfunding.