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Understanding Breach of Contract: Types, Causes, and Implications

Posted on by Treelife

Contracts are, indisputably, a foundation block in any partnership, collaboration or association between individuals or companies which provides with a clearer perspective to the duties, rights and obligations dispersed to all the parties. The significance of a legally binding document such as a contract is fetched beyond enumerating obligations on both parties, it also encircles the consequences that may arise in an instance where either of the parties lag behind or fail in fulfilling such duties. Such a non-fulfillment can be caused due to various and versatile reasons- which in legal and commercial landscape is termed as ‘breach of contract’.

This article dives deep into the legal landscape surrounding breach of contract, the different types, distinctive nature of the types, causes, implications and the potential consequences. It also explores remedies available to the non-breaching party and the penalties that can be imposed by the court in case the dispute is elevated.

What is Breach of Contract?

A contract is breached or broken when any of the parties fails or refuses to perform its obligations or duties either partially or completely as originally agreed under the contract. Breach of contract is a legal cause of action in which a binding agreement is not honored by one or more parties by non-performance of its promise. A contract involves mutual obligations and rights between parties who have entered into such a contract. A failure, by either of the parties or both, to fulfill the terms of the contract results in a breach of contract.

Some examples of a breach of contract can be:

(a) A contract to perform in a classical music festival is breached if the performing artist does not come to the venue on the day of the performance.

(b) A agrees to buy 100 coconuts from B on a particular date. The contract is breached if A refuses to buy the coconuts on the agreed date or B fails to deliver the promised number of coconuts.

In India, the Indian Contract Act, 1872 (“the Act” hereinafter) governs disputes arising out of instances where a legally binding agreement and contract is breached, and when the terms initially agreed in the contract are not adhered to. Although the Act does not provide for an explicit definition of ‘breach of contract’, it effectively enumerates the particulars of a breach of contract through its focus on obligations and consequences of non-performance. If a party fails to fulfill their contractual obligations, and this failure causes the other party to suffer a loss, it can be considered a breach of contract under the Act. These consequences can include:

  • Right to Claim Damages: The non-breaching party can claim compensation for any financial loss they suffer as a direct result of the non-performance.
  • Specific Performance: In certain situations, a court order can compel the breaching party to fulfill their obligations exactly as agreed upon.
  • Termination of Contract: Depending on the severity of the breach, the non-breaching party may have the right to terminate the contract.

Sections 73 to 75 in the Act enumerate the consequences of the breach of contract such as compensation for loss or damage caused by breach of contract (section 73); compensation for breach of contract where penalty is stipulated (section 74) and instances when a party is rightfully rescinding contract and is entitled to compensation (section 75). The Act addresses breach of contract through several key provisions, following are the particulars of the provisions:

  • Section 73: This section deals with compensation for loss or damage caused by a breach. It allows the non-breaching party to claim financial compensation for losses that naturally arise from the breach. These losses must be foreseeable and the plausible effects that can be anticipated by parties at the time the contract was formed. This section is based on the rule laid down in Hadley v. Baxendale[1]. In this case, the court established the principle that a breaching party is only liable for damages that are reasonably foreseeable at the time of entering the contract.
    This section states that compensation for a breach of contract cannot be given for any remote or indirect loss or damage sustained by reason of the breach. However, compensation can be awarded for:
  1. Loss or damage which the parties knew at the time of the contract was likely to result from the breach.
  2. Loss or damage which follows according to the usual course of things from such breach.
  • Sections 74 & 75: These sections deal with pre-determined compensation. Section 74 allows for ‘liquidated damages’ where the contract specifies a fixed amount payable in case of a breach. Section 75 covers situations where the contract is rescinded (canceled) due to a breach. Here, the non-breaching party can claim compensation alongside canceling the contract.

In the case of Fateh Chand vs. Balkishan Das (1963)[2], the court interpreted section 74, which says that “the contract contains any other stipulation by way of penalty,” was interpreted by the Court. In accordance with the judicial pronouncement, the applicability of this section extends to any contract that includes a penalty. It also applies to instances where there was a delay in payment for money or property delivery due to a contract breach, as well as instances in which the right to receive payment was forfeited for previously delivered property.

Types of Breach of Contract

While the Act doesn’t explicitly list breach types, courts consider factors like the severity of non-performance (material vs. minor breach), timing (actual vs. anticipatory breach) in order to categorize the types of breaches of contract.

Breach of contract may be actual or anticipatory, material or minor. In case of any breach of contract, the affected party can claim the damage from the court by forcing the other party to perform as promised. Remedies for breach of contract include suit for damages, suit for specific performance, canceling the contract, stopping the other party from doing something, suit upon quantum meruit (which means compensation for work done and services carried on before the breach took place). Following is a better explanation for the types of breach of contract and what they entail:

  1. Actual Breach: This occurs when one of the parties fails to meet contractual duties and obligations within the specified time period for performance. In such cases, the other party is not obligated to fulfill their obligations and can hold the defaulting party liable for the breach of contract. In such a case, the decision to enable the defaulting party to complete the contract would be based on whether the contract’s objective revolved around a stipulated time or the duration as decided in Venkataraman vs. Hindustan Petroleum Corporation Ltd[3]. Examples include non-payment for delivered goods, incomplete services, or receiving faulty products.
  2. Anticipatory Breach: Anticipatory breach of contract is a declaration made by one of the contracting parties of his intention not to fulfill the contract. And proclaim that he will no longer remain bound by it. The entire contract is rejected or canceled in the event of an anticipatory breach of contract. In an anticipatory breach of contract, the aggrieved party can rescind or cancel the contract and file a lawsuit for damages without having to wait until the contract’s due date. This breach occurs before the due date of a contract hits. The case of Hari Shankar vs. Anant Ram[4], is an instance in which the court determined an anticipatory breach of contract when the defendant refused to complete a sale of property, hence declaring his intention to not fulfill his duty of participating in the completion of the sale.
  3. Material Breach: A material breach is a serious breach of the terms entailed in a contract. It’s not just a minor inconvenience; it significantly impacts the core purpose of the contract entered by parties. The word “material” emphasizes the seriousness of the breach. It allows the non-breaching party to potentially terminate the contract and seek significant compensation for losses incurred. In the case of State Bank of India vs. Mula Sahakari Sakhar Karkhana Ltd[5], the court determined that the defendant’s failure to repay a loan was a material breach, entitling the bank to enforce its security interest.
  4. Minor Breach: A minor breach, also known as a partial or immaterial breach, occurs when a party receives what they were owed under the contract, but with a slight delay or imperfection. While the breaching party didn’t completely fulfill their obligations, the other party still receives the main benefit of the contract.

The UK Court of Appeal had decided in Rice (t/a the Garden Guardian) v. Great Yarmouth Borough Council (2000), that a clause stating that the contract could be terminated “if the contractor commits a breach of any of its obligations under the contract” should not be taken literally. It was deemed contrary to business norms to allow any breach, no matter how minor, to be grounds for termination.

Difference between Material and Minor Breach

 Minor BreachMaterial Breach
Impact on Non-Breaching PartyCauses minimal inconvenience or harmDeals with the objective and purpose of the contract, making it difficult or impossible for the non-breaching party to receive the benefit of the bargain
ExampleDelivering a product a few days lateDelivering a completely different product than what was agreed upon
Remedies– Non-breaching party may seek to:

a)      Withhold payment until the breach is cured.

b)      Demand the breaching party fulfill their obligations

–          Non-breaching party may seek to:

a)      Terminate the contract

b)      Sue for damages

c)      Withhold payment

TerminationGenerally not grounds for terminationMay be grounds for termination
MeaningRelatively unimportant deviation from the contractSerious deviation that undermines the purpose of the contract

Generally, the cause of action for breach of contract claim has four main elements:

  1. The existence of a contract: The existence of a contract, whether it be written or oral, is the first and most important component of a breach of contract.
  2. Performance by the plaintiff or some justification for nonperformance: Secondly, the plaintiff needs to prove that they fulfilled their end of the bargain. There might not be any compensation if both parties assert that the contract was broken, unless one party’s violation was more serious than the other.
  3. Failure to perform the contract by the defendant: Thirdly, the plaintiff needs to demonstrate which clause or condition of the agreement the defendant violated and how the the violation of contract happened.
  4. Resulting damages to the plaintiff: Lastly, In the event that the plaintiff demonstrates all three of these elements, they will also need to demonstrate the extent of the injury.

Causes of Breach of Contract

Contracts clearly define the obligations and expectations of each party, ensuring a smooth exchange of goods, services, or money. However, despite their best intentions, unforeseen circumstances or internal missteps can sometimes lead to a breach of contract. Ranging from an ambiguous linguistic built of the contract to force majeure event, the most common cause that build the foundation a breach of contract are as follows:

  1. Unclear or Ambiguous Contract Terms: The language of a contract must be as transparent as possible. It should not be ambiguous or cryptically knitted to stipulate different interpretations. If two clauses in a contract contradict or if a phrase has more than one reasonable interpretation, the contract is deemed ambiguous.
  2. Failure to meet deadlines: Even if a contract sets a deadline without explicitly stating that time is of the essence, missing the deadline is still considered a breach. It does not, however, grant the party the right to terminate the contract.
  3. Force majeure events: Lastly, indeterminate, unpredictable calamities like pandemics, wars, or natural disasters may also result in a breach of contract. Companies should think about putting words about force majeure in their contracts. In the case of unforeseen events, these clauses may offer relief.
  4. Non compliance with contract terms:  Non-compliance with contract terms refers to a situation where a party to a contract fails to fulfill their obligations as outlined in the agreement. This can take various forms, such as delivering a faulty product, missing deadlines, or not completing the agreed-upon service at all.
  5. Incapacity to fulfill a contract: A contract’s validity can be challenged if a party lacked the legal capacity to form the agreement. This could be due to factors like being a minor, mentally incompetent, or under the influence of substances at the time of signing. Additionally, unforeseen circumstances may render performance impossible, or frustrate the contract’s purpose to the point of impracticability.

 

Void vs Voidable

A breaking of contract generally does not make the contract become void or voidable automatically.  In most cases, the contract remains valid, but the non-breaching party has options.

Here’s a breakdown:

  • A void contract is essentially never a valid contract. It’s like it never existed from the beginning, and neither party has any obligations under it. This typically happens if the contract involves illegal activity or if it’s impossible to perform from the start.
  • A voidable contract is initially considered valid, but the non-breaching party can choose to cancel it due to certain issues, like fraud, mistake or misrepresentation or lack of capacity or undue influence or more.

Legal Remedies and Penalties

Entering into a contract is a solemn act, establishing a set of expectations and obligations for both parties. However, unforeseen circumstances can disrupt these expectations, leading one party to fail in fulfilling their contractual duties. This constitutes a breach of contract, and the aggrieved party is not left without recourse. The act provides a legal framework for seeking remedies and, in some cases, penalties for such breaches. Hence, sections 73, 74, and 75 specifically address the concept of penalties and compensation for breach. Below is a breakdown of these legal provisions:

  • Section 73: Compensation for Loss or Damage

This section establishes the general principle that compensation awarded for a breach of contract cannot include any remote or indirect loss or damage. The focus is on compensating the non-breaching party for the actual financial losses they suffer as a direct consequence of the breach.

  • Section 74: Penalty (Unreasonable) Not Recoverable

This section discourages the use of excessive penalties in contracts. If a contract includes a penalty clause that the court deems unreasonable or unconscionable, the court has the power to reduce the amount payable by the breaching party.

  • Section 75: Party Rightfully Rescinding Contract Entitled to Compensation

This section applies when a party rightfully rescinds (cancels) the contract due to a breach by the other party. Even after rescission, the non-breaching party can still claim compensation for any loss or damage they have already suffered due to the breach.

Several remedies can be sought by the aggrieved party in India. The act allows you to claim financial reimbursement for losses suffered due to the breach. However, there are limitations. This compensation only applies to losses that were natural consequences of the breach, foreseeable by both parties when signing the contract, and directly caused by the broken agreement. Remote or indirect losses are not covered under the act. Legal Remedies, for the counter-effect of a breach of contract may include:

  1. Recession of Contract
  2. Sue for Damages
  3. Sue for Specific Performance
  4. Injunction
  5. Quantum Meruit

1] Recession of Contract

When one of the parties to a contract does not fulfill his obligations, then the other party can rescind the contract and refuse the performance of his obligations. As per section 65 of the Act, the party that rescinds the contract must restore any benefits he got under the said agreement. And section 75 states that the party that rescinds the contract is entitled to receive damages and/or compensation for such a recession.

2] Suit for Damages

Section 73 clearly states that the party who has suffered, since the other party has broken promises, can claim compensation for loss or damages caused to them in the normal course of business.

Such damages will not be payable if the loss is abnormal in nature, i.e. not in the ordinary course of business. There are two types of damages according to the Act,

  • Liquidated Damages: Sometimes the parties to a contract will agree to the amount payable in case of a breach. This is known as liquidated damages.
  • Unliquidated Damages: Here the amount payable due to the breach of contract is assessed by the courts or any appropriate authorities.

3] Suit for Specific Performance

Specific performance is a remedy developed by the principle of equity. A party to a contract who is damaged because the contract is breached by another party has the option to file a suit for specific performance compelling to perform his part of contract. Before an equity court will compel specific performance, however, the contract must be one which can be specifically performed. So if any of the parties fails to perform the contract, the court may order them to do so. This is a decree of specific performance and is granted instead of damages. For example, A decided to buy a parcel of land from B. B then refuses to sell. The courts can order B to perform his duties under the contract and sell the land to A.

4] Injunction

An injunction is basically like a decree or court order for specific performance but for restraining a party to do an act. An injunction is a court order restraining a person from doing a particular act. So a court may grant an injunction to stop a party of a contract from doing something which is causing harm to the other party and is ultra vires to the purpose enshrined in the contract. In a prohibitory injunction, the court stops the commission of an act and in a mandatory injunction, it will stop the continuance of an act that is unlawful.

5] Quantum Meruit

Quantum meruit literally translates to “as much is earned”. At times when one party of the contract is prevented from finishing his performance of the contract by the other party, he can claim quantum meruit. So he must be paid a reasonable remuneration for the part of the contract he has already performed. This could be the remuneration of the services he has provided or the value of the work he has already done.

Mutually Beneficial Breach of Contract

A mutually beneficial breach of contract occurs when both parties involved in an agreement decide to walk away from, or alter, the terms of the contract because it’s in their best interest. This isn’t the same as simply failing to fulfill the contract – there’s an element of  communication and agreement between the parties. In a typical breach of contract, one party fails to fulfill their obligations as outlined in the agreement, causing harm to the other party. However, in a mutually beneficial breach, both parties acknowledge that adhering to the original terms might no longer be in their best interests.

  • An architect designs a building based on the client’s specifications. However, during construction, a critical safety flaw is discovered in the plans.  In this situation, breaching the contract to redesign the building to meet safety standards would be beneficial for both parties, even though it might cause delays.

Conclusion

Ultimately, a well-crafted contract serves not just as a legal safeguard, but also as a foundation for a productive and resilient partnership between individuals who decide to join hands for a mutual objective. The world of commerce thrives on agreements, with contracts acting as the sheet music that orchestrates a symphony of successful collaborations. However, just like any complex performance, unforeseen circumstances or discordant notes can lead to a breakdown in communication and a potential breach of contract. The true essence of a successful contract lies in fostering trust, transparency and a closely knitted linguistic built so that the possibility of a breach is less and hence, the terms of a contract are respected and adhered to.

Clearly defined terms, obligations, and expectations within the contract leave little room for misinterpretation and potential breaches. It is important to note that a successful contract with no discrepancies fosters a win-win situation, ensuring all parties fulfill their obligations and achieve their goals.

FAQs on Breach of Contract

  1. What is a breach of contract?
    A breach of contract occurs when one or more parties involved fail or refuse to perform their obligations under the contract, either partially or completely. This failure can result from various reasons and can be categorized into actual, anticipatory, material, or minor breaches.
  2. What are the consequences of breaching a contract?
    The consequences include the right to claim damages for financial losses, the option for specific performance where the court compels the breaching party to fulfill their obligations, and the termination of the contract based on its severity.
  3. What legal remedies are available for a breach of contract?
    Available remedies include claiming damages, specific performance, rescission of the contract, injunctions against further breaches, and quantum meruit for services rendered before the breach.
  4. Can a breach of contract lead to the termination of the contract?
    Yes, depending on the severity of the breach (particularly in cases of material breaches), the non-breaching party may have the right to terminate the contract.
  5. What is the difference between a material breach and a minor breach?
    A material breach significantly affects the contract’s core purpose, potentially allowing for termination and significant damages. A minor breach involves a slight delay or imperfection but still delivers the contract’s main benefits, typically not grounds for termination.
  6. How does the Indian Contract Act, 1872 address breach of contract?
    The Act, while not defining “breach of contract” explicitly, outlines the consequences and remedies available for breaches, including compensation for losses (Sections 73 to 75), and specific performance or termination of the contract.
  7. What if I partially breached the contract? Can the other party still sue me?
    Yes, even a partial breach can lead to legal action, especially if it significantly affects the other party’s ability to fulfill their obligations. The impact of a partial breach depends on its nature and severity.
  8. How can ambiguities in contracts lead to breaches?
    Unclear or ambiguous terms can result in different interpretations, leading to breaches if parties fail to meet expectations based on these interpretations.
  9. Are there situations where breaching a contract is mutually beneficial?
    Yes, in some cases, both parties may find it in their best interest to alter or walk away from the contract, known as a mutually beneficial breach, which involves communication and agreement between the parties to deviate from the original terms.
  10. What role do force majeure events play in contract breaches?
    Force majeure events, such as natural disasters or pandemics, can render the fulfillment of contractual obligations impossible, potentially excusing breaches under specified contract clauses.

[1]  (1854) 9 Exch 341

[2] 1964 SCR (1) 515

[3] 1998 AIR (SC) 817

[4] 2000 (1)WLC 351

[5] AIR 2005 BOM 385

Reverse Flipping for Startups: A New Shift Towards India

Posted on by Treelife

First Published on 12th September, 2023

In today’s globalized era, the world feels more interconnected than ever. Many companies are expanding internationally, setting up offices worldwide, and seeking new markets for their products. Some startups, including some unicorns, have relocated their holding company outside India in a process known as “flipping” to capitalize on global opportunities.

Understanding the Flipping Phenomenon

Flipping, in the Indian startup realm, refers to the practice where startups, originally based in India, restructure their corporate structure to relocate their holding company and intellectual property (IP) to foreign jurisdictions, usually the United States or Singapore despite having a majority of their market, personnel and founders in India.

The primary reasons for startups to externalize their corporate structure inter-alia are access to deeper pools of venture capital, favorable tax framework, market penetration and brand positioning as an international entity, which can be beneficial in terms of attracting global talent and customers.

However, recent times have seen an emergence of an interesting counter-trend: ‘Reverse Flipping’ or ‘De-externalization’.

However, recent times have witnessed an intriguing counter-trend: ‘Reverse Flipping’ or ‘De-externalization’ i.e. Indian startups are opting to reverse flip back into India due to its favorable economic policies, burgeoning domestic market, and growing investor confidence in the country’s startup ecosystem.

The Emergence of Reverse Flipping

Reverse flipping, as the name suggests, is the antithesis of the flipping trend. Here, startups that once relocated their holding companies outside India are now considering a strategic move back to their home ground, India.

As mentioned above, one of the primary reasons for reverse flipping back to India is the fact that the Indian startup ecosystem has matured significantly in recent years. There is now a large pool of untapped domestic retail investors who want to invest in emerging companies they believe have the potential to grow. Additionally, the Indian government is taking steps to make it easier for startups to go public, which could make it more attractive for startups to reverse flip.

Take, for example, PhonePe. Originally an Indian entity, it flipped its structure to Singapore but has now moved its base back to India. In doing so, the founders have gone on record to say that the investors had to pay almost INR 8,000 crore of taxes to the Indian Government. It also stands to lose the chance to offset its accumulated losses of almost INR 7,000 crore against future profits due to this restructuring. Also, all employees had to be migrated to a new India-level ESOP plan which stipulates a minimum 1 year cliff thereby resetting the vesting status to zero with a 1 year cliff.

PhonePe is not alone. Several startups like Razorpay and Groww are also evaluating this shift, acknowledging the promise that the Indian market holds.

How to Reverse Flip?

Structuring a reverse flip is not easy and startups considering this reverse journey have to navigate a maze of regulations. Some popular methods include share swaps, mergers, etc and could also require approval from NCLT.

Startups need to be aware of the potential tax and exchange control implications that come with such a restructuring exercise.

When a startup’s valuation has increased significantly since its initial flip, there can be significant tax consequences upon reverse flipping. The process can be perceived as a ‘transfer of assets’, leading to capital gains tax implications in India and possibly even in foreign jurisdictions. This can also technically lead to a change in beneficial ownership, thereby risking the accumulated losses for setoff against future profits. Startups also need to navigate the exchange control regulations when repatriating funds or assets to India, ensuring all compliances are met.

While the above provides a birds-eye view, it’s imperative for startups to consult experts for a tailor-made approach, aligning with their unique business needs and ensuring compliance with the tax and regulatory framework.

What is the Government saying?

Indian Economic Survey 2022-23 acknowledged the concept of reverse flipping and has listed possible measures that can accelerate the reverse flipping process for startups including simplifying the process for granting tax holidays to start-ups, simplification of taxation of ESOPs, simplifying multiple layers of tax and uncertainty due to tax litigation, simplifying procedures for capital flows, etc.

The International Financial Services Centres Authority i.e. IFSCA has also constituted an expert committee to formulate a roadmap to ‘Onshore the Indian innovation to GIFT IFSC’. IFSCA plans to make GIFT City, India’s first IFSC, the preferred location for startups to reverse flip into. This expert committee submitted its report1 on 25 August 2023 with recommended measures to be undertaken by various stakeholders such as ministries and regulatory bodies in implementing the idea of onshoring the Indian innovation to GIFT IFSC.

In Conclusion

The trend of reverse flipping underscores the belief in India’s potential as a global startup hub. While challenges exist, the long-term benefits of tapping into the domestic market, coupled with the strengthening startup ecosystem, are compelling many to look homeward. It will be intriguing to witness how this trend evolves and shapes the future.

Looking for expert contract advice? Call us at +91 9930156000 today.

Gaming Law Judgement Summaries

Posted on by Treelife

1. Play Games24x7 Private Limited v. Reserve Bank of India & Anr.

Factual Matrix

  • Play Games24x7 Private Limited (“Petitioner”) is engaged in the business of designing and developing software related to games of skill (“Business”), and offers the games ‘Ultimate Teen Patti’ and ‘Call it Right’ (“Impugned Games”). However, these Impugned Games do not involve any real-money winnings or cash prizes as rewards.
  • During the period 2006-2012, the Petitioner received several foreign remittances, for which the necessary reporting with the Reserve Bank of India (“RBI”) under the Foreign Exchange Management Act, 1999 and the rules made thereunder (“FEMA”) was pending from the Petitioner’s end. In 2012, the RBI, directed the Petitioner to file an application such that all the FEMA contraventions could be compounded together (“Compounding Application”).
  • In early 2013, the foreign exchange department of the RBI returned directed the Petitioner to approach the then Department of Industrial Policy and Promotion (now the Department from Promotion of Industry and Internal Trade (“DPIIT”)), to seek a clarification whether the Petitioner was eligible to legally receive FDI (“DPIIT Clarification”), which the Petitioner had applied for, but to no avail.
  • Thereafter, in March 2020, the Petitioner filed yet another Compounding Application with the RBI, which the RBI returned to Petitioner, citing that the DPIIT Clarification was still not obtained by the Petitioner.
  • Despite multiple communications with the RBI, there was no tangible outcome with regards to the DPIIT Clarification. In light of the same, in May 2021, the Petitioner filed the present petition against the RBI before the Hon’ble Bombay High Court alleging that the Compounding Application was being unreasonably delayed by the RBI.

Contentions and the question in point

Party  Contentions
PetitionerThe Impugned Games were casual/ social games which did not involve any real-money winnings or cash prizes as rewards. The Petitioner earned revenue through the Impugned Games only through in-app purchases by players and through in-game advertisements. Since the Impugned Games, although ‘games of skill’, did not have any real-money winnings or rewards, they could not be construed as ‘gambling’ under gaming laws in India.
RBIIt was not concerned with the assessment of the Petitioner’s nature of Business and that it just required for its records, the DPIIT to state that the Petitioner’s Business was not illegal in nature. If the DPIIT Clarification would identify the Petitioner’s Business as permissible, the Compounding Application would be processed by the RBI.
DPIITThe Impugned Games, being ‘games of chance’ under Indian laws, fell under the purview of ‘gambling’, which is a prohibited sector under the FDI Policy 2020 (“FDI Policy”).
Question in point before the Hon’ble Bombay High Court
Whether the Petitioner’s Business would constitute ‘gambling’ (which is a prohibited sector under the FDI Policy) and thus, disqualify the Petitioner from being entitled to FDI.

Judgement and Key Takeaways

JUDGEMENT

  • The Hon’ble Bombay High Court primarily placed reliance on the Hon’ble Supreme Court of India’s decisions in RMD Chamarbaugwala v. Union of India (AIR 1957 SC 628) and Dr. K.R. Laxmanan v. State of Tamil Nadu & Anr. [1996 (2) SCC 226] in order to determine the legality of the Petitioner’s Business and whether the same constitutes ‘gambling’.
  • The Hon’ble Bombay High Court held that in order to be construed as ‘gambling’, the game shall: (i) predominantly be a ‘game of chance; and (ii) be played for a reward. Since there was no real-money reward involved, the Impugned Games could not be brought under the purview of ‘gambling’.
  • The Hon’ble Bombay High Court also directed the RBI consider the Petitioner’s Compounding Application in an expedited manner.

KEY TAKEAWAYS

  • FDI in entities offering games with no real-money rewards is legal and shall not be prohibited under the FDI Policy.
  • For an online game to be considered ‘gambling’, it shall: (i) predominantly be a ‘game of chance’; and (ii) be played for a real-money reward.

2. Gameskraft Technologies Private Limited v. Directorate General of Goods Services Tax Intelligence & Ors.

Factual Matrix

  • Gameskraft Technologies Private Limited (“Petitioner”) is a company engaged in developing skill-based online games such as ‘Rummyculture’.
  • In November 2021, the GST authorities (“Respondents”) having conducted search and seizure operations at the Petitioner’s premises, alleged that the Petitioner had suppressed taxable amounts and passed certain orders (“Attachment Orders”) attaching the Petitioner’s bank accounts (“Attached Accounts”), to which the Petitioner filed several objections in the Hon’ble High Court of Karnataka, but to no avail.
  • In December 2021, the Petitioner challenged the Respondent’s orders attaching the Attached Accounts pursuant to which, the Hon’ble High Court of Karnataka issued an order, allowing the Petitioner to operate the Attached Accounts for limited purposes.
  • In August 2022, the Hon’ble High Court of Karnataka directed that no further action be initiated against the Petitioner by the Respondents. However, soon thereafter, in September 2022, the Respondents issued an intimation notice to the Petitioner under the applicable GST provisions, demanding that the Petitioner deposit a sum of approximately INR 21,000 crores along with applicable interest and penalty (“Intimation Notice”).
  • Thereafter, in March 2020, the Petitioner filed yet another Compounding Application with the RBI, which the RBI returned to Petitioner, citing that the DPIIT Clarification was still not obtained by the Petitioner.
  • Despite multiple communications with the RBI, there was no tangible outcome with regards to the DPIIT Clarification. In light of the same, in May 2021, the Petitioner filed the present petition against the RBI before the Hon’ble Bombay High Court alleging that the Compounding Application was being unreasonably delayed by the RBI.

Contentions and the question in point

PartyContentions
Petitioner– The Petitioner merely hosts the ‘rummy’ game and the discretion to play a game and the stake for which it is to be played lies entirely with the players. The Petitioner merely charges 10% of the players’ winnings as ‘platform fees’. – The Respondents’ contentions under the Impugned Notice were completely false, perverse, malicious and deserved to be disregarded on the following grounds: the game ‘rummy’ is a ‘game of skill’ as per well-established judgements of the Hon’ble Supreme Court of India and thus, the Petitioner cannot be said to have been engaged in betting/ gambling. – The Respondents had maliciously inflated the ‘buy-in’ amounts for the ‘rummy’ game and had shown the same as revenue derived by the Petitioner, whereby in reality, the ‘buy-in’ amount is not the Petitioner’s property and the same is reimbursed to the winner by the Petitioner, once the game is over. – The Terms & Conditions mentioned on the Petitioner’s portal, which were not referred to by the Petitioner, clearly mention that the monies deposited by the players are held in ‘trust’ by the Petitioner and that the same completely negated the Respondent’s contention that the entire ‘buy-in’ amount was the Petitioner’s income.
Respondents– The Petitioner’s provision of the platform, which allows users to play online ‘rummy’ and from which the Petitioner derives profits and gains, amounts to ‘betting and gambling’ under the CGST Act, since rummy is a ‘game of chance’. – The Petitioner’s contention that it charged 10% of the stakes placed by users as ‘platform fees’ was not acceptable, as the same shall be only collected in order to meet expenses and shall not be in the nature of commission. – In light of the above points, the Petitioner’s contention that ‘rummy’ is a ‘game of skill’ shall be rejected.
Question in point before the Hon’ble High Court of Karnataka
Whether games such as ‘rummy’, being predominantly ‘games of skill’, would tantamount to ‘gambling or betting’ as contemplated under the CGST Act.

Judgement and Key Takeaways

JUDGEMENT

  • The Hon’ble High Court of Karnataka held that ‘rummy’ would predominantly be a ‘game of skill’ and not a ‘game of chance’.
  • A ‘game of skill’ whether played with or without stakes would not amount to ‘gambling’.
  • The meaning of the terms “lottery, betting and gambling” under the CGST Act shall not include games of skill, and thus the same shall not apply to ‘rummy’, whether played with or without stakes. In light of the same, the game ‘rummy’ on the Petitioner’s platform, shall not be taxable as “betting and gambling” as contended by the Respondents under the Impugned Notice.
  • The Hon’ble High Court of Karnataka, finding the Impugned Notice illegal, arbitrary and without jurisdiction or authority of law, passed orders to quash the same.

KEY TAKEAWAYS

  • A game of skill whether played with or without stakes and whether played online/ offline does not amount to gambling. Thus, ‘rummy’, predominantly being a ‘game of skill’, whether played with or without stakes and whether played offline/ online, is not gambling.
  • A game of chance and played with stakes, is gambling.
  • A game of mixed chance and skill is not gambling, if it is predominantly a game of skill and not of chance.
  • A game of mixed chance and skill is gambling, if it is predominantly a game of chance and not of skill.

PhonePe Reverse Flip to India: Unraveling the Strategic Shift and its Impact

Posted on by Treelife

First Published on 21st August, 2023

The Reverse Flip

What is Reverse Flip?

“Reverse flip” or “re-domiciliation” refers to a corporate restructuring process in which a company changes its country of domicile or legal registration from one jurisdiction to another.

Background

  • PhonePe was incorporated in 2015 in India
  • In April 2016, PhonePe was acquired by Flipkart. As part of the acquisition, PhonePe flipped its structure to Singapore
  • In 2018, PhonePe became a part of Walmart after it acquired Flipkart
  • In October 2022, PhonePe announced that it has moved its domicile to India (reverse flip) for following key reasons:
    • PhonePe wants to focus on India markets for the next couple of decades. PhonePe is a digital payments company that operates primarily in India. By redomiciling to India, PhonePe can be more responsive to the needs of its customers and partners.
    • The Indian government has been tightening regulations for digital payments companies in recent years. By redomiciling to India, PhonePe can be more easily compliant with these regulations.
    • To be better positioned for an IPO. PhonePe is expected to go public in the next few years

What Happened?

Steps undertaken

  • PhonePe moved all businesses and subsidiaries of PhonePe Singapore to PhonePe India directly
  • PhonePe created a new ESOP plan at India level and migrated all group employees to this new plan
  • IndusOS, owned by PhonePe, also shifted operations from Singapore to PhonePe India

Key Consequences of Reverse Flip to India

  • Lapse of accumulated losses of USD 900 million
    • PhonePe stands to lose the chance to offset its USD 900 million (~INR 7,380 crore) of accumulated losses against future profits as shifting the domicile from Singapore to India is viewed as a restricting event under Section 79 of the Income Tax Act, 1961
    • As per the provisions of Section 79, a company is not allowed to carry forward the losses if the change in beneficial ownership of shareholding of more than 50% occurred at the end of year in which losses were incurred
  • Reset of ESOPs to zero vesting with 1 year cliff
    • All employees of PhonePe were migrated to the new India level ESOP plan which stipulates a minimum 1 year cliff.
    • Thus, the employees vesting status was reset to zero with a 1 year cliff
  • Tax payout by investors of almost INR 8,000 cr
    • PhonePe investors, led by Walmart, sold their stake in the Singapore entity and invested in PhonePe India
    • This means that there was a capital gains tax event in India for the the investors leading to a tax-pay-out of almost INR 8,000 cr

Other Startups looking at Reverse Flip

  • Razorpay is in process to move its parent entity from the US to India
  • Groww is planning to move its domicile from the US to India
  • Pepperfry has reverse flipped their structure to India via amalgamation

Source:

https://economictimes.indiatimes.com/tech/technology/phonepe-shifts-headquarters-from-singapore-to-india/articleshow/94621544.cms

https://www.bqprime.com/business/after-phonepe-razorpay-kicks-off-reverse-flipping-process

https://en.wikipedia.org/wiki/PhonePe#:~:text=10%20External%20links-,History,the%20CEO%20of%20the%20company

https://inc42.com/features/unicorn-desh-wapsi-reverse-flipping-is-the-new-startup-sensation

Compliance with the Indian Digital Personal Data Protection Act, 2023

Posted on by Treelife

For: B2B SaaS businesses

The Digital Personal Data Protection Act, 2023 (“Act”) is intended to safeguard and protect digital personal data, and (inter alia) govern the manner in which it can be collected, stored, processed, transferred, and erased. The Act imposes requirements on data fiduciaries/collectors and data processors, as well as certain duties on the data subject/individual with respect to personal data.

“Personal Data” under the Act includes any digital or digitized data about an individual (including any data which can be used to identify an individual). This excludes any non-digital data, or any data which cannot be used to identify an individual in any manner (including in concert with any other data).

This document is intended to provide a summary of the obligations of B2B-based SaaS business, which arise from the Act.

An Overview

The key obligations of businesses towards complying with the Act include:

  • Identify the extent of Personal Data collection, storage and processing which your business undertakes, and how much is necessary.
  • Prepare notices for procuring consents from individuals whose Personal Data you collect, store, and process (including those individuals whose Personal Data has already been collected and/or is being stored or processed), specifying:
    • Type/s of Personal Data you will use;
    • The specific purpose/s you will use it for;
    • The manner in which they can withdraw consent or raise grievances; and
    • The manner in which they can make a complaint to the Data Protection Board of India.
  • Maintain a record of consents procured and provide the following rights:
    • Right to request for (i) summary of their Personal Data being used; and (ii) identities of parties to whom their Personal Data has been transferred;
    • Right to correct, update and/or delete Personal Data (unless required to be retained for compliance with law);
    • Right to redressal for grievances and complaints;
    • Right to nominate another individual to exercise their rights (in the event of death or incapacity)

Action Items

While B2B SaaS platforms have limited Personal Data collection, Personal Data can still be collected and processed in case of user accounts for individuals/employees/representatives of enterprise customers. Businesses can take the following actions towards compliance with the Act:

  • Data audit: Carry out an internal data audit, including identifying Personal Data collection, storage and processing requirements;
  • Limit Personal Data usage: Erase or anonymize Personal Data to the extent feasible to reduce the compliance and associated risks, or limit the Personal Data points which are collected;
  • Update your product to enable privacy rights: Businesses should therefore make available on the SaaS tool / platform functionalities to:
    • Issue notices for procuring consent for Personal Data collection, storage and processing prior to any such collection, storage or processing. These notices can be worded in simple and clear terms so as to enable individuals to know their rights, and should include language which clearly states that consent is provided for collection, storage, and processing (including processing by third-parties); specify the purpose/s for the type or types of processing. For example – in case the processing will be done for purposes A, B and C, consent will have to procured specific for each of A, B and C; mention that consent can be withdrawn
    • Request modification, correction, updating, or erasure of Personal Data. Other than any Personal Data which is necessary for providing the services (for example, corporate email IDs), all Personal Data should be subject to modification or erasure pursuant to withdrawal of consent.
  • Appoint person/s who can handle complaints, grievances, or requests from individuals. This can be an individual assigned specifically for this task or a team responsible for ensuring speedy response.
  • Implement technical measures to protect against and mitigate data breaches and their consequences. The Act requires fiduciaries/collectors to “take reasonable security safeguards to prevent personal data breach”, which can include cloud monitoring, penetration testing, ISO certification, etc., depending on the sensitivity and extent of Personal Data.

Validity of WhatsApp Documents as Court Service: A Changing Landscape

Posted on by Treelife

Introduction

WhatsApp has become a ubiquitous messaging platform, with millions of users worldwide relying on it for personal and professional communication. With the legal system having already embraced technology and digital transformation to streamline their processes and enhance accessibility and electronic filing systems, digital signatures, and online platforms for case management, it has now also started accepting WhatsApp as a tool to enhance client communication and flow of information. Courts in India have also started accepting service of documents sent through WhatsApp to be valid service in certain situations.

Here is an analysis of accepting WhatsApp as a valid platform for service:

  1. Proof of Delivery

One of the primary requirements for accepting WhatsApp documents as valid court service is the ability to prove delivery. Traditionally, a clear paper trail was created through registered mail or in-person delivery to demonstrate that the documents were received by the intended recipient. With WhatsApp, the challenge lies in establishing irrefutable evidence of delivery.

  1. Acknowledgment and Read Receipts

WhatsApp offers features like read receipts and acknowledgment indicators, which can serve as evidence of delivery and receipt of documents. When a recipient opens and reads a message, the sender can receive a read receipt, providing a timestamp as proof of delivery. Additionally, if the recipient acknowledges receiving the message or responds to it, it further strengthens the case for the validity of WhatsApp documents as court service.

  1. Authentication and Integrity

Courts place a high value on document authenticity and integrity. When considering WhatsApp documents as valid court service, it becomes crucial to establish the authenticity of the sender and the integrity of the document. Verification mechanisms, such as digital signatures or encryption, can help ensure that the documents have not been tampered with and that they originate from the identified sender. Confidentiality of documents and service is another concern faced by courts, however, WhatsApp claims to incorporate end-to-end encryption.

  1. Legal Framework and Precedents

Courts in India have explicitly started recognizing WhatsApp as a valid platform of communication and service of documents related to court proceedings. However, burden of proof of service lies entirely on the party claiming service to have been completed through WhatsApp.

  1. Cost-Effective Solution

Adopting WhatsApp as a communication tool can be a cost-effective solution for legal service providers and helps reduce wastage of paper.

  1. Instances where courts have accepted service done via WhatsApp to be valid
  • The Delhi High Court set a precedent in 2017 in Tata Sons Limited & Ors Vs John Does, by allowing service of summons through WhatsApp after the Defendants evaded service though regular modes.
  • Thereafter, in SBI Cards and Payments Services Pvt Ltd Versus Rohidas Jadhav, the Bombay High Court accepted the service of notice in an execution application after finding that the PDF file containing the notice had not only been served but the attachment had also been opened by the opposite party. Justice G.S. Patel observed that “For the purposes of service of Notice under Order XXI Rule 22, I will accept this. I do so because the icon indicators clearly show that not only was the message and its attachment delivered to the Respondent’s number but that both were opened.
  • Justice G.S. Patel at Bombay High Court in Kross Television India Pvt Ltd & Anr Vs. Vikhyat Chitra Production & Ors. has also held that the purpose of service is to put the other party to notice. Where an alternative mode (email and WhatsApp) is used and service is shown to be effected and acknowledged, it cannot be suggested that there was ‘no notice’.
  • The Rohini Civil Court at Delhi in a case has also accepted the blue double-tick sign in a WhatsApp message as valid proof that the message’s recipients had seen a case-related notice.

Conclusion

As the Supreme Court is yet to lay down a precedent or ruling accepting Whatsapp as valid medium of service. The acceptance of WhatsApp documents as valid court service is a complex issue that requires careful consideration of factors such as proof of delivery, acknowledgment, authentication, and adherence to legal frameworks. As the Indian courts continue to navigate the digital landscape and embrace technology, it is essential for legal professionals, lawmakers, and technology providers to work together to establish clear guidelines and standards that safeguard the integrity of court proceedings while embracing the efficiencies offered by modern communication platforms like WhatsApp. The courts incorporating WhatsApp as part of the legal service workflow demonstrates the industry’s commitment to adapting to the evolving needs of clients in an increasingly digital world.

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