Law Optional (CLD-Negotiable Instruments Act and ADR system) by Rajnish Jindal

Model Answer

Question #1. Even though Section 89 of the Code of Civil Procedure, 1908 provides for out of court settlement of civil disputes filed in a civil court, the impact of such settlement through Alternative Dispute Resolution (ADR) appears to be mixed. Analyse the evolution of the ADR system in India and its importance.

Ans.

ADR is an abbreviation that stands for ‘Alternative Dispute Resolution’. ADR refers to all those methods of solving disputes which are alternatives for litigation in the courts. ADR processes are decision making process through which litigants or potential litigants may resolve their disputes. These procedures are usually less costly and more expeditious. This method can be used in commercial and labour disputes, divorce actions, in resolving tax-claims and in other disputes that would likely otherwise involve court litigation.

ADR (alternative dispute resolution) usually describes dispute resolution where an independent person (an ADR practitioner, such as a mediator) helps people in dispute to try to sort out the issues between them. ADR can help people to resolve a dispute before it becomes so big that a court or tribunal becomes involved. ADR can be very flexible and can be used for almost any kind of dispute.

Resolving your dispute through ADR is different from asking a court or tribunal to resolve your dispute. Using ADR to resolve your dispute can benefit everyone. It means that courts and tribunals can spend their time considering disputes that need a court or tribunal decision.

ADR processes can be less expensive than other ways of resolving your dispute. Going to a court can be very expensive. Tribunals can be less expensive but can still involve hearings and legal costs if you are represented.

ADR processes and outcomes focus on what is important to you and the other people involved. Courts and tribunals focus on legal rights. ADR processes may help you and other people to maintain relationship.

ADR in Ancient India:

Alternate Dispute Resolution system is not a new experience for the people of this country also. It has been prevalent in India since time immemorial. Legal history indicates that down the ages man has been experimenting with procedure for making it easy, cheap, unfailing and convenient to obtain justice. It is generally presumed that the commonly prevalent system of Government in Ancient India was monarchy and instances of republic were either exceptions or aberrations. The view is based on the apparent perception that since there were kings in ancient India, the system was that of monarchy.

In earlier times, disputes were peacefully decided by intervention of kulas (family or clan assemblies), srenis (guilds of men following the same occupation), parishads (assemblies of learned men who knew law) before the king came to adjudicate on disputes.  The political system of the Aryans in their initial days here was amazingly complex, though quite ingenious. They hung around together in small village settlements (which later grew to kingdoms) and the basis of their political and social organization was, not surprisingly, the clan or kula. Being of somewhat militant nature, this was very much a patriarchal society, with the man in the house expected to keep his flock in control. Groups of kulas together formed a Grama or village, which was headed by a Gramina. Many villages formed another political unit called a Visya, headed by a Visyapati. The Visyas in turn collected under a Jana, which was ruled by a Rajana or king. However, the precise relationship between the grama, the visya and the Jana has not been clearly defined anywhere.

In ancient India there were several grades of arbitration, for example the Puga or a board of persons who belonged to different sects and tribes but lived in the same locality; the Sreni or assemblies of tradesmen and artisans belonging to different tribes but connected in some way with each other, the Kula or groups of persons bound by family ties. From early times, the decisions of Panchayats were accepted as binding. According to Colebrooke (an English scholar and commentator on ancient Hindu law), Panchayats were different systems of arbitration subordinate to the regular courts of law. The decision of a Kula or kin group was subject to revision by the Sreni which, in turn, could be revised by the Puga. From the decision of the Puga, appeal was maintainable to Pradvivaca and finally to the sovereign and the prince.

It is important to note that in ancient India joint families were the order of the day and they were usually very large. When therefore, a disagreement or dispute used to take place between two members of a family, it was usually settled by its elders. If they failed to bring about any compromise, the sreni or the guild courts used to intervene. Srenis or guilds became a prominent feature of commercial life in ancient India from 500 B.C. They were well organized and had their own executive committees of four or five members.

ADR during British regime:

Judicial administration was changed during British period. The current judicial system of India is very close to the judicial administration as prevailed during British period. The traditional institutions worked as recognised system of administration of justice and not merely alternatives to the formal justice system established by the British. The two systems continued to operate parallel to each other.

The system of alternate dispute redressal was found not only as a convenient procedure but was also seen as a politically safe and significant in the days of British Raj. However, with the advent of the British Raj these traditional institutions of dispute resolution somehow started withering and the formal legal system introduced by the British began to rule.

Alternate Dispute Resolution in the present form picked up pace in the country, with the coming of the East India Company. Modern arbitration law in India was created by the Bengal Regulations. The Bengal Regulations of 1772, 1780 and 1781 were designed to encourage arbitration. Bengal Resolution Act, 1772 and Bengal Regulation Act, 1781 provided parties to submit the dispute to the arbitrator, appointed after mutual agreement and whose verdict shall be binding on both the parties. Hence, there were several Regulations and legislation that were brought in resulting considerable changes from 1772. After several Regulations containing provisions relating to arbitration Act VIII of 1857 codified the procedure of Civil Courts except those established by the Royal Charter, which contained Sections 312 to 325 dealing with arbitration in suits. Sections 326 and 327 provided for arbitration without the intervention of the court.

After some other provisions from time to time Indian Arbitration Act,1899 was passed, based on the English Arbitration Act of 1889. It was the first substantive law on the subject of arbitration but its application was limited to the Presidency – towns of Calcutta, Bombay and Madras. Act, however suffered from many defects and was subjected to severe judicial criticisms.

The Arbitration Act of 1940 was enacted replacing the Indian Arbitration Act of 1899 and section 89 and clauses (a) to (f) of section 104(1) and the Second Schedule of the Code of Civil procedure 1908. It amended and consolidated the law relating to arbitration in British India and remained a comprehensive law on Arbitration even in the Republican India until 1996.

ADR in Independent India:

 Bodies such as the panchayat, a group of elders and influential persons in a village deciding the dispute between villagers are not uncommon even today. In 1982 settlement of disputes out of courts started through Lok Adalats. The first Lok Adalat was held on March 14, 1982 at Junagarh in Gujarat and now it has been extended through out the country. Initially, Lok Adalats functioned as a voluntary and conciliatory agency without any statutory backing for its decisions. By the enactment of the Legal Services Authorities Act, 1987, which came into force from November 9, 1995, the institution of Lok Adalats received statutory status. To keep pace with the globalization of commerce the old Arbitration Act of 1940 is replaced by the new Arbitration and Conciliation Act, 1996. Settlement of matters concerning the family has been provided under Order XXXIIA of the Code of Civil Procedure, 1908 by amendment in 1976. Provisions for making efforts for reconciliation under Sections 23 (2) and 23 (3) of the Hindu Marriage Act, 1955 as also under Section 34 (3) of the Special Marriage Act, 1954 are made. Family Courts Act was enacted in 1984. Under Family Courts Act, 1984 it is the duty of family court to make efforts for settlement between the parties.

Introduction of section 89 and Order X Rule 1A, 1B and 1C by way of the 1999 Amendment in the Code of Civil Procedure, 1908 is a radical advancement made by the Indian Legislature in embracing the system of “Court Referred Alternative Disputes Resolution”.

Law Commission Report and Need for ADR:

Reasons of finding alternatives:

1. Weight of Pendency: The need for finding alternatives arises due to the working of the present system of administration of justice, which is crumbling under the weight of the pending cases.
2. State fighting the citizens: Interestingly, the government is the biggest litigant in the country. According to a rough estimate, around 70 per cent of all cases are either agitated by the State, or appealed by it. The State fight cases against the citizens at the costs of citizens. Thus, directly or indirectly the State is also responsible for increasing the weight of pending cases.
3. Other reasons: Jurists have suggested that the reduction in number of holidays of courts, and an increase in the working of days. At present the court are working for 210-230 days per year, with a fairly long summer vacation. If courts work for longer hours and days, litigation can be brought under control.
4. Adjournments: Unnecessary adjournments also extend the life of litigation. The process of adjournment, on frivolous grounds, is one of the major reasons for increase in delay. There is a need to evolve a set of guidelines for granting adjournments, and a framework for the settlement of dispute should be designed.

To overcome, such problems, the law commission of India set up to reform the ‘justice delivery system in India’, time in time came up with the solutions and suggestions, and these are:

The Law Commission of India, 117^th Report in the year 1986, talks on the ‘training of judicial officers’ so that the huge backlog of cases can be managed. The law officers should be trained as per modern methods of dispute resolution, so as to re-establish the credibility on justice delivery system in India and to restructure judiciary on all level in India.

The 221^st Law Commission of India, in the year 2009 came up with their report on ‘Need for Speedy Justice – Some Suggestions’ since there was Mounting of arrears of cases in courts, particularly in High Courts and District Courts, has been a cause of great concern for litigants as well as for the State. It is a fundamental right of every citizen to get speedy justice and speedy trial which also is the fundamental requirement of good judicial administration. In this Report, they have made few proposals which when given effect to, will be helpful not only in providing speedy justice but also in controlling frivolous, vexatious and luxurious litigations.

Several amendment has been suggested, In order to shorten delay in disposal of cases, it is necessary that provisions parallel to section 80 CPC be introduced for all kinds of civil suits and cases proposed to be filed by a litigant.

The 222^nd Report of the Law Commission of India on the subject- Need for Justice-dispensation through ADR etc came up in 2009 “To keep under review the system of judicial administration to ensure that it is responsive to the reasonable demands of the time and in particular to secure:-

(i) Elimination of delays, speedy clearance of arrears and reduction in costs so as to secure quick and economical disposal of cases without affecting the cardinal principle that decision should be just and fair.

(ii) Simplification of procedure to reduce and eliminate technicalities and devices for delay so that it operates not as an end in itself but as a means of achieving justice.

(iii) Improvement of standards of all concerned with the administration of justice.”

This report was in the continuum of the Law Commission’s various earlier reports on the subject of judicial administration. Hence, it is the execution of the saying that Justice must be effective, speedy, less costly and non-cumbersome.

The recommendations of law commission were adopted and incorporated in Rules 1-A, 1-B and 1-C of Order X of the CPC.

Law Commission of India (report no. 230) on ‘Reforms in the judiciary – some suggestions’ The recommendations in this Report are the suggestions made by the Hon’ble Shri Justice Ashok Kumar Ganguly, former Judge of the Supreme Court, these recommendations are:

• There must be full utilization of the court working hours. The judges must be punctual and lawyers must not be asking for adjournments, unless it is absolutely necessary. Grant of adjournment must be guided strictly by the provisions of Order 17 of the Civil Procedure Code.
• Judges must deliver judgments within a reasonable time and in that matter, the guidelines given by the apex court in the case of Anil Rai v. State of Bihar, must be scrupulously observed both in civil and criminal cases.
• Considering the staggering arrears, vacations in the higher judiciary must be curtailed by at least 10 to 15 days and the court working hours should be extended by atleast half an hour.

Law commission of India in its 240^th report in the year 2012 on ‘Costs in Civil Litigation’ also suggested some measures. The Law Commission has taken an in-depth study and had interaction with the judicial officers and lawyers at the conference held in some of the States.   The Rules of various High Courts governing taxation of costs and advocate’s fee have been pursued.  Keeping in view the triple goals of (i) ensuring realistic and reasonable costs to the successful party, (ii) curbing false and frivolous litigation and (iii) discouraging unnecessary adjournments, the recommendations have been made. To felicitate expeditious realization of costs pending appeals, amendments to law has been suggested. As per the recommendations, certain legislative changes in CPC have been proposed.  Amendments to Section 35A (compensatory costs for false and frivolous litigation), S. 95 (compensation for obtaining arrests, attachment, etc., on insufficient grounds), Order XXV (security for costs), Order LXI (appeals from original decrees), Order XX, Rule 6A (preparation of decree), have been suggested.

Impact of Sec 89 of the CPC in the Alternative Dispute Forum:

The object of Section 89 of the Code of Civil Procedure is that settlement should be attempted by adopting an appropriate Alternative Dispute Redressal process. Neither section 89 nor Order X, rule 1A of the CPC is intended to supersede or modify the provision of the Arbitration and Conciliation Act or the Legal Services Authorities Act, 1987.

Section 89 of the CPC makes it clear that two of the ADR processes (i.e. Arbitration and Conciliation) will be governed by the Act of 1996. And two others i.e. Lok Adalat and mediation is governed by the Legal Services Authorities Act, 1987.  Section 89 of the CPC cannot be take recourse unless all parties concerned give consent.

Question #2. Discuss the significance of Negotiable Instrument Act, 1881, especially Chapter XVII, in relation to modern corporate world and suggest the improvements required.

Ans.

Negotiable Instruments have been used in commercial world for a long period of time as one of the convenient modes for transferring money. The main object of the Negotiable Instruments Act, 1881 is to legalise the system by which instruments contemplated by it could pass from hand to hand by negotiation like any other goods. The purpose of the Act was to present an orderly and authoritative statement of the leading rules of law relating to the negotiable instruments. To achieve the objective of the Act, the legislature thought it proper to make provision in the Act for conferring certain privileges to the mercantile instruments contemplated under it and provide special procedure in case the obligation under the instrument was not discharged as held in Shri Ishar Alloy Steels Ltd v. Jayaswals Neco Ltd. (2001).

Further,

1. It facilitates the settlement of payments in business as they pass freely from holder to holder due to easy transferability of value of instrument.
2. It provides legal protection to different mercantile instruments.
3. It presents orderly and authoritative statement of leading rules of law relating to negotiable instrument.
4. It provides for the special procedure in case the obligations which have to discharge under the instruments.
5. It regulates the different types of negotiable instruments which include Promissory notes, Bills of Exchange and Cheques.
6. It explains the capacity and liabilities of the parties to the instrument.
7. It provides the understanding of different topics under the Act that are negotiation, assignment, endorsement etc.
8. It inculcates faith in the efficacy of banking operations and credibility in transacting business
9. on the negotiable instruments.

Importance of Chapter XVII of the Act: Before 1988 there was no effective legal provision to restrain people from issuing cheques without having sufficient funds in their account or any stringent provision to punish them. Of course, on dishonor of cheques, a civil liability accrued. With a view to protect drawee of the cheque need was felt that dishonor of cheque be made punishable offence. With that purpose Sec.138 to 142 were inserted by Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988. This was done by making the drawer liable for penalties in case of bouncing of the cheque due to insufficiency of funds with adequate safeguards to prevent harassment of the honest drawer.

However, in due course it was observed that the courts were unable to dispose of the cases expeditiously and in time bound manner. The loop holes were rectified by the amendment of the year 2002 and hence, the Negotiable Instruments (Amendment and Miscellaneous provisions) Act, 2002 was passed. The provisions of sec.143 to 147 were newly inserted and provisions of section 138, 141, 142 were amended. Further sections 143A and 148 have been instituted by the Amendment Act of 2018 to provide for interim compensation.

The object of this amendment Act was a) to regulate the growing business, trade, commerce and Industrial activities. b) To promote greater vigilance in financial matters. c) To safeguard the faith of creditors in drawer of cheque. The Hon'ble Supreme Court in the matter of Modi Cements Ltd. v. Kuchil Kumar Nandi, (1998) 3 SCC 249, observed that "The object of Chapter XVII, containing Sections 138 to 142, is to promote the efficacy of banking operations and to ensure credibility in transacting business through cheques."

In Krishna vs. Dattatraya (2008), it was held that the object of this chapter XVII is:

1. To regulate the growing business, trade, commerce and Industrial activities.
2. To promote greater vigilance in financial matters.
3. To safeguard the faith of creditors in drawer of cheque.

In the case of Dalmia Cement(Bharat) Ltd. v. Galaxy Traders and Agencies Ltd. (2001), the Apex Court referred to the object of Section 138 of the Act. The court observed that the Act was enacted and section 138 thereof incorporated with a specified object of making a special provision by incorporating a strict liability so far as the cheque, a negotiable instrument, is concerned. The law relating to the negotiable instruments is the law of commercial world legislated to facilitate the activities in trade and commerce making provision of giving sanctity to the instruments of credit which could be deemed to be convertible into money and easily passable from one person to another.

Constitutionality and Validity of Chapter XVII and Section 138: The introduction of chapter XVII in the year 1988 has been challenged on various grounds before the courts including the legislative competency of the Parliament to introduce the chapter, qua violative of Art. 14 of the Constitution, converting a civil liability into an offence, running counter to the principle of presumption of innocence and the exclusion of mens rea etc.

The constitutional validity of the provisions of chapter XVII and the power of the Parliament to enact the same has been upheld. Such power is available under Entry 45 (Banking) and Entry 46 (Bills of Exchange, Cheques, Promissory Notes and other like instruments) of List I of the Seventh Schedule of the Constitution as held in Rajinder Steels Ltd. v. Union of India, (2000).

In Ramawati Sharma v. Union of India (2001), section 138 was challenged in the Allahabad High Court on the ground that it punishes only dishonour of cheques and not bills of exchange or promissory notes and the liability to repay loan is only a civil one and thus was violative of Arts. 14, 19 and 21 of the Constitution. The court turned down the contentions and upheld the constitutionality of the provision. The court held that a promissory note cannot be equated with a cheque. A promissory note simply creates liability but by issuing a cheque, drawer desires that certain payment is to be made in favour of holder. The court also noticed that the law has been necessitated because of the malpractices prevalent in the society and was thus in public interest.