Lease and License

Distinguishing between a Lease and a Licence
Source: law and legal developments

In an earlier post, I had considered some of the principles regarding the  interpretation of documents. I had discussed the leading case of Sundaram  Finance v. State of Kerala, AIR 1966 SC 1178. In that case, the majority  held that the Court has the power to go behind the documents and determine the true effect of a transaction. At the same time, the words cannot be  ignored altogether. Drawing the line between substance and form can often be  a difficult task. A recent judgment of the Supreme Court illustrates some of  the complexities; and also discusses the law on the distinction between a  licence and a lease.

In New Bus-Stand Shop Owners Association v. Corporation of Kozhikode, (2009)  10 SCC 455, certain traders were in possession of various shops and offices  owned by the respondent Corporation. Licences had been issued to the  traders, and they were paying certain 'fees' in accordance with the relevant  provisions of the Kerala Municipalities Act, 1994. At the time of renewal of  the licences, the Corporation insisted that the agreements were in substance  leases, and accordingly, stamp duty should be paid thereon.

The Supreme Court approvingly cited a passage by Vaughan CJ in Thomas v. Sorell, [1558-1774] All ER Rep 107, which was approved by Lord Denning in  Errington v. Errington & Woods, [1952] 1 All ER 149:
"… 'A dispensation or licence properly passeth no interest nor alters or transfers property in anything, but only makes an action lawful which  without it would have been unlawful.' The difference between a tenancy and a  licence is, therefore, that, in a tenancy, an interest passes in the land,  whereas, in a license, it does not."


The Supreme Court went on to hold that the absence of exclusive possession  is one of the indications to show that the agreement is one of licence and not of lease. The Court then held that on its substance, the agreement was a  license. The fact that the agreement was termed as a 'licence' is of much  lesser significance than the substance of the agreement. Interestingly, from  the point of view of the law on interpretation of documents, the Supreme  Court approvingly cited the dissenting judgment of Subba Rao J. in
Associated Hotels of India v. R.N. Kapoor (the dissent being one on a  different issue – as far as the present issue is considered, Justice Subba  Rao concurred with the majority). In his dissent, Justice Subba Rao prefers  a substance-over-form approach; contrary to his dissent in Sundaram Finance.

Of course, in Sundaram Finance, the dissent was motivated by the fact that  the agreements were between two commercial persons in respect of commercial  dealings, when the presumption that form conveys substance correctly is  stronger. In Kapoor, Justice Subba Rao laid down the following propositions:
"The following propositions may therefore be taken as well established: (1)  to ascertain whether a document creates a licence or a lease, the substance  of the document must be preferred over the form; (2) the real test is the  intention of the parties – whether they intended to create a lease or a  licence; (3) if the document creates an interest in the property, it is a  lease; but, if it only permits another to make us of the property, of which  the legal possession continues with the owner, it is a licence; and (4) if  under the document a party gets exclusive possession of the property, prima  facie, he is considered to be a tenant; but circumstances may be established  which negative the intention to create a lease."

These propositions have now been reaffirmed by the Supreme Court.

Interpretation of Commercial Contracts

Source: Law and Legal Developments

I have previously discussed issues in relation to the interpretation of contracts in several posts. A recent judgment of the Bombay High Court, Novartis v. Aventis Pharma, enumerates the principles of interpretation of commercial contracts. The decision itself is available here. I will not go into the facts and the reasoning in this post; but will only highlight the principles which the Court derived from the authorities on the interpretation of commercial contracts. The relevant cases which the Court considered in forming these principles are Vimalchand Jain v. Ramakant Jajoo, 2009 (5) SCALE 59, RNRL v. RIL, 2007 (Supp.) Bom CR 925, Durham v. BAI, [2009] 2 All ER 26 etc. The four principles listed in paragraph 203 of Durham v. BAI by Justice Burton were approved by the Bombay High Court (per Anoop Mohta J.). These principles are as follows [citations omitted]:

1. Ordinary Meaning. There is a presumption that the words used should be construed in their ordinary and popular sense. The reasoning behind this is that the parties to a commercial contract must be taken to have intended, as reasonable men, to use words and phrases in their commonly understood and accepted sense. Importantly, the object of the inquiry is not necessarily to probe the ‘real’ intention of the parties, but to ascertain what the language they used in the document would signify to a properly informed observer.

2. Businesslike Interpretation. A commercial document should be construed in accordance with sound commercial principles and good business sense, so that its provisions receive a fair and sensible application. If a ‘detailed semantic and syntactical analysis of words’ used in a commercial contract would lead to a conclusion counter to business common sense, it must be made to yield to business common sense.

3. Commercial Object. The commercial object of the clause being construed, and its relationship to the contract as a whole, are relevant in resolving any ambiguity.

4. Construction to avoid unreasonable results. In cases where the wording of a clause is ambiguous, and one reading produces a fairer result than the alternative, then the more reasonable interpretation should be adopted.

Attribution of Fraud

Source: Law and Legal Developments

Moore Stephens: The Attribution of Fraud

Posted: 11 Feb 2010 09:13 PM PST

An earlier post had discussed the ex turpi causa arising in a recent House of Lords judgment – Stone & Rolls v. Moore Stephens. Another post had stated on the second issue (attribution), “It was held that a directing mind’s fraud will be attributed to the company in all cases, except where the fraud was played directly on the company. If the company is a vehicle of the fraud, as opposed to the victim of the fraud, the directing mind’s fraud will be attributed to the company. This would mean that the fraud of the directing mind is, in law, the fraud of the company. Once such attribution occurs, the principle of ex turpi causa would apply. The auditors were appointed for the very thing of detecting the fraud. Yet, when the company brings a claim against them for negligence in failing to detect the fraud, they can rely on the ex turpi causa rule to prevent the company from pursuing the claim. The only exception to this is if the company shows that it was the direct and primary victim of the fraud. In other words, if a company’s directing mind has committed a fraud using the company as a vehicle, then the company cannot bring a claim in negligence against the auditors for failing to detect the fraud.” This post considers the general law on attribution; and on the fraud exception to attribution.

In certain situations, acts of certain individuals can be attributed directly to the company, instead of vicariously through doctrines of agency. Thus, a company (although acting through the mechanism of individuals) can have certain acts attributed directly to it (Per Lord Hoffman, Meridian Global Funds Management (Asia) Ltd. v. Securities Commission, [1995] 2 AC 500, 506. Acts of the companies “directing mind and will” will be acts of the company itself. (Hence, the issue in Moore Stephens – is the fraud of the directing mind also the fraud of the company, or is there a fraud exception to attribution.) This “directing mind and will” theory can be traced to Viscount Haldane’s words in Lennard’s Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd., [1914-15] All ER Rep. 280, “… a corporation is an abstraction. It has no mind of its own any more than a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.”

The Supreme Court of India considered this theory in JK Industries v. Chief Inspector of Factories and Boilers, (1996) 6 SCC 665. The Supreme Court cited and specifically approved of Lennard’s case. It then stated that where the “directing mind and will” test is use, vicarious liability come into play to fasten liability on the company of the acts of the directing mind. With respect, this approach requires a slight clarification. The acts of the “directing mind and will” or the “alter ego” of the company are directly attributed to the company, not vicariously (Tesco Supermarkets Ltd. v. Nattrass, [1972] AC 153). The position on the point is clarified in the leading judgment of Lord Hoffman in the Meridian case. In Lord Hoffman’s view, “Any proposition about a company necessarily involves a reference to a set of rules. A company exists because there is a rule (usually in a statute) which says that a persona ficta shall be deemed to exist and to have certain of the powers, rights and duties of a natural person. But there would be little sense in deeming such a persona ficta to exist unless there were also rules to tell one what acts were to count as acts of the company. It is therefore a necessary part of corporate personality that there should be rules by which acts are attributed to the company. These may be called ‘the rules of attribution’. The company’s primary rules of attribution will generally be found in its constitution, typically the articles of association, and will say things such as ‘for the purpose of appointing members of the board, a majority vote of the shareholders shall be a decision of the company’ or ‘the decisions of the board in managing the company’s business shall be the decisions of the company’. There are also primary rules of attribution which are not expressly stated in the articles but implied by company law…”

The question which arises then, is – once a directing mind is identified, are all acts/knowledge of the directing mind to be attributed to the company? Is the fraud of the directing mind to be treated as the fraud of the company? In Moore Stephens, the House of Lords accepted that there was a fraud exception. In doing so, the Court relied on In re Hampshire Land Company, [1896] 2 Ch 743. I have elaborated on these points in an article forthcoming in the Journal of Business Law. Briefly, Hampshire Land is an agency-case. It deals with when the knowledge of an agent will not be attributed vicariously to the principal. Other cases on the point include Belmont Finance Corporation Ltd v Williams Furniture Ltd., [1979] Ch 250 and Canadian Dredge and Dock v. The Queen, [1985] 1 SCR 662. But, the Hampshire Land line of cases deals not with a directing mind’s knowledge; but with attribution of an agent’s knowledge. They are thus cases of exceptions to vicarious liability. The rationale behind Hampshire Land is restricted to agency; it does not apply to directing minds. The typical explanation for the Hampshire Land exception is, “…general principles of imputation are based on a presumption that there has in fact been communication between agent and principal, a presumption that must be rebutted by the agent's fraud on his principal, since no fraudster will tell his principal information that will reveal his fraud…” (Peter Watts, “Imputed Knowledge in Agency Law – Excising the Fraud Exception”, [2001] 117 Law Quarterly Review 300). But, when dealing with directing minds and wills, the general principles of imputation are not based on any such presumption of communication, they are based on the legal rule that the directing mind “is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company…” Once it is found that ‘X’ is acting as the directing mind, that finding is in itself is sufficient for attribution; no further presumption of any communication is needed. Hence, the Hampshire Land exception – premised as it is on the rationale of communication – is not apposite to cases of the directing mind and will.

There might be an independent fraud exception to attribution of the directing mind’s acts to the company. The Supreme Court of Canada has reached explained a possible basis for this exception: “The identification theory ceases to operate when the directing mind intentionally defrauds the corporation and when his wrongful actions form the substantial part of the regular activities of his office. In such a case, where his entire energies are directed to the destruction of the undertaking of the corporation, the manager cannot realistically be considered to be the directing mind of the corporation.” (emphasis added) See: Canadian Dredge v. The Queen, [1985] 1 SCR 662. This is quite different from the communication rationale of Hampshire Land. With respect, the House of Lords may have reached the right result by applying the Hampshire Land exception; it however adopted reasoning which can be made stronger if one recognises that it is not the Hampshire Land exception, but an independent fraud exception which applies the cases of the directing mind and will. Treating the two exceptions separately will avoid the confusion which is likely from the application of cases from one principle to facts pertaining to the other.

Contract: Interpretation of Commercial Contracts

Interpretation of Commercial Contracts

I have previously discussed issues in relation to the interpretation  of contracts in several posts. A recent judgment of the Bombay High Court,  Novartis v. Aventis Pharma, enumerates the principles of interpretation of  commercial contracts. The decision itself is available here. I will not go into the facts and the reasoning in this post; but will only highlight the  principles which the Court derived from the authorities on the
interpretation of commercial contracts. The relevant cases which the Court  considered in forming these principles are Vimalchand Jain v. Ramakant  Jajoo, 2009 (5) SCALE 59, RNRL v. RIL, 2007 (Supp.) Bom CR 925, Durham v.  BAI, [2009] 2 All ER 26 etc. The four principles listed in paragraph 203 of
Durham v. BAI by Justice Burton were approved by the Bombay High Court (per  Anoop Mohta J.). These principles are as follows [citations omitted]:

1. Ordinary Meaning. There is a presumption that the words used  should be construed in their ordinary and popular sense. The reasoning  behind this is that the parties to a commercial contract must be taken to
have intended, as reasonable men, to use words and phrases in their commonly  understood and accepted sense. Importantly, the object of the inquiry is not  necessarily to probe the 'real' intention of the parties, but to ascertain  what the language they used in the document would signify to a properly  informed observer.
2. Businesslike Interpretation. A commercial document should be construed in accordance with sound commercial principles and good business   sense, so that its provisions receive a fair and sensible application. If a  'detailed semantic and syntactical analysis of words' used in a commercial contract would lead to a conclusion counter to business common sense, it  must be made to yield to business common sense.
3. Commercial Object. The commercial object of the clause being construed, and its relationship to the contract as a whole, are relevant in resolving any ambiguity.
4. Construction to avoid unreasonable results. In cases where the wording of a clause is ambiguous, and one reading produces a fairer result than the alternative, then the more reasonable interpretation should be
adopted.

Source: Law and Legal Developments