Introduction
The recent movie “Amar Singh Chamkila” is gaining popularity, however some contractual disputes spurred regarding the release of the same in a recent case of Super Cassettes Industries Private vs Reliance Entertainment Studios (“Super Cassettes”). The issue arose regarding the privity of contract among parties namely, Super Cassettes Industries Private Limited (“SCIPL”), Reliance Entertainment Studios Private Limited (“Reliance”), and Window Seat Films LLP (“WSF”). The movie is produced by WSF in which Reliance holds 99.9% of share. The matter concerned the contract between SCIPL and Reliance, wherein Reliance defaulted on repayment of a loan that it received from SCIPL. Thus, SCIPL sort to invoke clause 9 of its Loan Agreement with Reliance which stated that “SCIPL holds a paramount lien and charge on all revenues generated by Reliance from any future films, whether produced solely, or along with a third-party.” SCIPL through this clause sought to extend its lien and charge on the revenues that were to be generated by Reliance and even WSF, on the account that Reliance was co-producing the movie along with WSF, and it was practically Reliance who had the major part in the production as it held the majority share in WSF. Reliance rebutted this argument by stating that it was only granted a sub-license right by WSF, under which it would be earning merely a 2% commission and no share in the licensing fee.
The issue pertaining to the privity of contract arose at this juncture, wherein the contention was raised by WSF that the lien and charge of SCIPL would not extend to it as it did not sign any agreement related to the same. The court gave its decision in the favour of WSF stating that “this clause can bind Reliance, and not any third parties who have not explicitly agreed to these terms”. This decision will have potentially negative ramifications in the Indian Contractual landscape, as it can become a very easy way for a firm to circumvent its obligations using the concept of privity of contract, which will ultimately lead to multiplicity in litigation. While exceptions to the privity of contract principle already exist, the author suggests considering flexible application of this rule in circumstances where it could reduce multiplicity of litigation.
Existing Position
Lacunas of the rigid application of privity of contract in such cases
Now in Super Cassettes ECIPL was the employer, Reliance was the main contractor, and WSF could be considered as a sub-contractor. In the event of Reliance being not able to repay the debt of ECIPL, the ECIPL has no recourse to recover its debt, other than filing a case on Reliance, which results in extensive litigation. The court’s decision of not extending the ECIPL’s lien and charge to WSF is erroneous and illogical as it forms a very fixated view of privity of contract. When considering that WSF acts as a subcontractor and Reliance holds a significant 99.9% share in it, it becomes apparent that WSF's primary role likely revolves around facilitating Reliance's avoidance of debt liabilities towards ECIPL. If the privity of contract is construed in a very strict sense like in the above mentioned cases, ECIPL will have no recourse to recover its debt from Reliance other than going to litigation. However, if ECIPL’s lien and charge is extended towards the revenue generated by WSF in the films co-produced with Reliance, it will be able to recover its debt without having to go to litigation. Let us understand this with the help of an illustration.
Illustration - Let us assume that ‘A’ is the employer, ‘B’ is the main contractor, and ‘C’ is the sub-contractor. Now, ‘A’ lends ‘B’ a loan of ‘X’ amount, and ‘B’ is not able to repay the loan. Now ‘B’ makes a company ‘C’ in which it has a 99.9% share and subcontracts with it to complete the task assigned to it by ‘A’. Now because of the principle of privity of contract ‘A’ does not have any lien or charge over the revenue generated by ‘C’ for the task is assigned/contracted to ‘B’. Further ‘A’ only has a lien and charge on the revenue generated by ‘B’ which is peanuts, as the main task is being performed by ‘C’ and ‘B’ is just getting some commission for it. Now if ‘A’ was able to have a lien or charge on ‘C’s’ revenue, it would be able to recover its debt more smoothly.
The above illustration is very similar to the Super Cassettes, wherein the court held that the lien will not extend to the third party. This position is really harmful and if it persists it will make it very easy for firms to circumvent their responsibility towards repayment of their debt. By delegating tasks to a firm in which they hold a majority share, they effectively shield themselves from the impact of liens and charges. While they may not directly earn significant revenue, they indirectly benefit from the earnings generated by the firm, thus evading the obligations associated with liens and charges. While one solution to this concern involves piercing the corporate veil to uncover the true workings of the company, this process is intricate and time-consuming. Alternatively, if the principle of privity of contract is applied flexibly in such scenarios, it could provide a more straightforward means for the firm to recover its debt. Additionally, the process of investigating potential fraud through piercing the corporate veil could continue alongside, ensuring comprehensive scrutiny while streamlining debt recovery procedures.
While there already exists jurisprudence on exceptions of letting go off the privity of contract in cases involving agency and implied contracts, a third party benefiting from the main contract, marriage settlements, acknowledgement or estoppel, and covenants running with land (where, without such exception, there would be multiplicity of litigation). However, in cases such as Super Cassettes there exists no such concrete exception, and the main contractor is easily able to circumvent its responsibilities of repaying its debt to the employer.
Suggestions
Given the limited options to avoid litigation, extending the lien to third parties not party to the contract (i.e., flexible application of privity to contract), as in cases like Super Cassettes, emerges as a viable solution. These third parties indirectly serve the employer's interests, making it reasonable for the employer to seek debt recovery from them. This approach ensures smoother debt recovery processes and minimises the need for prolonged litigation.While exceptions to the rule of privity of contract already exist, cases like Super Cassettes, where a flexible application of this rule could reduce litigation, should also be considered exceptions. By treating such cases differently, we can potentially streamline legal proceedings and promote fairness in contractual disputes.
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