Column: Legal

LEGAL
Going By The Book

Under the Consumer Protection Act, sellers, distributors, and packers can all be made liable for defects in the products, in addition to the manufacturer.

By Diljeet Titus, Titus & Co. Advocates

A former employee who quit our company to set up his own outfit has started soliciting our company's clients for his business. What legal action can we take against him?

The court in Gopal Paper Mills V.S.K.G. Malhotra air 1962 Cal 61 (66), held that clients of a company are its proprietary interests and an employer has a right to prevent its clients from being enticed away by its employee. You can, therefore, file an action against your former employee for inducement of breach of contract. To succeed, you need to prove that (I) the former employee has directly/indirectly solicited your clients by unlawful means, (ii) there is a predominant purpose to injure your company, and (iii) there is no justification for interference by the employee. You may also file an application for injunction restraining the former employee during the pendency of the suit. However, apart from cases of conspiracy to injure, acts of a third party lawful in themselves do not constitute an actionable interference with contractual rights only because they bring about a breach of contract, even if they were done with the intention and object of bringing about such a breach.

Can we issue shares to our US parent company against license fees due to it under a Technology License Agreement (TLA)? If so, what regulatory approvals are required?

The issue of shares to your US parent company against license fees due to it will require prior approval of the Secretariat for Industrial Assistance (SIA), in terms of Regulation 3 of Schedule 1 to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000. Further, the payment of license fees under the TLA should have been approved by the SIA or the Reserve Bank of India, as the case may be. Your application to the SIA for permission to issue shares against license fees should contain brief background information on the parties, details of the transaction, while also attaching a copy of the technology license agreement and your US parent company's no-objection/agreement to receive shares in lieu of licence fees. A condition for SIA approval will be that the price of shares to be issued to your US parent company should, in case yours is a listed company, be worked out in accordance with SEBI guidelines, and in all other cases, at a valuation done by a chartered accountant as per guidelines issued by the erstwhile Controller of Capital Issues. Also, the shares will need to be issued in an amount of the license fee less tax deducted on the license fees.

We are distributors of products manufactured by another company. We have been served with a legal notice by a consumer alleging product defects. Can we be made liable for any defects in the products?

Being a distributor, you fall within the definition of trader under the Consumer Protection Act (CPA), 1986, and a consumer can file a complaint against you. Under the CPA, sellers, distributors, and packers can all be made liable for defects in the products, in addition to the manufacturer. The intent of the cpa is to provide relief to the consumer in a situation where he may not be aware who the actual manufacturer of the products purchased by him is. Therefore, the question of your liability would depend on whether there is any fault, imperfection or shortcoming in the quality, quantity, potency, purity or standard of the products that as a distributor you are required to maintain under law or under any contract with the consumer, or which you have claimed in any manner whatsoever in relation to the products. If it is a manufacturing defect, you may apply to have the manufacturer joined as a necessary party in any legal proceedings brought against you by the consumer on the grounds that a non-joinder of the manufacturer would be fatal to the whole proceeding, although as a rule, the manufacturer is not a necessary party in a complaint filed against a 'trader'.

The view expressed here should not be construed as legal opinion and is for reference only. Business Today and/or the author will not be responsible for any decision taken by readers on the basis of these views. Please send in your queries to legal.bt@intoday.com or Going By The Book, c/o Business Today, F-26, Connaught Place, New Delhi-1

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