Drafting Solutions To Protect Sellers Of Shares, Companies, Property Or Other Assets From Agents Who Attempt To Conceal Material Or Insider Information From The Seller And Profit From It
This article discusses drafting solutions to ensure rapid resolution of disputes where an Agent, without the consent of his Principal or without disclosing all material facts about the subject matter of the agency, deals in the Principal’s business on his account, i.e., profits from his position as an Agent.
The article focuses on cases where the Principal engages an Agent to sell property, moveable, or immovable.
Keywords: Agency Agreement, Consent, Misrepresentation, Breach of Contract
Reference: Indian Contract Act, Section 215, Illustration a
Section 215, Indian Contract Act:
Section 215 of the Indian Contract Act deals with situations where an Agent misuses his position to profit at his Principal’s expense unlawfully. The section states that if an Agent, without the consent of the Principal, or without informing him of all material circumstances in his knowledge on the subject, deals in the business of the agency on his accounts, i.e., for his profit, then the Principal can repudiate the transaction.
The section essentially protects the Principal from fraud by the Agent by making the transaction voidable. In that sense, it is similar to the provisions of section 19 of the Indian Contract Act.
Section 215 has two illustrations. The first illustration, which is the basis of this article, provides a situation where the Agent obtains the Principal’s consent to deal in the agency’s business but conceals material information from the Principal.
Section 215, Illustration (a):
A directs B to sell A’s estate. B, on looking over the estate before selling it, finds a mine on the estate which is unknown to A. B informs A that he wishes to buy the estate for himself but conceals the discovery of the mine. A allows B to buy, in ignorance of the existence of the mine. A, on discovering that B knew of the mine at the time he bought the estate, may either repudiate or adopt the sale at his option.
In the above illustration, it would make more business sense for A to adopt the sale as, if A were to repudiate the contract, he would have to return the sale proceeds to B and once again go through the exercise of selling the land. However, A could, and would likely, sue B for compensation for the loss caused by B’s concealing facts from A.
Modern-day Illustration:
A engaged B, a stockbroker, to sell his shares in Company X, a home security technology company, as their value consistently declined over the previous three quarters. B learned that Company X was likely to be granted a patent that would significantly increase it’s value. However, B concealed from A the information about the likelihood of the patent being granted, and it’s potential impact on the company’s share price, and merely informed him that there was a patent application pending, and offered to buy the shares
Soon after the share purchase went through, the patent was granted, and, as expected, Company X’s shares doubled in value. Upon learning this, A sued B for compensation amounting to the difference between the sale price of the shares and their value after granting the patent.
Interpretation and Scenarios:
In the above example, A would base his case on the fact that B did not disclose the likelihood of the patent being granted or of it’s potential impact on Company X’s share price. He argued that had this information been disclosed, he would not have sold the shares till the patent was granted.
In his defense, B would deny the allegations on the ground that he informed A about the existence of the patent application, and therefore could not be said to have concealed anything from A.
A dispute like the one between A and B is not suitable for rapid resolution through Online Dispute Resolution as both parties would be required to lead substantial evidence, and the case would require several oral hearings. However, these disputes can be made friendly to rapid resolution by incorporating the solutions discussed in this article.
Solution 1 — Makes It Easy To Prove Misrepresentation
When selling property, moveable, or immoveable, the owner must have all information necessary to make an informed decision about the factors affecting the sale, such as:
- Whether or not to go ahead with the sale, i.e., any factors that would make him reconsider his decision to sell in the first place
- What would be a realistic sale price
- If there are multiple offers, whom to sell to
Since, in most cases, the owner’s information has to come from the Agent engaged in identifying a purchaser and completing the sale, the contract between the owner and Agent must incorporate a process that ensures that the Agent provides the necessary information to the owner.
However, in order for the process to be effective, it is equally necessary for the ‘necessary information’ to be defined in the agreement. If this is not done, it could allow the Agent to conceal information from the owner without actually being in breach of the contract.
Since the company was a home security technology company, if A had known the patent was likely to be granted, he would almost certainly have held on to the shares. Therefore, A’s agreement with B ought to have obliged B to disclose whether any patent applications or any other significant impending development was pending to the Agents knowledge and the likelihood of the patent being granted or the likelihood of the other developments having an enormous impact on the value of the shares.
Solution 2 — Makes It Easy To Determine Compensation
As mentioned earlier in the article, in a case where a Principal or property owner has suffered losses on account of misrepresentation by a sales agent, it does not make business sense to repudiate the entire transaction. Therefore, the agreement between the owner and vendor must allow for easy determination of compensation if the Agent breaches the contract.
This can be done by incorporating a clause stating that the Agent would be liable to pay the difference between the property’s actual sale price and the market price on the date the owner discovered the breach. The date of discovery can be the date the owner conveys knowledge of the misrepresentation to the Agent.
Solution 3 — Accelerate the Dispute Resolution Process:
The agreement should have a dispute resolution clause giving the claimant the right to ask for the arbitrator’s appointment by a named institution or ODR platform and for such appointment to be made within 35 days of receipt of the defendant receiving notice.
In these cases, it will better serve the parties if either the dispute resolution clause itself or the institution or ODR platform promises a process that binds the arbitrator to rapid resolution. ODR Platforms often do this by minimizing oral hearings, not accepting documentation delays, and not allowing adjournments unless in emergencies.
Conclusion:
While owners can repudiate sales where their sales agents have profited by purchasing the property for themselves at a lower price by concealing material facts from the owners, it makes much more business sense to sue for compensation. Therefore, agreements between property owners and sales agents must be drafted so that the owner can quickly and inexpensively recover compensation from the Agent if the agent profits by concealing material facts from the owner to purchase the property for himself at a lower price.
An explainer for the Layman:
Karan engaged Varun, a stockbroker, to sell his shares in ‘Suraksha Limited,’ a home security technology company, as their value consistently declined over the previous three quarters. Varun learned that Suraksha was likely to be granted a patent that would significantly increase it’s value. However, instead of informing Karan of the likelihood of the patent being granted and it’s potential impact on its share price, Varun merely told him that the company a patent application pending. He also offered to buy the shares himself at a slightly higher price than their current value.
Soon after the share purchase went through, the patent was granted. As expected, Suraksha’s shares doubled in value. Upon learning this, Karn sued Varun for compensation amounting to the difference between the sale price of the shares and their value after granting the patent.
Karan alleged that Varun did not disclose the likelihood of the patent being granted or it’s potential impact on Surakhsha’s share price. Karan argued that if this information been disclosed, he would have held on to the shares.
Varun denied the allegations on the ground that he had informed Karan about the existence of the patent application.
The dispute could have been resolved through Online Dispute Resolution if the agreement had contained the following:
- An exhaustive list of factors that could affect the sale of the shares that Varun was obligated to provide to Karan included information about pending patent applications and the likelihood of their being granted and a process by which Varun would provide the necessary information.
- A clause mandating that in the event Varun was found to have breached the contract, he would be liable pay compensation Karan amounting to the difference between the actual sale price of the shares and their market price on the date the concealment was discovered.
About the Article
Rapid Contract Enforcement is an essential requirement for the growth and prosperity of India. It will enable more investment, entrepreneurship, and trust for all stakeholders in business and commerce. The community of lawyers in India does not have access to a practical and scholarly manual that gives them a path to deliver rapid contract enforcement to their clients. Such a manual will also help lawyers to draft contracts that enable timely enforcement. Quick enforcement requires the effective use of the Arbitration Act, the institutional framework, and technology-enabled dispute resolution infrastructure. This article belongs to a series where the author analyses each of the Illustrations available in the Contract Act and recommends practical approaches to rapid enforcement.
About the Author:
Dushyant Krishnan is a Mumbai based lawyer and the co-founder of House Court, an online dispute resolution platform.
