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How do e-Wallets like Paytm work?

abhishek-ray   In the dawn of demonetisation, most of us have found ourselves adapting to new payment mechanisms and methods. The government’s strong push towards a cashless society seems to be ushering in the age of the e-wallet. Paytm alone is responsible for more transactions per day than the combined average daily usage of all the debit and credit cards in India. Mobile wallets, which many of you are using these days, are a type of pre-paid instrument. But what are pre-paid instruments? How do they work?

Here are some frequently asked questions, which should provide some clarity on the conceptual and regulatory framework behind pre-paid instruments in India.

I am hearing this term for the first time. What is a pre-paid instrument?

Pre-paid instruments are payment instruments that facilitate purchase of goods and services, including by way of funds transfer, against the value stored on such instruments. The value stored on these instruments represents the value paid for by the holders of such instruments.

The issuers of pre-paid instruments have tie-ups with various merchants, and you can use the value stored on your instruments to carry out transactions with these merchants.

Ok. That’s a very legalese definition. Did the Reserve Bank of India come up with it? What is the regulatory framework for pre-paid instruments?

Actually, yes! The Reserve Bank of India (RBI) first provided the guidelines on pre-paid instruments (let’s just call them PPIs) in 2009. Over the years the RBI, issued several notifications (yes, they were not as dynamic as today!) in relation to PPIs. It then decided to consolidate all these notifications in a Master Circular (which gets updated on a yearly basis). Pre-paid instruments are subject to the Payment and Settlement Systems Act, 2007.

The latest Master Circular – Policy Guidelines on Issuance and Operation of Pre-paid Payment Instruments in India was notified on 01 July 2016. You can have a look at that here. You will find all the definitions and other details in this Master Circular.

Cool! So I guess then a PPI is a regulated instrument and one needs to have the approval of the RBI to issue one?

Yes. The RBI provides licenses to issue PPIs. All persons proposing to operate payment systems and involved in the issuance of PPIs have to seek authorisation from the Department of Payment and Settlement Systems, RBI, under the Payment and Settlement Systems Act, 2007.

Ok. If mobile wallets are one type of PPIs, what are the other types?

PPIs can be issued as smart cards, magnetic strip cards, internet wallets, mobile accounts, mobile wallets, paper vouchers and any such instrument, which can be used to access the pre-paid amount. A mobile wallet (Paytm, Mobikwik etc.) is one type of PPI. However, this is a dynamic sector and entrepreneurs are devising new prepaid mechanisms everyday.


Mobile Wallets like Paytm and Mobikwik are Pre-Paid Instruments

Broadly the RBI classifies PPIs into the following types: Closed, Semi-Closed and Open Payment Instruments.

What are Closed System Payment Instruments?

These are payment instruments issued by a person for facilitating the purchase of goods and services from him/it. These do not permit cash withdrawal or redemption. As these instruments do not facilitate payments and settlement for third party services, issue and operation of such instruments are not classified as payment systems. (A pre-paid card in your canteen or a food court can be considered a type of closed system payment instrument.)

What are Semi-Closed System Payment Instruments?

These are payment instruments, which can be used for purchase of goods and services, including financial services at a group of clearly identified merchant locations/establishments, which have a specific contract with the issuer to accept the payment instruments. These instruments also do not permit cash withdrawal or redemption by the holder.

Mobile wallets like Paytm and Mobikwik are semi-closed payment instruments.

What are Open System Payment Instruments?

These are payment instruments, which can be used for purchase of goods and services, including financial services like funds transfer at any card accepting merchant locations (point of sale terminals) and also permit cash withdrawal at ATMs.

Debit cards are open system payment instruments.

Are there any limits in relation to the value that I can store in the PPIs?

Currently, the limit is Rs. 20,000 per month for PPIs where minimum details of the customers have been collected.

This limit can be extended up to Rs 1,00,000 per month after collecting the appropriate KYC (Know Your Customer) documents from the holders.

Ok. So what can I do with my pre-paid instruments?

Let’s only consider semi-closed PPIs from now on, as these are the most commonly used. Your scope of usage of a semi-closed PPI is dependent upon the number of merchants the PPI issuer has tied up with. Generally you can use your PPI for payment of utilities with these merchants and for transferring money to other PPIs.

e.g. Paytm has a tie up with Uber and not with Ola. So you can use your Paytm wallet to make a payment for Uber but not for Ola.

Ok. So what happens to the money after I transfer it to my PPI?

Every PPI issuer (like Paytm, Mobikwik etc.) is required to create an escrow account with a bank, where all the money collected from its customers are credited. This account is a non-interest bearing account. The PPI issuer is required to create a security on this account in favour of the PPI holders (customers like you and me). Therefore the holders are secured and in the event of liquidation/bankruptcy of the PPI issuer, the merchants/PPI holders shall be given preference to the other creditors of the PPI issuer.



There are strict norms, which regulate any debit or credit of this escrow account. However at no point of time can the amount in the escrow account be less than the aggregate of the balance amount in all the corresponding PPIs and all pending payment instructions in favour of the merchants. So don’t worry, your money is safe with a PPI issuer!

Can I redeem the money stored in my PPI?

No. You are not allowed to redeem your money from a semi-closed PPI. However if that particular PPI is being closed or if the RBI decides to stop this entire product of PPIs (highly unlikely, the RBI usually does not reverse a decision), the customers shall be allowed to redeem the amounts stored in the PPI, within the expiry date of the PPI.

Who can issue PPIs? Are all PPI issuers NBFCs or banks?

Only banks can issue Open PPIs. Non Banking Financial Companies (NBFCs) and other persons can issue Closed and Semi-closed PPIs. These persons need to have a minimum paid-up capital of Rs. 500 lakh and minimum positive net-worth of Rs. 100 lakh at all times. Only companies incorporated in India are eligible.

As mentioned earlier, the authorisation of the RBI is required.

If I keep my money in my bank account it earns me interest. Can I earn interest on the amount stored in my pre-paid instrument?

The money in the wallet or PPI can only be used for transactions against the value stored in such instruments.

You will not earn interest on the amount stored in the wallet.

I heard of an offer where I can get cashback points if I use a mobile wallet. How does this work?

These are usually marketing offers. The merchant may be offering the product at a discount to increase sales. The discounted amount is then credited back into the PPI.

At times, the PPI issuer may also credit the PPI with an additional amount to incentivise customers. A PPI can be funded/reloaded by third parties, so the PPI issuer is transferring the cashback amount to your PPI.

Hope this is of help! Do take some time to go through the RBI Master Circular for more details.

Abhishek is a legal and business strategy consultant with ePaylater, one of India’s first one- click checkout payment solutions. This article should not be construed as legal advice. The views expressed in this article are his personal views and opinions. He can be reached at

Written by myLaw

Open court hearings in review petitions after Mohd. Arif (2014)

SohamGoswami_DeathPenaltyProcedureThe Supreme Court of India has qualified the scope and extent of the right to life enshrined in Article 21, through a series of judgments from A.K. Gopalan v. State of Madras, AIR 1950 SC 27 to Maneka Gandhi v. Union of India, AIR 1978 SC 597, ensuring that infringements upon life and personal liberty may only be made through “fair, just and reasonable procedure”.

So what of the procedure extinguishing life from a person who has been found guilty of capital offences? There is a comprehensive procedure under Indian law to ensure that a person sentenced to death may be afforded the maximum opportunities to present his side of the case so that he can hopefully be acquitted or his sentence commuted. A Court of Sessions, which is the competent court to record evidence and convict the accused, must cite its reasons in writing (Section 367 of the Code of Criminal Procedure, 1973) for awarding the death sentence and must then submit that decision to the state’s High Court for confirmation (Section 366). The sentence is considered valid only after confirmation and the convict may (if the High Court certifies the case under Article 134 of the Constitution) move the Supreme Court. The convict has a right of appeal if the High Court has either (a) overturned an acquittal or lesser conviction by the Court of Sessions and awarded the death sentence or (b) withdrawn proceedings before the Court of Sessions and conducted the same in the High Court.

The Supreme Court’s review jurisdiction

Under Article 137 of the Constitution, the Court may review cases decided by them. Order XL of the Supreme Court Rules, 1966 further require review to be done in chambers (that is, by judges, conferring amongst themselves without the assistance of counsel) and based on written pleadings made by counsel.

The Supreme Court in P.N. Eswara Iyer v. Registrar, Supreme Court of India, AIR 1980 SC 808, upheld the constitutional validity of Order XL, Rule 2 (requiring review in chambers), citing the heavy burden upon the Supreme Court to hear oral arguments in all cases within its jurisdiction.

The Supreme Court however, in Mohd. Arif v. Registrar, Supreme Court of India and Others, (2014) 9 SCC 737, dealt with the question of whether death sentence cases would form a class by themselves, meriting separate treatment.

The disagreement in Mohd. Arif

Writing for the majority, Justice Rohinton F. Nariman held that due to the nature of the death penalty, where:

1. the punishment is irreversible, and

2. due to lack of sentencing guidelines, it is left to various judges as to the quantum of sentence to be awarded (for instance, one judge might award the death sentence in a certain case, while another judge might sentence someone to life imprisonment for the same offence and same circumstances), sentencing was often arbitrary;

the highest standard of scrutiny was required in such cases.

Justice Rohinton F. Nariman interpreted Justice V.R. Krishna Iyer’s (the author in P.N. Eswara Iyer) ruling as allowing for such cases to be heard orally in open court. He quotes paragraph 29A of P.N. Eswara Iyer “…indeed, there is no judicial cry for extinguishment of oral argument altogether.”

However, Justice Chelameswar dissented, holding that the question of arbitrary sentencing did not arise as the same judges of the Supreme Court who passed the original judgment were required to sit on the review bench.

However, Mohd. Arif (the lead petitioner) was denied the opportunity to file a review petition himself. This was because he had already submitted a curative petition (the last option in the Supreme Court) and the Court held that to grant him a review petition now would infinitely delay the process. The review petition is filed and admittedor dismissed prior to the curative petition.

Eventually, a Constitution Bench of the Supreme Court on January 19, 2016 allowed Arif to re-open his review petition on the ground that he would be the only person not receiving the benefit of a review petition, which would be unfair to him; further, the dismissal of the curative petition should not preclude the petitioner from receiving the benefit of a review petition in open court, no matter how slim the chance of success may be.

As one can see upon perusal of the judgment in Mohd. Arif, the purpose was to ensure that, no matter how slim, people receiving the death sentence should be given as many opportunities as permissible under the law for evidence to be re-appreciated. However, the problem that is apparent from the dissent of Justice Chelameswar is that ordinarily, the same Bench hearing the original case on merits deals with the review petition (unless any of the judges retire). It is unlikely therefore, that they would change their opinion on whether the convict should receive the death penalty; thus, the purpose of the review petition is not realised.

The purpose of the review bench, as is evident from Order XL of the Supreme Court Rules, is to merely check whether there is an error apparent on the face of the record. The composition of the bench should therefore, not matter, as the matter for appraisal should not lead to different conclusions. At the same time, the same judges having already looked into the matter once, would ordinarily not be willing to sit and review the whole case again.
Mohd. Arif is however, a pathbreaking judgment given its implications for prisoners on death row—that at the penultimate stage of proceedings at the Supreme Court, they are entitled to an open court hearing and reappreciation of evidence in their case argued by their lawyer. It remains to be seen, however, the manner in which Supreme Court deals with these petitions.


(Soham Goswami, currently in the third year at ILS Law College, Pune, is an intern at the Centre on the Death Penalty. The views expressed in this article are his alone.)

Written by myLaw

6 things law students can learn from the previous Star Wars movies

SayakDasguptaI deeply resent the fact that we in India have had to wait an extra week for Star Wars: The Force Awakens simply because Disney was too scared to release it on the same day as Dilwale and Bajirao Mastani. Like many others, I took this time to watch the entire series all over again. Although I prefer the original trilogy (Episodes IV, V, and VI) to the prequel trilogy (Episodes I, II, and III) made later, I decided to watch the series in the intended chronological order of the saga, beginning with Episode I and ending with Episode VI. As I powered through the largely clunky, exposition-filled dialogue, awkward performances, and weak writing of the first three episodes, I began to notice a lot of parallels between Star Wars and the life of a law student. People often tend to forget that Star Wars is essentially a story about students trying to gain knowledge and skills in a very specific area and learning how to apply them in their chosen paths. Sound familiar?

So here are 6 lessons law students could take away from the six Star Wars movies we have had before Star Wars: The Force Awakens.


1. Your background does not matter. A true Jedi can come from anywhere. (Episode I: The Phantom Menace)

StarWarsThePhantomMenaceWhen the team at visits some of the lesser-known law schools, particularly those situated outside the metros, we meet many students who are worried about their future because they are not studying at a top-tier law school. Many others feel they are at an extreme disadvantage because no one in their family is a lawyer, or because they come from a small town or village and are not very comfortable with English, and so on. We tell all of them the same thing: ultimately, it doesn’t matter which law school you go to, or who your relatives are, or where you come from. These are challenges that can be overcome. What really matters is how hard you work towards getting to where you want to be.

In Episode I, Jedi Master Qui-Gon Jinn finds young Anakin Skywalker on a little-known dead end of a desert planet called Tatooine. Anakin and his mother Shmi are slaves with no hope for a better future. But Anakin isn’t just naturally talented; he has worked hard to hone his skills as a gifted pilot and expert builder of complex machines. Qui-Gon wagers with Watto (who owns Anakin and Shmi) that if Anakin wins an upcoming pod race, he will be freed. Some might say Anakin owes his freedom to Qui-Gon, but let’s not forget that it was Anakin who built the pod, and it was Anakin who raced it. Qui-Gon gave him an opportunity, which he seized immediately. Unfortunately, Qui-Gon didn’t survive to train Anakin, but he asked his own Padawan, Obi-Wan Kenobi, to take him as his apprentice.  No matter what your circumstances are, if you work hard and make the best of the available resources and opportunities that come your way, you will do well. Here’s a quick example: Harish Salve was a young chartered accountant working with his father in Nagpur. He was asked to write a note on a certain law and what he wrote impressed his father so much that he showed it to Nani Palkhivala. Palkhivala asked Salve, “When are you joining the profession?” Salve studied law in Nagpur and when he graduated, Palkhivala asked Soli Sorabjee to take him on as a junior, and the rest is history. Think of Salve as Anakin, Palkhivala as Qui-Gon, and Sorabjee as Obi-Wan.

2. You have a lot to learn, young Padawan. (Episode II: Attack of the Clones)

StarWarsAttackOfTheClonesEpisode II focuses on an adolescent Anakin who is beginning to discover the extent of his powers under the tutelage of Obi-Wan. While Anakin is certainly gifted, he is also brash, arrogant, and hot-headed. This will ultimately lead to his downfall. Your internships are a lot like Jedi apprenticeships. Think of the lawyers you’re working under as Jedi masters. They are more knowledgeable and experienced than you, and if you show humility, enthusiasm, and curiosity, they will be willing to teach you many things that are far more valuable than what you learn in law school. Even if they don’t take a hands-on approach to teaching, you can learn a lot just by assisting and observing.

There’s an even larger point here. A law student should be like a sponge, absorbing everything s/he can. This doesn’t mean you should just pay attention to the professor in class or the lawyer you’re doing your internship with. There is a whole world out there that is governed by laws. You need to keep abreast of current affairs and latest developments and how these things affect the law or vice versa. Read, debate, discuss, explore. Speak to the top lawyers in this country or anywhere in the world and you will discover that they have a wide range of interests and can hold an intelligent conversation on just about any topic. To be a good lawyer, you need to have a well-rounded personality, and that can only come with a strong penchant to keep learning.

3. Things are not always as they seem. Analyse everything; take nothing for granted. (Episode III: Revenge of the Sith)

StarWarsRevengeOfTheSithEpisode III is a culmination of all the mistakes everyone has made in the previous episodes. The ostensibly trustworthy senator Palpatine turns out to be the evil Sith lord, Darth Sidious. As Palpatine, Darth Sidious had gained everyone’s trust and got himself elected Supreme Chancellor of the Galactic Republic. He now reorganises the Republic into the Galactic Empire and declares himself the Emperor amidst the wildly enthusiastic approval of the entire senate, prompting Queen Amidala to utter one of the most poignant lines in the whole series: “So this is how liberty dies… with thunderous applause.” The Jedi, despite the depth of their knowledge, ability to sense disturbances and imbalances in the force and power to look into the future, have been unable to detect this evil that has lurked right under their noses this whole time and are shocked when they hear the truth. Meanwhile, Darth Sidious has turned Anakin to the Dark Side and christened him Darth Vader. The Jedi had so far operated under the assumption that Anakin was “the chosen one” who would destroy the Sith and bring balance to the Force as foretold by the prophesy. Now Master Yoda admits, “A prophesy that misread could have been.” Even the mighty Jedi can make mistakes. A law student needs to question and analyse everything. A clause in a contract, a provision in a bare act, a line in a pleading may seem fine on the surface, but you need to go deeper, deconstruct, and analyse. In a statute or legal document, every single word has a specific meaning and significance. You have to make sure that you understand it. Don’t just go by what some authority or your professor or the lawyer you are working under has stated on an issue. These people are human and humans make errors. Question everything, right down to the basis of a law – why does it exist? For what specific purpose was it drafted? Does it apply in your case? In a document, why has a particular word or term been used? Does it go against the interests of your client? Is a clause completely watertight or is there a loophole? When lawyers take things for granted or at face value, disasters happen.

4. Try new things. Get out of your comfort zone. (Episode IV: A New Hope)

StarWarsLike his father, Luke Skywalker is a boy who lives on Tatooine. He may not be as preternaturally gifted as his father was, but he does have the same ambition – to leave the planet and make something of himself. However, he lets things hold him back. Even when he discovers a mysterious message for old Ben Kenobi, even when Ben tells him of his Jedi father and asks him to come with him across the galaxy on a life-altering adventure, Luke keeps hesitating and telling Ben that he has things to do at home and he can’t just take off. It is only when his uncle Owen and aunt Beru are slaughtered by Imperial stormtroopers that Luke realises he must go. Most of Luke’s trajectory through this movie and the next one is his attempt to get over his doubts and hesitations and become a true Jedi. As a law student or intern, your aim should be to get the most out of your law school or internship. This means exploring every avenue that presents itself. The worst thing that you could say to yourself at the end of it is “I wish I had tried that.” Go ahead and participate in that moot, write that article, take part in that debate, start that students’ group in law school, organise that festival, present a paper in that seminar, do that internship with that small NGO that doesn’t pay, take on some research on an area you have never worked on before, have a go at drafting a document you have never tried drafting before, do a course in a niche subject that you find interesting. If you don’t try something, you will never know whether you can do it. This is your time to discover what you want to do for the rest of your life. Make it count.

5. Don’t rush into anything without preparing yourself for it. (Episode V: The Empire Strikes Back)

StarWarsTheEmpireStrikesBackIn Episode V, Luke travels to Dagobah, a remote world of swamps and forests, to receive advance training in the ways of the Force from Jedi Master Yoda. However, in the midst of his training, Luke has a vision in which he sees Han and Leia are going to be in trouble. He decides to leave immediately to help them. Both Yoda and the spirit of Obi-Wan warn him repeatedly that he must not go on this mission without finishing his training. Only a fully trained Jedi with complete control over the Force can face Darth Vader and his forces. Leaving while his training is still incomplete, Luke will risk everything they have all fought for all these years. But Luke goes anyway, and sure enough, he is thoroughly underprepared. Darth Vader forced Lando Calrissian to help him capture Han and Leia on the planet Bespin and used them as bait to lure Luke. To cut a long story short, Luke ends up helping no one. When he reaches Bespin, Han has already been frozen in carbon and dispatched to Jabba the Hutt, and Darth Vader is waiting to confront Luke. Luke is not even close to being a match for Darth Vader who cuts his hand off in a lightsaber battle. He is also not equipped to deal with what Darth Vader reveals to him: that he is Luke’s father. If he had stayed in Dagobah and completed his training, he would have had the strength and fortitude to handle it. In fact, a true Jedi would have not only repelled Darth Vader’s attack, but also sensed the nature of the revelation (In Episode VI, Luke senses Leia is his sister before Obi-Wan actually reveals it to him). Physically wounded and emotionally devastated, Luke has to be rescued by Leia who had managed to escape with Lando’s help. While in the previous point I said you should always be ready to try new things, it is also absolutely essential that you prepare for them. Give your absolute 100% to anything you take up, otherwise the results could be disastrous. Whether you’re mooting, writing an article, taking an exam, presenting a paper in a seminar, writing a note on a legal question during an internship or sitting for an interview, always ensure you have covered all the bases, done you research thoroughly and are completely and thoroughly prepared to the best of your abilities. Taking short cuts and hoping you can wing it can prove fatal in the legal profession.

6. Learn to be a team player. (Episode VI: Return of the Jedi)

StarWarsReturnOfTheJediThe major difference between Anakin and Luke is that while Anakin was an island and thought he could do everything on his own, Luke realised he would need help and asked for it. As a part of the rebel group, he became an integral member of a team that through the course of the last three episodes got increasingly better at achieving its goals. The two major missions in the movie were successfully completed thanks only to smart delegation of work and perfect teamwork. The first one, rescuing a carbon-frozen Han from Jabba the Hutt’s lair, was achieved mostly through cunning, with R2-D2, C-3PO, Leia, Chewbacca, Lando and Luke infiltrating Jabba’s palace under various pretexts and guises and overcoming a setback to kill Jabba and make a clean getaway. The second, destroying the new Death Star, was a much larger and more complicated plan involving two separate sub-groups of the team working together and coordinating over a vast distance in order to succeed. Thanks to their teamwork, the relatively smaller rebel alliance with its limited resources managed to defeat the enormous, powerful Galactic Empire. As a law student, intern and a future lawyer, you should start getting used to working in teams to achieve targets effectively. You need to be able to communicate and coordinate with your teammates perfectly and assume a role of leadership when necessary. You have to learn to do your job and help others do theirs. That is the only way to work.

So, these are the 6 major lessons for a law student I could glean from the Star Wars movies. Clearly, there is a lot more you can learn from them. Go enjoy the movies, watch the new installment and let me know if I have missed something by writing in the comments.

And as always, may the force be with you.

(Sayak Dasgupta wanders around looking for things to do.)

Written by myLaw

Carpooling apps and the car owners who use them violate the law. And their passengers have no insurance cover.

vijayaraghavannarasimhamA concept that is now being commercially exploited through mobile apps, “carpooling” is the practice of people who want to travel on the same route or to the same place sharing their cars for convenience and to share costs. It is not new. Employees of the Bhilai Steel Plant for example, have consistently shared their cars in this manner.

But the new startup enterprises that have launched mobile apps to facilitate carpooling are on a sticky legal wicket. They “pool the cars of various owners” and form a “corpus of cars” that are then readily available for sharing by the users of these apps. Obviously, the  pooled in this manner are registered as private cars and would also be carrying insurance policies as private cars. This falls foul of the Motor Vehicles Act, 1988 (“the Act”).

While it is perfectly legal for individuals to pool their private cars for mutual benefit, a cloud-based solution to pool private cars and commercially exploit them contravenes Section 66 of the Act.

No owner of a motor vehicle shall use or permit the use of the vehicle as a transport vehicle in any public place whether or not such vehicle is actually carrying any passengers, save in accordance with the conditions of a permit granted…authorizing him the use of the vehicle in that place in the manner in which the vehicle is being used.

Under Section 2(47), “transport vehicle means a public service vehicle…” and under Section 2(35), “public service vehicle means any motor vehicle used or adapted to be used for the carriage of passengers for hire or reward…

Clearly, a vehicle registered as a private car and without a permit to “carry passengers for hire or reward”, cannot be “carpooled” to run “for hire or reward”. People, who offer their private vehicles for such a purpose, are permitting the use of their vehicles in a manner that is prohibited by Section 66 of the Act. The transport authorities would have a duty to seize these vehicles and prosecute their owners and even the startup enterprise for facilitating such illegal use. Commercial carpooling therefore, can only be legal if the vehicles are already registered as transport vehicles and have a permit to carry passengers for hire or reward.


Some carpooling apps

In addition, under Section 3(1), the drivers of such vehicles need an endorsement authorising them to drive a transport vehicle. This means that even if private cars are somehow allowed to operate on commercial lines, their drivers may not possess the necessary endorsement because the vehicles registered as private vehicles do not need such endorsements.

Moreover, insurance policies available for private vehicles do not cover their use to carry ‘passengers for hire or reward’. Insurers can easily cry breach of the “limitations as to use” clause in the insurance policy and avoid liability for the passengers travelling in carpooled cars.

It would therefore appear that as an enterprise, carpooling  has to deal with serious regulatory issues. Meanwhile, they can either carpool using only transport vehicles and not involve private cars or hope that the motor vehicles regulator is looking the other way. They will also need specialised insurance covers for pooled cars.

Vijayaraghavan Narasimhan is an advocate practicing at the Madras High Court.

Written by myLaw

Are celebrities at risk when they endorse products?

vijayaraghavannarasimhamWhen a case was instituted before the Additional Chief Judicial Magistrate of Barabanki against Amitabh Bachan, Madhuri Dixit, and Preity Zinta for endorsing Maggi noodles, it made almost as much news as the ban on the instant noodle brand. These days, celebrities tell us what to eat, drink, drive, and invest in. But when the representation of a celebrity endorser is believed and “acted upon” by a customer who then “suffers prejudice”, does a “cause of action” arise against the celebrity?

In 1972, Hugo Zacchini, an entertainer who performed a “human cannonball” act, was filmed during his 15-second act by a freelance reporter and the clip was broadcast on a news programme. Mr. Zacchini’s claim was that such conduct was an unlawful appropriation of his “professional property”. The Ohio Supreme Court ruled that a “TV station has a privilege to report in its newscasts matters of legitimate public interest which would otherwise be protected by an individual’s right of publicity, unless the actual intent of the TV station was to appropriate the benefit of the publicity for some non-privileged private use, or unless the actual intent was to injure the individual.” 

At the Supreme Court of the United States, the majority ruled in favour of Mr. Zacchini. The performer had his own manner and mode of promotion of the event and had a ticketed audience. The broadcast of the show by the news media even as “news clip” without the consent of the performer was prejudicial to his common law right to exploit his skill and talent. Even submissions relying on free speech did not sway the Court.

Such is the supremacy of the right of a celebrity to exploit his or her ‘property in the celebrity status’. So when this property is commercially exploited, are there standards of care and accountability? What the House of Lords said in 1889 about deceit continues to hold true. “No honest mistake, no mistake not prompted by a dishonest intention, is fraud

ShraddhaKapoor_SehwagCollageThe Lords held in Derry v. Peek that to succeed in an action of deceit, the plaintiff had to prove fraud, and to prove fraud, the plaintiff had to establish that “a false representation has been made knowingly, or without belief in its truth, or recklessly, without caring whether it be true or false. A person who carelessly makes a false statement but believes that it was substantially true, is not liable for an action of deceit.

What of mere negligence or carelessness? The case of Hanberry v. Hearst before the California Court of Appeals provides the greatest support for holding a celebrity-endorser liable for a negligently-given endorsement. The court applied a duty of care standard to an unprecedented extent by imposing liability on an endorser for the negligent misrepresentation of a product. The Hearst Publishing Company had given a line of shoes its “Good Housekeeping Seal of Approval”. A plaintiff who had slipped and injured herself while wearing a new pair of these shoes, could recover for the defendant’s negligence in putting its seal of approval on defectively designed shoes. The plaintiff had relied on the defendant’s seal believing that the shoes had been examined and tested and implicit in that seal was a representation that it had taken reasonable steps to independently examine the product and had found it satisfactory. The Court also held that because the purpose of the seal was to attract consumers, Hearst could have foreseen that certain consumers would rely on the representation and purchase the shoes. By voluntarily lending its name to the shoes, “Hearst … placed itself in the position where public policy imposes upon it the duty to use ordinary care in the issuance of its seal … so that members of the consuming public who rely on its endorsement are not unreasonably exposed to the risk of harm.”

In light of these decisions, it would seem that the affected consumer may have a case to proceed against celebrity endorsers only if there is adequate proof of (a) reckless misrepresentation or (b) deceit or fraud, on the part of the celebrity. While they may breathe easy about civil claims, celebrities should conduct their checks as to what could potentially land them in trouble. They may even consider an insurance policy to cover the risks associated with endorsements. The risk of being summoned before a magistrate in a possible criminal complaint remains however, and cannot be insured against.

Vijayaraghavan Narasimhan is an advocate practicing at the Madras High Court.

Written by myLaw

Statutory reform alone will not make domestic arbitration more efficient – A closer look at the Law Commission’s 246th Report

SindhuSivakumar_DraftingForArbitrationThat arbitration in India is a costly, time-consuming, and inefficient affair is well known. Excessive court applications, exorbitant arbitrator fees, and respondent recalcitrance are the norm and in many ways, arbitrations do not provide a better and more efficient alternative to the courts for the resolution of commercial disputes. Only if this important objective is achieved can arbitration promote trade, commerce, and investment.

The Law Commission of India, on August 7, 2014, released its 246th report (“Report”), suggesting amendments to the Arbitration and Conciliation Act, 1996 (“ACA”) to make arbitration in India more efficient. With the Union government indicating that it will implement statutory reforms to the ACA soon, let us first look at some aspects of arbitration practice in India that the Report has identified as being at the root of the inefficiency.

No ‘institutional’ arbitration

‘Institutional’ arbitration is carried out under the administration of a specialised institution, like the London Court of International Arbitration (“LCIA”) or the Singapore International Arbitration Centre (“SIAC”) and in accordance with their rules. In ‘ad hoc’ arbitrations, the parties determine all aspects of the arbitration themselves. Institutional arbitrations typically tend to be better regulated and therefore, less inefficient as they involve detailed procedural rules, tighter timelines, reasonable (arbitrator) fee schedules, and administrative oversight.

Exorbitant ‘per sitting’ fees

The fees that are typically charged by arbitrators in Indian ad hoc arbitrations not only drive up costs, but also disincentivises arbitrators from conducting arbitrations speedily (that is, with fewer sittings).

Adjournment culture

Parties seek and receive too many adjournments over the course of the arbitration and arbitrators do not use cost sanctions to check any wasteful or dilatory conduct.

Wide scope of judicial enquiry

The judiciary has unnecessarily widened the scope of judicial enquiry when hearing arbitration applications. For instance, Section 11 appointments have been characterised as a ‘judicial’ function. This has subjected them to the lengthy Special Leave Petition process. Similarly, when hearing set-aside applications under Section 34, awards are re-opened and reviewed on merits based on the ‘public policy’ ground.

Perverse statutory incentives that increase arbitration-related court applications

A party who challenges an award under Section 34 can obtain the statutorily created ‘stay’ of the enforcement of the award under Section 36. This has led to losing parties routinely filing set-aside proceedings to delay the enforcement of an award.

Let us delve deeper into the Report’s recommendations to disentangle arbitration from the courts, specifically its recommendations to reduce the scope of judicial enquiry in arbitration-related court applications.

The first problem is one of ‘judicial overreach’, that is, the trend of Indian courts expanding the scope of judicial review in arbitration-related court proceedings, undercutting the spirit of judicial minimalism in the ACA. The other is the volume of arbitration-related court proceedings in domestic arbitration in India. We will concentrate on the first problem.

Expansive judicial review in arbitration-related court proceedings

There has been a lot of academic and practitioner-led literature in this regard, particularly in the context of:

– Section 5 of the ACA, which has been read down to make it subject to the inherent powers of the civil courts under Sections 9 and 151 of the Code of Civil Procedure, 1908;

– Section 8 of the ACA, which has also been interpreted to allow the courts to get into issues relating to the validity, operability, and enforceability of the arbitration agreement notwithstanding its express exclusion by the drafters of the ACA, worsened by the fact that the courts often encroach upon the jurisdiction of the tribunals and decide substantive issues in dispute when hearing challenges to the arbitration agreement;

– Section 11 of the ACA, under which the arbitrator-appointment function of the courts has been converted from an ‘administrative’ function to a ‘judicial’ decision, which can be subject to lengthy appellate proceedings through the SLP route; and

– Section 34 of the ACA, under which the ‘public policy’ ground for challenging awards has been expanded to such an extent that it is now essentially the same as a regular appeal on law under the Code of Civil Procedure, 1908.

The Report echoes existing popular opinions and recommends on reducing the scope of judicial review in these proceedings. For example, it clarifies that Section 11 appointments should be regarded as administrative acts (not subject to review through the SLP process).

Judicial review of issues related to the validity of arbitration agreements and the arbitrability of disputes

Further, the questions that a court can get into when hearing Section 11 and Section 8 (stay) matters should be limited to issues regarding the existence or validity of the arbitration agreement as well as issues of arbitrability, but not questions regarding the scope of the arbitration agreement or the merits of the dispute (which includes issues relating to the validity of the underlying contract). Essentially, the Report echoes the position taken by the Supreme Court in National Insurance Co. Ltd. v. M/s. Boghara Polyfab Pvt. Ltd. (September 18, 2008) and other such cases.

The Report also clarifies what matters the court can and cannot determine when hearing challenges to the arbitrability or the arbitration agreement under Sections 8 and 11. Again, it echoes what was said in Boghara Polyfab Pvt. Ltd., that is, that the court can decide questions of (i) whether it (the relevant court) has jurisdiction to hear the application; (ii) whether there is a valid and enforceable arbitration agreement; (iii) whether the party who has applied is a party to such an agreement; (iv) whether the claim that is subject to arbitration is a dead claim (barred by limitation) or a live claim; and (v) whether the disputes subject to arbitration have been settled.

Tightening the ‘public policy’ ground used to set aside awards

In relation to Section 34, the Report seeks to tighten the ‘public policy’ ground for setting aside arbitral awards to discourage the courts from interpreting this ground widely and reviewing awards on merits. The Report refers to Renusagar Power Co. Ltd. v. General Electric Co. (1994), where the Supreme Court, in relation to a challenge to the enforcement of a foreign award, interpreted the meaning of the ground, “in conflict with the public policy of India”. The Court held that the term ‘public policy’ meant: (i) fundamental policy of Indian law; (ii) the interests of India; or (iii) justice or morality. The Court categorically held that contravention of law alone will not attract the bar of public policy.

The Report suggests that ‘public policy’ be confined to (i) and (iii) above in the context of international arbitrations seated in India, that is, that challenges based on the award being against the interests of India be disallowed. For domestic awards however, courts should be permitted to check the award for “patent illegality” when there is a challenge under Section 34.

These suggestions are commendable and mostly in line with what practitioners and commentators suggest. However, it is not clear whether they will make a difference in practice, as their application and interpretation remains at the hands of the judiciary, which has traditionally expanded the scope of its role in arbitration-related court hearings.

For example, in relation to challenges to the arbitration agreement, it is not difficult to envisage a situation where a court decides to delve into the substantive issues in dispute, such as the validity of the underlying contract, when it is framed as part of a challenge to the validity of the arbitration agreement (as the lower courts did in Enercon), or declare an agreement “inoperable” when there are pending proceedings before the courts relating to matters subject to the arbitration agreement (as the Delhi High Court did in Vikram Bakshi and Another v. Mc Donalds India Pvt. Ltd. and Others, I.A. No.6207/2014). Likewise, the public policy criteria in Section 34 – “justice or morality” and “fundamental policy of Indian law” can easily be interpreted by the courts in a wide manner. The point is simple. Statutory reforms by themselves do not protect against an interfering judiciary; much of the effectiveness of these reforms depends upon the judicial approach to arbitration-related court proceedings.

The large volume of arbitration-related court applications is another, and perhaps even more important aspect, of the problem of arbitration-court entanglement in India. This not only slows down arbitration, but also adds to the arrears before our already overburdened civil courts. The suggestions in the Report in this regard are quite far reaching and deserve closer attention.

(Sindhu Sivakumar is a solicitor on the rolls of England and Wales and qualified as an advocate in India.)

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Behind the pipeline – legal strategies to combat unknown sources of water pollution

CommunitiesAndLegalAction_KanchiKohliIt was a hot summer afternoon in central India. Four of us had spent all morning taking a close look at an underground coalmine, its housing colonies, roads, transportation area, and other support infrastructure. We stopped to chat with workers at a local teashop. Even though we were fascinated and moved by their stories, we had to move on.

We had come to this place to understand how an important river had been polluted and the impact of this pollution. For many villages, this river and its feeder streams were important sources of water for drinking and for irrigation.

Across the road from the boundary wall of the mine, visible under a muddy patch of the road where we stood, was the mouth of a metal pipe. It was discharging thick black slurry. The slurry was heading straight into a stream flowing along the road. It was difficult to ascertain the source of the slurry in the pipe. Instead of following the pipe, we decided to follow the slurry.

After walking along the stream till it was not possible to trek any further, we met a resident of the area. “This polluted stream meets our river”, he said. “We are not able to use water from the river confidently any more. We are not even sure if it is fit for cattle. We have no clue what the black slurry is bringing with it.”

It was true. When we drove down towards the main river, we saw that it had been contaminated. There was no way to tell whether the water was poisonous or not. But it was clear that the discharge from the pipeline had been collecting on the river bed and blocking the easy flow of the river. Other residents of the area told us that the water flow is much stronger on some days.

Picture courtesy Kanchi Kohli

Picture courtesy Kanchi Kohli

To me, the veracity of their apprehension was just as big a question as whether the discharge should have been allowed in the first place. Since no one really knew who was responsible for constructing the pipeline and getting away with the effluent discharge, we had to understand the possible legal options for two scenarios – one where we knew who was responsible for the effluent discharge and one where that was not the case.

Almost all industries, mines and infrastructure activities where there is possibility of water extraction or water contamination are regulated at least by two laws: the Environment Protection Act, 1986 (“EPA”) and the Water (Prevention and Control of Pollution) Act, 1974 (“Water Act”). These industrial activities or processes would have also had to take approval under the Environment Impact Assessment Notification, 2006 (“EIA notification”) and seek consent under the Water Act.

When the source of pollution is known

If formal or informal sources indicated that the underground mine was indeed the source of the pollution, the course of action would be to immediately collect copies of the permissions granted under the EIA notification and the consent to operate letter from the relevant pollution control board.

Both the EIA-related permission (“environment clearance”) and the “consent to operate” are likely to have conditions related to how the polluted water to should be treated and where it should be discharged.

For instance, an environment clearance letter would say: “Mine water discharge and/or any wastewater should be properly treated to conform to the prescribed standards before reuse/discharge”. If this was mentioned in the approval given to the underground mine, then the discharge of the slurry into the stream would constitute a legal violation.

Sections 25 and 26 of the Water Act would also specifically be applicable to the underground mine. The project owners would have had to seek an approval from the Pollution Control Board clearly indicating the quantum and place of discharge. In their “consent to operate” letter, it is likely that the Pollution Control Board would have mentioned that coal waste should not be released into the neighbouring stream.

Environment clearance is a one-time permission given either by the Ministry of Environment, Forests and Climate Change or a state environment impact assessment authority. On the other hand, the consent to operate needs to be renewed every year by the relevant pollution control board, in charge of checking water pollution. For industries, the validity of the approval is five years to initiate the operations. No renewals are required thereafter. It is these pollution control boards or their regional offices, which also monitor whether these conditions are being followed.

When the source of pollution is not known

“But, there is no way we can find out the source of the pipeline. Only the discharge point is visible to us. However, we know that every 10-12 days, the discharge is much heavier than other days and the river is dark. Is there anyone we can complain to about this? , a teenaged schoolgirl, who had been overhearing our conversation, asked.

The Water Act has a clear objective of “prevention and control of water pollution and the maintaining or restoring of wholesomeness of water”. Pollution control boards (“PCBs”) set up under this law, have the responsibility for ensuring this. In fact, since 1974, these PCBs have been empowered by Section 17 (a) of the law to “to plan a comprehensive programme for the prevention, control or abatement of pollution of streams and wells”

Section 24 of the Water Act relates to prohibition of the use of a stream or a well for the disposal of polluting matter, by anyone. It did not really matter therefore, if we did not know the source of pollution. The PCB or its regional office could be asked to take action. People could meet the relevant officials or, as environmental groups or people with the help of civil society organisations have often done, file a written complaint.

Not surprisingly, my explanation was dismissed by a few in the group. “Why should we take the headache of going through all this paperwork when it is the responsibility of the government”, said one of them who seemed to be visiting his village from the neighbouring town. “No one cares about our place, or river”, another remarked.

I did not have any strong reason to disagree with the second remark. It is true that many regulatory procedures related to the environment are yet to be implemented to their true potential. Close to forty years of water pollution law in India and our rivers are still being polluted.

But I responded to the former remark. There is much to be desired from our regulatory institutions and  they hide behind the excuses of lack of personnel and “pressures” leading to inaction. The filing of complaints before them however, remains an option for those who are affected. By not filing any complaints, are we not accepting the inaction? Perhaps an increase in evidence-based complaints can push the institutions to respond?

The extent to which affected people are willing to take their chances is a big question.

Kanchi Kohli is a researcher working on law, environment justice, and community empowerment.

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“You don’t want the government controlling education” – David Friedman

Anarchist-anachronist-economist. That’s how David Friedman, who is currently a professor of law at Santa Clara University (more about him on his website), describes himself. The son of economists Rose and Milton Friedman, David studied physics and chemistry at Harvard.

Prashant Narang: Welcome to India, David. You hold no formal education in economics and law, yet you teach these subjects. Durga Das Basu might have been one such rare example in colonial India. One cannot teach without a degree in India. How do you think we can get to a system where the competence of a person is determined by something other than the certificates he holds?

Professor David Friedman

Professor David Friedman

David Friedman: In the United States, most people hold doctorates in concerned professions, not all – but most. My uncle for instance, an important person, started law and economics, was a professor at the University of Chicago and held only an undergraduate degree. He had written a book and was associated with the University of Chicago for a long time. So it is not impossible but it also was certainly not easy. There is however, no legal restriction of the sort.

Even in practice a university might hire a professor whose doctorate was in a different but related profession. So it is not really that surprising for a physics department to hire someone with a doctorate in mathematics or for the economics department for that matter.

PN: As a recent trend in India, private universities are coming up. While they provide state-of-the-art facilities, the fee structures are exorbitant. Do you think such a system would promote merit?

DF: Presumably over time you can have more than one private university or law school. What prevents others from existing?

One of the things that struck me while in India is that while India seems like the most egalitarian country in the world, there is a vast gap between the rich and the poor. There are stores with very expensive things in them and then there are people sleeping on the streets. I suspect that these two are not unrelated. One of the results of a society where you need certificates and permits for everything is that it is very hard for you to rise. This is true even in the US. There are restrictions. The Institute for Justice (IJ) has dealt with certain such cases of restrictions with regards to who can enter certain professions. These restrictions make it very hard for someone who doesn’t have the money or connections to rise. So I wonder if in fact the regime and style of the Indian government is one of the reasons why it has such striking poverty than you would normally expect from it.

PN: Education institutions, be it primary, secondary, or tertiary, in India – have to be “not-for-profit”. Education is supposed to be a charitable activity and no one should be making profits out it.

DF: If people have a better way, a cheaper way, and know how to do a better job, to figure out best ways of teaching and have an incentive in the sector, they will invest. If the government feels that for-profits are evils, then surely the government officials should accept a reduction in their wages.

Also, by that logic, even restaurants and farms should be for non-profit. Surely food is more important than education. Why not follow the same principle.

This is very odd. One charitable activity is feeding hungry people. My wife’s church for example, every once in a while, has a dinner for the homeless people. But the fact that it is charitable does not mean that feeding people in a restaurant or having a farm – for money, is illegal. So if people wish to provide charitable education, that’s fine, but there is no reason to forbid those who don’t.

PN: Private schools in India, by law, have to provide reservations of 25 per cent to economically weaker and other backward classes. Or should there be more government schools?

DF: You have all these laws that are supposed to help poor people do better, yet you have an enormous number of people who are poor. Shouldn’t you at some point think you are doing something wrong?

In China, after Mao died, various leaders went abroad and were able to see how the rest of the world was living and while they believed that socialism was right, they realized they were doing something wrong. India has all sorts of interventions to help the poor. She claims to be in favour of equality, when in reality it appears that it’s all about the large imposing governmental bungalows with open spaces and gardens on one side and over-crowded housing, business spaces etcetera, for everybody else on the other.

If you require more private schools for education, it means there are fewer private schools and more governmental schools –which also implies an obvious control of the government over education.

There are a couple of arguments why education should be paid by state. More societal productivity is one. Well, if you build a factory, the factory too will be more productive for the society. Getting educated in ways that make you more productive is investing in more human capital. In a market system when you insist on more human capital, most of the return goes to you because you get a higher wage.

Now, that may be less true in India, I don’t know how much of the wage goes to the government in one-way or another. As a general rule, getting education is just a form of capital investment in people and it is not true that my being productive automatically makes you better. You may be a competitor, you may be a customer, but most of the gain of my being productive goes to me.

The other argument is that you need to have educated voters in a democracy so they all vote correctly. Here specifically, you don’t want the government controlling education – they will teach people what they want them to believe. It is hard to tell if education can ensure that people will vote correctly. This is simply because an ordinary voter – not just has very little incentive to vote, but it also affected by various factors. William Buckley said “he’d rather be ruled by a 1000 random people pulled out of the New York telephone book at random, than by the faculty at Harvard; simply because the faulty at Harvard has a fairly uniform set of political bias.”

PN: Thank you, David, for your time.

(Prashant Narang is an advocate with iJustice, a CCS initiative.)

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Violence and the republic in The Man Who Shot Liberty Valance (1962)

What role does violence have in establishing a republic? Is the rule of law a peaceful one? John Ford’s The Man Who Shot Liberty Valance (1962) poses these and other questions that are fundamental to the exercise of power by the people.

Republican values arrive in the American frontier town of Shinbone through the protagonist Ransom “Ranse” Stoddard (played by James Stewart), a “youngster fresh out of law school, bag full of law books”. On his Westward journey, the idealistic Stoddard gets a taste of “Western law” when he stands up to the fearsome robber Liberty Valance (played by Lee Marvin) and is whipped to the ground. Law, he soon learns, could not subdue Valance’s terror. The town’s cowardly marshall is no match for Valance and the townsfolk seemed to prefer the protection of the gun.

The only man with the gunfighting skills to stand up to Valance is Tom Doniphon (John Wayne) who, like Valance, has a sneering contempt for the law and, like Valance, represents the frontier’s faith in the gun. “Out here”, Doniphon tells Stoddard, “a man settles his own problems”. The machismo of Valance and Doniphon is contrasted with the well-mannered Stoddard, who is washing dishes in a restaurant and is frequently apron-clad.

The key difference between Valance and Doniphon of course, lay in what they use their guns for. Valance uses violence to meet his selfish needs and those of the cattle ranchers who hire him. Doniphon on the other hand, represents righteous violence and uses his gun to protect the townsfolk.

Stoddard soon earns the town’s respect. Refusing to accept Valance’s authority, he establishes a law practice and a school to teach the illiterate townsfolk and their children to read and write.

Hallie (Vera Miles), who also works in the restaurant, is used to show the law’s attraction for the townsfolk – the promise of stability and respect for individuals in a violent world. While Doniphon woos her with presents and compliments, he does not want her to go to school. It is Stoddard who ultimately earns her affection.

However, even as the town warms up to the rule of law, Stoddard becomes a participant in the frontier’s violence. He acknowledges the threat posed by Valance and accepts a revolver from the editor and publisher of the local newspaper. Not amused by a trick played on him, he even punches Doniphon in the face.

This grudging acceptance of violence as a way of the frontier happens just as the town begins to articulate its yearning for republican values. The town wants to elect a representative to press the demand for statehood at the territorial convention but Valance, who has been hired by the predatory forces of capital – the cattle ranchers who would rather the territory remain ruled by the hired gun, threatens the fair conduct of the election. Only after Doniphon blunts the threat can the election proceed. The rule of law could only emerge in Shinbone at the point of Doniphon’s gun.


Ransom Stoddard prepares to confront Liberty Valance in The Man Who Shot Liberty Valance (1962, Paramount Pictures).

After Stoddard is elected to represent the town at the statehood convention, Valance challenges him to a gunfight and in the confrontation between them, to everyone’s surprise, it is Valance who falls dead. Doniphon’s climactic revelation [SPOLER ALERT] confirms the suspicion that it was he who felled Valance. The revelation assuages Stoddard’s conscience and he embarks on a life in politics. But the final scene reveals the endurance of the myth that it was Stoddard who was “the man who shot Liberty Valance”. The myth continued to sustain a long and glittering career in public life.

The endurance of one legend reveals the falsehood about a “fact” – the peaceful rule of law. Its moral authority may derive from popular acceptance but, like Stoddard’s political career, the rule of law had deep roots in violence.

(Aju John is part of the faculty at

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All in the game – how the game theory framework helps design and understand leniency laws

ShreedharSasikumarMost game theory discussions start with an explanation of the “prisoners dilemma”. If only for the sake of originality (and since we will be coming back to the prisoner’s problems), let us start with a different ‘game’, the “driver’s dilemma”.

Imagine a world with no traffic rules. A driver can choose to drive on either the left or the right side of the road. Now, think of two drivers approaching a bend in the road from opposite directions. Since the road is curved, neither can see which side of the road the other is on. If both of them are on the same side of the road, they will crash into each other. If they are on opposite sides, they will pass each other with no incident. The following table shows the potential payoffs in this interaction.

Driver’s dilemma – No traffic rules

Driver's dilemma - No traffic rules

In a world with no rules, there is a 50 per cent chance that a driver will drive on the right and an equal chance that he or she will drive on the left. Since the individual driver cannot know the other driver’s choice, there is now a 50 per cent chance that they will both chose the same side and a 50 per cent chance that they won’t. And this means a 50 per cent chance of a crash each time they round a corner.

But if there were a law that fined drivers USD 500 for driving on the right, then all rational drivers would chose to drive on their left, thereby avoiding crashes.

Achieving beneficial outcomes for the group by aligning individual incentives

Game theory shows that a collection of individuals often act rationally and yet end up with outcomes that are bad both for the individual and for the group. In these situations, laws can be used to align individual incentives, for instance, let everyone agree on a side to drive on. This in turn leads to outcomes that are beneficial to the individual and to the society. Game theory frameworks can be used to identify areas where laws are necessary. Indeed, game theory justifies the very existence of laws in a free society!

Laws are designed to help individuals interact with each other productively to create successful societies and game theory is the study of how individual interactions add up to group outcomes. Game theory frameworks therefore, can be applied to a variety of legal questions.

For example in tort law, game theory can assist lawmakers and judges in setting punitive damages for defective products so as to incentivise manufacturers to establish the correct quality procedures. Game theory is also useful in intellectual property cases where regulators must balance the need to reward innovation (patent protection) against the necessity to make the innovation widely available (allowing generics). However, the most commonly discussed application of game theory in legal questions is the use of game theory in leniency policies, especially in the realm of antitrust enforcement.

Busting cartels and conspiracies using leniency

Broadly speaking, a leniency policy is an agreement that a member(s) of the conspiracy who assists law enforcement in proving a conspiracy will be given a reduced punishment, or perhaps no punishment at all.

When law enforcement investigates a crime, they usually suffer from an information asymmetry, that is, the conspirators know more than the enforcers about how the crime was committed. If the conspirators co-operate, then it becomes very difficult for law enforcement to obtain the proof they need to prove the conspiracy. By offering reduced punishments, leniency systems can give individual conspirators an incentive to ‘betray’ the conspiracy. This in turn provides enforcers with the necessary information to prove the conspiracy and punish the participants.

To illustrate how a leniency system can be an effective tool for law enforcement, let us use that canonical example of game theory, the “prisoner’s dilemma”.

First, consider a system without a leniency policy. Two criminal accomplices (A and B) have conspired in a serious crime that carries ten years in prison. The police however, have evidence of only a minor crime punishable by only two years in prison. The police need information from at least one of them to have proof of the serious crime. The table below describes each person’s payoffs in this scenario.

Prisoner’s dilemma – no leniency


In this scenario, both A and B will clearly stay silent. In any scenario other than both staying silent, they both get 10 years in prison. So without a leniency policy, neither will co-operate and law enforcement is unable to prove the major crime.

Now, what if the police were to offer some ‘leniency’ for cooperation. Both criminals will be offered a chance to confess. If one confesses while the other stays silent, the confessor will go free while the non-cooperator will get the maximum 10 years. However if both co-operate, both can get a reduced sentence of 6 years. The table below describes the payoffs in the revised scenario.

Prisoner’s dilemma – with leniency


In the revised scenario, if B is going to be silent, A is better off talking because A would go free. If B is going to talk, A is again better off talking since a six-year sentence is better than a 10-year sentence. So whatever B does, it is better for A to talk, so as a rational person, A will talk. However, if B is equally rational, he will talk as well. With both confessing, law enforcement can convict both for the serious crime.

This shows that leniency policies can be a powerful tool for law enforcement to break criminal conspiracies like cartels. For one, they provide the possibility of detecting conspiracies that might have gone undiscovered. Secondly information gleaned through the leniency system make it much more likely that the conspiracy can be proven and the participants sanctioned.

Perhaps more importantly, leniency policies act as a deterrent for conspiracies. If each conspirator knows that their partner has an incentive to betray them in the future, they are less likely to enter into the conspiracy to begin with. This is especially true when leniency is offered only to the first conspirator to come forward, creating a potential ‘race to betrayal’. Promoting confusion and mistrust in a conspiracy through leniency policies makes it less likely that a conspiracy can form or continue for long periods.

Leniency systems however, are no magic bullet. A leniency policy without a strong enforcement and investigative program for example, is toothless. Unless one or more conspirators fear imminent detection, they will have no incentive to come forward. Similarly, the level of punishment and leniency matter. If sanctions for conviction are minor, then it reduces the value of the leniency in coming forward.

Too much leniency however, means reducing the deterrent for forming conspiracies in the first place. At times, leniency policies can provide incentives for false testimony or even encourage the formation of cartels in certain situations. The specifics are important and game theory frameworks can be very useful in calibrating leniency policies. The dynamics of how game theory is used in setting the optimal policies for different situations is a fascinating discussion in itself. But to quote the famous Kipling, ‘that is another story for another time’.

Law enforcement uses leniency systems in a variety of contexts. The most common version is similar to the “prisoner’s dilemma” and a staple of most cop TV shows, where investigators urge a criminal ‘to roll’ on his accomplices. Whistleblower laws that reward employees for reporting malfeasance by their employers is another form of leniency policy. Perhaps the most discussed application of leniency policies is in investigating cartels of companies indulging in anti-competitive activities like price-rigging. Cartels are often very difficult to prove because much of the collusion between the firms is tacit and undocumented. This makes it crucial to have ‘inside info’ from one of the participants. A famous recent example was when Samsung was granted immunity by the European Commission for revealing a conspiracy with other firms like LG to collude on the prices of LCD screens. However, while it is a powerful tool, it must be used judiciously because there is much potential for abuse or for creating an environment where law enforcement seems inconsistent and arbitrary.

(Shree is a wandering economist who has changed his address fourteen times in the last fourteen years. He has few ideas except those opposite to who he is talking to.)

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