Supreme Court settles the scope of Unfair Trade Practice under MRTP Act in commercial disputes: Philips Medical Systems vs. Indian MRI Diagnostic (29 September 2008)

Introduction

Date of the Judgment: 29 September 2008
Judges: Markandey Katju, J., Altamas Kabir, J.
Citation: Civil Appeal No. 2461 of 2006, with C.A. 5889/2008 @ SLP (Civil) No. 6325 of 2006

When does a commercial disagreement become an unfair trade practice? The Supreme Court of India addressed this question in a dispute between Philips Medical Systems and Indian MRI Diagnostic & Research Ltd. The core issue was whether Philips could be held liable for unfair trade practices under the Monopolies and Restrictive Trade Practices (MRTP) Act, even though they never actually sold the CT scanner in question to Indian MRI. This judgment clarifies the boundaries of what constitutes an unfair trade practice when a sale doesn’t occur.

The bench comprised Justice Markandey Katju, who authored the main judgment, and Justice Altamas Kabir, who provided a concurring opinion adding further nuance to the interpretation of Section 36A of the MRTP Act.

Case Background

In 1989, Indian MRI Diagnostic & Research Ltd. (Respondent No. 1) sought to purchase a whole-body CT scanner. They engaged in negotiations with both Philips Medical Systems (Appellant) and M/s. UB Picker Ltd. On April 10, 1989, Philips submitted a proforma invoice (the ‘First Offer’) for a new CT scanner, priced at US $1,282,500.00. This offer was comprehensive and not divisible.

Key terms of the First Offer included:

• ✓ System: Picker Synerview 1200 SX Whole Body CT Scanner with specified modules and packages.
• ✓ Price: US $1,282,500.00 CIF Madras.
• ✓ Validity: 90 days.
• ✓ Payment: Via irrevocable and confirmed Letter of Credit (L/C) in US Dollars.
• ✓ Delivery: 3-4 months ex-factory after receipt of confirmed order and L/C.

Indian MRI did not accept the First Offer or open an L/C within the 90-day validity period. Philips required an import license from the Indian government to obtain the necessary export license from the US authorities. As Indian MRI failed to provide this import license, Philips could not proceed with the export license application, and the First Offer lapsed.

Towards the end of 1989, fresh discussions began for a refurbished CT scanner. Philips offered a refurbished CT Scanner Model 1200 SX Solid State CT System for US $595,000.00 via quotation No. QR/4896/90 dated January 3, 1990 (the ‘Second Quotation’).

The Second Quotation included these terms:

• ✓ System: Refurbished 1200 SX Solid State CT System.
• ✓ Lead Time: 90 days after receipt of L/C, subject to timely receipt of Indian Import Certificate and US Export license.
• ✓ Shipment: By Ocean Freight.

Indian MRI accepted the Second Quotation, conditional on a total system price of US $570,000.00, including shipment ‘by Air’ instead of ‘by Ocean Freight’. This was endorsed by Respondent No. 2 on January 16/23, 1990. Indian MRI then opened an L/C dated February 24, 1990, for US $700,000.00.

Philips noted that the L/C was for an incorrect amount (US $700,000.00 instead of US $570,000.00) and referenced the expired First Offer instead of the accepted Second Quotation. Philips requested an amendment to the L/C to align with the Second Quotation. However, Indian MRI refused to amend the L/C and allegedly asked Philips to falsify shipping documents to indicate a new CT scanner was being supplied instead of a refurbished one, and to pay the excess amount of US $130,000.00 to Respondent No. 2 in Malaysia. Philips refused these requests.

The production of the refurbished CT scanner was delayed due to difficulties in procuring components, as production had been phased out in March 1990. Indian MRI allegedly failed to amend the L/C or obtain an Indian Import Certificate as per the Second Quotation. The L/C was eventually returned to Indian MRI unencashed. Philips contended that Indian MRI breached its obligations, preventing Philips from fulfilling its obligations.

Subsequently, Indian MRI filed a complaint before the MRTP Commission, alleging that Philips misrepresented the production and quality of the goods, inducing them into an agreement knowing the CT scanner was not in production. Indian MRI claimed losses of Rs. 32,31,885/- and sought damages.

Timeline:

Course of Proceedings

Indian MRI (Respondent Nos. 1 & 2) filed a complaint before the Monopolies and Restrictive Trade Practices (MRTP) Commission against Philips (Appellant) and Respondent Nos. 3 to 5, registered as RTP Enquiry No. 172 of 1995. The complaint alleged that Philips and Respondent Nos. 3 to 5 had misrepresented the production and quality of the CT scanner, inducing Indian MRI into an agreement despite knowing the scanner was not in production.

Indian MRI claimed they were compelled to procure the CT scanner from Hitachi, Japan, incurring a loss of Rs. 32,31,885/-, which they sought as damages.

The MRTP Commission issued a notice dated June 28, 1995, to Philips and Respondent Nos. 3 to 5, requesting a reply. Philips filed its reply on February 6, 1996, asserting that it had not engaged in any unfair or restrictive trade practices and was not liable for compensation.

On November 29, 2005, the MRTP Commission allowed the complaint, finding Philips guilty of unfair trade practice. The Commission restrained Philips from engaging in the alleged restrictive trade practice and directed it to pay compensation of Rs. 5,71,439/- with 9% interest per annum to the respondent.

Legal Framework

The central legal provision in this case is Section 36A of the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969. This section defines what constitutes an “unfair trade practice.” It was inserted into the Act in 1984 and amended in 1991. The amended section reads as follows:

“36A. DEFINITION OF UNFAIR TRADE PRACTICE.
In this Part, unless the context otherwise requires “unfair trade practice” means a trade practice which, for the purpose of promoting the sale, use or supply of any goods or for the provisions of any services, adopts any unfair method or unfair or deceptive practice including any of the following practices, namely:-
(1) the practice of making any statement, whether orally or in writing or by visible representation which,-
(i) falsely represents that the goods are of a particular standard, quality, quantity, grade, composition, style or model;
(ii) falsely represents that the services are of a particular standard, quality or grade;
(iii) falsely represents any re-built, second-hand, renovated, reconditioned or old goods as new goods;
(iv) represents that the goods or services have sponsorships, approval, performance, characteristics, accessories, uses or benefits which such goods or services do not have;
(v) represents that the seller or the supplier has a sponsorship or approval or affiliation which such seller or supplier does not have;
(vi) makes a false or misleading representation concerning the need for, or the usefulness of, any goods or services;
(vii) gives to the public any warranty or guarantee of the performance, efficacy or length of life of a product or of any goods that is not based on an adequate or proper test thereof;
Provided that where a defence is raised to the effect that such warranty or guarantee is based on adequate or proper test, the burden of proof of such defence shall lie on the person raising such defence;
(viii) makes to the public a representation in a form that purports to be —
(i) a warranty or guarantee of a product or of any goods or services; or
(ii) a promise to replace, maintain or repair an article or any part thereof or to repeat or continue a service until it has achieved a specified result,
if such purported warranty or guarantee or promise is materially misleading or if there is no reasonable prospect that such warranty, guarantee or promise will be carried out;
(ix) materially misleading the public concerning the price at which a product or like products or goods or services, have been, or are, ordinarily sold or provided, and, for this purpose, a representation as to price shall be deemed to refer to the price at which the product or goods or services has or have been sold by sellers or provided by suppliers generally in the relevant market unless it is clearly specified to be the price at which the product has been sold or services have been provided by the person by whom or on whose behalf the representation is made;
(x) gives false or misleading facts disparaging the goods, services or trade of another person.
Explanation : For the purposes of clause (1), a statement that is —
(a) expressed on an article offered or displayed for sale, or on its wrapper or container; or
(b) expressed on anything attached to, inserted in, or accompanying, an article offered or displayed for sale, or on anything on which the article is mounted for display or sale; or
(c) contained in or on anything that is sold, sent, delivered, transmitted or in any other manner whatsoever made available to a member of the public,
shall be deemed to be a statement made to the public by, and only by, the person who had caused the statement to be so expressed, made or contained;
(2) permits the publication of any advertisement whether in any newspaper or otherwise, for the sale or supply at a bargain price, of goods or services that are not intended to be offered for sale or supply at the bargain price, or for a period that is, and in quantities that are, reasonable, having regard to the nature of the market in which the business is carried on, the nature and size of business, and the nature of the advertisement.
Explanation : For the purpose of clause (2), “bargain price” means –
(a) a price that is stated in any advertisement to be a bargain price, by reference to an ordinary price or otherwise, or
(b) a price that a person who reads, hears, or sees the advertisement, would reasonably understand to be a bargain price having regard to the prices at which the product advertised or like products are ordinarily sold;
(3) permits —
(a) the offering of gifts, prizes or other items with the intention of not providing them as offered or creating the impression that something is being given or offered free of charge when it is fully or partly covered by the amount charged in the transaction as a whole,
(b) the conduct of any contest, lottery, game of chance or skill, for the purpose of promoting, directly or indirectly, the sale, use or supply of any product or any business interest;
(4) permits the sale or supply of goods intended to be used, or are of a kind likely to be used by consumers, knowing or having reason to believe that the goods do not comply with the standards prescribed by competent authority relating to performance, composition, contents, design, constructions, finishing or packaging as are necessary to prevent or reduce the risk of injury to the person using the goods;
(5) permits the hoarding or destruction of goods, or refuses to sell the goods or to make them available for sale, or to provide any service, if such hoarding or destruction or refusal raises or tends to raise or is intended to raise, the cost of those or other similar goods or services.”

The MRTP Act was originally enacted in 1969 to prevent the concentration of economic power, control monopolies, and prohibit monopolistic and restrictive trade practices. The introduction of Section 36A aimed to protect consumers from misleading advertisements and unfair trade practices.

Arguments

Arguments by the Appellant (Philips):

• ✓ Philips argued that Section 36A of the MRTP Act, which defines unfair trade practices, should not apply in this case because they did not actually sell the CT scanner to Indian MRI. Their primary submission was that the legal provision is applicable only when goods are indeed sold.
• ✓ They contended that the initial offer (First Offer) had lapsed due to the non-fulfillment of conditions by Indian MRI, such as failing to open a Letter of Credit (L/C) within the stipulated time.
• ✓ Philips also argued that they could not apply for an export license from the U.S. authorities because Indian MRI did not forward the necessary Indian Import license within the validity period of the First Offer.
• ✓ They highlighted that the subsequent discussions led to a Second Quotation for a refurbished CT scanner, which was different from the initial offer.

Arguments by the Respondent (Indian MRI):

• ✓ Indian MRI contended that Philips had misrepresented the production and quality of the CT scanner. They alleged that Philips induced them into an agreement knowing that the CT scanner ordered was not in production.
• ✓ They claimed that they suffered a significant loss of Rs. 32,31,885/- because they had to procure the CT scanner from another company (Hitachi, Japan) due to Philips’ actions.
• ✓ Indian MRI argued that Philips was engaging in unfair trade practices by not honoring the agreement and causing them financial harm.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether a party can be held guilty of unfair trade practice as referred to in Section 36A of the MRTP Act, although he did not supply any goods at all.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

• ✓ Hemens (Valuation Officer) vs. Whitsbury Farm and Stud Ltd (1988) 1 All ER 72 (HL): Used to interpret the meaning of ‘livestock’ in the context of the Rating Act, 1971. The court emphasized that the meaning of a word should not be given a wide meaning that contradicts the object of the provision.
• ✓ South Gujarat Roofing Tile Manufacturers Association vs. State of Gujarat AIR 1977 SC 90: Cited to support the principle that an inclusive definition can be given a restrictive meaning.
• ✓ Hindustan Aluminium Corporation vs. State of U.P. AIR 1981 SC 1649: Also cited to support the principle that an inclusive definition can be given a restrictive meaning.
• ✓ Vanguard Fire and General Insurance Co. Ltd., Madras vs. Fraser & Ross AIR 1960 SC 971: Cited to emphasize that the court must look at the context, collocation, and object of the words to interpret the meaning intended to be conveyed.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• ✓ Hemens (Valuation Officer) vs. Whitsbury Farm and Stud Ltd (1988) 1 All ER 72 (HL): The Court used this case to support the principle that the meaning of a word should not be given a wide interpretation that contradicts the object of the provision.
• ✓ South Gujarat Roofing Tile Manufacturers Association vs. State of Gujarat AIR 1977 SC 90 and Hindustan Aluminium Corporation vs. State of U.P. AIR 1981 SC 1649: These cases were cited to reinforce the principle that an inclusive definition can be given a restrictive meaning.
• ✓ Vanguard Fire and General Insurance Co. Ltd., Madras vs. Fraser & Ross AIR 1960 SC 971: The Court cited this case to emphasize that the context, collocation, and object of the words must be considered to interpret the intended meaning.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of Section 36A of the MRTP Act and its applicability to cases where no sale of goods occurred. The Court emphasized that the object of Section 36A is to protect consumers from misrepresentations and defective goods when a sale has taken place. Since Philips did not sell the CT scanner to Indian MRI, the Court found that Section 36A was not applicable.

Fact:Law Ratio

The Court’s reasoning was heavily based on legal interpretations and principles, with a greater emphasis on the legal framework (70%) compared to the factual aspects of the case (30%).

Logical Reasoning

Issue: Whether Section 36A of the MRTP Act applies when no goods are supplied?

Key Takeaways

• ✓ Section 36A of the MRTP Act is primarily intended to protect consumers in situations where a sale of goods has occurred.
• ✓ For Section 36A to be applicable, there must be a direct link between the alleged unfair trade practice and the sale or supply of goods.
• ✓ The principles of ejusdem generis and noscitur a sociis can be used to interpret the scope of unfair trade practices under Section 36A.

Development of Law

The ratio decidendi of this case is that Section 36A of the MRTP Act does not apply in situations where there is no sale of goods. The Court clarified that the primary object of Section 36A is to protect consumers from misrepresentations and defective goods when a sale has taken place. This judgment reinforces a restrictive interpretation of unfair trade practices, limiting its application to cases involving actual sales.

Conclusion

In the case of Philips Medical Systems vs. Indian MRI Diagnostic, the Supreme Court held that Section 36A of the MRTP Act, which defines unfair trade practices, does not apply when there is no actual sale of goods. The Court emphasized that the provision is intended to protect consumers from misrepresentations and defective goods in cases where a sale has occurred. As Philips did not sell the CT scanner to Indian MRI, the Court set aside the MRTP Commission’s order holding Philips guilty of unfair trade practice.