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a breach of FEMA after having provided unambiguous representations to Cruz City regarding enforceability of its obligations under the agreements.
In the DoCoMo case, while the Court did not directly delve into the question of whether the transaction was in conflict with public policy of India, it upheld DoCoMo’ s right to receive 50 % of its original investment amount. In this case, Tata was required to find a buyer for DoCoMo’ s shares in the event that it failed to satisfy certain pre-determined performance parameters. The arbitral tribunal unanimously ruled that Tata was liable to pay damages and recognized that the parties had deliberately linked the exit provision with breach of performance parameters, being aware that exchange control regulations may prevent performance of a simple put option. The Court upheld the award and rejected the contention of the RBI that the payment from Tata to DoCoMo was in the nature of an assured return.
These cases establish a very clear intent- violation of an economic law to protect foreign exchange outflow is not sufficient ground for declining the enforcement of a foreign award on grounds of public policy. Indian parties should honor their contractual commitments and should not be permitted to hide behind their failure to obtain approvals or the lack of gravity in making a promise which they could later treat as illegal. A contrary stance would have certainly affected the faith of foreign investors in the Indian legal system.
It is pertinent to note that in both these cases, the foreign arbitral awards were challenged. Under the Arbitration and Conciliation Act, 1996( the Arbitration Act), enforcement of a foreign award can be challenged on substantial grounds if it is contrary to the public policy of India. In such a scenario, an interesting question that arises is whether the parties challenging the arbitral award would have had a better case if they had resorted to domestic arbitration. This is more so in light of the recent amendment to the Arbitration Act, which permits arbitral awards arising out of arbitrations, other than international commercial arbitrations, to be set aside if the court finds that the award is vitiated by patent illegality appearing on the face of the award.
Patent illegality was brought within the ambit of public policy by the Supreme Court in the case of Oil and Natural Gas Corporation Limited v Saw Pipe Limited where it held that“ if the award is contrary to substantive provisions of law or the provisions of the Act or against the terms of the contract, it would be patently illegal”. However, based on recommendations of the law commission and the judgment of the Supreme Court in ShriLal Mahal v Progetto Grano Spa, the legislators did not want the concept of patent illegality to apply to foreign arbitral awards and therefore, decided to limit the scope of the interpretation given to‘ public policy of India’ and included‘ patent illegality’ as separate ground
Indian parties should honor their contractual commitments and should not be permitted to hide behind their failure to obtain approvals or the lack of gravity in making a promise which they could later treat as illegal
to set aside domestic awards. Awards have been set aside on the grounds of arbitrariness, irrationality or a perverse understanding or misreading of the materials placed before the arbitrator, or even in cases where the arbitrator has awarded damages without the parties having proved the losses suffered by it. The ambit of judicial intervention has also been restricted by the amendment which states that an award cannot be set aside merely on grounds of an erroneous application of the law or by reappreciation of evidence. This seems to indicate that the conclusion of the Court may not have been very different even if the arbitral awards in the DoCoMo case and the Cruz City case were subjects of domestic arbitrations.
In conclusion, Indian courts are strongly heading towards an approach that discourages Indian parties from using regulatory compliances as a defense for resisting contractual obligations. While such a stance in laudable from an investor perspective, it urges Indian promoters to look at their contractual commitments, specially around exit provisions, with greater scrutiny. Investors are likely to use these decisions to their advantage and incorporate structures that will minimize the risk quotient in their equity investment and at least ensure a downside protection. In such cases, the Indian promoters may have very limited opportunity to negotiate against such provisions. Therefore, to adequately protect the Indian promoters against any misuse of these provisions, contracts will need to be drafted to ensure that the factors triggering exits are watertight and not subjective or ambiguous. The parties, both the investor and the promoter, need to be clear on what they have signed up for because neither will be able to back out.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.
November 2017 | Legal Era | www. legaleraonline. com