Dispute Resolution

Section 34 of the Arbitration and Conciliation Act, 1996 (Act) sets out the grounds on which arbitral awards passed in domestic arbitrations and international commercial arbitrations seated in India can be set aside.  As regards foreign awards (i.e. arbitral awards passed in foreign seated arbitrations), whilst the same cannot be challenged in India, the enforcement of the same in India can be validly objected to by the award debtor on grounds that are set out in Section 48 of the Act. The grounds for setting aside arbitral awards passed in domestic arbitrations and international commercial arbitrations seated in India under Section 34 of the Act and the grounds for refusing enforcement of foreign awards in India under Section 48 of the Act are substantially identical. One such ground is if the arbitral award is found to be contrary to the “public policy of India”.Continue Reading Supreme Court’s judgment in Vijay Karia v. Prysmian Cavi e Sistemi S.r.l.: Impact on challenges to awards passed in International Commercial Arbitrations conducted in India

Change is inevitable. Growth is optional.

– John Maxwell

Covid-19 has seen the legal landscape leapfrog into digital courts, electronic filings and asynchronous video hearings. The change has been fundamental and deep deliberations are currently underway for the systemic adoption of a new normal. Such a material shift often facilitates rapid adoption of other innovations that were hitherto stuck at the threshold of a conservative mindset. We believe that Third Party Funding of litigation is one such legal innovation that will now come of age in India.Continue Reading Cash constrained and need to litigate? Third Party Funding may be the solution

unfettered right to exclude or limit their liability for breach of contract Part 2

In Part I of this post, we had discussed the concept of exclusion or limitation of liability clauses and the position in India. In this part, we will examine the position of such clauses in England and provide our views on such clauses. 

Position in England 

The application of clauses excluding or limiting liability in England is more consistent. When faced with standard form contracts or contracts where there is inequality of bargaining power, English courts apply the test of fairness or reasonableness of clauses in such contracts and refuse to enforce provisions of contracts that are unconscionable or exploitative.[1]
Continue Reading Do parties have an unfettered right to exclude or limit their liability for breach of contract? – Part II

Do parties have an unfettered right to exclude or limit their liability for breach of contract – Part 1

Introduction

The law of damages in India is codified in Sections 73 and 74 of the Indian Contract Act, 1872 (“Contract Act”). Section 73 of the Contract Act provides that a party that suffers breach of contract is entitled to receive from the party that has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach or which the parties knew, when they made the contract, to be likely to result from a breach. Section 73 of the Contract Act bars the grant of compensation for remote and indirect loss or damage sustained on account of breach of contract.

This bifurcation between damages towards losses, which naturally arise in the usual course of things (first limb) and losses that the parties knew, when they made the contract, to be likely to result from a breach of the contract (second limb), appears to be borrowed from the principle laid down in the celebrated English decision of Hadley v. Baxendale.[1] The first limb is popularly referred to as general damages, whilst the second limb is referred to as special damages i.e. additional loss caused by a breach on account of special circumstances, outside the ordinary course of things, which was in the contemplation of the parties.
Continue Reading Do parties have an unfettered right to exclude or limit their liability for breach of contract? – Part I

To Pay Rent or Not To Pay Rent - The Delhi High Court rejects plea for suspension of rent during lockdown

The COVID-19 outbreak and the resultant nationwide lockdown have severely impacted performance of obligations, whether contractual or otherwise, across the country. Most entities/individuals are exploring the option of pleading frustration of contract[1] or invoking force majeure[2] clauses to suspend or obtain a relaxation on their contractual obligations. In this post, we examine the recent decision in Ramanand & Ors. v. Dr. Girish Soni & Anr.,[3] where the Delhi High Court rejected an application for waiver or suspension of rent on account of the lockdown.
Continue Reading To Pay Rent or Not To Pay Rent? The Delhi High Court rejects plea for suspension of rent during lockdown

Determinable contracts under the Specific Relief Act,1963 – Part II

In  Part I of this post, we discussed the concept of determinable contracts under the Specific Relief Act, 1963 (the “Act”) and analysed two decisions of the Supreme Court in this regard. In this post, we will examine the decisions of various High Courts which caused some confusion as to what would qualify as a determinable contract under the Act.

Delhi

As far back as 1999, the Delhi High Court found a joint venture agreement which provided for termination by either party in the event that certain government approvals were not obtained by a specified date, to be determinable in nature.[1] Conspicuously, the court did not refer to the decision of the Supreme Court in Indian Oil Corporation Ltd. v. Amritsar Gas Service & Ors.[2]

The most notable result of the lack of clarity in Amritsar Gas (supra) came by way of a decision of the Delhi High Court (Division Bench) in Rajasthan Breweries Ltd. v. The Stroh Brewery Company.[3] The agreements in this case specified certain events which would entitle each party to terminate. Observing that the facts of the case before it were identical to those in Amritsar Gas (supra), the court held that the agreements in this case were determinable and, therefore, not capable of specific performance. The court went so far as to hold that even in the absence of a specific clause enabling either party to terminate the agreement on the happening of specified events, the very nature of the agreement (being a private commercial transaction) made it liable to termination without assigning any reason by serving a reasonable notice. In the event such termination is held to be wrongful or bad in law, the only remedy available to the aggrieved party is to seek compensation for wrongful termination and not specific performance. The decision in Rajasthan Breweries (supra) was applied by the Delhi High Court in subsequent decisions.[4]
Continue Reading Determinable Contracts Under the Specific Relief Act, 1963 – Part II

Determinable contracts under the Specific Relief Act, 1963 – Part I

Introduction

The remedies most resorted to for breach of contract are damages, specific performance, and injunctions. The remedy of damages is governed by the Indian Contract Act, 1872, whilst specific performance and injunctions are governed by the Specific Relief Act, 1963 (the “Act”).

Prior to the amendment of the Act in 2018, the grant of specific performance was not available as a matter of course but was based on the discretion of the court. Section 10 of the un-amended Act laid down cases in which the court could exercise this discretion viz. when no standard exists for ascertaining the actual damage caused by non-performance of the act agreed to be done or when the act agreed to be done is such that compensation in money for its non-performance would not afford adequate relief. The Specific Relief (Amendment) Act, 2018 substituted Section 10 of the Act, which now provides that specific performance of a contract shall be enforced by the court, subject to Sections 11(2), 14 and 16 of the Act.[1] Section 20 of the un-amended Act, which set out the contours of the court’s discretion and enumerated cases under which the court may exercise discretion not to grant specific performance, was substituted in its entirety with a provision relating to substituted performance. The grant of specific performance of a contract is, therefore, no longer a matter of discretion and must be granted subject to the exceptions set out in the Act.
Continue Reading Determinable contracts under the Specific Relief Act, 1963 – Part I

Contract of service or contract for service - The Supreme Court Test

In Sushilaben Indravadan Gandhi v. The New India Assurance Company Limited,[1] the Supreme Court crystallised and clarified the tests to differentiate between a contract of service and a contract for service, while also interpreting an exemption of liability clause in an insurance policy.

Factual Background

Respondent No. 3 viz. the Rotary Eye Institute, Navsari (“Institute”) subscribed to a Private Car ‘B’ insurance policy offered by Respondent No. 1 viz. New India Assurance Company Limited (“Insurance Company”) on April 17, 1997 (“Insurance Policy”). The Insurance Policy, which inter alia covered death of or bodily injury to any person including occupants in the relevant motor car, expressly excluded the Insurance Company’s liability in cases of death or injury arising out of and in the course of the employment of the person so affected, by the Institute. The Insurance Policy also provided for compensation on a particular scale for bodily injury sustained by any passenger other than inter alia a person in the employ of the Institute, coming within the scope of the Workmen Compensation Act, 1923, and engaged in and upon the service of the Institute at the time when such injury is sustained.
Continue Reading Contract of service or contract for service: The Supreme Court Test

Invoking Material Adverse Change based on Covid-19: Easier said than done A Material Adverse Change (MAC), also known as Material Adverse Event (MAE), clause enables a party to withdraw from a contract in circumstances where there is a material change after its signing. Such clauses are usually found in acquisition and financing agreements. In acquisition agreements, the MAC clause gives the buyer the option of withdrawing from the transaction whereas in financing agreements, it gives the lender the option of not disbursing the amount agreed to be advanced. MAC clauses are essentially definitions that reflect the allocation of risks between contracting parties. The risks allocated to the seller or borrower (as appropriate) are covered by the MAC clause whereas all other risks are allocated to the buyer or lender, respectively. Generally, systemic and industry-wide risks are allocated to the buyer/ lender while risks that are specific to the business/ borrower are allocated to the seller/ borrower. The MAC clause is used in conjunction with other provisions of an agreement. For instance, in acquisition agreements, the absence of any MAC could be a condition precedent for closing or a representation/ warranty by the seller. Additionally, the occurrence of a MAC could also be a ground for termination by the buyer. Similarly, in financing agreements, the absence of any MAC could be a condition precedent to drawdown/ disbursement under a facility or a representation/ warranty by the borrower. At the same time, the occurrence of a MAC could also be an event of default entitling the lender to accelerate/ recall the loan. Change in Attributes of the Target/ Borrower In order to trigger a MAC, a change must relate to one or more of the specific attributes of the target/ borrower mentioned in the MAC clause. These attributes include financial condition, business, assets, etc. Having fewer attributes in the MAC clause can considerably narrow down its scope. For instance, the Federal Court of Australia has held that a change in cash flow projections did not constitute a change in the ‘business, assets or financial condition’ of the borrower. Inclusion of a longer list of attributes such as condition (financial or otherwise), business, assets, operations, etc. may reduce the risk of changes being found not to be covered under the MAC clause. The specific attributes that should be included will vary depending upon the circumstances in which the agreement is being signed as well as the business model of the target/ borrower. Further, the change needs to be determined by reference to the circumstances that existed at the time the agreement was signed. The Court of Chancery at Delaware (United States) has held that even where a MAC clause is broadly written, it is best read as a backstop protecting the acquirer from the occurrence of ‘unknown’ events, thereby suggesting that MAC cannot be invoked if a change is caused by an event which was known at the time the agreement was signed. However, the Queen’s Bench Division (England) has held that mere knowledge of the acquirer of the causes of probable future losses prior to the agreement would not prevent the acquirer from invoking a MAC if such losses actually occur because it is concerned with changes and not with the causes of such changes. Ordinarily, a party cannot invoke the MAC clause on the basis of circumstances of which it was aware at the time the agreement was signed since it will be assumed that the parties contracted despite the same. However, it will be possible to invoke the clause where conditions worsen in a way that makes them materially different in nature. Anticipated changes/ effects A MAC can usually be invoked only in respect of circumstances that exist on the date of invocation. However, specific wording may enable a MAC to be invoked in respect of anticipated changes as well. For instance, where (i) the seller represented that there was no threatened litigation other than those that “… would not have or reasonably be expected to have …” a MAE; and (ii) ‘prospects’ was one of the attributes mentioned in the MAE clause, the court relied on the same to observe that the said clause emphasises the need for a forward-looking analysis which would include changes reasonably expected to occur in future. Nevertheless, even if a MAC clause included such wording, the likelihood of the anticipated change/ effect must be clearly demonstrable when invoked. The Supreme Court of New South Wales (Australia) has indicated that the anticipated change/ effect should be so likely that any objection as to MAC not having already occurred should be “… tantamount to a submission that a person who falls out of an aircraft has not suffered a [MAC] until the person hits the ground…”. Determining Materiality Every adverse change does not amount to a MAC; only ‘material’ changes do. If the MAC clause prescribes a formula or method for what is material, then the issue of materiality will depend on the said formula/ method. If no formula/ method is prescribed, then it will be left to the court to determine whether the particular change(s) in question are material based on judicially formulated principles. Courts in Delaware (United States) have evolved the following principles for determining materiality in MAC clauses in the specific context of acquisition agreements: • Contractual language has to be read in the larger context of the transaction to determine what is material; • Even where a MAC condition is broadly worded, the same is best read as a backstop protecting the buyer from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally significant manner; • A short-term hiccup in earnings should not suffice, rather the MAC should be material when viewed from a long-term perspective of a reasonable acquirer; • The most important consideration is whether there has been an adverse change in the target’s business that is consequential to the target’s long term earnings power over a commercially reasonable period, which one would expect to be measured in years rather than months; and • The issue of whether a change/ effect constitutes a MAC has both qualitative aspects and quantitative aspects. In the context of financing agreements, courts have held that only a change which significantly affects the borrower’s ability to perform its obligations and, in particular, its ability to repay the loan will be considered material. Proving the Existence of a MAC Unless there is clear language to the contrary, the burden of proving the occurrence of a MAC/ MAE is on the party seeking to excuse its performance, irrespective of how the MAC/ MAE is drafted (i.e. whether as a representation/ warranty or as a condition precedent). In acquisition agreements, the burden is a heavy one for the buyer to discharge. Mere speculation is not enough and both factual as well as expert testimony is required to be adduced in order to discharge this burden. However, admissions made by the seller/ borrower during the course of the trial may sometimes be sufficient by themselves for the court to rule in favour of the invoking party. Subjective MAC Clauses in Financing Agreements Sometimes, MAC clauses in financing agreements provide that the issue of whether a MAC. has occurred will be determined in the opinion or reasonable opinion of the lender. In such cases, the question which the court has to examine is not whether a MAC has in fact occurred but whether the lender has properly formed the required opinion. Where the MAC clause requires the formation of a reasonable opinion, the likely approach is for the court to apply principles akin to those laid down in the context of judicial review of administrative action and only satisfy itself that the lender has not acted arbitrarily, capriciously, whimsically or dishonestly without substituting the lender’s opinion with the court’s own judgment regarding whether a MAC has occurred. Where the clause merely requires the formation of an opinion, the court will only ascertain if the opinion formed by the lender was an honest one. The Supreme Court of New South Wales (Australia) explained this to mean that the opinion of the lender will be upheld unless it is so perverse/ irrational that no reasonable person in the position of the lender could have formed that opinion. However, even in such cases, it cannot be ruled out that the courts may imply a term to the effect that any opinion formed by the lender regarding occurrence of a MAC must necessarily be a reasonable one. MAC and Covid-19 in the Indian context The above examination of the judicial approach across various jurisdictions indicates that the courts are conservative when viewing MAC clauses and do not readily permit parties to use MAC for terminating an agreement. While Indian courts have not yet had the opportunity to rule on a MAC clause, there are indications they will be equally (if not more) circumspect when dealing with it. First, the Supreme Court has, in the context of the Takeover Code, interpreted the grounds on which an open offer may be withdrawn in a very narrow manner that is akin to impossibility. Secondly, Indian courts are likely to approach MAC clauses as being a contractual avatar of the doctrine of frustration and apply the high thresholds under Section 56 of the Indian Contract Act, 1872 while determining the justification for invoking such a clause. Given that the Covid-19 situation is widely perceived as a temporary one, parties invoking MAC based on the pandemic will have to demonstrate that its effects on the specific target/ borrower in their case are so grave that they will continue well after the crisis has been resolved. This may be difficult at present because the duration of Covid-19 itself is still unknown and ascertaining its full economic impact is, therefore, even more difficult. However, there could be cases where the severity of the impact would be sufficient to demonstrate a MAC. Parties invoking MAC even in such cases should anticipate being dragged into litigation and prepare for the same by collecting sufficient material to defend their invocation. In cases where the impact has not yet occurred but is unmistakably imminent, parties invoking MAC should consider the timing of invocation carefully and be aware of heightened litigation risks. Where agreements have been signed after the Covid-19 outbreak, parties invoking MAC should be prepared to demonstrate that the extent of its adverse impact on the target/ borrower has been so significant that it could not have been foreseen/ contemplated by the parties at the time of signing the agreement. Concluding Observations MAC clauses came about, at least in part, as an alternative to invoking force majeure and frustration. The purpose was to include an option with a somewhat lower threshold to make it easier for a party to walk away from a transaction. However, given the judicially evolved principles for interpreting a MAC clause, parties will find that invoking it comes with its own set of challenges. Even if a MAC clause is tailor-made for the specific transaction in question (as is best practice), the evidentiary burden on the invoking party coupled with the cost of collating sufficient material to discharge the same could be daunting. In the context of acquisition agreements, invoking a MAC is likely to remain an option on paper and do little more than provide leverage to re-negotiate the terms of the agreement since most sellers would prefer to avoid a protracted litigation. However, in the context of financing agreements, if the lender invokes an event of default based on MAC, it could effectively trigger the slide of the borrower into insolvency, leaving him with no option but to drag the lender into litigation as a survival strategy.

A Material Adverse Change (MAC), also known as Material Adverse Event (MAE), clause enables a party to withdraw from a contract in circumstances where there is a material change after its signing. Such clauses are usually found in acquisition and financing agreements. In acquisition agreements, the MAC clause gives the buyer the option of withdrawing from the transaction whereas in financing agreements, it gives the lender the option of not disbursing the amount agreed to be advanced.

MAC clauses are essentially definitions that reflect the allocation of risks between contracting parties. The risks allocated to the seller or borrower (as appropriate) are covered by the MAC clause whereas all other risks are allocated to the buyer or lender, respectively. Generally, systemic and industry-wide risks are allocated to the buyer/ lender while risks that are specific to the business/ borrower are allocated to the seller/ borrower. The MAC clause is used in conjunction with other provisions of an agreement. For instance, in acquisition agreements, the absence of any MAC could be a condition precedent for closing or a representation/ warranty by the seller. Additionally, the occurrence of a MAC could also be a ground for termination by the buyer. Similarly, in financing agreements, the absence of any MAC could be a condition precedent to drawdown/ disbursement under a facility or a representation/ warranty by the borrower. At the same time, the occurrence of a MAC could also be an event of default entitling the lender to accelerate/ recall the loan.
Continue Reading Invoking Material Adverse Change based on Covid-19: Easier said than done

Public Interest versus Promissory Estoppel – Chalk another one up on the board for Public Interest

In its recent decision in Union of India & Anr. v. M/s. V.V.F. Limited & Anr.,[1] the Hon’ble Supreme Court held that government notifications which are issued in public interest are not hit by the doctrine of promissory estoppel.

Facts

The Gujarat Notifications

Post the devastating earthquake that struck the District of Kutch (in the State of Gujarat) in 2001, the Government of India issued a notification (“2001 Notification”) inter alia exempting those goods from excise duty which were manufactured in a new industrial unit (set up in the District of Kutch) for the purpose of sale. These new industrial units could claim a refund (in the manner stipulated in the 2001 Notification) of the excise duty paid on the goods manufactured by them. Further, July 31, 2003 was decided as the cut-off date for setting up of new industrial units in the District of Kutch with manufacturers allowed to claim excise refunds for a period of five years from the date of commencement of the commercial production of goods. The 2001 Notification was amended from time to time to inter alia extend the cut-off date for setting up new industrial units, from July 31, 2003 to December 31, 2005

Pursuant to two subsequent amendments to the 2001 Notification in 2008 (“2008 Notifications”), the benefit of refund granted under the 2001 Notification was restricted/ limited to the ‘value addition’ to the goods made by the new industrial units. Consequently, the new industrial units could now only claim a refund of 34% of the total duty paid by them, as opposed to the entire amount under the earlier notifications. The 2008 Notifications were challenged by way of several writ petitions before the Hon’ble Gujarat High Court and were quashed and set aside inter alia on the ground that the bar of promissory estoppel would operate.
Continue Reading Public Interest versus Promissory Estoppel – Chalk another one up on the board for Public Interest