By: Sharanya Ranga and Neil Lopez
Contract enforcement through speedy dispute resolution has always been one of the biggest concerns for the business community in India, particularly foreign investors. The recent judgments of the Delhi High Court (HC) in the high profile Tata-Docomo case and that of the Cruz City-Unitech case touching upon enforcement of foreign arbitral awards and contractual obligations, have helped boost investor confidence. We briefly discuss these two judgments and their larger impact on foreign investment.
Foreign exchange control regulations and breach of contract
As per India’s foreign exchange regulations, any transfer of shares of an Indian company to a non-resident investor has to be at a price not exceeding the fair market value of the shares and cannot be at a fixed price. The thinking behind such a share price cap appears to be that an equity investment ought not to provide an assured return, as that attains the colour of a debt instrument, which is subject to greater regulatory oversight than equity investments.
In the Docomo v Tata case, the Japanese telecom giant, NTT Docomo Inc (‘Docomo’), acquired a 26.5 per cent stake in Tata Teleservices Limited (joint venture – JV) for US$2.5bn in March 2009. The shareholders’ agreement entered into between the shareholders (Docomo and the majority shareholder, Tata Sons (‘Tata’)) granted Docomo the right to exit the JV on Tata’s failure to satisfy certain ‘key performance indicators’. The exit provision provided that Tata would be obliged to find buyers for Docomo’s shares in the JV at a sale price which is the higher of (a) the fair value of those shares as of 31 March 2014; or (b) 50 per cent of the price at which Docomo purchased those shares. As the business failed to take off, Docomo exercised its exit option in July 2014. On the failure of Tata to find a buyer for Docomo’s shares, Docomo initiated arbitration before the London Court of International Arbitration (LCIA). While Tata argued that these exit provisions became void as the Reserve Bank of India (RBI) had refused to provide special permission to exit at a pre-determined valuation, the arbitral tribunal held that Tata was liable for breach of contract and awarded Docomo damages amounting to US$1.17bn (almost equivalent to half of its investment in the JV). Docomo subsequently approached the HC in July 2016 for enforcement of the arbitral award. While the enforcement proceedings were between Docomo and Tata, RBI tried to implead itself in the proceedings, arguing that enforcement of the arbitral award would result in a breach of India’s foreign exchange regulations, which prohibit assured returns to non-residents on equity investments.
The HC concluded that the arbitral award was in the nature of damages for breach of contractual obligations by Tata and not an award pertaining to the sale price for the shares. The HC also noted that, as the shareholders’ agreement was worded more in the nature of a downside protection to Docomo as opposed to an assured return on its investment, there was no violation of Indian exchange control laws. The HC dismissed the intervention application of the RBI, stating that it had no locus standi to intervene in this matter.
While the outcome of this dispute has been welcomed by foreign investors, the conservative approach adopted by the HC raises several questions on the enforceability of exit option clauses providing an assured return in similar investment transactions. The RBI argued that its role cannot be negated ‘for any reason whatsoever’, as the arbitral award involved remittances to a foreign entity and its special permission was required as the fair value of the JV shares was less than its sale price. The HC dismissed this on the basis that no law permitted the RBI to intervene in a petition seeking enforcement of an arbitral award to which the RBI is not a party.
In the Cruz City v Unitech case, the parties and their subsidiaries had entered into various agreements for investing in real estate projects in India. Due to delays in the projects, Cruz City exercised its put option, requiring Unitech’s subsidiaries to purchase its shares. As this was not acted upon, Cruz City initiated arbitration under LCIA rules. The arbitral tribunal passed an award in favour of Cruz City, directing Unitech and its subsidiaries to pay Cruz City the pre-agreed consideration: the purchase price of its shares. Cruz City sought to enforce this award by approaching the HC. The HC examined various RBI circulars that prohibited optionality clauses and held that such restrictions would not be applicable in a situation where a party was only using such an option as a remedy for breach of contract; that is, Cruz City invoking the put option clause to trigger an exit upon default by the other party. It therefore held that an assured return was permissible so long as it was not absolute, unconditional or open-ended, and that it could be invoked in specific circumstances that arise due to breach of contractual obligations.
Notably, the HC rejected Unitech’s invocation of public policy as grounds to resist enforcement of the foreign award, stating that, in such cases, the term has to be constructed in a narrow manner such that it offends the core values of a state’s national policy and the ’fundamental and substratal legislative policy and not just a provision of any enactment’. Therefore, enforcement of an award cannot be challenged on the ground of public policy when there is only a simpliciter violation of a particular provision of foreign exchange control laws, as that cannot be treated as offending the fundamental policy of Indian law. Commendably, the HC considered the paradigm policy shift in the laws relating to foreign exchange with the opening up of India’s economy in 1991 and the gradual movement to manage (as opposed to regulate) foreign exchange transactions.
Sacrosanct nature of contractual obligations
A common thread in both these cases was the manner in which the HC upheld the sacrosanct nature of contractual obligations. When a party to the contract expressly represents that the transactions contemplated under the contract are in compliance with applicable laws, it cannot thereafter escape liability by arguing that specific provisions of the contract were in violation of law and resist enforcement of an arbitral award.
Both these HC judgments will go a long way in boosting investor confidence in India, especially when the Indian economy is in the midst of decline. While the Indian government is doing its best to woo foreign investments into India and make it easy to do business, enforcement of contractual rights in Indian courts remains a non-starter for most parties. While this has been addressed to some extent by parties resorting to institutional arbitration as a dispute resolution mechanism for international commercial transactions, the enforcement of foreign arbitral awards in India was often frustrating for private parties, especially when regulators intervened or a public policy aspect was brought to delay or question the enforcement of the award. While it remains to be seen if these judgments expedite the relaxation of specific foreign exchange policy regulations relating to investors’ exit, it has definitely underscored the importance of a well-drafted contract.
 NTT Docomo Inc. v. Tata Sons Limited, (2017) O.M.P.(EFA)(COMM.) 7/2016, (Delhi High Court).
 Cruz City 1 Mauritius Holdings v. Unitech Limited,(2017) EX.P.132/2014, (Delhi High Court).
 Cruz City 1 Mauritius Holdings v. Unitech Limited ,(2017) EX.P.132/2014, (Delhi High Court)
(This article was first published by the IBA Asia-Pacific Regional Forum in August 2017, and is reproduced by kind permission of the International Bar Association, London, UK. © International Bar Association.)