Friday, August 29, 2014

Good faith in multi-tier dispute resolution clauses - Part I

One of the more significant contract law decisions to emerge from the English High Court in 2013 was the decision of Leggatt J in Yam Seng, which held that 'good faith' was a concept not limited to civilian legal systems and could be put to use in the interpretation of contracts in the common law world. Another decision of the High Court last month has now extended the dictum of Yam Seng to multi-tier dispute resolution clauses, marking another departure from previous jurisprudence.

The issue in Emirates was straightforward - the Court was asked to interpret and determine the enforceability of the following clause:

"In case of any dispute or claim arising out of or in connection with or under this [contract], the Parties shall first seek to resolve the dispute or claim by friendly discussion. Any party may notify the other Party of its desire to enter into consultation to resolve a dispute or claim. If no solution can be arrived at in between the Parties for a continuous period of 4 (four) weeks then the non-defaulting party can invoke the arbitration clause and refer the disputes to arbitration."

Mr Justice Teare began by stating that the clause could not be construed to require the parties to "engage in friendly discussion ... for a continuous period of 4 weeks". The parties merely needed to engage in friendly discussion to the extent possible, and if no solution could be arrived at after 4 weeks (irrespective of the period the discussion lasted), the dispute may be referred to arbitration. Teare J also rightly pointed out that the notification of the desire to enter into the consultation was not a mandatory requirement, but merely an option available to the parties ("any party may").

The critical question then was whether this obligation to "first seek to resolve the dispute or claim by friendly discussion" was enforceable. In a somewhat surprising decision, Teare J concluded that the clause was enforceable, distinguishing decisions of the House of Lords, the Court of Appeal and four High Court decisions, relying instead on a decision of the New South Wales Court of Appeal. Teare J held that in order to bring a claim in arbitration, it was necessary for the parties to have sought to resolve the dispute by friendly discussion and for a period of 4 weeks to have elapsed since such effort was first made. On facts, Teare J held that this prerequisite was satisfied and therefore the arbitration claim had been validly brought.

The most interesting aspect of the decision however is the crucial role played by the Yam Seng reasoning in arriving at this conclusion – as will be discussed below (and in a following post), without the implication of ‘good faith’ the decision would have been fundamentally at odds with binding English precedent.

The locus classicus on the enforceability of agreements to negotiate is the House of Lords decision in Walford v Miles [1992] 2 AC 128. In Walford, the House of Lords held that a lock-out agreement (whereby one of the parties agreed not to negotiate or consider proposals from third parties) was unenforceable.

Lord Ackner’s judgment for the Court addresses the two discrete obligations pleaded by the claimant: (1) a negative obligation to not negotiate with any other party; and (2) a positive obligation to negotiate with the claimant in good faith. Lord Ackner held that the negative obligation could not be enforced because the agreement in question did not specify any time limit for its operation and held that the positive obligation could not be enforced because an obligation to negotiate in good faith is “inherently repugnant to the adverserial position of the parties when involved in negotiations”. In arriving at his decision on the positive obligation, Lord Ackner made several statements regarding the uncertainty of the obligation and the unworkability of enforcing such a subjective obligation in practice, which have since been relied on by several English courts in determining the enforceability of agreements to negotiate.

Against this backdrop, it is easy to identify the major distinction between the facts of Walford & Miles and Emirates – the negative obligation in Emirates was time-bound. What is more difficult however is to give effect to the positive obligation to “seek to resolve the dispute or claim by friendly discussion”. In the next post, we will discuss how Teare J gave effect to this obligation placing reliance on the NSWCA decision in United Group Rail Services v Rail Corporation New South Wales and, crucially, on Yam Seng.

Thursday, August 28, 2014

Foreign Investment in Rail Infrastructure

Following the liberalisation of foreign investment in the defence sector, the Department of Industrial Policy & Promotion, Government of India has issued Press Note No. 8 (2014 Series) that now permits foreign investment in the railway sector. The permitted scope of business in the sector is as follows:

Construction, operation and maintenance of the following:

(i) Suburban corridor projects through PPP, (ii) High speed train projects, (iii) Dedicated freight lines, (iv) Rolling stock including train sets, and locomotives/ coaches manufacturing and maintenance facilities, (v) Railway Electrification, (vi) Signaling systems, (vii) Freight terminals, (viii) Passenger terminals, (ix) Infrastructure in industrial park pertaining to railway line/sidings including electrified railway lines and connectivities to main railway line and (x) Mass Rapid Transport Systems.

This reform is significant because the legal regime transforms from one where no foreign investment was allowed in railway transport (except for mass rapid transport systems) to one where foreign investment is now allowed up to 100% under the automatic route. However, this is subject to any sectoral guidelines imposed by the Ministry of Railways. Moreover, in case of proposals involving foreign investment of more than 49% in sensitive areas from a security point of view, they must be taken before the Cabinet Committee on Security.

Although the reforms on foreign investment in the rail sector are far-reaching, on its face the press note seems to be limited to foreign direct investment (FDI) and does not seem to cater specifically to foreign portfolio investment (FPI) (as was the case in the press note on the defence sector).

NLS Business Law Review (Volume 1): Call for Submissions

[The following announcement is posted on behalf of the Editors of the NLS Business Law Review]

The NLS Business Law Review is an initiative by the National Law School of India University to recognise and foster academic research and scholarship in corporate and commercial law. The law review intends to examine the interface between the myriad regulatory frameworks that impact doing business in India, particularly in light of comparative international perspectives. The mandate of the NLS Business Law Review thus includes company law, securities and capital markets regulation, banking and finance, taxation, foreign investment, competition law, commercial dispute resolution, contract and commercial law, and employment law inter alia.

The NLS Business Law Review (NLSBLR) is now accepting submissions to its inaugural issue (Volume 1) under the following categories:

- Articles (6,000 - 10,000 words) are comprehensive publications that analyse important themes, and may adopt comparative perspectives.

- Essays (4,000 - 6,000 words) typically identify a specific issue, which may be of contemporary relevance, and present a central argument.

- Case Notes, Legislative Comments, Book/Article Reviews (1,500 - 3,000 words)

The call for submissions to Volume 1, which details the submission guidelines and policy of the journal, is available on our website (download available at The last date for submissions to Volume 1 is December 10, 2014. Submissions and clarifications may be emailed to

For more information and updates, please visit our website, and follow us on Facebook ( and Twitter (@NLSBLR).

Wednesday, August 27, 2014

Liberalisation of Foreign Investment in Defence

A few weeks ago, the Cabinet had announced the liberalisation of the foreign investment policy in the defence sector. Now, the Department of Industrial Policy and Promotion has issued the Press Note No. 7 (2014 Series) that implements the new policy. Some of the principal changes include the following:

(i)         Increase in the sectoral cap: The maximum foreign investment limit has been increased from 26% to 49%. However, the investment continues to be under the government approval route.

(ii)        Foreign Portfolio Investors: The scope and nature of permissible foreign investment has been considerably enhanced. Previously, only foreign direct investment (FDI) was allowed in the sector and foreign portfolio investment (FPI) was expressly disallowed. Now, FPI has been permitted within the overall composite foreign investment limit of 49%, which would include various types of foreign portfolio investors. However, there is a sub-limit whereby the aggregate FPI cannot exceed 24% in a company.

(iii)       Lock-in: The previous lock-in requirement of 3 years for non-resident investors has now been done away with.

The increase in the sectoral cap and the broadening of the types of foreign investment allowed would certainly put this sector in play. Considering the sensitivities in the sector, however, the local ownership requirements continue to operate strongly whereby the majority stake in the company must be ‘owned and controlled’ by domestic investors.

The Blue Paper and the Pink Paper: The Interpretation of Options

One of the most frequently encountered issues in the practice of commercial law is the construction of contractual notice requirements: a contract that confers on one of the parties the right to do something (eg exercise an option or a break clause) would ordinarily require that party to give notice to the other party. The consequences of failing to understand exactly what the notice requires and comply with it can be disastrous: for example, a tenant may lose the opportunity to exit an expensive lease in a falling market, an option-holder the opportunity to buy valuable property in a rising market and so on. The Court of Appeal has recently considered the principles governing the construction of clauses of this kind in Friends Life v Siemens.

The leading authority in this field is the classic speech of Lord Hoffmann in Mannai Investments. The facts of that case were beguilingly simple. A tenant with a 10-year lease of a property in Jermyn Street in London was allowed to exercise a break clause provided he gave notice to this effect to ‘expire on the third anniversary of the commencement date’ of the lease. The lease had been entered into on 13 January 1992. So the tenant should have given notice to expire on 13 January 1995. But it mistakenly gave notice to expire on 12 January 1995, confusing ‘first day of third year’ with ‘last day of second year’. Though what the tenant meant was obvious to the landlord (who was seeking to capitalise on the error), the judge and the Court of Appeal held that the notice was defective, particularly against the background principle that break clauses and notice requirements for options must be complied with strictly. In the House of Lords, allowing the appeal, Lord Hoffmann explained that the tenant had in fact complied strictly with the notice requirement because one does not confuse the ‘inherent’ meaning of words (if any) with the meaning the use of the words conveys to a reasonable person possessed of all the background knowledge the parties had.

Friends Life, at first sight, was a remarkably similar case. The tenant had taken a 25 year lease commencing in January 1999. It had one opportunity to exit this lease by exercising a break clause. Clause 19.2 provided that the tenant could exercise the break clause by:

giving the Landlord not more than 12 months’ and not less than six months’ written notice, which notice must be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954.

On 28 September 2012, the tenant purported to exercise this break clause by serving a notice in the following form:

…WE HEREBY GIVE YOU NOTICE, for and on behalf of the Tenant, that the Tenant intends to terminate the Lease 23 August 2013 in accordance with clause 19 of the Lease.

This notice, as is evident, was ‘expressed to be given’ in accordance with clause 19 of the Lease, rather than (as clause 19 required) ‘under section 24(2) of the Landlord and Tenant Act 1954’. It is obvious that the tenant’s intention is plain, as it was in Mannai: the landlord could not have understood the notice to mean anything other than that the tenant was exercising the break clause.

In these circumstances, a layman might be surprised to learn that there is even a debate to be had about whether the notice is effective or not. The Court of Appeal held, however, that the tenant had made a fatal mistake, and it is submitted that that is clearly correct, and consistent with Mannai. In analysing cases of this kind, it is important to distinguish between: (a) a clause that requires the notice-giver to communicate a message bearing a certain meaning to the recipient; and (b) a clause that requires the notice-giver to comply with some condition that is independent of the meaning of words. In Mannai, Lord Hoffmann gave a well-known example that illustrates the difference:

If the clause had said that notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease.

If the clause falls under category (a), the notice-giver can comply with it successfully even if it uses the ‘wrong’ words. In Mannai, the notice stated to expire on ‘January 13’ conveyed the meaning that it was to expire on ‘January 12’ because no reasonable representee could have thought in those circumstances that January 13 was the intended meaning. Notices of this kind are successful not because they ‘substantially comply’ with the contractual requirement: they comply with it fully and strictly. But this kind of reasoning is simply irrelevant if the clause in question falls under (b): the only way to comply with a requirement to send a notice on blue paper is to use blue paper. It is no good using pink paper even if the landlord knows that this was a mistake, and even if the message written on the pink paper was understood perfectly well by the landlord: the problem is the paper, not the message. Mannai and the cases that apply it, therefore, do not decide that ‘substantial’ compliance is enough: they decide that complete and exact compliance has been achieved even though the wrong words have been used.

In Friends Life, clause 19 required the tenant to give notice expressed to be under section 24(2) of the Landlord and Tenant Act 1954. This seems to be a clause under category (b) above: it does not relate to the meaning that the tenant must communicate to the landlord but to some form of words that the notice must use. At first blush, the conclusion that the notice is invalid seems obvious. But leading counsel for the tenant argued that clause 19 should be taken to have been complied with if the reason for the insertion of clause 19 has been complied with, that is, if the mischief clause 19 was intended to address has not been defeated because of the tenant’s mistake. Lewison LJ correctly rejects this argument in an instructive passage:

Attractively as that argument was advanced I cannot accept it. I accept, of course, that the purpose underlying a contractual provision may be highly relevant to what it means. But Mr Fancourt accepted that what the clause meant was that the notice had to say that it was being given under section 24 (2) of the Landlord and Tenant Act 1954. He did not contend that clause 19.2 should be interpreted in such a way that it meant no more than that the notice should satisfy the substantive provisions of section 24 (2). But compliance with the substantive provisions of section 24 (2) is not the same as complying with the formal requirements of clause 19.2. Moreover as Mr Wonnacott submitted since clause 19.2 required that the notice be “expressed” to be given under section 24 (2) it would not be enough to conclude that it conveyed that message implicitly. Here there was no compliance with the formal requirement of clause 19.2 that the notice be “expressed” in a particular way. There was quite simply no reference in the notice to section 24 (2) at all.

In other words, there is a difference between what clause 19 means, and why clause 19 was inserted: it is no good complying with the latter without complying with the former. The tenant’s obligation is to give notice in accordance with what clause 19 means, not to give notice that fulfils the reason for including clause 19 in the contract in the first place.

The importance of this case for the general law is that it highlights the value of a close analysis of whether a notice requirement relates to the meaning of words (thus governed by the Mannai rule) or to some form of words or condition independent of the meaning of words (thus governed by the pink paper example). Making a mistake about this can result in expensive litigation. As Lewison LJ says:

I do not accept that in the field of unilateral (or “if” contracts) there is any room for the notion of substantial compliance. As Diplock LJ said in United Dominions Trust the question is whether the relevant event has occurred. That question is to be answered “Yes” or “No”. It cannot be answered “Almost”. Either a purported exercise of an option satisfies both the formal and substantive provisions of the clause, or it does not. If it does not, then it is ineffective. In my judgment ours is such a case. I appreciate that that is a harsh result, but hard cases make bad law…The clear moral is: if you want to avoid expensive litigation, and the possible loss of a valuable right to break, you must pay close attention to all the requirements of the clause, including the formal requirements, and follow them precisely.

Monday, August 25, 2014

Are disputes in s. 397-398 petitions capable of being referred to arbitration?

A learned Single Judge of the Bombay High Court recently considered (in Rakesh Malhotra v. Rajinder Malhotra) the question of whether disputes before the CLB under ss. 397-398 and 402 of the Companies Act, 1956 are capable of being referred to arbitration. 

Patel J. concluded that having regard to the nature and source of the powers of the CLB, disputes in petition properly brought under ss. 397-398 are not capable of being referred to arbitration. His Lordship clarified that mala fide, vexatious, oppressive or “dressed up” petitions can be so referred. In other words, in petitions under ss. 397-398 read with s. 402, “… it is not enough for an applicant seeking a reference to arbitration merely to show that there exists an arbitration agreement. He must, in addition, establish before the CLB that the petition is mala fide, vexatious, and ‘dressed up’ and that the reliefs sought are such as can be resolved by a private arbitral tribunal…” 

The Court noted that there was a difference between what a civil court could do in a derivative action or shareholder action, and what a specially empowered authority such as the CLB can do. The powers in s. 402(a) to (g) were held to be of such expansive nature that no arbitral tribunal could be called upon to exercise such powers. It was argued before the Court that (a) the CLB always has the power to refer parties to a civil suit, and (b) in a civil suit, disputes within the ambit of an arbitration clause would necessarily have to be referred to arbitration, therefore (c) actions before the CLB were also referable to arbitration. This argument was not accepted; with the learned Single Judge characterizing the argument as an example of the fallacy of the undistributed middle. The learned Single Judge placed reliance on Sukanya, Booz Allen, Haryana Telecom and Bennett Coleman

It was further argued that in case the CLB finds that a petition before it is vexatious and ‘dressed up’, the only solution would be the dismissal of that petition. This argument was also rejected. It was held that what is not referable is a dispute properly within the ambit of s. 397-398 r.w.s. 402: however, if a petition is filed before the CLB which is ‘dressed up’ as an oppression/mismanagement petition to avoid an arbitration clause, that petition can be referred to arbitration and need not be dismissed outright. 

The judgment is available here.

Saturday, August 23, 2014

Proposal to Further Boost Secondary Market Disclosures

One of our pet peeves has been the considerable disparity in the primary market disclosure norms where SEBI requires extensive disclosures when a company undertakes a public offering and in the secondary market disclosures norms where companies have to make continuous disclosures post-listing. The secondary market disclosure norms are considerably weaker than those for the primary markets.

Hearteningly, having been cognisant of this disparity, SEBI has been progressively taking steps to uplift disclosure requirements in the secondary markets. Disclosures in the secondary markets are of two kinds. One is continuous disclosures such as quarterly reporting and annual reporting, and the other is episodic disclosures whereby the company is required to release information to the markets immediately upon the occurrence of any material event that may have an impact on its stock price. Earlier this year, SEBI issued a proposal to increase continuous disclosures by requiring companies to issued an annual information memorandum on a consolidated basis. This takes into account integrated disclosure methods of the kind adopted in other jurisdictions such as the US.

Now, SEBI has undertaken measures to strengthen the episodic disclosure requirement. In a "Discussion Paper on review of clause 36 and related clauses of the Equity Listing Agreement", it vastly expands the scope of episodic disclosures. The discussion paper sets out the underlying philosophy behind this action – to increase market efficiency by enhancing the timeliness and adequacy of the disclosures. In this existing avatar, clause 36 sets out a few circumstances when a listed company must make disclosure to the stock exchanges. They are not only limited to the most significant events, but they also leave a lot of flexibility to the companies to determine whether the events are material enough to merit disclosure. SEBI now proposes to have an elaborate list of events and circumstances when disclosure becomes mandatory. The idea appears to be to limit the discretion in the hands of companies and to (nearly) exhaustively list out situations for disclosures. This would bring about greater certainty and predictability both for companies and investors. Readers’ attention is drawn to the extensive listing of such events that SEBI has attempted in the discussion paper.

While there could be issues emanating from the technical details of the discussion paper (such as an attempted definition of materiality), on the whole this move is welcome and would aid in enhancing market efficiency as well as minimising the disparity between primary and secondary market disclosures.

Guest Post - Proposed Amendments to Arbitration Law: Part 2

[The following post is contributed by Prachi Narayan and Aditi Pal of Vinod Kothari & Company. They can be contacted respectively at and

This is a continuation of a previous post]

Powers of Tribunal and interim measures: Section 17 of the Act provides that the arbitral tribunal has the power to order interim measures of protection, unless the parties have excluded such power by agreement However, the Apex Court has held that the even though the tribunal is empowered to pass interim orders, the same cannot be enforced as orders of court as it is only section 9 of the Act, that expressly provides for courts’ powers to pass interim measures in case of arbitration. In light of the same, the Commission thus suggested amendments to section 17 that would not only provide teeth to interim orders of the arbitral tribunal but also provide for the due recognition and enforcement as “Court Orders”.

Arbitrability of fraud and complicated issues of fact: The issue of arbitrability of fraud has arisen on numerous occasions and there exist conflicting decisions of the Supreme Court on this issue. One set of decisions of the Supreme Court hold fraud and serious issues of allegations as “non-arbitrable”, while the others recently have in the interest of justice and equity expressly held them to be arbitrable. In the absence of a clear provision of the Act as to what constitutes an arbitrable issue and what does not and in order to rest the controversies, the Commission has suggested amendments to section 16 of the Act thereby making issues of fraud expressly arbitrable.

Neutrality of Arbitrators: One of the basic ingredients of any judicial or quasi-judicial adjudication is that it must be in accordance with principles of natural justice and fairness. In the context neutrality of adjudicating authorities including those of arbitrators, viz. their independence and impartiality, is critical and vital to the entire process of adjudication. Section 12(3) of the Act, provides that “An arbitrator may be challenged only if (a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality...”. However, the test is to identify such circumstances that lead or give rise to justifiable doubts with respect to conduct of the arbitrator in the arbitration proceedings. Further, there has been plethora of judgments of the Supreme Court on this subject matter saying that the independence of the arbitrators cannot be compromised at any stage of proceeding. The Commission has suggested, “There are certain minimum levels of independence and impartiality that should be required of the arbitral process regardless of the parties’ apparent agreement.” With a view to combat this issue, the Commission has suggested the following:

- Requirement of having specific disclosures by the arbitrator, at the stage of his possible appointment, regarding existence of any relationship or interest of any kind which is likely to give rise to justifiable doubts.

- Incorporation of a Schedule that would serve guide to determine whether circumstances exist which give rise to such justifiable doubts.

- Situations of family arbitrations or other arbitrations where a person commands the blind faith and trust of the parties to the dispute, despite the existence of objective “justifiable doubts” regarding his independence and impartiality.

Amendment to definition of "party": Arbitration is a consensual form of dispute resolution, with the arbitral tribunal deriving powers and authority on the basis of the “contract” or the “agreement” between the parties. Parties cannot invoke arbitration unless there exists an agreement between them. Further, this gives rise to a widespread consequence – it takes away the right of the party to the arbitration agreement to avail its remedies in a traditional courts for disputes covered by the arbitration agreement; and makes the consequent award binding, with a limited right of recourse. It is further noted here that the parties to the agreement are the ones bound by the award of the arbitrators and thus excludes from within its purview that are connected and are essential to the dispute. Taking a narrow interpretation of the term “party” to the agreement would not be satisfactory and thus the Commission has proposed to amend the definition of “party” accordingly.

Costs and Interest on sums awarded: Litigation in India is an expensive proposition and arbitration is no such exception to it. However, in order to fine-tune the same, the Commission recommended a new section to empower arbitral tribunals to award costs that are rational and realistic.

The issue on whether arbitral tribunals are authorized to award future interest is payable not only on the principal sum but also on the interest accrued till the date of the award has been a controversial one in absence of any express and clear provision/intent under the Act. The Commission has thus made efforts to clarify the scope of powers of the arbitral tribunal to award compound interest, in as much as to rationalize the default rate from the existing rate of 18% to a market based determination in line with commercial rates.

Other amendments

Place of Incorporation: An amendment has been proposed to the definition of “international commercial arbitration so that the test for determining the residence of a company is based on its place of incorporation and not the place of central management/control.

Definition of “Arbitration Agreement”:  The Commission has proposed that the arbitration agreement in question or dispute must envisage a “subject matter capable of settlement by arbitration.” This is done so as to give statutory recognition to the doctrine of arbitrability. Further amendments are suggested to extend the scope and bring within the purview those arbitration agreements also that are accomplished by way of electronic communication/means.

Forfeiture of statement of defence: Adjudication of disputes is delayed many a times due to dilatory tactics of the Respondent in communicating its statement of defence. In order to prevent this, the Commission has proposed amendments to section 25 (b) to include within the power of the arbitral tribunal the discretion to forfeit such a right of the respondent and proceed as undefended.


The Arbitration and Conciliation Act, 1996, even though in force for almost two decades, has failed in terms of its intrinsic deliverables due to inconsistencies and infirmities including those of high costs and delays. These inordinate delays as opposed to the basic objective of the Act of speedy justice put the alternative dispute regime at par with the traditional judicial regime. Even though traditional courts have to a major extent been pivotal in upholding the inherent objective of the Act, however, it often happens that arbitration related proceedings get caught up and lost in the huge list of pending cases, thereby frustrated the very object of quick alternative disputes resolution.

In order to straighten these infirmities and get in line with the international practices the amendments to the Act were indispensable and once enacted hope to surface and uphold real intent behind the alternative dispute resolution legislation.


- Prachi Narayan and Aditi Pal