Wednesday, September 3, 2014

Guest Post: Company Law Settlement Scheme – 2014

[The following guest post is contributed by Abhishek Dubey, who is a Senior Associate with BMR Legal. Prior to joining BMR Legal, Abhishek has worked with Amarchand & Mangaldas & Suresh A. Shroff & Co. and P&A Law Offices.]


The Ministry of Corporate Affairs has introduced a scheme for companies who have defaulted in making annual statutory filings with the Registrar of Companies (hereinafter “RoC”). The scheme offers to condone the delay in filing annual statutory documents with the RoC and grant immunity for prosecution in respect of such delayed filings. The scheme is named the “Company Law Settlement Scheme 2014” (hereinafter the “Scheme”). Under the Scheme, companies are permitted to file annual statutory documents that were due for filling until June 30, 2014.

The eForm CLSS-2014 for making filings under the Scheme was made available from September 1, 2014. The Scheme will remain in force up to October 15, 2014 and defaulting companies will have an opportunity to file their delayed filings until that date.

Objective of MCA for Introduction of the Scheme

The quantum of punishment (both penalty and imprisonment) for non-compliances under the Companies Act, 2013 (hereinafter “2013-Act”) has been considerably increased vis-à-vis the Companies Act, 1956.  

Further, the 2013-Act contains a specific provision for higher penalty in case of subsequent offenses. Section 451 of the 2013-Act prescribes that if the offense is committed on a subsequent occasion within a period of three years, in addition to any imprisonment prescribed for directors, the penalty amount shall be twice the amount of fine prescribed for such offense.

Most importantly, the 2013-Act makes a person, who is a director of a company which has not filed financial statements or annual returns for any continuous period of three financial years, ineligible for appointment as a director for a period of five years.

With the objective to provide the defaulting companies a prospect to escape the stricter provisions of the 2013-Act and provide the directors of such companies an opportunity to avoid disqualification, the Ministry of Corporate Affairs has rolled out the Scheme permitting delayed filing of annual compliances at a significantly reduced penalty amount. 

Permitted Delayed Filings & Reduced Penalty

A defaulting company is not permitted to make all of its contraventions good through this Scheme. The Scheme offers an opportunity to the defaulting companies to make delayed filings in respect of the following documents only:

(i)           Form 20B - Form for filing annual return by a company having share capital;

(ii)          Form 21A - Particulars of Annual return for the company not having share capital;

(iii)         Form 23AC, 23ACA, 23AC-XBRL and 23ACA-XBRL - Forms for filing Balance Sheet and Profit & Loss account;

(iv)         Form 66 – Form for submission of Compliance Certificate with the RoC; and

(v)          Form 238 - Form for Intimation for Appointment of Auditors.

While making the delayed filings under the Scheme, the defaulting companies have to pay the statutory filing fee as prescribed under the Company (Registration Offices and Fee) Rules, 2014 and, in addition, a reduced penalty of 25% of the total prescribed penalty for the contraventions (as opposed to full prescribed penalty amount).

Option of Obtaining Dormant Company Status or Striking-off the Name from Register of Companies

The defaulting “inactive” companies, while filing belated documents under the Scheme can also simultaneously either:

(i)           apply for obtaining dormant company status for a maximum period of 5 years, under Section 455 of the 2013-Act by filing e-form MSC-1 at 25% of the prescribed fee. Once a company is declared a dormant company under the 2013-Act, it is not required to comply with all the compliance requirements of the 2013-Act and is only expected to make minimum annual filings with the RoC; or

(ii)          apply for striking off the name of the company from the register of companies by filing e-Form FTE at 25% of the prescribed fee. However, for making an application to strike off the name of the company from the register of companies, inter alia, the following pre-conditions must be complied: (a) the company shall have NIL assets and liabilities (which may include NIL contingent liabilities); (b) the company shall not have any dues towards Income Tax or other government authorities. Therefore, companies having any outstanding tax demands or dispute/litigation with the tax department may not be able to file an application under the Scheme for striking its name off the register of companies.

The 2013-Act defines an “inactive company” as a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years.

In conclusion, the Scheme offers a good opportunity to the defaulting companies to make their defaults good by paying only 1/4th of the prescribed penalty and an occasion to the directors of such companies to avoid disqualification. However, the time window of only 45 day (i.e., from September 1, 2014 to October 15, 2014) looks very narrow and must be extended to achieve the objective of the Scheme

- Abhishek Dubey

Guest Post: CCI Order on Car Manufacturers for Anti-Competitive Conduct

[The following guest post is contributed by Ann Minu Jose, a lawyer working with the Competition Commission of India. Views expressed are personal.

The CCI Order discussed is available here


Information was filed under Section 19(1)(a) of the Competition Act, 2002 (“Act”) initially against 3 car manufacturers[1] alleging anti-competitive practices on part of the opposite parties (“OPs”). OP1 to OP3 were involved in the business of manufacture, sale, distribution and servicing of passenger motor vehicles in India and also operated/authorized/controlled the operations of various authorized workshops and service stations which were selling automobile spare parts, besides, rendering aftersale automobile maintenance services.

The informant alleged that the components and parts used in the manufacture of OP’s respective brand of automobiles were often sourced from independent original equipment suppliers (“OESs”) and other suppliers were restrained by the OPs from selling them in the open market. Such restriction on the OESs limited the access of such spare parts/components in the open market, thereby allowing the OPs to create a monopoly-like situation in spare parts for their respective brand of automobiles, and enabling the OPs to influence and determine the price of the spare parts/components.

The Director General (“DG”) investigated the market practices of all the automobile manufacturers or original equipment manufacturers (“OEMs”). During the course of the investigation, it was observed that other car manufacturers also indulged in similar practice. Vide Commission’s order dated 26 April 2011, the scope of the investigation was extended to 14 other opposite parties.

Order of the Commission:

1.         Jurisdiction- Commission not required to confine inquiry only to parties named in the information

The OPs argued that the scope of the inquiry was confined only to the 3 OPs named in the information. The Commission, on the basis of the judgment in CCI v. Sail[2] held that being an expert body, it is clothed with a duty to prevent practices having adverse effect on competition in the markets. Hence the Commission is mandated by law to examine the issues in a holistic and not in a piecemeal manner. In the present case, the direction of the Commission was with respect to alleged anti-competitive conduct by the said industry in general and not specifically qua the car manufacturers named in the information.

2.         Violation of Section 4 of the Act

2.1       Definition of Relevant market: The Commission held that there existed two separate relevant markets; one for manufacture and sale of cars and the other for the sale of spare parts and repair services in respect of the automobile market in the entire territory of India. The automobile primary market and the aftermarket for spare parts and repair services does not consist of a unified systems market since: (a) the consumers in the primary market (manufacture and sale of cars) do not undertake whole life cost analysis when buying the automobile in the primary market (as data required is either not available or the data is very complex) and (b) in spite of reputational factors[3] each OEM has in practice substantially hiked up the price of the spare parts[4] since the customers are ‘locked in’ the aftermarket due to high switching cost and depreciated value of the vehicle post registration.

2.2       Assessment of Dominance of OEMs: The Commission was of the view that each OEM is a 100% dominant entity in the aftermarket for its genuine spare parts and diagnostic tools and correspondingly in the aftermarket for the repair services its brand of automobiles.

Factors under Section 19(4): The Commission while considering factors under Section 19(4) noted that in terms of ‘market share of the enterprise’, each OEM is a monopolist player and owns a 100 per cent share of the market share of the spare parts and repair services aftermarket for their own brand of cars. As far as ‘dependence of consumers on the enterprise’ is concerned, the limited interchangeability of spare parts between the automobiles manufactured by various OEMs made each consumer completely dependent upon such OEM. With respect to ‘entry barriers’ under Section 19(4), the Commission noted that barriers to entry can include advantages peculiar to the dominant company and the technical compatibility of a consumable secondary product to the durable primary product act as such a barrier. Further, each OEM had also created barriers in the entry of independent repairers to the aftermarket of the repairs and maintenance of its brand of cars.

2.3       Abuse of Dominant Position: Each OEM through a network of contracts restricted the supply of genuine spare parts of models of automobiles manufactured by it to the aftermarket and imposed restrictions on their respective local OESs from supplying spare parts directly in the aftermarket. The Commission found the OEMs  to be indulging in anti-competitive practices resulting in contravention of section 4(2)(a)(i), 4(2)(a)(ii), 4(2)(c) and 4(2)(e) of the Act.

(a)        Denial of market access: The Commission held that the OEMs have violated Section 4(2)(c) of the Act. OEM, being a dominant player in the aftermarket for the supply of spare parts and diagnostic tools, through a network of contracts, limited the access of independent repairers and other multi brand service providers to genuine spare parts and diagnostic tools required to effectively compete with the authorized dealers of the OEMs in the aftermarket.

(b)        Unfair Price: The Commission was of the view that Section 4(2)(a)(ii) does not prohibit profit margins; only unfair prices have been prohibited. Unfair price means price which is unrelated to the ‘economic value’ of the product and that such price is being charged because of the enterprise’s capacity to use its market power in that relevant market to affect its competitors or consumers in its favour.

The Commission considered the decisions in British Horseracing Board v. Victor Chandler International[5] and General Motors Continental NV v. Commission[6] and noted that the fact that the OEMs are the only source of genuine spare parts compatible to its brand of automobiles in the aftermarket allows such OEMs to use its dominant position to reap trading benefits. The DG’s investigations revealed that all OEMs had substantially marked up the price of its spare parts by an average of 100% and in some extent to as high as 5000%. Such exploitative pricing conduct by each OEM is a manifestation of lack of competitive structure of the Indian automobile market and structural modification of the competitive nature of such market will itself induce market self-correcting features.

(c)        Leveraging: The Commission held that the OEMs are in violation of Section 4(2)(e) of the Act because they use their dominance in the relevant market of supply of spare parts to protect the other relevant market, i.e, after sales service and maintenance. The OEM and the authorized dealers allowed the use of genuine spare parts only for purpose of undertaking service and repairs at the workshop of the authorized dealers. Therefore, in most cases the owner of the automobile was completely dependent on the authorized dealer network of the OEMs and was not in a position to avail services of independent repairers. In addition to this, nearly all the OEMs had warranty clauses which effectively denied any warranty to the owners of automobiles if such owners availed the services of the independent repairers or other multi brand service providers. Further, none of the OEMs allowed their diagnostic tools, repair manuals etc., to be sold in the open market, thereby foreclosing independent repairers from the aftermarket for repairs and maintenance.

(d)        Intellectual property- The Commission noted that unlike Section 3(5), there is no exception to section 4(2) of the Act. Therefore, if an enterprise is found to be dominant pursuant to Explanation (a) to Section 4(2) and indulged in practices amounting to denial of market access; it is no defense to suggest that such exclusionary conduct is within the scope of intellectual property rights of the OEMs.

3.         Violation of Section 3 of the Act

It was noted that the OEMs enter into three types of agreements: (a) agreements with overseas suppliers; (b) agreements with OES and local equipment suppliers and (c) agreements with authorized dealers and analysis was done to determine whether these agreements and arrangements were prohibited under section 3(4) of the Act.

3.1       “Between” under Section 3(3) and “amongst” under Section 3(4): It was argued by some OEMs that an agreement relatable to section 3(4) cannot be a bilateral one and has to be an agreement between 3 or more persons, (i.e., multilateral) and that the provisions of the Act will apply to vertical agreements, i.e., agreement between the OEMs and the OESs or the OEMs and their authorized dealers, only when three (3) of more parties are present to an agreement. The Commission held that the Legislature did not intend to restrict the application of the provisions of section 3(4) of the Act to only multilateral agreements and that such an interpretation shall encourage enterprises to enter into anti-competitive vertical agreements by structuring such agreements as bilateral agreements.

3.2       Analysis of agreements/arrangements between the OEMs and their overseas suppliers: The DG alleged that it is possible that there was an internal arrangement/understanding between the OEM and their overseas suppliers restricting the latter from supplying spare parts directly to the Indian aftermarket in the nature of an exclusive distribution arrangement/understanding under section 3(4)(c) of the Act. The Commission, however, was unable to conclude the existence of these agreements within the meaning of section 3(4)(c) of the Act, because of insufficiency of evidence.

3.3       Analysis of agreements/arrangements between the OEMs and the OESs: The OEMs were procuring spare from the local OESs. Their dealing were vertical in nature and the Commission concluded that these agreements were having features of exclusive distribution agreement and refusal to deal as per the provisions of section 3(4)(c) and (d) of the Act.

(a)        Balance between factors in Section 19(3): The Commission observed that Section 19(3)(a)-(c) deal with factors which restrict the competitive process in the markets where the agreements operate (negative factors) while clauses (d)-(f) deals with factors which enhance the efficiency of the distribution process and contribute to consumer welfare (positive factors). Whether an agreement restricts the competitive process is always an analysis of the balance between the positive and the negative factors listed under section 19(a)-(f). Where an agreement, irrespective of the fact that it contains certain efficiency enhancing provisions, allows an enterprise to completely eliminate competition in the market, and thereby become a dominant enterprise and indulge in abusive exclusionary behavior, the negative factors should be prioritized over the positive factors.

(b)        Protection of OEM’s IPR: The Commission was of the opinion that the restrictions placed on the OESs adversely affects the competition in the automobile sector and falls within the mischief of Section 3(4) read with Section 3(1) of the Act. The OEMs submitted that the restrictions imposed upon the OESs were necessary to ensure quality control and protect the goodwill of the brand of the OEM. The Commission observed, inter alia, that the OEMs can, through its contractual agreements with the OESs, ensure that its intellectual property rights are not compromised and are protected. The OEMs can license their safety check methodology to their OESs for a royalty fee and can require that the OESs label the genuine spare parts sold by them directly in the aftermarket with appropriate labels to limit their liability. The Commission was of the view that the ultimate choice should be left with the consumers who may choose either an authorized dealer of the OEM or an independent repairer to purchase spare parts of repair services.

3.4       Availability of the IPR exemption under Section 3(5)(i) of the Act: Section 3(5)(i) allows an IPR holder to impose reasonable restrictions to protect his rights ‘which have been or may be conferred upon him under’ the specified IPR statutes mentioned therein.

(a)        Statues specified in Section 3(5)(i): The OEMs were unable to establish their claim of IPRs in the spare parts and the diagnostic tools to avail of the exemption provided in Section 3(5)(i) of the Act. Further, even if the parent corporation of the OEMs held such rights in the territories where such rights were originally granted, the same cannot be granted upon the OEMs operating in India by entering into a technology transfer agreement (“TTA”)[7], unless such rights have been granted upon the OEMs pursuant to the provisions of the statutes specified under Section 3(5)(i) of the Act. Consequently, such OEMs could not avail of the exemption provided in Section 3(5)(i) of the Act.

(b)        Necessary restrictions: The exemption under section 3(5)(i) allows an IPR holder to “impose reasonable conditions, as may be necessary for protection any of his rights”, thus qualified by the word “necessary”. The Commission held that the OEMs could contractually protect their IPRs as against the OESs and still allow such OESs to sell the finished products in the open market. Since the exception under Section 3(5)(i) of the Act was not applicable to the agreements between OEMs and OESs, the contravention found by the Commission under Section 3(4)(c) & (d) read with Section 3(1) of the Act was established.

3.5       Analysis of agreements/arrangements between the OEMs and the authorized dealers: The Commission was of the view that consumer’s choice should not be taken away in the guise of consumer protectionism. It held that by restricting access of independent repairers to spare parts and diagnostic tools and by denying the independent repairers access to repair manuals, the agreements entered into between OEMs and authorized dealers fell foul of the provisions of Sections 3(4)(b), 3(4)(c) & (d) read with section 3(1) of the Act.

4.         Conclusion and Penalty imposed by the Commission

The Commission noted that in both mature and the developing competition law regimes of the world, refusal to access branded or alternate spare parts and technical manuals/repair tools, necessary to repair sophisticated consumer durable products, such as automobiles, was frowned upon. The Commission concluded the order by observing that it is necessary to (i) enable the consumers to have access to spare parts and also be free to choose between independent repairers and authorized dealers and (ii) enable the independent repairers to participate in the aftermarket and provide services in a competitive manner and to have access to essential inputs such as spare parts and other technical information for this purpose.
The Commission in addition to imposing a penalty of about Rs. 2545 crores and a cease & desist order, inter alia, directed the OPs to put in place an effective system to make the spare parts and diagnostic tools easily available through an efficient network and allow OESs to sell spare parts in the open market without any restriction. Further no impediments were to be placed on the operation of independent repairers/garages. The Commission, through this order, also drew the attention of the government to the lack of suitable legislation pertaining to safety and standards relating to spare parts and after sales services.

Analysis of the order

This order creates many firsts for competition law jurisprudence in India. This is the first order of the Commission pertaining to the concept of ‘aftermarkets’ and in which an agreement under Section 3(4) of the Act was found to have an appreciable adverse effect on competition in India. There is an interesting interplay of Section 3(4) and Section 4 of the Act in the instant case, since dominance in the aftermarket for sale of spare parts and repair of automobiles is created through a series of agreements and arrangements of the nature prohibited under Section 3(4). The OEMs, through these vertical agreements and arrangements, in turn were abusing their dominance in violation of Section 4 of the Act, thus resulting in a vicious circle where the OES’ bargaining position is progressively weakened and the OEMs continue imposing restrictive clauses; further strengthening their dominance. This model is not self-correcting and hence interference of the Commission was appears to be necessary.

This is also the Commission’s first order to discuss the interface between IPRs and competition law. Competition law and IPR regime promote innovation and consumer welfare, albeit through different means. Innovation gives rise to competition, thus encouraging more innovation, and ultimately resulting in economic development of the country. The Commission, by only restricting a dominant enterprise from indulging in unfair prices and suggesting methods to sell finished goods in open market without compromising on OEMs’ IPR on spare parts and diagnostic tools, has strived to strike a balance between the objectives of IPRs and competition law.

Mr. Ashok Chawla, the Chairperson of the Commission, stated in an interview at an ASSOCHAM event that this order is an attempt to make the spare parts and maintenance market more broad-based, user-friendly and less expensive for the consumers. In the coming days, it will be interesting to see how this sector will reorganise and correct itself, in the light of this order, and whether the OESs, independent service providers and the end consumers can avail the benefits of a competitive market.

- Ann Minu Jose

[1] Honda Siel Cars India Ltd (“OP1”), Volkswagen India Pvt Ltd (“OP2”) and Fiat India Auomobiles Ltd (“OP3”)
[2]  (2010)10SCC744
[3] The OPs submitted the theory that reputational concerns in the primary market usually dissuade the manufacturer of the primary market product from charging exploitative prices in the aftermarket.
[4] In certain cases up to 5000% approx.
[5] [2005] EWHC 1074 (Ch)
[6] [1975] ECR 1376
[7] The Commission held that the OEMs, pursuant to a TTA, were holding a right to exploit a particular IPR held by its parent corporation and not the IPR right itself.

Monday, September 1, 2014

Oppression/Mismanagement and Arbitration Clauses

We had earlier briefly noted the decision of the learned Single Judge of the Bombay High Court in Malhotra v. Malhotra, where it was held that disputes in a petition properly brought under sections 397-398 of the Companies Act are not capable of being arbitrated. In essence, the learned Single Judge held that considering the nature and source of the oppression/mismanagement remedies and the scope of reliefs which can be granted by the CLB, petitions u/s 397-398 are not capable of being referred to arbitration. The Court further held, however, that if the petition is mala fide brought solely to defeat an arbitration agreement, then the same could be referred to arbitration.

Insofar as this latter holding is concerned (and assuming that petitions u/s 397-398 are otherwise not referable to arbitration), it is respectfully submitted that if a petition is brought u/s 397/398 solely to defeat an arbitration agreement or is otherwise vexatious or oppressive, that petition can well be dismissed outright. If it is so dismissed outright there may be no question of any reference to arbitration: nothing remains to be referred anywhere. However, it is respectfully submitted that the holding of the Court on the larger issue (that as a matter of law, petitions bona fide brought under s. 397-398 are not capable of being referred to arbitration) may require some further elaboration.

One may usefully contrast the approach of the Bombay High Court with that of the Court of Appeal in Fulham v. Richards. The Court of Appeal was concerned with the analogous question of whether unfair prejudice petitions can be referred to arbitration. We have discussed the decision in Fulham in detail earlier on this blog. The Court of Appeal affirmed the judgment of Vos J, holding that “… the determination of whether there has been unfair prejudice consisting of the breach of an agreement or some other unconscionable behaviour is plainly capable of being decided by an arbitrator and it is common ground that an arbitral tribunal constituted under the FAPL or the FA Rules would have the power to grant the specific relief sought by Fulham in its s.994 petition. We are not therefore concerned with a case in which the arbitrator is being asked to grant relief of a kind which lies outside his powers or forms part of the exclusive jurisdiction of the court. Nor does the determination of issues of this kind call for some kind of state intervention in the affairs of the company which only a court can sanction. A dispute between members of a company or between shareholders and the board about alleged breaches of the articles of association or a shareholders’ agreement is an essentially contractual dispute which does not necessarily engage the rights of creditors or impinge on any statutory safeguards imposed for the benefit of third parties…

While it is true to say that remedies u/s 402 are wider than what an arbitral tribunal can grant, that in itself may not mean that every petition u/s 397-398 necessarily invokes those reliefs and is therefore incapable as a matter of law of being referred to arbitration. The approach in Fulham, at first glance, appears distinct from the approach in Malhotra. Fulham appears to leave open some flexibility depending on the nature of the particular dispute and the nature of the reliefs sought. While the approach in Malhotra (if applied strictly to hold that petitions u/s 397-398 are not at all capable of arbitration) does have the advantage of certainty, that advantage is to some extent negated by the Court leaving open a window to argue that petitions are mala fide and "dressed up" and solely brought to evade an arbitration clause. It may well be possible to hold that where the reliefs are such as can be granted by the arbitral tribunal, then the petition u/s 397-398 is "dressed up" and hence is capable of being referred to arbitration. It remains to be seen how the exceptions laid down by the Court in Malhotra will be interpreted in future: if they are interpreted widely (without insisting on strict demonstration of mala fides, for instance) it may well be that the two approaches can ultimately be reconciled. 

Resources on the Securities Laws (Amendment) Act, 2014

[One of our readers has helpfully shared various resources in connection with the latest legislative amendments relating to the powers and functions of SEBI, which might be of wider interest]

The Securities Laws (Amendment) Act, 2014 received the assent of the President on the 22 August, 2014 and was published in the Gazette of India on 25 August, 2014. The debates from Lok Sabha and Rajya Sabha including the statement of Finance Minister providing interpretation of certain provisions such as Section 11AA on Collective Investment Schemes are available at following sources:  

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.