Provided on Request only. Private and...

Provided on Request only. Private and confidential.


Srinivasa Raghavan & Anindya Ghosh*

The Bharat Aluminium Co. Vs. Kaiser Aluminium Techni-cal Services, Inc. judgment (“BALCO Judgment”) of the Supreme Court of India (“Supreme Court”) has removed all the anomalies regarding the applicability of the Part I of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) to international commercial arbitrations outside In-dia. The Supreme Court revisited the doctrine laid down in its previous judgments and has reinstated the territo-rial principle adopted by UNCITRAL.

The Arbitration Act is divided into four parts; out of which only Part I and Part II is of relevance in this context. Part I of the Arbitration Act lays down the procedure for arbitra-tion where the place of arbitration is in India. Whereas, Part II deals with the recognition and enforcement of for-eign arbitration awards when place of arbitration is out-side India.

Previously, the Supreme Court, in its judgment Bhatia International Vs. Bulk Trading S.A1 (“Bhatia International Judgment”), had ruled that in cases of international com-mercial arbitrations held outside India provisions of Part I of the Arbitration Act would apply unless the parties by agreement have, expressly or impliedly, excluded all or any of its provisions, thereby, empowering the Indian courts to assume jurisdiction in international commercial arbitrations held outside India. Further, by virtue of the judgment of the Supreme Court in Venture Global Engi-neering Vs. Satyam Computer Services Ltd2. (“Venture Global Judgment”), Section 34 of the Arbitration Act, which allows an Indian court to set aside a domestic arbi-tration award, was found to be applicable to international

NO MORE INTERVENTIONS OF INDIAN COURTS IN FOREIGN SEATED INTERNATIONAL COMMERCIAL ARBITRATIONS – CRAFTING INDIA TO BE A PRAGMATIC CHOICE AS THE SEAT?

commercial arbitration held outside India, provided, its applicability had not been excluded either expressly or impliedly by the parties.

The aforesaid judgments were viewed largely by the for-eign investor community as defeating the very purpose of arbitration as an ‘alternate dispute resolution mecha-nism’, resulting in routine challenges to international arbitral awards and substantial delays in enforcement of such awards. The BALCO Judgment has reversed the above position and has restored the principle of territori-ality and party autonomy criterion.

Highlights of the BALCO Judgment:

Part I is not applicable to international commercial arbi-tration held outside India

The Supreme Court held that omission of the word “only” in Section 2(2) of the Arbitration Act does not detract from the territorial scope of its application as embodied in Article 1(2) of the UNCITRAL Model Law. The scheme of the Arbitration Act makes it abundantly clear that the territorial principle, accepted in the UNCITRAL Model Law, has been adopted by the Arbitration Act. Accord-ingly, Part I of the Arbitration Act would have no applica-tion to international commercial arbitrations held outside India, irrespective of whether the law governing the con-tract was Indian law or otherwise .

* Srinivasa Raghavan, Partner, and Anindya Ghosh, Associate, IndusLaw. 1(2002) 4 SCC 1052(2008) 4 SCC 190


No overlapping between Part I and Part II of the Arbitra-tion Act

Supreme Court held that it is clear from the provisions of the Arbitration Act that there cannot be any overlap-ping between Part I and Part II. The provisions in Part II cannot be said to be supplementary to Part I. The two parts are mutually exclusive of each other. Part I is not applicable to international commercial arbitration held outside India. The territoriality principle of the Arbitration Act precludes Part I from being applicable to a foreign seated arbitration, even if the agreement purports to pro-vide that the arbitration proceedings will be governed by the Arbitration Act.

Indian courts do not have the power to grant an interim relief:

The Supreme Court disagreed with the conclusions of Bhatia International and Venture Global Judgments and ruled that Indian courts do not have the power and juris-diction to grant interim relief in international commercial arbitrations held outside India under Section 9 (which falls under Part I) or any other provision of the Arbitration Act, since the applicability of Part I is limited to arbitra-tions which take place in India.

Prospective overruling

To avoid uncertainty and confusion the Supreme Court has also ruled that its decision will only apply to arbitra-tion agreements entered into after this judgment i.e. after September 6, 2012. Therefore, parties to international commercial arbitration agreements, executed prior to this judgment, would be entitled to avail of provisions of Part I of the Arbitration Act and approach Indian courts for

reliefs and remedies even if the seat of arbitration were outside India. However, based on the ratio of the Bhatia International Judgment (which held the field till BALCO Judgment) obviously such option to approach Indian courts will be available only if the agreement expressly or impliedly does not exclude application of Part I of the Arbitration Act.

Indian courts do not have the power to set aside a foreign seated international arbitral award under Section 34

Regulation of arbitration consists of four steps (a) the commencement (b) the conduct (c) the challenge to the award and (d) the recognition or enforcement of the award. Part I regulates arbitrations at all the four stages. Part II, however, regulates arbitration only in respect of commencement and recognition or enforcement of the award. The Supreme Court pointed out that Part I deals with all stages of the arbitrations but only those which take place in India and that Part II does not consist of any provisions which regulates the conduct of arbitration or the challenge to the award since Part II deals with foreign awards. In view of the foregoing, it was held that the regu-lation of conduct of arbitration and challenge to an award, where the seat of arbitration is not India, would have to be done by the courts of the country in which the arbitra-tion is being conducted. Such a court shall be then the supervisory court possessed of the power to annul the award. The Supreme Court further held that the Arbitra-tion Act does not confer jurisdiction on the Indian courts to entertain a challenge to an international commercial award made outside India. Consequently it was held that applicability of Section 34 of the Arbitration Act dealing with challenges to awards is limited to the awards made in India only.


Seat

The Supreme Court clarified that the choice of another country as the seat of arbitration inevitably imports an acceptance that the law of that country relating to the conduct and supervision of arbitrations will apply to the proceedings. It would, therefore, follow that if the arbitra-tion agreement is found or held to provide for a seat / place of arbitration outside India, then even if the contract specifies that the Arbitration Act shall govern the arbitra-tion proceedings, Part I of the Arbitration Act would not be applicable or shall not enable Indian courts to exercise supervisory jurisdiction over the arbitration or the award. The Supreme Court clarified that in cases where the par-ties designate a foreign country as the seat of arbitration, but however, at the same time, chose the (Indian) Arbitra-tion Act as the law governing the arbitration proceedings, it would only mean that the parties have contractually im-ported from the Arbitration Act, those provisions which are concerned with the internal conduct of their arbitra-tion and which are not inconsistent with the mandatory provisions of the procedural law of the country which is the seat of arbitration. This position necessarily followed from the fact that Part I applied only to arbitrations having their seat / place in India.

Implication:

Till now Indian parties to international commercial ar-bitration agreements were comfortable agreeing to have the seat of arbitration outside India knowing that they could still have the alternative of moving Indian courts either for interim reliefs, or for challenging the award. By virtue of the BALCO Judgment since the seat of the arbitration shall determine the court having supervisory jurisdiction, now, the parties to international commercial arbitration electing the seat of arbitration outside India cannot even contractually agree to vest such powers or jurisdiction with Indian courts. From the perspective of foreign parties, post Bhatia International Judgment, in order to avoid the likelihood of Indian courts assuming jurisdiction during or after the arbitration proceedings, it was quite a prevalent practice to specifically exclude Part I of the Arbitration Act in the international commercial arbitration agreements. BALCO Judgment has rendered such requirement of specific exclusion redundant for all international commercial arbitration agreements to be ex-ecuted after September 6, 2012.


In this context, it would be interesting to carry out a brief analysis of the implication of the BALCO Judgment on several hypothetical situations:

Situation 1 An international commercial arbi-tration with seat of arbitration out-side India, law governing the con-tract is Indian law and the contract is silent about the law governing the arbitration procedure.

By virtue of the BALCO Judgment, the seat of the arbitration shall determine the applicable curial law/ law governing the arbitration. Therefore, if the seat of the arbitration is for example England the English procedural law i.e English Arbitration Act, 1996 shall govern the arbitration proceedings. Accordingly, the courts in England shall have supervisory jurisdiction over such arbitration proceedings. The law governing the contract shall have no implication on the curial law. Irrespective of the fact that the law governing the contract is not English law in this case, the curial law applicable shall continue to be the English law. The current position is a significant departure from the previous position. Previously, according to the principle of the Bhatia International Judgment, in such a situation the Part I of the (Indian) Arbitration Act would have applied as the parties have not excluded its applicability and as also the law governing the contract is Indian Law. However, now after BALCO judgment such principle will no more be applicable.

Situation 2 An international commercial arbi-tration with seat of arbitration out-side India, Law governing the con-tract is foreign law and the contract is silent about the law governing the arbitration procedure.

Similarly, in this scenario, the law governing the arbitration shall be the law of the seat of the arbitration and the courts of the seat of the arbitration will exercise supervisory jurisdiction over the arbitration proceedings. Recourse to Indian Courts for interim reliefs, challenges to the award, would not be permissible.

Situation 3 An international commercial ar-bitration with seat of arbitration outside India, the law governing the contract is Indian law and the arbitration is conducted by an arbi-tration institution/centre

The seat and the curial law shall be determined as per the relevant rules of the institutional arbitration. For example rules of the Singa-pore International Arbitration Centre (“SIAC”) or the London Court of International Arbitration (“LCIA”) clearly state that parties to arbitra-tion agreement are free to choose the seat, failing which seat of such arbitration shall be the place as designated by the rules. SIAC rules specify Singapore and LCIA rules designate London as the seat of arbitration in the event parties to arbitration have not chosen the seat. Consequently, the respective courts at Singapore and London shall have supervisory jurisdiction over the arbitration proceedings. Since


the parties have decided to conduct the arbitration in accordance with the relevant rules of the institutional arbitration, law governing the contract shall have no implications on the seat or curial law applica-ble to the arbitration proceedings. This argument has been previously recognized by the Supreme Court in its judgment Yograj Infrastruc-ture Ltd. Vs. Ssang Yong Engineering and Construction Co. Ltd .

Situation 4 An international commercial ar-bitration with seat of arbitration outside India, the law governing the contract is foreign law and the arbitration is conducted by an arbi-tration institution/centre.

Likewise, the seat and the curial law applicable shall be determined as per the relevant rules of the institutional arbitration. Law governing the contract shall have no implications on the seat or curial law ap-plicable to the arbitration proceedings.

Situation 5 An international commercial arbi-tration with seat of arbitration in In-dia, the law governing the contract is a foreign law and the arbitration agreement is silent regarding the law governing the arbitration pro-ceedings.

It is observed by the Supreme Court in BALCO judgment that Part I applies only to arbitrations having their seat / place in India.Therefore since the arbitration is taking place in India, the law governing the arbitration shall be the (Indian) Arbitration Act and the courts in India will have supervisory jurisdictions over the arbitration proceedings.

Situation 6 Where the arbitration is taking place in India and the law govern-ing the contract is foreign law and the arbitration is conducted by an institutional arbitration.

The outcome shall be determined as per the relevant rules of the in-stitutional arbitration rules. Rules of SIAC, LCIA and International Chambers of Commerce (“ICC”) provide parties option to choose the seat/place of the arbitration. In view of the fact that the parties have chosen the seat of the arbitration to be India, Indian courts will have supervisory jurisdiction over the arbitration proceedings.


Indeed, the BALCO Judgment aims at establishing the party autonomy principle and prima facie appears to be beneficial to foreign parties. But the underlying fact is that it does significantly impair foreign parties. In ar-rangements like distributorship contracts, franchisee agreements, joint ventures and contracts involving li-censing of proprietary rights, transfer of technology or similar other transactions where foreign parties may have to injunct actions sought to be done in India, or seek for some protective measures over assets located in India and where the Indian party may not have much foreign presence, if the seat of the arbitration is outside India, Indian courts would not have any sort of jurisdic-tion for granting interim relief. In such circumstances even if the foreign courts were to grant any interim re-liefs, enforceability of such interim orders in India would be potentially problematic. The effective execution of any interim reliefs, granted by the courts of the seat of arbi-tration, with regard to any subject within India remains a solicitous impediment. Hence one cannot presume that foreign companies would necessarily be overjoyed with the BALCO Judgment and would choose a seat outside India for arbitration. It would be advisable that prior to choosing a seat of arbitration outside India, thought be given to the nature of disputes that can potentially arise from the transaction, the need for interim reliefs in such cases, whether the law of the seat of arbitration (if outside India) would provide for grant of such interim reliefs, whether there could be potential problems in enforcing interim orders if granted by non-Indian courts, etc.

On such analysis one can easily foresee foreign compa-nies being readily agreeable to have the seat of arbitra-tion in India even while choosing a foreign law to govern the contract.


Suneeth Katarki & Uthara Priyadharshini*

Introduction

Section 28 of the Indian Contract Act, 1872 renders agreements void which are in restraint of legal proceed-ings on grounds of public policy. This section classifies such agreements as:

| Agreements by which a party is restricted absolutely from enforcing his rights arising under or in respect of a contract, or which limits the time within which he may thus enforce his rights (S. 28(a))

| Agreements which extinguish the rights of any party, or discharge any party from any liability under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights. (S. 28(b))

Clause (b) to this section was added in the year 1997 by way of an amendment (“Amendment”). This Amendment was in pursuance of the 97th Report of the Law Commis-sion of India. This article is an endeavour to analyse how the position of law has changed after this Amendment and the impact of the same on various kinds of contracts.

Position prior to 1997

Prior to the Amendment, Section 28 consisted only of clause (a) which invalidated agreements restricting a par-ty absolutely from enforcing his rights or which limited the time within which such rights may be enforced. Thus,

NECESSITY OF “RIGHT-EXTINGUISHMENT” CLAUSES IN CONTRACTS

*Suneeth Katarki, Partner, and Uthara Priyadharshini, Associate, In-dusLaw.4Since private equity contracts are of recent origin, judgments ex-amining the validity of such clauses are available only in relation to contracts of insurance and arbitration.

5AIR 1997 SC 2049.6(1913) ILR 38 Bom 344.

clauses providing for extinguishment of rights if not ex-ercised within a specified period were not hit by this sec-tion and the courts showed no hesitation in upholding the same. Clauses of this kind are used in several con-tracts, particularly relating to insurance, private equity investment, mergers and acquisition (“M&A”) and those providing for reference to arbitration4. One such typical clause discussed in the landmark judgment of National Insurance Co. Ltd. v. Sujir Ganesh Nayak and Co. & An-other5 is as follows:

“Condition No. 19-In no case whatever shall the company be liable for any loss or damage after the expiration of 12 months from the happening of loss or the damage unless the claim is the subject of pending action or arbitration.”

It is evident that this clause does not merely bar the en-forcement of the right arising under the contract on the expiration of the specified period, but extinguishes the right in itself. This distinction was the reasoning given by the courts for upholding such clauses prior to the Amendment.

In one of the earliest cases on this section, the Bombay High Court in Baroda Spinning & Weaving Co. Ltd. v. The Satyanarayan Marine and Fire Insurance Co. Ltd. 6held that such a condition was not within the scope of this section since the section spoke only about enforcement of a subsisting right and not a right which stood extin-guished on the repudiation of the claim and the action not having been commenced within the stipulated period of three months. A similar view was taken by various courts in the country thus, upholding such extinguishment


clauses. The celebrated judgments of the Supreme Court in this regard are Vulcan Insurance Co.Ltd. v. Maharaj Singh7, Food Corporation of India v. New India Assur-ance Co. 8and National Insurance Co. Ltd. v. Sujir Ganesh Nayak and Co. & another9.

It appears that such clauses were upheld based on the distinction that existed between “right” and “remedy”. The judgment in the case of National Insurance Co. Ltd. v. Sujir Ganesh Nayak and Co. & another10 is worth stat-ing in this regard:

“…an agreement which in effect seeks to curtail the peri-od of limitation and prescribes a shorter period than that prescribed by law would be void as offending Section 28 of the Contract Act. That is because such an agreement would seek to restrict the party from enforcing his right in Court after the period prescribed under the agreement expires even though the period prescribed by law for the enforcement of his right has yet not expired. But there could be agreements which do not seek to curtail the time for enforcement of the right but which provides for the forfeiture or waiver of the right itself if no action is com-menced within the period stipulated by the agreement. Such a clause in the agreement would not fall within the mischief of Section 28 of the Contract Act. To put it differ-ently, curtailment of the period of limitation is not permis-sible in view of Section 28 but extinction of the right itself unless exercised within a specified time is permissible and can be enforced. If the policy of insurance provides that if a claim is made and rejected and no action is com-menced within the time stated in the policy, the benefits flowing from the policy shall stand extinguished and any

subsequent action would be time barred. Such a clause would fall outside the scope of Section 28 of the Contract Act. This, in brief, seems to be the settled legal position.”

Raison d’être of the Amendment

Before getting into the rationale behind the Amendment, it is necessary to understand the rationale behind inser-tion of such clauses in contracts. As already mentioned above, it can be seen that such clauses are used mainly in contracts of insurance, private equity investment, M&A and also in arbitration agreements. The necessity of such clauses in insurance has been explained in various deci-sions. In the already cited case of National Insurance Co. Ltd. v. Sujir Ganesh Nayak and Co. & another11, while concurring with the decision given in Food Corporation of India v. New India Assurance Co12. it was held as fol-lows:

“Such clauses are generally found in insurance contracts for the reason that undue delay in preferring a claim may open up possibilities of false claims which may be dif-ficult of verification with reasonable exactitude since memories may have faded by then and even ground situ-ation may have changed. Lapse of time in such cases may prove to be quite costly to the insurer and therefore it would not be surprising that the insurer would insist that if the claim is not made within a stipulated period, the right itself would stand extinguished. Such a clause would not be hit by Section 28 of the Contract.”

Thus, it can be seen that such clauses have a purpose in the insurance industry. It is in the interest of both the insurer and the insured that claims must be made when

7AIR 1976 SC 287.8AIR 1994 SC 1889.9Supra 2.10Ibid.11Ibid.12Supra 5.


the matters are fresh as it is only then that they can be verified efficiently. Undue delay not only encourages false claims, but also leads to loss of important evidence. This can be ensured only by mandating the insured to make a claim within a specified period from the date of occur-rence of the loss.

As regards arbitration, clauses requiring the parties to refer the dispute to arbitration within a period specified therein are frequently used. The weight of judicial pro-nouncements lean towards holding such a clause also as invalid due to operation of Section 28(b). 13 However, in our opinion, such a clause may not be hit by Section 28 because the right to get a matter settled by an arbitrator is merely a contractual right and not a statutory one. Hence, where it is created by a contract, it can be extinguished by the same. Further, even where the right to approach an ar-bitrator stands extinguished by such a clause, the parties always have the option of approaching the courts of law.14

The Law Commission had discussed the unamended section in detail in its 13th Report in the year 1958. Since commercial contracts were not much in vogue then, it could not take the aforesaid reasons into consideration. The Report concluded that since it is a well recognised principle that an agreement providing for relinquishment of rights and remedies is valid, but one providing for re-linquishment of remedies only falls within the mischief of Section 28, no change was required. This section was again analysed by the Law Commission in the year 1984 in its 97th Report. However, the conclusion arrived at this time was different. It opined that the section should be so amended that clauses providing for extinguishment of rights on the expiry of a specified period are also brought

within its ambit. It based its reasoning on the following grounds:

| The distinction as evolved by the courts between “right” and “remedy” is too subtle. It may be sound in theory, but not in practice.

| It might be used to defeat the cause of economic jus-tice as such clauses are usually inserted in contracts where the parties enjoy unequal bargaining power. By providing for a clause extinguishing the right (and not merely the remedy), the party in a superior position can achieve something which could not have been achieved by merely barring the remedy.

| Under the present law, a more radical and serious con-sequence-the abrogation of rights-becomes permissible, while a less serious device-the extinction of the mere remedy-becomes impermissible.

Based on this recommendation, the 1997 Amendment was passed and clause (b) was thereby inserted. The Government cannot unilaterally or arbitrarily extinguish the rights of a private citizen merely because it has execu-tive authority over such legislative items. Such execu-tive action needs to be supported by some authority of law in this regard.15 Thus, when law requires the State to take precautions before extinguishing a citizen’s rights, a private party should not be allowed to easily extinguish another’s rights under a contract. Though the reason-ing seems to be sound, it is not known from the Report whether the views of insurers or others employing such clauses in their contracts were considered.

13Few of such judgments are Sunil Goyal v. Haryana Agriculture Marketing Board, 2011 (2) Arb. LR 251 (P&H); Chander Kant & Co. v. The Vice-Chairman, DDA & Ors., Arbitration Petition No. 246 of 2005 decided on 26th May 2009 by Delhi High Court (Division Bench); Pandit Construction Co. v. DDA & Anr., 2007 (3) Arb. LR 205 (Del).

14Similar view has been expressed by the Bombay High Court in Axios Navigation Co. Ltd. v. Indian Oil Corporation Ltd., 2012 (2) All MR 881.15Ram Jawaya Kapur v. State of Punjab, (1955)2SCR225.


Position after 1997

After amendment, the distinction between barring of rem-edy and extinguishment of right has disappeared. Both the clauses have been rendered void by the amended sec-tion. Though there is no Supreme Court decision on the point, there has been a plethora of High Court decisions (most of them from the Delhi High Court) striking down extinguishment clauses as invalid in view of the newly amended section. Some of the often cited judgments in this regard are Hindustan Construction Company v. DDA16 ; Kalyan Chand Goyal v. Delhi Development Au-thority 17; J.K. Anand v. DDA & Anr.18 ; Union of India v. Simplex Concrete Piles India (P) Ltd 19.; Explore Com-puters Pvt. Ltd. v. Cals Ltd. & Anr.20 and Union of India through Textile Commission v. Bhagwati Cottons Ltd., G. P. B. Fibres Ltd. & Indusind Bank Ltd. 21

In the case of Explore Computers Pvt. Ltd. v. Cals Ltd. & Anr.22, it was held:

“The amendment to Section 28 was made with effect from 8.1.1997 and it is not disputed that the cause of action in respect of the subject matter in the present suit arose after the amendment. Sub-clause (b) of the amended Section 28 deals with the clauses which extinguish the rights of any party thereto or discharge any party from any liability being void under the said section. Thus, the scope of Section 28 has been widened whereby clause (a) deals with the position prior to the amendment alone and clause (b) is in addition.

54. In view of the amended section coming into force, the distinction sought to be carved out earlier by the legal pronouncements would not hold good.”

Impact of the Amendment

Insurance companies would be the ones most affected by this Amendment. As already stated above, clauses pro-viding for extinguishment of rights if the claims are not made within a specified period, are of utmost importance to insurers. By rendering such conditions void, the legis-lature has put them in a disadvantaged position.

Commenting upon the fate of this Amendment, Mulla23

observes:

“A distinction must also be made between an agreement restricting any party from enforcing his right, and one re-quiring him to make a claim or assert his right within a specified time, or prescribing a period for operation of the contract. Thus, a contract requires that a party to it as-sert his rights or requiring a party to make a claim within a certain time, will not be affected by the amendment.”

The Apex court decision in the case of Food Corporation of India v. New India Assurance Co.24 has been quoted by the author in this regard. Decided prior to the Amend-ment, this decision endeavours to create a difference be-tween making of a claim (i.e. assertion of a right) and filing of a suit (i.e. enforcement of a right). It says that an extinguishment clause in the policy does not prevent the insured from filing a suit within the three year period stipulated by the Limitation Act, 1963 provided the claim is made within the period specified in the policy (say 6 months or 12 months). In other words, such a clause requires only the claim to be made within the specified period and in no way affects the right of the insured to file a suit in respect of the contract within the statutory limitation period.

161999 (1) Arb. LR 272 (Delhi).171999 (3) Arb. LR 79 (Delhi).182001 (59) DRJ 380.192003 (3) Arb. LR 536 (Delhi).20131 (2006) DLT 477.212008(3)ALLMR63.

22Supra 17.23Mulla & Pollock, Indian Contract and Specific Relief Acts, p. 675, Nilima Bhadbhade (Ed.) 14th edition, 2012.24Supra 5.


It is seen that insurers have not yet refrained themselves from incorporating such extinguishment clauses in their contracts. Many insurance contracts contain clauses which require:

| the insured to make a claim within a specified period (usually 15 days) from the date of occurrence of the loss; and also,

| in case of dismissal of such a claim, the insured to make it the subject matter of a suit in a court of law within a specified period25 from the date of disclaimer. On fail-ure to do so, the clause deems the claim to have been abandoned for all purposes and hence, non-recoverable thereafter. In other words, it discharges the insurer from any liability with respect to such claim. This falls within the mischief of the amended Section 28.

It is not known whether insurance companies are contin-uing to use the extinguishment clauses post-Amendment based on the Food Corporation decision. However, this alone cannot be used to support such clauses as the de-cision suffers from certain drawbacks:

| There is ambiguity in the separate concurring judgment written by Sahai. J. At one place, he says that making a claim is only assertion of the right26. However, in another, he says that enforcement commences from making of de-mand (claim) and ends with vindication of the same.27

(emphasis supplied)

| Even assuming for the sake of argument that the afore-said ambiguity does not exist, the difference between ‘as-

sertion’ and ‘enforcement’ is too subtle to be of any prac-tical use. This is because there is no reason why making of a claim is to be considered only as assertion of a right and not enforcement of the same. Therefore, there can be no hard and fast rule in this regard and this would only lead to more litigation. This would in fact make the law more complicated and thus, go against the object behind the Amendment which was to remove the hardships as-sociated with the previous law.

It is interesting to also examine the impact of this Amend-ment on commercial contracts particularly share sub-scription agreements under which investments are made into companies, or agreements under which companies or businesses are acquired such as share purchase agreements and business transfer agreements. Often, in these contracts the indemnity clauses generally provide for discharge of liability if the right is not exercised within a certain specified period. These are often provided by restricting all representations and warranties, breach of which leads to indemnification for a limited period of say one year. While there was reasonable basis to argue ear-lier that these extinguished the right itself and not merely its enforcement and therefore valid, post-amendment these clauses come under greater scrutiny.

Prima facie, it would appear to be void now as hit by Section 28 in its amended avatar. However, the question now being debated is whether such clauses actually ex-tinguish any rights on the expiry of a specified period so as to restrict any party from enforcing his rights or are merely extinguishment of contractual rights itself. Again, making such a distinction would seem to be futile and defeating the purpose of the Amendment. The spirit of the Amendment seems to indicate that such distinctions must

25Usually within 12 months, which is lesser than the three-year period provided under the Limitation Act.26Paragraph 17 of the judgment.27Paragraph 19 of the judgment.


not be made and the clause should therefore be deemed void. The only logic provided for such extinguishment of rights is that any claim made after the specified period is incapable of being clearly ascertained which argument also seems fallacious. Surely if that be the case, then the same argument may be pleaded in every type of contract and no sanctity would attach to the actual law of limita-tion. Other than insurance contracts, there does not seem to be any basis to give a particular type of commercial contract any special treatment. Insurance contracts which are anyway placed differently as being contracts of utmost good faith may be the only arguable exception. However such clauses continue to be negotiated and incorporated into documents particularly in investment and acquisi-tion contracts and until there is some ruling by the courts on this issue, the debate will continue.

Therefore, if indeed it is felt desirable to give special treatment to insurance contracts, instead of complicat-ing the law any further by relying on this pre-Amendment decision, Section. 28 can be suitably further amended by carving out an exception to the following effect:

“Exception 3-Nothing in this section shall affect the va-lidity of a clause in a contract of insurance requiring the insured to make a claim to (not institute a suit against) the insurer in respect of the loss suffered within the time specified therein.”

Conclusion

In view of the above discussion, it appears that the pur-pose of the Amendment was to render void all clauses providing for extinguishment of rights or discharge of liability on the expiry of a specified period, without get-

ting into any legal niceties. As already mentioned, if it is felt desirable to place insurance contracts on a special pedestal, it is best to provide for a specific exception to it under Section 28. Even in contracts of insurance, the purpose of efficient investigation of veracity of the claim would be served if the insured is required to make a claim alone within the period specified in the contract. It is not necessary to require him to file a suit also within a period lesser than that provided under the Limitation Act, 1963. Therefore, the need of the hour is a further amendment to the section in the form of an exception as aforesaid which would free the insurance companies of the existing legal restriction.


RESERVE BANK OF INDIA (“RBI”) UP-DATES:

1. Issue of shares under FDI scheme not permitted for import of second hand machinery.

In lieu of RBI circular dated June 30, 2011 (“Circular”) which amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Out-side India) Regulations, 2000 (“FEMA 20”) more particu-larly in relation to permitting the issue of shares for the import of capital goods, there was an ambiguity in rela-tion to issuance of equity shares/ preference shares inter alia for import of second-hand machineries, under the Government. The RBI has vide notification dated January 10, 2013, amended the Circular by clarifying that equity/preference shares is not permitted to be issued for im-port of second hand machineries and should be restricted inter alia to import of capital goods (excluding second-hand machineries).

The above amendment has been brought about to restrict import of used capital goods to protect domestic manu-facturers and increase their competitiveness.

2. Revised Guidelines on Ready Forward Contracts in Corporate Debt Securities

The RBI has by notification dated January 7, 2013, re-vised the existing guidelines on Ready Forward Contracts in Corporate Debt Securities. Previously, repo transac-tions (“Repo”) was permitted in corporate debt securities vide the directions issued through the notification dated January 8, 2010 (“Directions”). The RBI has through the current notification made the following revisions to the

REGULATORY UPDATES

Direction:

(a) Repo in corporate debt is to be permitted on commer-cial papers, certificates of deposit and non-convertible debentures of less than one (1) year of original maturity.

(b) The minimum haircut, applicable on the market value of the corporate debt securities prevailing on the date of trade of 1st leg has been revised as under:

AAA AA+ AAPrevious Haircut 10% 12% 15%Current Haircut 7.5% 8.5% 10%

3. Credit Default Swaps (CDS) permitted for unlisted Corporate Bonds.

The RBI has by notification dated January 7, 2013, re-vised the existing guidelines on Credit Default Swaps (“CDS”) for Corporate Bonds as follows:

(a) In addition to listed corporate bonds, CDS are per-mitted on unlisted but rated corporate bonds for issues other than infrastructure companies.

(b) Users are permitted to unwind their CDS bought position with original protection with seller at mutually agreeable price or FIMMDA price.

(c) CDS is to be permitted on securities with original maturity up to one (1) year, like Commercial Papers, Cer-tificates of Deposit and Non Convertible Debentures with original maturity less than one (1) year as reference / de-liverable obligations.


4. External Commercial Borrowing (“ECB”) limit for NB-FC-IFCs under the automatic route enhanced.

As per the current Master Circular on External Commer-cial Borrowings and Trade Credits, the Non-Banking Fi-nancial Companies categorized as Infrastructure Finance Companies (NBFC-IFCs) are permitted to avail ECB, in-cluding the outstanding ECBs, up to 50 per cent of their owned funds for on-lending to the infrastructure sector as defined under the ECB Policy, subject to their complying certain conditions specified therein. The RBI vide its no-tification dated January 7, 2013, has decided to enhance the ECB limit for NBFC-IFCs under the automatic route from 50% to 75% of their owned funds, including the outstanding ECBs. NBFC-IFCs proposing to avail ECBs beyond 75% of their owned funds would require the ap-proval of the Reserve Bank of India. The amended ECB policy is in force with immediate effect.

5. Revision in existing investment limits in plant and machinery / equipment for lending to Micro Enterprises in the 40:20 proportion.

The RBI has by notification dated December 31, 2012, revised the existing investment limits in plant and ma-chinery/ equipment for lending to Micro Enterprises in the 40:20 proportion with immediate effect. The revised limits are as follows:

(a) 40 percent of total advances to micro and small en-terprises sector should go to Micro (manufacturing) en-terprises having investment in plant and machinery up to Rs. 10,00,000/- (previously Rs. 5,00,000/-) and micro

(service) enterprises having investment in equipment up to Rs. 4,00,000/- (previously Rs. 2,00,000/-);

(b) 20 percent of total advances to micro and small enterprises sector should go to Micro (manufacturing) enterprises with investment in plant and machinery to Rs. 10,00,000/- (previously Rs. 5,00,000/-) and up to Rs.25 lakh, and micro (service) enterprises with invest-ment in equipment above Rs. 4,00,000/- (previously Rs. 2,00,000/-) and up to Rs.10, 00,000/-.

6. Definition of ‘Infrastructure Loan’ for NBFCs amended.

The Reserve Bank of India has by notification dated De-cember 28, 2012, amended the definition of infrastructure loan contained in paragraph 2(1)(viii) of the Non-Bank-ing Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 (con-tained in Notification No. DNBS. 192/DG(VL)-2007 dated February 22, 2007) . The said amendment has been made to harmonise the definition of infrastructure lending for NBFCs with that of banks.

7. Foreign investment in India by SEBI registered FIIs in corporate debts enhanced.

The RBI has by notification dated January 24, 2013, de-cided that the limit for FII investment in corporate debt in any sector other than infrastructure sector shall be USD 25 billion (previously USD 20 billion). However, the en-hanced limit of USD 5 billion shall not be available for in-vestment in Certificate of Deposits (CD) and Commercial Papers (CP). Accordingly, the total corporate debt limit


stands enhanced from USD 45 billion to USD 50 billion with sub-limit of USD 25 billion each for infrastructure and other than infrastructure sector bonds. In addition, Qualified Foreign Investors (QFIs) shall continue to be eligible to invest in corporate debt securities (without any lock-in or residual maturity clause) and Mutual Fund debt schemes subject to a total overall ceiling of USD 1. This limit of USD 1 billion shall continue to be over and above the revised limit of USD 50 billion for investment in corporate debt.

The revised limit of USD 25 billion for corporate bonds for other than infrastructure sector shall be available for investment by FIIs and the long term investors like Sov-ereign Wealth Funds (SWFs), Multilateral Agencies, En-dowment Funds, Insurance Funds, Pension Funds and Foreign Central Banks registered with SEBI. As a measure of further relaxation, it has also been decided to dispense with the condition of one year lock-in period for the limit of USD 22 billion (comprising the limits of infrastructure bonds of USD 12 billion and USD 10 billion for non – resident investment in IDFs) within the overall limit of USD 25 billion for foreign investment in infrastructure corporate bond. The residual maturity period (at the time of first purchase) requirement for entire limit of USD 22 billion for foreign investment in infrastructure sector has been uniformly kept at 15 months. The 5 years residual maturity requirement for investments by QFIs within the USD 3 billion limit has been modified to 3 years original maturity.

8. CRR reduced for Scheduled State Co-operative Bank and Regional Rural Banks.

The RBI has by circulars dated January 29, 2013 and January 30, 2013 notified that the average Cash Reserve Ratio (CRR) required to be maintained by every Sched-uled State Co-operative Bank / Regional Rural Bank and by every Scheduled Primary (Urban) Co-operative Bank, respectively, shall be 4.00 per cent of its net demand and time liabilities from the fortnight beginning February 9, 2013. The CRR of above banks have therefore been re-duced by 25 basis points, from 4.25 per cent to 4.00 per cent.

9. Companies engaged in hotel sector permitted to avail ECB for repayment of Rupee Loans.

The RBI had by its circular dated June 25, 2012, allowed companies in the manufacturing and infrastructure sector to avail of ECBs for repayment of Rupee loan(s) availed from the domestic banking system and / or for fresh ru-pee capital expenditure, under the approval route. Such companies are permitted to avail ECBs upto a maximum limit of USD 10 billion. Further, individual companies are entitled to avail ECBs upto a maximum limit of 50 per cent of the average annual export earnings realized dur-ing the past 3 (three) financial years. The RBI has vide its circular dated January 21, 2013 decided to include Indi-an companies in the hotel sector (with a total project cost of INR 250 crore or more), irrespective of geographical location as eligible borrowers under this scheme under the approval route.


1. Amendments to guidelines on sale of shares through Offer For Sale (OFS) mechanism

SEBI vide its circular dated 25 January 2013 has amended the “Comprehensive guidelines on sale of shares through Offer For Sale (OFS) mechanism”. The guidelines pro-vide as under:-

(a) Sellers’ eligibility: All promoters/promoter group en-tities of top 100 companies by market capitalization in any of the last four completed quarters would be allowed to participate in the scheme instead of the earlier posi-tion which allowed participation based on average market capitalization of the last completed quarter.

(b) Timelines: As against both orders and funds, the guidelines provide that now orders are required to be placed on the exchange within trading hours. Funds may be placed later.

(c) Order placement: Orders with 100% margin paid up-front by institutional investors and non-institutional in-vestors can be modified/cancelled during trading hours. Orders with no upfront margin can only have upward re-vision in quantity or price. Earlier, modification/ cancel-lation of orders/ bids were not allowed during the last 60 minutes of the duration of the offer.

(d) Settlement: Now for all bids with 100% margin, set-tlement will take place on T+1 day (one trading day fol-lowing the trade date). For institutional investors with no margin, settlement will be as per secondary market rules.

SECURITIES EXCHANGE BOARD OF INDIA (SEBI) UPDATES:

(e) Default pay-in: In case of default in pay-in by any investor, 10% of the order value shall be charged as penalty from the investor and collected from the broker. Earlier, the penalty was to be forfeited and the remaining amount to be returned to the bidder.

2. Listed companies prohibited from dealing in their own securities in the secondary market through Employ-ee Welfare Trusts.

SEBI has by way of a circular dated January 17, 2012 amended the ESOP Guidelines. SEBI noticed that cer-tain listed companies have established employee welfare trusts (EWT) to deal in the securities of the company in the secondary market and its issuance to employees. With an apprehension that such EWT route could be used by listed entities for inflating, depressing, or causing fluctuations in the security prices, SEBI has by way of this circular amended the ESOP Guidelines and Equity Listing Agreement to prohibit listed companies from ac-quisition of their own securities from secondary market. A new Clause 22B has been inserted in ESOP guidelines inter alia providing that no acquisitions of securities shall be permitted from secondary market under ESOP scheme. Further, by insertion of new Clause 35C in the Listing Agreement, SEBI has provided that the compa-nies already having an ESOP Scheme whereby dealing in securities in the secondary market is contemplated, shall also need to comply with the amended ESOP Guidelines.


GAAR deferred, Shome Committee recommendations ac-cepted

After examining the final report submitted by the Shome Committee, the Government has accepted certain key recommendations therefrom and under a press release dated January 14, 2013 issued a statement containing key changes to the provisions related to General Anti-Avoidance Rules (GAAR) (“Press Release”) which inter alia include the following:

(a) GAAR shall now be implemented from April, 2016 as against April, 2014;

(b) The definitions of “associated person” and “connect-ed person” will be combined and there will be only one inclusive provision defining a ‘connected person’ ensur-ing greater clarity in determining the nature of relations between parties to a transaction;

(c) Section 96 which defines “impermissible avoidance agreement” (“IAA”) shall be amended to now provide that only those arrangements, which has a main object of tax avoidance shall be hit by GAAR. Earlier even arrange-ments with one of the main objects being tax avoidance were covered. Necessarily, it can be presumed that an ar-rangement with substantial business purpose shall not be hit by GAAR.

(d) The Assessing Officer shall now be obligated to is-sue show cause notice to Assessee before invoking pro-visions of Chapter X-A.

TAX UPDATE:

(e) Approving Panel shall now consist of a Chairperson-Judge of a High Court; one member of the Indian Reve-nue Service not below the rank of Chief Commissioner of Income-Tax; and one member who shall be an academic or scholar in the field. Earlier all persons manning the panel were to be officers of the department.

(f) Directions of the Approving Panel shall be binding on both the department and the Assessee.

(g) It has been provided that Investments made before August 30, 2010 shall be grandfathered.

(h) GAAR will not apply to such FIIs that choose not to take any benefit under an agreement under section 90 or section 90A of the Income-tax Act, 1961. GAAR will also not apply to non-resident investors in FIIs. This was one of the key recommendations of the Shome Committee which has been accepted by the government. This shall help in ensuring that multiple taxation of the same in-come is avoided.

(i) A monetary threshold of INR 3,00,00,000 (Indian Ru-pees Three Crores only) has been created for attracting the provisions of GAAR. Also, where only a part of the arrangement is impermissible, the tax consequences of an ‘impermissible avoidance arrangement’ will be limited to that portion of the arrangement.

(j) Limits shall be provided for actions to be taken by various authorities in relation to GAAR. The Ministry has also stated that the administration of Authority for Ad-vance Ruling with respect to GAAR shall be strengthened.


(k) Also, auditors shall be obligated to report any tax avoidance arrangement which they come across in the process of their audit.

On the downside, the Press Release fails to address a key Shome Committee recommendation which provided that GAAR should not override treaty, where treaty itself has anti-avoidance provisions. Also the penal provisions regarding non-compliance of certain obligations includ-ing the reporting requirement by auditors, has not been clarified as of now. As is well known, the language or drafting of provisions will be a key factor in interpretation of statutes as it finally is and hence it is imperative that we wait for the final language of the amendments to be notified before drawing any certain conclusions or inter-pretations thereon.


DECISION OF THE BOMBAY HIGH COURT:

Non-consideration of crucial evidence and submissions made by parties, a ground to set aside arbitral award

Zee Entertainment Enterprises Limited v. Klassic Studios & Films Private Limited, (Arb. Petition No. 556 of 2012)

Date of Decision: January 8, 2013

The petition was filed by Zee Entertainment Enterprises Limited (ZEE) under section 34 of the Arbitration and Conciliation Act, 1996 (“Act”) challenging an arbitral award, wherein part claims of Klassic Studios & Films Pvt. Ltd. (KLASSIC) were allowed. The disputes arose out of KLASSIC’s claim for damages allegedly caused due to the termination by ZEE of an agreement for the produc-tion of a television serial.

One of the contentions raised by ZEE was that the arbitra-tor, while granting KLASSIC’s claim, had not allowed set off of certain amounts on the ground that it had not been proved through any evidence led by ZEE, though payment of it had been admitted by KLASSIC’s witness. The High Court accepted ZEE’s contention and held that this part of the award was bad in law and in violation of principles of natural justice for not having dealt with material and cru-cial evidence forming a part of the cross examination. It was held that once the respondent witness had admitted a fact, then there was no need for the Petitioner to examine any other witness independently to prove the fact again. The High Court also held that this does not amount to

CASELAW UPDATES

reappraisal of evidence (which the High Court is not per-mitted to do under Section 34 of the Act) but is a case of non-consideration of material and crucial evidence and of submissions made by parties and therefore interfer-ence of the court under Section 34 is necessitated. The rest of the award, in relation to the other amounts and rate of interest awarded, was upheld.

DECISION OF THE DELHI HIGH COURT:

Delhi- 6: Movie does not hurt any community’s senti-ments

Rakeysh Omprakash Mehra & Anr v. Govt. of NCT of Delhi & Anr, MANU/DE/0001/2013

Date of Decision: January 02, 2013

The Petitioners filed this petition seeking for quashing of an FIR registered against them under the Scheduled Castes and the Scheduled Tribes (Prevention of Atroci-ties) Act, 1989 and The Protection of the Civil Rights Act, 1955. The Petitioners directed and produced a Hindi movie titled “Delhi-6” (the ‘film’), which was also passed by the Central Board of Film Certification (the ‘CBFC’). The Respondents alleged that the character enacting the role of a lady sweeper had been insulted and thereby the entire Balmiki Samaj had been insulted.

The Court agreed with the Petitioner’s contention that the film sought to convey a social message to the public at large and was not intended to hurt the sentiments of any


section of or the society at large. Therefore a film that car-ries a message that a social evil is evil cannot be banned on the ground that it depicts the social evil – it is done to illustrate that social evil. The Court noted that the test to determine whether a film falls foul of freedom of expres-sion guaranteed by the Constitution is to view the film in its entirety and examine its overall impact and not con-sider individual scenes and this decision is best left to the sensibility of a multi member expert tribunal like the CBFC. Therefore once a film has been cleared by CBFC, there is no reason why it should be considered as hurting any community or caste’s sentiments. After viewing the entire film, the Court was of the view that in fact the film in its entirety actually generates sympathy for the Sched-uled Castes and Scheduled Tribes and does not in any way preach or approve the practice of untouchability. On the question of quashing an FIR under investigation, the Court reiterated the position of law that this can indeed be done, though in rare and compelling circumstances. In light of all the above findings, the FIR was quashed.

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