"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well."

-Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Monday, June 11, 2018

Party Autonomy and NOM Clause in the UK SC: Rock Advertising v MWB Business Exchange

The true scope of the elusive but all pervasive party autonomy doctrine was at the heart of the debate in the case of Rock Advertising Limited v. MWB Business Exchange Centres Limited. On the day when Kings XI fell just three runs short of the 186 runs scored by Mumbai Indians, the UK Supreme Court delivered two opinions in the case settling and at the same time unsettling the law on the validity of oral amendments to a contractual provision which prohibited oral modifications to an agreement (No Oral Modification or NOM Clause). While the two opinions coincided in the outcome, the reasoning and the scope of the party autonomy doctrine in the context of validity of oral amendments to NOM clauses were vastly different. While one opinion preferred commercial certainty, the other side sought to strike a balance between certainty and reality. No wonder the leading opinion began with these lines: "Modern litigation rarely raises truly fundamental issues in the law of contract. This appeal is exceptional." (Para 1)

In this post we will provide a descriptive comment of the decision of the UK Supreme Court of the majority opinion in the case and in a later post, we will look at the minority view and the Indian law on the subject.

Facts

Rock Advertising Limited ("Rock") entered into an agreement with MWB Business Exchange Centres Limited ("MWB"), a company engaged in the business of operating serviced offices. Rock, the licensee, was supposed to pay a monthly consideration to the licensor, MWB. Clause 7.6 of the agreement, which was the term in issue, read:
This Licence sets out all of the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.” (emphasis supplied)
Unfortunately, Rock defaulted in payments to MWB. Rock's sole director spoke over phone with an employee of MWB regarding the dues. The director contended that the MWB's employee agreed to vary the agreement by in line with the revised schedule of payment proposed by him, which MWB's employee denied. 

The Legal Proceedings

Thereafter MWB locked out Rock from the premises owing to Rock's failure to pay the arrears, then terminated the licence agreement,and sued for the arrears in the County Court. In the proceedings, Rock filed a counterclaim for damages for wrongful exclusion from the premises. 

Although the County Court found that (a) there was an oral agreement between the Director of Rock and the employee of MWB and (b) MWB's employee had the ostensible authority to enter into such an agreement, the court concluded that Clause 7.6 (quoted above) made such a variation agreement ineffective. Note that clause 7.6 (emphasised above) requires that a variation agreement should be agreed, in writing and signed on behalf of both the parties before they took effect.

The Court of Appeal decided in favour of Rock by holding that the oral agreement to revise the payment schedule amounted to an agreement to dispense with the requirements of Clause 7.6. On the contention that there was no consideration in the purported agreement, the Court held that the consideration was supported by consideration: that Rock would make payments as per the revised schedule of payments. MWB appealed to the Supreme Court.

Judgement of the UK Supreme Court

As noted above, there are two opinions, one by Mr Justice Sumption (with whom Ms Justice Hale, Mr  Justice Wilson and Mr Justice Lloyd-Jones agreed) and the other one by Mr Justice Briggs. We'll summarise the majority opinion in this post:

The Leading Decision by Justice Sumption

The reasoning part of Justice Sumption's opinion began by acknowledging the baseline legal position that "law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation." Next, the judge gave the analogy of statutes requiring certain agreements to be in specific forms and stated that there is no principle prohibiting parties from doing what a statute does by adopting formal requirements by contract..

The judge noted three reasons why No Modifications Clauses are recognised despite common law placing virtually no formal requirements for a valid contract:

  • Such clauses prevents attempts at undermining agreements by informal means;
  • It avoids disputes between the parties as to whether there was a modification in the agreement and the exact nature of the modification;
  • A level of formality provides a level of internal control to the corporations on authority to effect such contractual modifications.
The judge felt that such "legitimate commercial reasons" do not act against any public policy and that case law disregarding them were entirely "conceptual", that is to say, did not serve substantial practical purpose. The conceptual justification to disregard NOM clauses was that parties who could agree on such clauses could also undo them.

The judge took aid from the international legal systems such as the UNIDROIT Principles of international Commercial Contracts and the Vienna Convention on Contracts for International Sale of Goods regarding the absence of formal requirements for contracting and the paradoxical recognition of NOM clauses. These were taken to suggest that there was "no conceptual inconsistency between a general rule allowing contracts to be made informally and a specific rule that effect will be given to a contract requiring writing for a variation."

Drawing the attention to Entire Agreement clauses, the judge took note of the coupling of such clauses with NOM clauses and found the commonality between these provisions: contractual certainty. The court "clarified" the legal position on the enforceability of entire agreement clauses by holding that such clauses may not operate where there is a collateral agreement (whose effect is against the entire agreement clause) which is supported by its own consideration, then most standard form Entire Agreement clauses would not have the effect of preventing such agreement's enforceability. However, the court clarified that if otherwise, the entire agreement clause would be given effect to.

As regards the parties' right to orally modify the agreement, the court held that it was not that oral modifications were forbidden; they simply agreed that oral modifications were forbidden. This is not to mean a party who made a representation so as to make the other rely on that representation and act on it can go without accepting the consequences. But for such a situation to arise, there should have been atleast "some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and something more would be required for this purpose than the informal promise itself".

On the basis of the above principles, the Judge Sumption concluded on facts that the oral variation was invalid as it did not satisfy the requirements of Clause 7.6 of the Agreement. The opinion of Judge Sumption left the question as to whether the consideration was adequate enough for MWB to accept a less advantageous schedule of payments to a larger bench and on another occasion.

More in the next post on this topic. The decision can be accessed from this link.

Friday, May 11, 2018

Specific Performance v Substituted Performance: Critique of the Proposed Amendments to Specific Relief Act

So far, we've had about five posts on the Specific Relief (Amendment) Bill, 2018 (pdf) providing a virtually unbridled right to specific performance:


In this last post on the subject, we discuss why the amendment goes much beyond the Expert Committee's Report (pdf) on Specific Performance and is likely to lead to draconian results, especially for innocent promisors.

Whether the Bill Prioritises Specific Performance over Damages?

The Bill seeks to amend Section 10 such that the court's discretion is removed and specific performance is mandatorily ordered except in certain limited exceptions. Section 14. The heading of Section 10 is also sought to be changed from "Contracts which can be specifically enforced" to "Specific performance in respect of contracts". The Expert Committee also recommended the heading to be changed but the Committee's recommendation was to change it to "Specific performance and injunctions in respect of contracts". (See para 18.9).

As stated in an earlier post, the proposed amendment does not make specific performance as the first remedy but provides an option to the victim of the breach to either seek specific performance, or claim damages, or even claim the costs and expenses of substituted performance. In other words, the victim of the breach is empowered to decide the remedy of her choice. 

Why does the Bill not Balance the Interests of the Victim with that of the Promisor?

In the previous post, we had argued that Contract law does a fine balancing act between the interests of the victim whose contract was broken and at the same time ensures that the promisor who broke the contract is not made to pay the price and suffer as a consequence of the breach: contract law's focus is not to punish the breaching party but to satisfy the expectations of the promisee. We request readers to access the previous post for the discussion on this fine balancing act, which was discussed with an example.

It is true, as was acknowledged in the previous post, that Indian contract law does a bad job of compensating the victim and within reasonable time. Hence, the recommendation of the Expert Committee to provide for specific performance is fine. Recognising the fine balancing act that we're talking about, the Committee has also sought to protect this equilibrium: A perusal of Para 18.13 of the Committee's Report would reveal that the second ground that is sought to be a ground for refusing specific performance is where the party seeking specific performance could reasonably obtain substituted performance from another source on comparable terms, including price and time. Please recollect the lengthy example we discussed in the previous post where it was possible for Gowri to obtain substituted performance from Shyamu but even so Gowri sought to obtain specific performance from the original promisor Ramu, which would have resulted in disastrous consequence (and possibly loss of life) for the promisor, and which the law could not have intended.

The Committee's recommendation is in line with international practice. For instance, Article 7.2.2(c) of the UNIDROIT Principles of International Commercial Contracts provides that specific performance cannot be sought where the promisee "may reasonably obtain performance from another source". A similar provision can be found in Article 9:102(d) of the Principles of European Contract Law. (See, Para 12.2.2. of the Committee Report.

Why is the New Section 14 beyond the Committee's Recommendations and Erroneous?

Despite the recommendations by the Committee, the Government has sought to exclude this requirement and provide instead that specific performance cannot be claimed where a party to the contract "has obtained substituted performance". The difference between the clause recommended by the Committee and the one in the proposed Section 14(a) is that the proposed one excludes only those contracts for which substituted performance has been obtained while the one recommended by the Committee excluded cases where substituted performance "could be reasonably" obtained. Courts would have had the leeway to eliminate the injustice likely to be caused by an order for specific performance had the recommendation of the Committee been accepted. Instead, the Government chose to adopt a draconian provision that could result in substantial injustice, as in the case of Gowri discussed in the previous post.

There is absolutely no reason or justification why the Government did what it did: disregard the fine balancing act sought to be maintained by the Expert Committee and replace with a provision is draconian and is likely to cause substantial injustice. This is especially true especially in cases involving poor, uneducated or illiterate litigants. Considering the corruption in the legal system, it would do well to provide such safeguards as recommended by the Committee. Also, the recommendation by the Committee would only further genuine cases of efficient breach theory (see this post) where transaction costs of obtaining substituted performance are reckoned in the calculation.

There is also another problem with Section 14 of the 2018 Bill. It states that the "following contracts cannot be specifically enforced" but Section 14(a) does not strictly speak of a contract but of a situation "where a party to the contract has obtained substituted performance..."  

How to Remedy this Defective Provision?

There are two options to remedy this situation: the first option is for the Government to introduce amendments Clause 14(a) and incorporate the recommendations of the Expert Committee. The Bill is not yet an enactment; it has only been passed by Lok Sabha. The second option is to be exercised by the courts; in case the Bill in its current form is passed, the courts should construe Section 14(a) such that "has obtained substituted performance" would be read as "has or could reasonably obtain substituted performance." 

"Court May Refuse Specific Performance"

In Section 14, the Committee recommended: "(1) The Court may refuse to grant specific performance or injunction in the following cases, and in no others..." Note that the term used is "may". This means that even if the grounds in Section 14(1) for refusing specific performance, the court could still enforce specific performance. However, this is not found in the Bill. Section 14 of the Bill simply starts off with the expression: "The following contracts cannot be specifically enforced..." Thus, it appears that the Government avoided the phrase used by the Committee. But does it mean that the Government chose to reject the Committee's recommendation on the issue? We are not too sure.  

Committee's Report and the Bill does not go the Whole Way

In Para 11.9, the Committee recommended that Section 14 should have limited grounds on which specific performance could be refused. The Committee stated: "Such change will cast the burden of proving the grounds of refusal on the party against whom such relief is sought.." However, the Committee did not clearly cast the burden on the promisor while making its recommendations on the text of the amendments. Section 10 merely proposed that the victim would be entitled to specific performance, "unless relief can be refused under sections 14, 16 or 41..." (see Para 18.10). However, even this Section does not clarify who has to prove the availability of a reasonable source for substitute performance. Similarly Section 14 of the Bill also does not clearly cast the burden. 

Of course, owing to Section 103 of the Indian Evidence Act, 1872, it could be argued that the the burden of proof of the availability of reasonable substitute would  be on the person who would wish to be believe in its existence. It could also be argued that the plaintiff/ victim cannot be expected to prove the negative: that no reasonable substituted performance is available. On the other hand, the facts regarding substituted performance could very well be especially within the knowledge of the victim/ plaintiff, who then has to establish that no reasonable substitute was available as per the mandate of Section 106 of the Indian Evidence Act, 1872.

We are not very sure if the Expert Committee sought to leave it for courts to come up with the onus: going by the recommendations of the Committee in para 11.9, it appears that the burden was supposed to be cast on the defendant. We are also not altogether sure if the Government consciously had a view to leave it to the courts to construe the provision and cast the onus accordingly. 

We therefore suggest that Section 14 of the Bill be modified to state: The following contracts cannot be specifically enforced "All contracts can be specifically enforced unless the promisor in breach of the contract establishes that...  Note that it is sufficient if the party breaching contract establishes one ground in Section 14.  

Wednesday, May 9, 2018

Download the Expert Committee Report on Amendments to the Specific Relief Act

Followers of this blog are well-aware that the recent Expert Committee Report on the Amendments to the Specific Relief Act, 1963 was not in public domain. Despite several requests to the Law Ministry, the Report was kept away from public domain. 

Pursuant to an Right to Information Act, 2005 application by this blawgger, the Ministry has sent a copy of the Report. We take this opportunity to thank the Deputy Secretary & CPIO of the Legislative Department to have acted in consonance with the letter and the spirit of the Right to Information Act, 2005 and disclosed the Report. 

Readers can access a scanned copy of the Report from this link (pdf). Happy Reading! 

Tuesday, May 8, 2018

Delineating Investor-State Arbitration: Delhi High Court's Vodafone Judgement

Yesterday's judgement by Manmohan, J. of the Delhi High Court in the civil suit by Union of India seeking a declaration and an injunction against the second investor-treaty arbitration invoked by Vodafone in its lengthy tax dispute with the Union of India is one of the clearest expositions of law in the recent times. The judgement, although a little lengthy (80 pages) is a must read for those who are interested in arbitration, be it commercial, investor-treaty, or otherwise.

The judgement should form a part of any reading material in Indian law schools on Investor-Treaty Law and Arbitration. The judgement can be accessed from this link.

For those who wish to read the judgement later but are curious to know what the judgement says, we quote the conclusion by Manmohan, J. which succinctly summarises the law on the subject:

"142. To conclude, investment treaty arbitration between a private investor and the host State, which results by following the treaty route is not itself a treaty, but is sui generis and recognized as such all over the world. It has its roots in public international law, obligations of States and administrative law. As a species of arbitrations, it is of recent origin and its jurisprudence cannot be said to be settled or written in stone; far from it. Investment Treaty jurisprudence is still a work in progress. 

143. However, there is some disquiet over the spectrum of nations both developed and developing as to the spiraling consequences of investment awards and its impact on sovereign functions, as reflected in the speech of Mr. Justice Sundaresh Menon, Chief Justice of Singapore on International Arbitration : The Coming of New Age for Asia (and Elsewhere) (supra). 

144. It also cannot be said as an absolute proposition of law that the moment there is an investment treaty arbitration between a private investor and the State, National Courts are divested of their jurisdiction. The Court of Appeal in England in Republic of Ecuador (supra) rejected the argument that the Courts have no jurisdiction to interpret or apply unincorporated International treaties between an investor and a host State. Consequently, in the opinion of this Court, there is no legal bar over the subject matter of the suit. 

145. Further, Investment Arbitration disputes are fundamentally different from commercial disputes as the cause of action (whether contractual or not) is grounded on State guarantees and assurances (and are not commercial in nature). 

146. As the present case is not a commercial arbitration, the Act, 1996 shall not apply. This Court is of the view that in a situation where the Act, 1996 does not apply, its inherent powers are not circumscribed by anything contained in the Act and the ratio in McDonald (supra) will not apply. Even in commercial arbitration, the jurisprudence of minimum intervention is relatively of recent vintage. It has its roots in Article 5 of the Model Law of 1985 which then took fifteen to twenty years to gain traction and general acceptance in the body of nations. 

147. Notwithstanding, this limited intervention role, it is not unknown for Courts to issue anti arbitration injunction under their inherent power, especially when neither the seat of arbitration nor the curial law has been agreed upon. In Excalibur Ventures LLC (supra), the Court held that where he foreign arbitration was oppressive or unconscionable, the Court may exercise its power to grant an injunction. In fact, the said judgment cites seven cases which have upheld the Court‟s jurisdiction to restrain foreign seated arbitrations. 

148. Of course, it is a matter of practice that National Courts will exercise great self restraint and grant injunction only if there are very compelling circumstances and the Court has been approached in good faith and there is no alternative efficacious remedy available. Such a restrictive approach and jurisdiction is in consonance with any international obligation, India may have under VCLT or any other treaty. 

149. However, keeping in view the aforesaid findings vis-a-vis, the abuse of process, kompetenz-kompetenz issues, the present suit and application are dismissed with liberty to the Plaintiff-Union of India to raise the issue of abuse of process before India-United Kingdom BIPA, that now stands constituted... "