2017 (5) TMI 492 - HC - FEMA

Tata breached Shareholder Agreement, liable for $1.17 billion damages; court enforces award, orders compliance.

NTT Docomo Inc. Versus Tata Sons Limited

The court found Tata in breach of the Shareholder Agreement by failing to acquire or find a buyer for the Sale Shares at the agreed price, leading to an ... Enforcement of the Award - recognition and enforcement of Award made in favour of Docomo - Held that:- As regards the refusal of permission by RBI for the second time, after the Award, the seeking of such permission by Tata was based on its earlier opposition to the Award which was similar to the one raised now by RBI. With Tata having accepted the Award as such, it has withdrawn its objections thereto and consequently its stand in the application made to RBI on 1st July 2013 seeking permission. As long as the Award stands, there is no need for any special permission of RBI for remission by Tata of the amount awarded thereunder to Docomo as damages. The refusal by RBI of such permission which is not required in the first place, or the fact that such refusal has not been challenged, would therefore not affect the enforceability of the Award. There is no provision in law which permits RBI to intervene in a petition seeking enforcement of an arbitral Award to which RBI is not a party. Its prayer for permission to intervene is rejected. Validity of the SHA and the Award - Clause 5.7.2 of the SHA was a contractual promise by Tata to find a buyer for Docomo's shares which could always have been performed using general permissions of RBI under FEMA 20. It was held that the promise was valid and enforceable because sub-regulation 9(2)(i) of FEMA 20 permitted a transfer of shares from one non-resident to another non- resident at any price. The AT held that Tata could have lawfully performed its obligation to find a buyer at any price, including at a price above the shares' market value, through finding a non-resident buyer. Its failure to do so was, according to the AT, a breach entitling Docomo to damages. The SHA, therefore, could not be said to be void or opposed to any Indian law including the FEMA, much less the ICA. FEMA contains no absolute prohibition on contractual obligations. It envisages grant of special permission by RBI. As rightly held by the AT, Clause 5.7.2 of the SHA always was legally capable of performance without the special permission of RBI, using the general permission under sub-regulation 9(2) of FEMA 20. As far as the Award itself is concerned, the interpretation placed by the AT on the clauses of the SHA was consistent with the intention of the contracting parties and not opposed to any provision of Indian law. There is nothing in the SHA as interpreted by the Award that renders it void or voidable under the ICA or opposed to either the public policy of India or the fundamental policy of Indian law. The AT's interpretation of the various provisions of the FEMA and the regulations thereunder have also not been shown to be improbable or perverse. What was invested by Docomo was US $ 2.5 billion and what it will receive in terms of the Award is only 50% of that amount. The Court finds that no ground under Section 48 of the Act is attracted to deny the enforcement of the Award. Is the compromise valid? - Held that:- The Court is unable to find anything in the Consent Terms which can be said to be contrary to any provision of Indian law much less opposed to public policy or void or voidable under the ICA. The issue of an Indian entity honouring its commitment under a contract with a foreign entity which was not entered into under any duress or coercion will have a bearing on its goodwill and reputation in the international arena. It will indubitably have an impact on the foreign direct investment inflows and the strategic relationship between the countries where the parties to a contract are located. These too are factors that have to be kept in view when examining whether the enforcement of the Award would be consistent with the public policy of India. It appears to be a well settled legal position that parties to a suit, or as in this case, an Award, may enter into a settlement even at the stage of execution of the decree or Award. The Award dated 22nd June 2016 passed by the AT in London in LCIA Case No. 152896 under the LCIA Rules is declared as enforceable in India and shall operate as a deemed decree of this Court.The parties are bound by the Consent Terms and will proceed to take steps in terms thereof. Issues Involved:1. Requirement of RBI's special permission for Sale Option.2. Tata's absolute obligation under Clause 5.7.2 of the SHA.3. Reasonable endeavors to obtain RBI's special permission.4. Consequences of RBI's refusal to grant special permission.5. Breach of SHA by Tata for non-acquisition of Sale Shares.6. Indirect restitution of excess amount beyond FEMA Pricing Guidelines.7. Entitlement of Docomo to restitution of 50% of its investment.Detailed Analysis:1. Requirement of RBI's Special Permission for Sale Option:The AT concluded that the performance of TTSL’s obligation under Clause 5.7.2 was subject to a general permission from RBI, which allowed non-resident purchasers to buy shares at the sale price and resident purchasers to buy at fair market value. The impediment to performance was factual rather than legal, as the market value of the Sale Shares had fallen, making the sale price unattainable.2. Tata's Absolute Obligation under Clause 5.7.2 of the SHA:The AT held that Tata had an unqualified obligation to find a buyer for Docomo's shares at the Sale Price by 3rd December 2014. Tata’s failure to perform this obligation constituted a breach of the SHA. The AT rejected Tata's argument that its obligation became void under Section 56 of the Indian Contract Act due to RBI’s refusal of special permission, as there were alternative methods of performance unaffected by the refusal.3. Reasonable Endeavors to Obtain RBI's Special Permission:The AT found that Tata did not make reasonable endeavors to obtain RBI’s special permission. Tata limited its application to RBI to only encompass a purchase of the Sale Shares by Tata at the Sale Price and did not apply for permission to pay an indemnity or have its foreign affiliate(s) acquire the Sale Shares.4. Consequences of RBI's Refusal to Grant Special Permission:The AT concluded that Tata’s obligation under the SHA was not discharged by RBI’s refusal to grant special permission. The obligation to perform the Sale Option remained, and Tata was liable to pay damages for its failure to perform.5. Breach of SHA by Tata for Non-acquisition of Sale Shares:The AT held that Tata was in breach of the SHA for failing to acquire or find a buyer for the Sale Shares at the Sale Price. This breach entitled Docomo to damages.6. Indirect Restitution of Excess Amount Beyond FEMA Pricing Guidelines:The AT rejected Tata's argument that an award of damages for breach of Clause 5.7.2 would amount to a circumvention of FEMA Regulations. The damages awarded were for Tata’s breach of contract, not for the sale of shares at a pre-determined price.7. Entitlement of Docomo to Restitution of 50% of Its Investment:The AT awarded Docomo damages amounting to US$ 1,172,137,717, which represented 50% of its investment. Tata was ordered to pay this amount along with interest and costs.Locus Standi of RBI:The court held that RBI had no locus standi to intervene in the enforcement proceedings as it was not a party to the Award. The court emphasized that only a party to the arbitration agreement could oppose the enforcement under Section 48 of the Arbitration and Conciliation Act.Validity of the SHA and the Award:The court found the SHA and the Award to be valid and not opposed to any Indian law, including FEMA and the Indian Contract Act. The AT’s interpretation of the SHA and the FEMA regulations was consistent with the intention of the contracting parties and not improbable or perverse.Consent Terms:The court took on record the Consent Terms between Docomo and Tata, which included the withdrawal of Tata’s objections to the enforcement of the Award and the agreement to comply with the statutory requirements for remittance of funds. The court declared the Award enforceable in India and directed the parties to proceed as per the Consent Terms.Conclusion:The petition was disposed of with the court declaring the Award enforceable and directing compliance with the Consent Terms. The court granted liberty to both parties to apply in case of any difficulty in complying with the directions.