AMAZON- FUTURE RETAIL – RELIANCE: THE BATTLE OF CONTROL
FUTURE RETAIL- AMAZON – RELIANCE: THE BATTLE OF CONTROL
SHUBHAM BUDHIRAJA[1]
Future retail filed Order 39 Rule 1&2 Suit for Interim Injunction
restraining the Amazon to interfere with the transactions happening between
Reliance and Future retail on basis of the fact that the relief claimed by
Amazon through emergency arbitration is non-Coram
judice and thus inherently barred by jurisdiction of arbitrator. Hence the main ground for praying Injunction
is that the Inunction / relief of emergency arbitration taken by Amazon
pursuant to agreement between Amazon and Future retail was without inherent
jurisdiction of arbitrator because the emergency arbitration is foreign to
Indian law.
It was held that though prima facie case is made out by the plaintiff future retail
because the resolution approving transaction of future retail and reliance is
prima facie valid, shareholder agreement between future retail and amazon
cannot exceed the control to the extent of acquisition and that the test of
unlawful tortious interference also lies in favor of future retail plaintiff
because the amazon has written letters to authority to not to grant approval to
the transaction. However even if prima facie case is made out, the other
factors are balance of convenience and irreparable loss. In this case if amazon
is restrained not to approach authorities then it would create prejudice for amazon
because it is contending its rights on premise of shareholder agreement. Hence,
balance on convenience lies in favor of amazon. Also, if Injunction granted it
would cause irreparable loss to amazon. Hence, Order 39 Rule 1 & 2
suit dismissed.
The Injunction is filed on 4 premises
1. There
is unlawful tortious Interference by amazon in transaction between future
retail and reliance.
2. That
the EA is not recognizable. Even if it the same is contrary to arbitration law
in India because statute does not refer it in definition of arbitral award.
Hence, any relief on such award is not enforceable.
3. The
directors have to act in fiduciary relation and they cannot themselves write to
amazon especially when there is a board resolution passed by company approving
transaction of reliance and future retail.
4. The
shareholder agreement giving excessive control power to amazon and this control
amounting to acquisition and thus violates special act. i.e. Companies act,
2013
There are largely 2 issues w.r.t arbitration in this case
Firstly whether EA passed is
valid. It is held that party autonomy is the essence and parties expressly
agreed to SIAC as procedural law hence the EA is valid.
Secondly, this EA so passed can
be quashed only if it contrary to public policy or law of arbitration in India.
It cannot be held that emergency award is barred by law mere because parliament
refuses the law commission suggestion to incorporate in law.
Observations of court
1. Party autonomy is essence of arbitration.
Parties are free to choose curial law and procedural law. Since parties
themselves chosen curial law –Singapore International arbitration center which
allows emergency arbitration. Hence, the parties cannot contend that emergency
award was not known to them under rules because parties themselves agreed
earlier.
2. Suit prima facie maintainable because
cause of action contended is tortious interference and validity of Emergency
award can be challenged here on basis that it has no inherent jurisdiction. But
once this ground refused the plaintiff has to contend on merits of award which
cannot be decided in this proceeding but only as per arbitration appeals, etc.
3. However emergency award also valid and this suit have not challenged its merits.
AIR 1962 SC 199 Hira Lal Patni vs. Sri Kali Nath held that
the validity of a decree can be challenged in execution
proceedings on the ground that the Court which passed the decree was lacking in
inherent jurisdiction, in the sense that it could not have seisin of
the case, because the subject matter was wholly foreign to its jurisdiction or
that the defendant was dead at the time the suit had been instituted or decree
passed, or some such other ground which could have the effect of rendering the
Court entirely lacking in jurisdiction, in respect of the subject matter of the
suit or over the parties to it. Therefore, in the case of inherent lack of
jurisdiction in a Court or an authority, the same can be challenged even in
collateral proceedings.
Normally a decree
passed by a Court of competent jurisdiction, after adjudication on merits of
the rights of the parties, operates as res-judicata in a subsequent suit
or proceedings and binds the parties or the persons claiming through them and
its validity should be assailed only in an appeal or revision as the case may
be. It was further held that however, a decree which is
passed by a Court without jurisdiction over the subject matter or on other
grounds which go to the root of its exercise of jurisdiction/lacks
inherent jurisdiction is a coram non judice. A decree passed by such a Court is
a nullity and is nonest. Its invalidity can be set up
whenever it is sought to be enforced or is acted upon as a
foundation for a right, even at the stage of execution or in collateral
proceedings.
Calcutta High Court in XXIV The Calcutta Weekly Notes 723 Hriday
Nath Roy & Ors. vs. Ram Chandra Barna Sarma & Ors., noting the distinction between existence of jurisdiction and exercise of
jurisdiction held that the authority to decide a cause at all and not the decision
rendered therein is what makes up jurisdiction; and when there is
jurisdiction of the person and subject matter, the decision of all other
questions arising in the case is but an exercise of that jurisdiction.
VALIDITY OF EMERGENCY ARBITRATION
In an International Commercial
Arbitration, there are three sets of law
that may apply, i.e. proper law of the contract; proper law of the
arbitration agreement/lex arbitri;
and proper law of the conduct of arbitration/lex fori/curial law
Supreme Court in NTPC vs. Singer
(supra) is that in case the parties have not chosen the
procedural law, the procedure for conduct of arbitration will be determined by
the law of the seat of arbitration. However, if the parties have
expressly chosen the Rules or the procedure to be applicable on the conduct of
the arbitration, the said Rules will apply so long as the same are not in
conflict to the public policy or the mandatory requirements of the law of the
country in which the arbitration is seated. Therefore, as per the decision of
the Supreme Court in NTPC vs. Singer (supra) the SIAC Rules will apply to the
arbitration conducted in terms of Clause 25 of the FCPL SHA, to the extent they are not contrary to: (i) public policy of India;
and/or (ii) mandatory requirements of the law under the A&C Act.
1998 (1) SCC 305 Sumitomo Heavy Industries Ltd. vs. ONGC Ltd.
&Ors., Supreme Court defined the area of operation of
curial law relying upon various foreign decisions and commentaries
concluding that (i) in the absence of an expressed agreement regarding the
choice of curial law, the curial law would be the same as the law of the place
of arbitration on the ground, that is the country most closely connected with
the proceedings; (ii) it is open for the parties to chose a curial law which is
different from the law governing the arbitration agreement; and (iii) when the
law governing the arbitration agreement and the curial law are different, the
Court will first look at the arbitration agreement to see if the dispute is
arbitrable, then to the curial law to seek how the reference should be
conducted and then return to the first law in order to give effect to the
resulting award.
It is perfectly legal for the
parties to choose a different procedural law, the issue which is required to be
considered is whether the provisions of Emergency Arbitration of such
procedural law (in this case the SIAC rules), are in any manner contrary
to/repugnant with the public policy of India, or with the mandatory
requirements of the procedural law under the Arbitration and Conciliation Act,
1996 (A&C Act).
Party autonomy is
the backbone of arbitration. The courts in India have given due
importance to the concept of party autonomy, and have further given full effect
to the choice of the parties with respect to all three laws involved in an
arbitration agreement, subject to the public policy of India and the mandatory
provisions of the A&C Act
Where the parties exercising
autonomy expressly choose different procedural rules for conduct of
arbitration, they are assumed to be aware of the provisions of such rules,
including the procedure for obtaining interim relief, and the fact that such
rules provide for emergency arbitration by appointment of an emergency
arbitrator. In the present case, the parties had with open eyes left it for
themselves, to choose between availing interim relief from the emergency
arbitrator on the one hand, or the Courts under Section 9 of the A&C Act on
the other hand. Thus, Amazon has exercised its choice of the forum for interim
relief as per the arbitration agreement between the parties. Nothing in the
A&C Act prohibits the parties from doing so.
The Indian law of
arbitration allows the parties to choose a procedural law different from the
proper law, and this Court finds that there is nothing in the A&C Act that
prohibits the contracting parties from obtaining emergency relief from an
emergency arbitrator. An arbitrator‟s authority to act is implied
from the agreement to arbitrate itself, and the same cannot be restricted to
mean that the parties agreed to arbitrate before an arbitral tribunal only and
not an Emergency Arbitrator.
2020 SCC OnLine 656 Avitel Post Studioz Ltd. & ors. vs. HSBC PI
Holdings (Mauritius) Ltd., Supreme Court dealing with the contention
that an amendment to Section 16 proposed by the 246th Law Commission Report in
the light of the Supreme Court decision i.e. 2010 (1) SCC 72 N. Radhakrishnan
vs. Maestro Engineers which appears to denude an Arbitral Tribunal of the power
to decide on issues of fraud etc. claimed that the decision in N. Radhakrishnan
(supra) having not been legislatively overruled, cannot now be said to be in
any way deprived of its precedential value, as the Parliament has taken note of
the proposed Section 16 (7) in the 246th Law Commission Report, and has
expressly chosen not to enact it. Supreme Court held that the development of law by the Supreme Court cannot be thwarted merely
because a certain provision recommended in a Law Commission Report is not
enacted by the Parliament. It noted that the Parliament may have
felt, that it was unable to make up its mind and instead, leave it to the
Courts to continue, case by case, deciding upon what should constitute the
fraud exception. Parliament may also have thought that Section 16(7), proposed
by the Law Commission, is clumsily worded as it speaks of “a serious question
of law, complicated questions of fact, or allegations of fraud, corruption,
etc. Hence, it cannot be held that an Emergency
Arbitrator is outside the scope of Section 2(1)(d) of the A&C Act, because
the Parliament did not accept the recommendation of the Law Commission to amend Section 2(1)(d) of the A& C
Act to include an ' Emergency Arbitrator'
CONCLUSION W.R.T. EMERGENCY ARBITRATION
Firstly, the parties in an international commercial
arbitration seated in India can by agreement derogate from the provisions of
Section 9 of the A&C Act;
Secondly, in such a case where parties have expressly chosen
a curial law which is different from the law governing the arbitration, the
court would look at the curial law for conduct of the arbitration to the extent
that the same is not contrary to the public policy or the mandatory
requirements of the law of the country in which arbitration is held;
Thirdly, inasmuch as
Section 9 of the A&C Act along with Sections 27, 37(1)(a) and 37(2) are
derogable by virtue of the proviso to Section 2(2) in an International
arbitration seated in India upon an agreement between the parties, it cannot be
held that the provision of Emergency Arbitration under the SIAC rules are, per
se, contrary to any mandatory provisions of the A&C Act.
Hence the
Emergency Arbitrator prima facie is not a coram non judice and the
consequential EA order not invalid on this count.
SHAREHOLDER AGREEMENT
The amazon and Future retail entered into
shareholders agreement. The future retail contend that there is force majure
circumstances due to which it is not able to carry on and hence it require to
collaborate with reliance. Also, the shareholder agreement is a private
contract and that company should be allowed to do anything in normal
course. The amazon contend that it is in
talk to infuse fund in future retail where future retail contend that it is not
the shareholder but the director who are in fiduciary position who are to
decide the Interest of company.
(2012) 6 SCC 613 Vodaphone International Holdings B.V. Vs. Union of
India that a shareholders' agreement (SHA) is essentially a contract
between some or all shareholders in a company, the purpose of which is to
confer rights and impose obligations over and above those provided by the
company law. It was held that SHA is a private contract
between the shareholders compared to the Articles of Association of the company,
which is a public document. Being a private document, it binds
parties thereon and not the other remaining shareholders of the company.
Explaining the advantages of a SHA, Supreme Court noted that it gives greater
flexibility, unlike Articles of Association and makes provision for resolution
of any dispute between the shareholders and also how the future capital
contributions have to be made. It was further held that the provisions of the SHA may also go contrary to the provisions of the
Articles of Association, however, in that event, naturally provisions of
Articles of Association would govern and not the provisions in SHA
Agreement between
non-members and members of a company will not bind the company, but there is
nothing unlawful in entering into agreement for transferring of shares.
Of course, the manner in which such agreement is to be enforced in the case of
breach is given in the general law between the company and the shareholders. A
breach of SHA which does not breach the articles of association is a valid
corporate action and the parties aggrieved can get remedies under the general
law of the land.
The rationale behind the Articles
of Association of a company prevailing over a shareholder's agreement stems
from the basic principles that the general law i.e. the Contract
Act has to give way to the Special Act i.e. the Companies Act, in case of
conflict. Indubitably, it is in the interest of the society that the
integrity of the contracts are maintained as contractual remedies promise broad
commercial stability, however it is equally true that the Indian Contract
Act is not a complete Code as was noted by the Privy Council in AIR
1929 PC 132 Jwaladutt R. Pillani vs. Bansilal Moti Lal based on the preamble of
the Indian Contract Act, 1872 which notes, "whereas it is expedient to
define and amend certain parts of the law relating to contracts"
The Application of
the doctrine of frustration requires a multi-factorial approach.
Among the factors which have to be considered are the terms of the contract itself,
its matrix or context, the parties' knowledge, expectations, assumptions and
contemplations, in particular as to risk, as at the time of the contract,
at any rate so far as these can be ascribed mutually and objectively, and then
the nature of the supervening event, and the parties' reasonable and
objectively ascertainable calculations as to the possibilities of future
performance in the new circumstances. Since the subject-matter of the doctrine
of frustration is contract, and contracts are about the allocation of risk, and
since the allocation and assumption of risk is not simply a matter of express
or implied provision but may also depend on less easily defined matters such as
―the contemplation of the parties‖, the application of the doctrine can often
be a difficult one. In such circumstances, the test of ―radically different‖ is
important: it tells us that the doctrine is not to be lightly invoked; that
mere incidence of expense or delay or
onerousness is not sufficient; and that there has to be as it were a break in
identity between the contract as provided for and contemplated and its
performance in the new circumstances.
The Companies Act, 2013 which is
a special enactment codifies the fiduciary duty of the directors of a company
under Section 166
AIR 1950 SC 172 Nanalal Zaver & Anr. Vs. Bombay Life Assurance
Co. Ltd. & Ors. reiterating the well settled principle that in
exercising their powers, whether general or special, the directors, must always
bear in mind that they hold a fiduciary position and must exercise their powers
for the benefit of the company and for that alone. It was held that the Court can intervene to prevent the abuse of a power, whenever such
abuse is held proved, and also cautioned that where directors have a discretion
and are bona-fidely acting in the interest of the company, it is not
the habit of Court to interfere with the same. It was further held that when a
company is in no need of further capital, directors are not entitled to use
their power of issuing shares merely for the purpose of maintaining themselves
and their friends in management over the affairs of a company, or
merely for the purpose of defeating the wishes of the existing majority of the
shareholders.
In RNRL vs. RIL (supra), Supreme Court reiterated that the Board of Directors has to act in a fiduciary capacity vis-a-vis the
shareholders and that this duty has been a part of broader understanding of
company law from the time of settlement companies that were the precursors of
joint stock companies. Supreme Court deprecating the demand of RNRL
that the Board of RIL only act at the behest and as rubber stamp of the
decisions of the promoters held, that acceptance of such demands would destroy
the fabric of the Company Law itself and the foundation of trust, faith and
honest dealing with the shareholders.
Hence, the Board Resolution dated 29th
August, 2020 of Future retail approving transaction of future retail and
reliance is prima facie neither void nor
contrary to any statutory provision nor the Articles of Association of FRL.
WHETHER SHAREHOLDER AGREEMENT GIVING “CONTROL”
AND THAT CONTROL USING BY AMAZON TO ACQUIRE THE COMPANY AND HENCE BREACH OF AOA
& CA 2013?
In the decision
reported as 2000 (3) Mh.L.J 700 Rolta India Ltd., Mumbai & Anr. vs. Venure
Industries Ltd. Haryana & Ors. the Division Bench of the Bombay
High Court dealing with the pooling agreement between two or more shareholders
held that by such an agreement shareholders bind one another to vote as they
mutually agree. These agreements are enforceable because the right to vote is a
proprietary right which right to vote may be aided and effectuated by a
contract. It was also held that a pooling agreement may be utilized in
connection with an election of Directors and shareholders‟ resolution where
shareholders have a right to vote however, a pooling agreement cannot be used
to supersede the statutory right given to the Board of Directors to manage the
company, the underlying reason being the shareholders cannot achieve by pooling
agreement that what is prohibited to them if they are voting individually. It
was held:
“22. A pooling agreement may be
utilised in connection with the election of Directors and shareholders' Resolutions where shareholders have a
right to vote. However, a pooling agreement cannot be used to supersede the
statutory rights given to the Board of Directors to manage the company, the
underlying reason being that the shareholders cannot achieve by pooling agreement that which is prohibited to them, if
they are voting individually. Therefore, the power of shareholders to unite is
not extended to contracts, whereby restrictions are placed on the powers of Directors
to manage the business of the Corporation. It is for this reason that a pooling
agreement cannot be between Directors regarding their powers as Directors. There is vast difference in principle between the case of a shareholder
binding himself by such a contract and the Director of the Company undertaking
such an obligation by compromising his fiduciary status. The shareholder is
dealing with his own property. He is entitled to consider his own interests,
without regard to interests of other shareholders. However, Directors are
fiduciaries of the Company and the shareholders. It is their duty to do what
they consider best in the interests of the Company. They cannot abdicate their
independent judgment by entering into pooling agreements. The Company works
through two main organs, viz. the shareholders and the Board of Directors.
Therefore, 'control'
includes the right to appoint majority of Directors, the right to control
management and the right to control the policy decision. Such rights can be
exercised individually or collectively, directly or indirectly by
shareholdings‟ management rights, shareholders agreements, voting agreements
etc. Such control based on the rights accruing through the
shareholding/voting rights may be easily determinable however, when the same
are through agreements assessments of such rights often becomes complex due to
the camouflage of the language used. Though the basic principle governing the
field is that veto rights not amounting to acquisition of control may be
protective in nature rather than participative, that is, that such rights are
vested in the investor to protect his investment or prevent dilution of his
shareholding however, there is a thin line between these rights
being confined to veto rights which are protective in nature and the veto
rights transgressing to acquisition of control on the company, the
later being subject to FEMA FDI Rules.
Thus to determine whether the
rights conferred on Amazon under the FCPL SHA and the FRL SHA, amount to
control over FRL would be a question to be determined on analysis of the
various clauses of the agreement and can be determined only after the parties have completed their
necessary pleadings and documents
showing the underlined intention or by the competent fact finding authority.
ON TORTIOUS UNLAWFUL INTERFERENCE
In India, the ingredients of tortious unlawful interference were
succinctly laid down in the decision
2017 SCC Online Calcutta 14920 Lindsay International Vs. L.N. Mittal following
the decision in OBG Limited (supra) as under:
(i)
use by the defendant of unlawful means.
(ii)
interfering with the action of a third party in
relation to the claimant.
(iii)
intention
to cause loss to the complainant.
(iv)
Damages
Thus existence of a contract,
interference wherein is alleged is a sine qua non for the tort of inducement.
The board resolution in present case is a contract between reliance and future
retail.
Hence, four tests as laid down
in Lindsay International (supra) to the facts of the present case, it is
evident that the second,
third and fourth test stand prima facie satisfied as Amazon has written letters
to various statutory authorities/Regulators asking them not to grant approval
to the transaction between FRL and Reliance, which would cause loss and damages to both FRL and
Reliance.
INTERIM INJUNCTION- FAILED IN PRESENT CASE
Principles for
grant of interim injunction i.e. prima facie case, irreparable loss and balance
of convenience are required to be tested in terms of principles as
noted above. Since this Court has held that prima facie the representation of
Amazon based on the plea that the resolution dated 29th August, 2020 of FRL is
void and that on conflation of the FCPL SHA and FRL SHA, the 'control' that is
sought to be asserted by Amazon on FRL is not permitted under the FEMA FDI
Rules, without the governmental approvals, this Court finds that FRL has made
out a prima facie case in its favour for grant of interim injunction. However, the main
tests in the present case are in respect of "balance of convenience"
and "irreparable loss". Even if a prima facie case is made
out by FRL, the balance
of convenience lies both in favour of FRL and Amazon. If the case of
FRL is that the representation by Amazon to the statutory authorities /regulators
is based on illegal premise, Amazon has also based its representation on the alleged
breach of FCPL SHA and FRL SHA, as also the directions in the EA order. Hence
it cannot be said that the balance of convenience lies in favour of FRL and not
in favour of Amazon. It would be a matter of trial after parties
have led their evidence or if decided by any other competent forum to determine
whether the representation of Amazon that the transaction between FRL and
Reliance being in breach of the FCPL SHA and FRL SHA would outweigh the plea of
FRL in the present suit. Further in case Amazon is not permitted to represent its case
before the statutory authorities/Regulators, it will suffer an irreparable loss
as Amazon also claims to have created preemptive rights in its favour in case
the Indian law permitted in future. Further there may not be
irreparable loss to FRL for the reason even if Amazon makes a representation
based on incorrect facts thereby using unlawful means, it will be for the
statutory authorities/Regulators to apply their mind to the facts and legal
issues therein and come to the right conclusion. There is yet another aspect as
to why no interim injunction can be granted in the present application for the
reason both FRL and Amazon have already made their representations and counter
representations to the statutory authorities/regulators and now it is for the
Statutory Authorities/Regulators to take a decision thereon. THEREFORE, THIS COURT FINDS THAT NO CASE FOR GRANT OF INTERIM
INJUNCTION IS MADE OUT IN FAVOUR OF THE FRL AND AGAINST AMAZON
This work is a result of skills,
labour and creativity of author. Therefore all rights are duly reserved with
respect to the ownership of this literary work. Further, this work is meant only
for academic purpose and therefore same should by no stretch of imagination be
accepted or construed as a legal opinion.
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