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.

 



[1] Associate Company Secretary & Final year law student from Faculty of Law, University of Delhi

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