India: The Tata-Docomo Conundrum – How Far An Arbitral Award Can Bind Third Parties

Last Updated: 19 September 2017
Article by Ajit Warrier and Aditya Nayyar

The high-profile shareholders dispute between NTT Docomo Inc. and Tata Sons Ltd. was given a quietus when the Delhi High Court, on 28 April 2017, declared an Award passed by a foreign Arbitral Tribunal as enforceable. The High Court further declared that the Award shall operate as a deemed decree of the Court. The said Order has thrown up certain interesting questions of law, namely:

  1. Would an award passed in arbitral proceedings be binding on third parties who are strangers to such proceedings?
  2. Whether a third party/stranger to a foreign seated arbitration would be entitled to object to enforcement of a foreign award passed in such proceedings?

Brief background

NTT Docomo Inc. ("Docomo"), Tata Sons Ltd. ("Tata") and Tata Teleservices Limited ("TTSL") entered into a Shareholders Agreement on March 25, 2009 ("SHA"). Clause 5.7 of the SHA provided that if TTSL failed to satisfy certain 'Second Key Performance Indicators' as contractually stipulated, Tata would be obligated to find a buyer or buyers for Docomo's shares in TTSL at a sale price being the higher of either (a) the fair value of those shares as of March 31, 2014; or (b) 50% of the price at which Docomo purchased the shares. Clause 5.7.2 of the SHA provided that in the event Tata was "unable to find a willing buyer or buyers to purchase the Sale Shares at the Sale Price or if the sale of the Sale Shares is not closed during the Sale Period", Tata "shall acquire, or shall procure the acquisition of, the Sale Shares at any price not later than the end of the Sale Period." Further, Tata was obligated to indemnify and reimburse Docomo "for the difference between the Sale Price and the price at which the Sale Shares are actually sold, which payment shall be made at the time of closing of the Sale/Sales".

It appears that since TTSL failed to deliver evidence to Docomo of its compliance of the Second Key Performance Indicators, Docomo issued a Sale Notice to Tata and TTSL calling upon Tata to find a buyer or buyers to acquire the Sale Shares during the Sale Period. The Sale Period terminated on 03 December 2014.

Docomo commenced arbitration proceedings and an Arbitral Tribunal having its seat at London was constituted, which finally delivered the Award on 22 June 2016 ("the Award"). The Arbitral Tribunal held that the primary obligation cast on Tata, which was absolute in nature, was to find a buyer or buyers of the Sale Shares on the terms that Docomo receives the Sale Price. The Arbitral Tribunal further held that Tata could have avoided the breach by availing itself of one of the alternative methods of performance provided under the SHA if it was unable to find a willing buyer at the Sale Price. The Arbitral Tribunal further held that the question as to whether a contractual obligation remains enforceable if it is subject to a requirement for special permission from the Reserve Bank of India ("RBI") under the FEMA Regulations did not arise on facts. The Arbitral Tribunal awarded damages to the tune of US$ 1,172,137,717 (exclusive of interest) to Docomo on the basis that Tata was in breach of its primary obligations, which did not require any special permission of the RBI.

Docomo thereafter filed proceedings before the Delhi High Court for seeking recognition and enforcement of the Award.

It appears that during the pendency of the proceedings, Docomo and Tata entered into a settlement and jointly applied to the Delhi High Court to place on record the consent terms and seeking disposal of the proceedings in terms of the settlement. Under the consent terms, the parties' inter-alia agreed that the Award be declared enforceable in India and that Tata would remit the awarded amount to Docomo, subject to certain conditions.

RBI's intervention

Before the settlement was brought on record, RBI filed an intervention application in the proceedings primarily on the ground that since the Award required remittance of money to an entity outside India, the RBI's role would not be negated. On merits, it was argued that the Award was illegal and contrary to the public policy of India inasmuch as it concluded that the FEMA Regulations need not be looked into.

The Delhi High Court dismissed the intervention application on the basis that since RBI was not a 'party' as defined under Section 2(h) of the Arbitration and Conciliation Act, 1996 ("Act"), it cannot seek to intervene in proceedings for the enforcement of the Award. The High Court further held that neither the Civil Procedure Code ("the Code") nor the Act recognized the locus standi of an entity, which is not a party to the suit or as in the present case, an award, to oppose a compromise arrived at between the parties. The High Court opined that this would be the position even in cases where there may be arbitral awards (or judgments of the Court) in private disputes to which RBI is not a party where its powers and functions under the statute that governs it or the rules and regulations thereunder may be discussed.

Merits of the Judgment

On merits, the High Court held that what was awarded to Docomo under the Award was damages and not the price of the shares, the remittance of which did not require special permission from RBI. It was further held that it was not open to RBI to re-characterize the nature of the payment in terms of the Award, especially when Tata was not opposing its enforcement.

The Court further observed1 that will be "bound by an arbitral Award interpreting the scope of its powers or any of its regulations subject to it being upheld by a Court when challenged by a party to the Award". This observation is followed by an illustration as extracted below:

"If, for example, there is a judgment by a civil Court, within India or outside India, taking a particular interpretation of the powers of RBI under the FEMA and that judgment is either not challenged or is upheld on challenge by the superior judicial body, then as far as the two parties to the judgment are concerned, RBI will be bound by the decision of the Court. There may be instances where the executing Court might direct that the payment of monies under an Award to a non-Indian entity outside India would be subject to the permission of the RBI since the regulations under the FEMA require it. That determination, too, subject to being altered in appeal, will be binding on the parties as well as RBI. However, even in that situation, RBI cannot intervene in those proceedings and demand to be heard. As of date, this may be viewed as a gap in the Act, particularly, in the context of Indian courts being frequently approached for the enforcement of international Awards. But in the absence of a provision that expressly provides for it, the question of permitting RBI to intervene in such proceedings to oppose enforcement does not arise."

It is the authors' respectful view that the aforesaid observations would present a number of difficulties.

Firstly, it is now a generally accepted position that disputes involving private parties and private rights which can generally be decided by a civil court are arbitrable. In other words, all disputes relating to 'rights in personam' are, generally speaking, arbitrable and choice is given to the parties to choose an alternative forum and get their inter-se disputes resolved through arbitration. However, disputes relating to 'rights in rem' which involve inherent public interest may not be arbitrable and the parties' choice to choose the alternative forum of arbitration is ousted in such circumstances. Arbitration law is thus based on the concept of party autonomy where parties are free to agree on how their disputes will be resolved, subject only to such safeguards as are necessary in the public interest. The Delhi High Court, in HDFC Bank Ltd. v. Satpal Singh Bakshi2, relying on Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd3., held that the Arbitral Tribunals are 'private fori' chosen by the parties to a contract in the place of Courts or Tribunals which are 'public fori' constituted under the laws of the country. It is also trite that a stranger or a third party to an arbitration agreement cannot ask for arbitration unless the applicant claims through or under the signatory party under certain circumstances.4

In consonance with the principle of party autonomy, the law in India makes an arbitral award binding only on the parties to the arbitration. Section 35 of the Act provides that a domestic arbitral award would be final and binding on the parties and persons claiming under them respectively. Similarly, Section 46 of the Act provides that any foreign award, which is enforceable under Part II of the Act, shall be treated as binding, for all purposes, on the persons as between whom it was made, and may accordingly be relied on by any of those persons by way of defence, set off or otherwise in any legal proceedings in India. Further, 'party' has been defined under Section 2(h) of the Act (falling in Part I) to mean 'a party to an arbitration agreement'. Hence, the legislative philosophy appears to be that an award made by an arbitrator on the differences between the parties, whether domestic or foreign, cannot bind third parties or strangers to such arbitration. A reading of Sections 34 and 48(1) of the Act would also point to this conclusion, inasmuch as only parties to an arbitration are allowed to seek judicial intervention by challenging a domestic award or by objecting to enforcement of a foreign award. Russell on Arbitration, 23rd Edition 2007 @ Page 342 states that "Save where a third party agrees to be bound by it, an award is generally only effective as regards the parties to it and persons claiming through or under them."

By declaring that the Arbitral Award would bind a third party (i.e. RBI in this case) the High Court did not refer to the language of Sections 35 or 46 of the Act or Section 13 of the Code, which provides the tests for a foreign judgment to be considered as conclusive under Indian law.

The reasoning in the Judgment may also present practical challenges. For instance it is not inconceivable that parties to a foreign seated arbitration or civil proceedings outside India may obtain a foreign award or a foreign judgment which holds forth upon the ambit of powers of, and its exercise by, a Governmental or statutory authority in India, without the involvement or perhaps even knowledge of such authority. Such an interpretation may or may not be acceptable to such Governmental or statutory authority in India or may otherwise be in the larger public interest. However, the fact that such a foreign award is mandatorily binding on such authorities, even though it may adversely affect the rights of such authority, is fraught with risks.

Secondly, it appears that the attention of the High Court was not drawn to the fact that Section 48 (2) of the Act, in contradistinction to sub-section (1) of Section 48, does not require a 'party' to furnish proof to the Court with respect to the grounds stated therein. On the contrary, sub-section (2) of Section 48 places the onus on the Court to refuse enforcement if the Court finds existence of the circumstances outlines therein, and referred to in the preceding paragraph. The language employed by Parliament in sub-section (2) of Section 48 and in particular, absence of the word 'party' therein, is interesting, seen in contrast to Section 34, and in particular, sub-sections (3) and (5) thereof. Therefore, the question would arise whether RBI could have been non-suited for want of locus standi, if its objections to the Award were falling under sub-section (2) of Section 48 of the Act. From a reading of the Judgment, it is not discernible whether such a submission had actually been advanced before the High Court.

It is the authors' respectful view that the issues outlined above may require deeper consideration in an appropriate case, especially given the conclusion reached by the High Court that RBI, not being a party to the arbitration, could not have intervened in the proceedings for enforcement of a foreign award under the extant provisions of the Act. Therefore, to the extent the High Court has thereafter proceeded to examine whether a foreign award, or even a foreign judgment, would be binding upon a statutory authority like the RBI, it could perhaps be argued, in a future scenario, that the observations of the Court in that regard are obiter and not ratio5. In fact, the Supreme Court of India has held that when a direction or order is made by consent of parties, the Court neither adjudicates upon the rights of the parties nor does it lay down any principle6. Alternatively, the legislative anomaly in the Act, as noted by the High Court, will have to be rectified so as to provide more clarity on this issue.

Footnotes

* Authored by : Mr. Ajit Warrier, Partner and Mr. Aditya Nayyar, Senior Associate (Shardul Amarchand Mangaldas and Co.)

1. At Para 42 of the Judgment

2. WP (C) No. 3238 of 2011 decided on 13 September 2012

3. (2011) 5 SCC 532

4. Chloro Controls (I) P. Ltd. v. Severn Trent Water Purification Inc. and Ors. (2013) 1 SCC 641

5. Additional District Magistrate, Jabalpur v. Shivakant Shukla (28.04.1976) MANU/SC/0062/1976

6. Municipal Corporation of Delhi v. Gurnam Kaur (1989) 1 SCC 101

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