Originally published 12 February 2010
Keywords: outsourcing contracts, India, supplier, US, judgment, UK assets, supplier
In any offshore outsourcing transaction, the enforcement of the US customer's rights and remedies is always a vital concern. Those concerns can be exacerbated when dealing with an Indian supplier with few or no meaningful assets in the United States against which any judgment or arbitral award could be executed.
If the Indian supplier has meaningful assets located in the United States, and if a US plaintiff-customer successfully obtains a judgment against the supplier in a US court, the judgment can be readily enforced against those US assets. Significant issues arise, however, when the Indian supplier's primary assets are located in India, rather than in the United States. In that event, and even if a dispute with the supplier has been successfully adjudicated in a US court, the US plaintiff must still seek redress within the Indian legal system to obtain and enforce a judgment against the Indian supplier's India-based assets.
Therefore, a US customer should understand upfront the Indian supplier's corporate structure, including the location of assets within the supplier's corporate family, and structure the dispute resolution provisions to maximize the possibility of recovery against the Indian supplier's assets in the event of a dispute.
If the Indian supplier has assets in multiple jurisdictions outside the US, the US customer should seek recovery against the Indian supplier's assets in a jurisdiction that will be most effective vis-ŕ-vis the customer's suit. For example, if the Indian supplier has assets in both the UK and India, it may be prudent for the US customer to seek enforcement of a US judgment against the Indian supplier's UK-based assets. This is because the enforcement of US judgments by UK courts is relatively routine.
Whenever possible, the US customer should also consider additional mechanisms beyond the operative contract in order to guarantee performance and payment from the Indian supplier. Such protections might include, for example, parent or affiliate guarantees, letters of credit, payment escrow accounts, product liens and security interests and insurance, as applicable.
Enforcing US Judgments in India
Under Indian law, a US judgment is not directly enforceable in India. Rather, it can only be enforced by filing a fresh lawsuit in an Indian court based on the US judgment, which will be treated as a component of the plaintiff's evidence against the Indian defendant. It should be noted that such a lawsuit can require years before any relief is actually awarded by the Indian court. Furthermore, the US judgment will not be enforceable in India if the Indian court determines that:
- The judgment was not issued by a court of competent jurisdiction.
- The judgment was not issued on the merits of the case.
- The judgment appears to be founded on an incorrect view of international law or a failure to recognize Indian law if such law is deemed applicable.
- Principles of natural justice were ignored by the US court.
- The judgment was obtained by fraud.
- The judgment sustained a claim founded on a violation of any law in force in India.
Only when a judgment is obtained from the Indian court in this proceeding may the US customer seek to attach the Indian supplier's assets in India. This restriction also applies to any injunctive relief issued by a US court that will need to be enforced against a defendant in India.
The enforcement process is much more simplified and streamlined with respect to certain countries designated as "reciprocating territories" by the Indian government. Foreign judgments passed by courts of these "reciprocating territories" can be directly enforced in India by filing execution proceedings, and they are deemed to be decrees of the Indian courts for enforcement purposes, thereby considerably speeding the process. India's designated reciprocating territories include the UK, Singapore, Hong Kong, Malaysia, Canada and New Zealand, to name a few. The United States is not considered by India to be a reciprocating territory.
Efforts to enforce a foreign judgment in India can be arduous, time-consuming, expensive and unpredictable. Consequently, US customers of Indian outsourcers should incorporate effective jurisdiction and enforcement provisions in the operative outsourcing contract. This will help to ensure that the US customer is protected by adequate, flexible rights and remedies that are appropriate to the nature and scope of the services outsourced to the Indian supplier. Particular care must be taken to safeguard any intellectual property (IP) or other sensitive or proprietary data that may necessarily be transferred to the Indian supplier in the course of the outsourced engagement.
Enforcing Governing Law and Forum Selection Provisions
Indian courts recognize private international law principles and will generally enforce choice-of-law clauses agreed upon by the parties, except under very limited circumstances. Exceptions to this general rule are made if, for example, the chosen governing law would violate public policy in India in some way. Thus, in the operative outsourcing contract between an Indian supplier and a US customer, the customer must always unambiguously require a particular state's law as the governing law of the contract.
A US customer should be aware, however, that Indian courts may nonetheless apply Indian law to adjudicate disputes in certain fields, including disputes involving IP, real property, labor issues and insolvency, for example, regardless of the governing law stipulated in the contract, thereby limiting the practical realization of the contract's intended protections should the Indian supplier seek protection in an Indian court. Therefore, a US customer should be cognizant of the effect that Indian laws might have on the contract terms agreed upon by parties to an outsourcing arrangement. Indian courts also generally recognize forum selection clauses, including clauses that require the parties to litigate disputes in a foreign jurisdiction. To avoid becoming embroiled in litigation in Indian courts, a US customer should require that the parties adjudicate any dispute arising from the licensing or technology transfer transaction exclusively in a US jurisdiction or a "neutral," non-Indian jurisdiction.
To be enforceable in India, exclusive foreign venue provisions should be carefully crafted in accordance with Indian law requirements and should include express waivers. One exception to an exclusive venue provision that may be beneficial to a US customer would be to retain the customer's right to seek injunctive relief in a local court in India under appropriate circumstances, such as to stop an Indian party from the unauthorized use or disclosure of the US customer's IP in India.
It is important to note that enforcement of venue selection clauses are not without limitation in Indian courts. If an outsourcing contract contains an exclusive non-India venue provision but the Indian supplier seeks protection in an Indian court, that court may elect, at its discretion, not to enforce the venue provision. Instead, the court may act to adjudicate the lawsuit in India if it determines that justice will be better served.
For example, a US customer could find itself involuntarily in an Indian court if the Indian supplier, notwithstanding the agreement to submit to foreign jurisdiction, initiates an action in an Indian court or seeks an "anti-suit" injunction against the proceedings initiated by the US customer in a foreign court. In such a situation, the Indian court could decide to assume jurisdiction or could stay the action, depending on the circumstances of the case.
Arbitration Preferred over Litigation
Among US and other international customers of Indian outsourcers, private arbitration is the preferred means of dispute resolution in commercial transactions involving India. Arbitration enables customers to mitigate the risks of an Indian supplier seeking refuge in an Indian court, of becoming mired in prolonged litigation, and of being subjected to unfamiliar adjudication procedures. Other factors, such as the confidentiality of arbitral proceedings and the relative ease of enforcing both foreign- and India-based arbitral awards in India, provide additional compelling reasons for adopting arbitration as the formal dispute resolution mechanism in India.
India is a signatory to the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Awards, commonly referred to as the "New York Convention." The agreement makes a foreign arbitral award rendered in a "convention" country far easier to enforce in India than are comparable court judgments. However, a foreign arbitral award may be challenged or refused enforcement in India on certain limited grounds. These include:
- Incapacity on the part of any parties to the contract
- Invalidity of the arbitration agreement under the law governing the dispute
- Lack of due process afforded to either party
- An award that is beyond the arbitration clause's scope
- Matter that is not subject to resolution by arbitration under India's laws
- A situation in which enforcement would be contrary to public policy in India.
If an Indian court is satisfied that the foreign arbitral award is enforceable pursuant to India's Arbitration Act, it is deemed to be a decree of that court and is readily enforceable in India.
In an outsourcing transaction, therefore, the operative contract should unequivocally specify that all disputes relating to the transaction must be arbitrated. In addition, the contract should stipulate that the arbitration is to be conducted in the United States or (although less preferable) in recognized neutral, non-India venues, such as Paris, London or Singapore. The US customer should consider whether to preserve the right to seek injunctive relief in India depending on the circumstances specific to the transaction.
On January 10, 2008, the Supreme Court of India issued an important decision in Venture Global Engineering v. Satyam Computer Services, Ltd., 2008 (1) CTC 348, regarding the enforcement in India of foreign arbitration awards. The Court's decision paves the way to challenge foreign arbitral awards in an Indian court based on broad public policy grounds and has important implications for any US customer that may find itself involved in an arbitration proceeding against a supplier located in India.
Specifically, the Supreme Court upheld a challenge in India to a foreign arbitration award on the grounds that the relief contained in the award violated certain Indian statutes and was, therefore, contrary to Indian public policy pursuant to Part I of India's Arbitration and Conciliation Act of 1996 (the "Arbitration Act"). As a result of the Venture Global decision, new risks exist with respect to the impact of Part I of India's Arbitration Act on contract parties' rights and expectations in agreements that involve India and that contain arbitration clauses.
The Supreme Court's decision did recognize, however, the right of contract parties to exclude the application, in whole or in part, of Part I of the Arbitration Act in their contracts. Accordingly, new risks arising from the Court's decision may be mitigated through diligent analysis of Indian law concerning the rights and interests involved in a particular transaction and through carefully drafted provisions in the underlying contract that expressly address issues raised by the Court's holding.
Unpredictable Consequences of Indian Supplier Bankruptcy
In India, as in the United States and many other jurisdictions, a supplier's bankruptcy can have a catastrophic effect on the customer and can significantly impact the enforceability of the operative outsourcing contract. A party's bankruptcy can significantly alter the relationship of the parties by operation of law to effectuate the purpose of bankruptcy laws (i.e., to maximize the value of the debtor's estate).
The outcome of bankruptcy proceedings in India can be unpredictable and can pose severe risk to a US customer. If the Indian supplier becomes a debtor in bankruptcy, the status of the outsourcing contract, including any IP or proprietary technology that may have been licensed, assigned or otherwise transferred to or from the Indian debtor in bankruptcy, becomes a significant issue. Questions raised in this context include:
- Can a US customer unilaterally terminate the outsourcing contract and all underlying licenses to customer IP or proprietary technology when the Indian supplier files for bankruptcy in India?
- If not, what rights and duties will the Indian debtor-supplier continue to have with respect to the outsourcing contract and to any US customer's IP?
- Can the Indian debtor-supplier unilaterally terminate the outsourcing contract or otherwise cut off the US customer's access to the supplier's IP that might be critical for the US customer's operations?
- What legal recourse is available to a non-debtor contract party in India?
These are important considerations from a US customer's perspective that must be carefully analyzed and addressed beforehand in an effort to mitigate the unpredictable consequences of an Indian supplier's bankruptcy.
A US customer should be aware that India's bankruptcy laws are antiquated, complex and inefficient compared to US bankruptcy law. For example, India's bankruptcy laws do not provide any specific guidance like that found in Section 365 of the US Bankruptcy Code relative to the respective legal obligations and rights of licensors and licensees of IP in bankruptcy. Lack of available protections or predictability for non-debtor contract parties under Indian bankruptcy laws, therefore, can potentially create real vulnerabilities for the US customer.
The unanticipated consequences of an Indian counterparty's bankruptcy may be avoided if the US customer is able to promptly terminate the operative outsourcing contract pre-bankruptcy. Of course, timely termination is usually feasible only if the US customer remains vigilant toward the Indian supplier's performance and financial health on a routine basis.
When drafting the outsourcing contract, care should be taken to include effective mechanisms that will provide the US customer with early warning of supplier difficulty. Appropriate, applicable tools such as performance benchmarks, periodic financial reporting and "no material adverse change" certification requirements, as well as escrow arrangements and security interests in critical licensed IP, should be thoughtfully incorporated into the contract. In addition, payment terms, licenses and any ongoing obligations of the parties under the operative contract should be structured to minimize the impact of the Indian counterparty's bankruptcy on the US customer's interests.
Enforceability of Third Party Beneficiary Rights
India, unlike the United States, does not explicitly recognize any established "third party beneficiary" law. Typically, such laws entitle a third party to enforce contract terms in agreements to which it is not a party but that are expressed or implied for that party's benefit. In that context, a third party beneficiary is an intended — not just an incidental — beneficiary of a contract.
There is no statute in India that expressly permits or prohibits an intended third party beneficiary from enforcing such a contract. The general rule under Indian law to date, however, is that no right under a contract may be enforced by a person who is not a party to the contract unless certain established exceptions apply. In other words, Indian courts have adopted a rather strict interpretation of the doctrine of privity of contract based on English common law.
Currently, Indian legal practice entitles only contracting parties to enforce rights, and hence to recover damages, under the contract. Indian courts have acknowledged certain exceptions to the privity doctrine based on the principles of equity, but these exceptions are very limited and narrow in scope.
India's strict application of the privity doctrine can potentially create a significant enforcement gap from a US customer's perspective. To illustrate this point, consider an research and development (R&D) services outsourcing contract between a US company ("US Co") and an Indian supplier, pursuant to which the supplier will provide services to US Co and US Co's affiliate ("US Affiliate"), and the supplier's indemnities will extend to both US Co and US Affiliate receiving the services under the outsourcing contract. In this hypothetical situation, US Affiliate would be deemed an intended third party beneficiary under the contract.
If US Affiliate were to voluntarily or involuntarily engage in an Indian legal proceeding to independently enforce a supplier indemnity for the affiliate's benefit, it could well be deemed not to have legal standing or sufficient rights or interests to sue under the contract. For the same reasons relative to standing, rights in interest, actual damages and so forth, US Co's ability to enforce the contractual supplier indemnity for the benefit of US Affiliate would be equally questionable in an Indian forum.
It is therefore prudent to determine upfront the intended third party beneficiaries and, where feasible, to structure the contractual relationship in a manner that will adequately equip such beneficiaries with direct enforcement rights in India. Alternatively, the operative outsourcing contract can be assigned to a third party beneficiary, in which case the assignee beneficiary will be able to directly enforce the contract.
While outsourcing to India can be a powerful means of streamlining IT and business functions that can yield substantial cost savings, increased efficiencies and improved service quality, it also demands more complex and robust risk assessment and management because of the unique and heightened risks inherent in cross-border outsourcing arrangements and the potential challenges of enforcing rights and remedies in foreign jurisdictions with different legal systems. These risks and challenges can be successfully managed, however, with thorough due diligence, objective supplier selection and the careful assessment and treatment of the issues discussed above in an outsourcing contract that memorializes all underlying business terms and provides effective real and practical protections and enforcement mechanisms to a US customer.
Copyright 2010. JSM, Mayer Brown International LLP and/or Mayer Brown LLP. All rights reserved. Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: JSM, a Hong Kong partnership, and its associated entities in Asia; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and Mayer Brown LLP, a limited liability partnership established in the United States. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.
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