India: Outsourcing Contracts with Indian Suppliers: What to Expect When Enforcing US Customers' Rights and Remedies in India

Last Updated: 26 March 2010
Article by Sonia Baldia

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-à-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.

Conclusion

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.

Learn more about our Asia offices and Business & Technology Sourcing practice.

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.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions