India: WHAT ARE THE CONSTITUENTS OF A JV AGREEMENT? HON'BLE DELHI HIGH COURT'S JUDGEMENT IN- HFCL ADVANCE SYSTEMS PVT. LTD. VS CENTRE FOR DEVELOPMENT OF ADVANCE COMPUTING (C-DAC)

INTRODUCTION

With perpetual expansion in technology, commerce and industry, various entrepreneurs and companies are determined to form partnerships or Joint Ventures, in order to bring forth and pool in their respective expertise and resources and accomplish a specific task. In the present case, the Petitioner had bid as a Joint Venture (JV) for a tender floated by the Respondent and was subsequently disqualified after a series of communication, on the ground that the Petitioner did not meet various terms of the Request for Proposal (RFP), more specifically its claim of being a "Joint Venture" entity as was to be reflected from an executed JV Agreement.

FACTUAL BACKGROUND

In order to understand the law laid down in the present case, it is necessary to be aware of the factual circumstances that led to this litigation. To state the facts briefly, Petitioner Company (HFCL Advance System Pvt. Ltd.) - hereinafter referred to as "HASPL", claimed to be a Joint Venture entity (JV), with M/s HFCL Limited said to be holding 90% shares with M/s Polixel Security Systems Pvt. Ltd. holding balance 10% shares. C-DAC [Centre for Development of Advance Computing (C-DAC)], one of the Respondent, is a Scientific Society under the aegis of Ministry of Electronics and Information Technology, Government of India, registered under the Societies Registration Act, 1860, with administration and management vested in the Governing Council of the Society, chaired by Union Minister of Communication and IT.

The Respondent on 18.12.2020 floated a tender for implementation, Operation and Maintenance of Surveillance System under Safe City Project of Delhi Police, being Tender No.CDACP/Safety City/MSI/2020/313 and a Pre-Bid Corrigendum was issued by C-DAC on 20.06.2021 setting out definition of what was to be considered as "a Joint Venture".

The Petitioner Company (HASPL) was originally incorporated on 23.02.2015 as a wholly-owned subsidiary of M/s HFCL Limited. On 13.02.2021, for the purpose of applying for the tender as a JV entity, M/s HFCL Limited divested its 10% shareholding in HASPL and transferred 10,000 equity shares of face value of Rs.10/- each in favour of M/s Polixel Security Systems Pvt. Ltd.

Thereafter, in compliance of Form-13 of the RFP, on 17.08.2021, the Petitioner (HASPL) alongwith the members of the JV entity executed certain documents and on 20.08.2021 submitted its bid as a JV entity. Upon scrutiny of the tender documents, on 02.10.2021 the Technical Evaluation Committee of the Respondent (C-DAC) raised some Pre-Qualification queries which were replied by the Petitioner on 07.10.2021 and further correspondence ensued between Petitioner Company and C-DAC on the issue of Petitioner being a JV entity and documents in support thereof. Not being satisfied with the answers and documents supplied by HASPL, on 16.11.2021 HASPL was disqualified by C-DAC on the ground that it being a JV entity did not meet various terms prescribed under the RFP and the Corrigendum issued thereafter. 

This lead to the Petitioner (HASPL) filing a writ petition against C-DAC's communication dated 16.11.2021 disqualifying Petitioner Company as a bidder for the tender in question.

SUBMISSIONS OF THE PARTIES

Petitioner's Stand

Petitioner contention is summarised as under:

• That the JV entity came into existence with the transfer of 10% of the equity shares of HASPL by HFCL in favour of M/s Polixel Security Systems Pvt. Ltd. – extract of register of members of HASPL alongwith the share transfer certificate endorsed with such transfer was submitted as proof of same.
• That C-DAC itself defined JV for the first time in the Pre-Bid corrigendum dated 30.06.2021 and that hence there was no requirement for the Petitioner to incorporate a Joint Venture prior to the said date.
• That there is no set format of a JV agreement provided in the RFP or elsewhere;
• That the RFP specifies a draft format of an undertaking required to be filed with the bid documents (Cl. 7.13 of the RFP) which infact has been signed by the JV members as well as the JV entity (dated 17.08.2021). Petitioner Company took the stand that this undertaking was infact the "JV agreement" as was contemplated by the RFP and was also in compliance of definition of a "Joint Venture" as set out in Section 2(6)(b) of the Companies Act, 2013 and hence disqualification was unwarranted and same ought to be quashed.
• Lastly, it was contended that Clause 1.9 (b)(vii) of the RFP mandated that in case the JV agreement is not acceptable to the respondent, the JV will modify the same so as to be acceptable to the Respondent. Said clause is extracted below for better understanding

• It was thus contended that in view thereof an opportunity ought to have been granted to the Petitioner to modify its JV and that since there was no further communication received from the Respondent's post their clarification dated 27.10.2021, it was reasonably and bonafidely believed that all the queries regarding JV Agreement had been fully met and hence the disqualification was unwarranted and same ought to be quashed.

Respondent's Stand

Ld. ASG Mr. Sanjay Jain, Sr. Adv. along with Mr. Sanjoy Ghose Sr. Adv. defended C-DAC's decision and submitted that C-DAC filed its detailed counter affidavit defending their decision to disqualify HASPL. Relying upon various clauses of the RFP, particularly the definition of a JV as well as that of an eligible bidder, Respondent took the stand that a JV bidder was mandatorily required to submit following documents in support of its claim of being a JV entity:

• Copy of JV agreement setting out the % of shareholding amongst members of the JV entity;
• Registration documents of the JV entity
• Memorandum and Articles of Association of the JV entity

It was set out by C-DAC that keeping in mind various clauses of the RFP, HASPL chose to bid as a JV entity; that despite repeated demands by C-DAC for specified documents in support of being a JV entity, HASPL did not submit the JV agreement, Memorandum of Association (MOA) and Articles of Association (AOA) of the "JV entity". It was informed to the Court that HASPL repeatedly relied upon and submitted copy of the MOA and AOA of the company as it existed prior to formation of the JV entity by transfer of 10% equity shares. It was further contended by C-DAC that accordingly C-DAC concluded that there existed no JV agreement and hence disqualified HASPL's bid as a JV entity. With regard to the "undertaking" filed by HASPL, C-DAC contended that said document cannot be interpreted as a JV agreement in view of the following factors not being present in the said undertaking -

• Preamble of the undertaking was termed in such a manner that it appeared that the JV entity had already come into existence prior to signing of the undertaking;
• There was no provision specifying shared responsibility between members of the JV – regarding capital investment structure, composition of Board of Directors, appointment and change in Chairman, quorum of meeting, casting vote provision in board meeting, appointment of CEO/mid, deadlock resolution mechanism, general meeting provision;
• No provision specifying shared profit and losses amongst the JV members (% of profit or losses allocated to each party).

Mr. Sanjay Jain, Ld. ASG, defended C-DAC's decision and submitted that:

1. Mere transfer of 10% of equity holding in HASPL does not result in formation of a "JV entity";
2. that there is infact no underlying JV agreement between HFCL Ltd. and Polixel, setting out the agreed terms & conditions, responsibilities and roles of respective members of the JV that each of them would undertake and discharge in the execution of any contract awarded to the Petitioner;
3. There has been no change in the MOA of the Petitioner Company post divestment of 10% equity by HFCL Ltd. in favour of Polixel; there is no JV agreement which describes the role and responsibilities of JV partners, despite the Respondent repeatedly pointing and asking the Petitioner to submit various documents to show existence of a JV entity, no satisfactory response was forthcoming.
4. That the Preamble of the undertaking executed by members of the so-called JV entity (dated 17.08.2021) shows that both HFCL Ltd. and Polixel are claiming to act through the Petitioner Company only; There is no Board resolution authorizing the Petitioner Company to act for and on behalf of HFCL Limited, or on behalf of Polixel – thus, there is no risk or responsibility being undertaken by either of the so-called JV partners.
5. That despite repeated requests of C-DAC (dated 02.10.2021 and 12.10.2021), Petitioners submitted only the MOA and AOA the Petitioner at the time of formation of the said company and not the revised MOA and AOA of the JV entity which is claimed to have been formed;

DECISION OF THE COURT

After careful perusal of the definition of a JV in the RFP, relevant terms and conditions of the RFP and taking into consideration reasons for rejecting Petitioner's bid, Hon'ble High Court concluded that they were unable to agree that – the Petitioner is a Joint Venture company; that the undertaking dated 17.08.2021 is a JV agreement. Court stated as under:

1. Recitals of the prescribed format of the undertaking presupposes the existence of a Joint Venture in as much as even before the format is filled and submitted, the recital show that parties signing the undertaking must have already arrived at an understanding and the JV entity would have had already come into existence, prior to signing of the said undertaking; Whereas the Petitioner claims to have become a JV entity with the transfer of 10% equity shareholding as on 13.08.2021, the undertaking is signed and dated 17.08.2021 and accordingly the undertaking cannot be said to be the JV agreement.
2. Clause (v) of Clause 1.9 of the RFP required MOA & AOA of the JV to be submitted, however the MOA & AOA submitted was of pre-alleged JV HASPL Pre, and not of the newly incorporated JV.
3. Court laid down the Essential features of a Joint Venture Agreement
   • The Hon'ble Court referring to the interpretation of the term "Joint Venture" as laid down in New Horizons Ltd. Vs Union of India, (1995) 1 SCC 478 and in Faqir Chand Gulati Vs. Uppal Agencies (P) Ltd., (2018) 10 SCC 345 held as under:
     • That the document creating a JV must incorporate the essential terms/clauses that reflect the true intention and nature of the understanding between the parties.
     • Each entity/party in the joint venture keeps its separate legal status with the agreement outlining the resources, such as money, properties, other assets, knowledge or skill/ expertise that each party will bring to the venture. Thus, both parties in a joint venture contribute to the resources, share ownership of the joint venture's assets and liabilities, and share responsibilities in the implementation of the project.
     • That a JV agreement also establishes how the JV entity will be managed and controlled alongwith manner in which profits and losses is agreed to be divided / distributed.
     • Court emphasized that both parties must contribute to the JV and share opportunities and risk involved therein.
4. The Undertaking submitted by the Petitioner is not a JV agreement Relying on the interpretation of what would constitutes a JV agreement as laid down in New Horizons and Faqir Chand judgement, Court concluded that the undertaking dated 17.08.2021 submitted by the Petitioner does not fall within the 4 corners of the JV agreement for the following reasons:
   • The undertaking dated 17.08.2021 submitted by the Petitioner is merely a paper reproduction of the format as provided under the RFP and is devoid of the essential features of a JV agreement. Court was of the view that Petitioner has lost the essence of the undertaking as well as of a pre-existing JV and that the Petitioner has confused "the form" and "the substance" of the undertaking and the JV agreement. The undertaking as required to be submitted under the RFP was only to ensure that the Joint Venture continues during the performance of the work if awarded to the JV, hence the requirement of the undertaking by the JV;
   • Relying on Part 1.9(b)(ii), 1.9(b)(iii), 1.9(b)(iv) and 1.9(b)(vii) of the RFP, Court held that both the JV agreement and the undertaking were a must; that both operate in separate spheres and there was no overlap or commonality between the 2 documents.
   • The undertaking signed is simply an undertaking signed by two equity shareholders in the Petitioner Company and submitted to fulfill the condition laid down in the RFP document;
5. None of the Documents required by Clause 1.9 are submitted by the Petitioner: On a combined reading of the entire correspondence between the Petitioner and C-DAC, Court concluded that even though Respondent was, time and again, requesting for copy of the Memorandum and Articles of the newly incorporated JV company, which would reflect the change in the management structure of the alleged JV entity in terms of the alleged Joint Venture agreement, but the Petitioner failed to provide the same.
6. Clause vii of Pre-Bid Corrigendum – about curing defects by the bidder The Hon'ble Division Bench, agreeing with Respondent's contention, held that as regards Clause vii of the Pre-Bid Corrigendum wherein the Respondent was obligated to remove defects, said clause would have come into operation only upon Petitioner submitting the JV agreement and since in the present case Petitioner did not submit the alleged JV Agreement executed Clause vii is not attracted and does not come into play.

CONCLUSION

After a detailed consideration of all submissions and contentions of both the parties, Hon'ble Division Bench of the High Court concluded that the Petitioner was rightly disqualified by the Respondent for failing to submit the JV agreement and hence there was no perversity, arbitrariness and/or malafide in the impugned letter dated 16.11.2021 and hence the Court dismissed the Writ Petition for being devoid of any merit.

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